Cutting Red Tape in Health Care:

How Streamlining Billing Can Reduce California's Health Care Costs

by Sarah Payne, Frontier Group; and Michael Russo, CALPIRG Education Fund

Executive Summary

California’s health care system is broken. Costs are rising faster than either inflation or wages, and wasteful spending is a major culprit. Inefficient and duplicative administrative systems force doctors and hospitals to spend more time and money on administrative support than is necessary, which increases costs to patients.

However, by following the example of other states and streamlining key processes— such as insurance billing and payment and physician credentialing at hospitals—providers and payers in California can collectively save hundreds of millions of dollars annually and help lower the cost of health care.

Complicated billing practices and administrative systems result in grossly inefficient communication between physicians, hospitals and insurers and lead to higher-cost care for patients.
• Physicians’ offices spend large amounts of administrative time on getting paid for the care they provide. In California doctors’ offices, billing and insurance-related costs account for more than half of all administrative spending, or 14 percent of total office revenues.
• Insurers share the burden of inefficient administrative processes. In California, 21 percent of private insurer health care spending goes to billing and insurance-related costs instead of direct patient care. This is the rough equivalent of $9 billion, or 5.4 percent of total yearly health care spending statewide.

In several states, integrated health information networks are helping health care providers and payers increase efficiency and cut costs, with important benefits to consumers.
• Utah’s health information network has been active since 1993, and reduces costs by empowering a public-private partnership to operate a computerized system that serves as a common intermediary between providers and insurers. The Utah network has:
o Boosted the efficiency of the health insurance billing and claims processes for the 95 percent of Utah physicians and 100 percent of Utah insurers, laboratories and hospitals that participate in the network, increasing processing speeds to more than 6 times the national average; and
o Reduced transaction costs on average to less than 5 cents per transaction for its members.
• In New England, a multi-state consortium embraced federal regulations and achieved administrative simplification by creating a network that functions as an information pipeline. In just over a decade, the New England network has:
o Connected the payers and providers who serve more than 2.5 million residents;
o Cut the cost of sending claims-related information, resulting in savings of $1 million in one year for a large provider group (and more in some cases); and
o Generated returns on new-member investment in a period of less than one year.

By following the lead of other states and streamlining health care administrative practices, California can help fix its broken health care system and save consumers money. It can accomplish this by:
• Actively encouraging the formation of a health information network similar to the Utah and New England examples. The network would be operated on a non-profit basis, and would be funded and governed by participating health care entities. Members would receive equal returns on investment, preventing any one business from gaining a competitive edge. All members would generate significant cost savings from the enterprise, which could be established in parallel with the adoption of further technology-related health care reforms.
• Providing short-term, low-interest loans to needy parties. While most healthy businesses will be able to make the small investments necessary to operate a California health information network, the state can help finance the investments of struggling providers by granting small, low-interest loans in cases of proven need.
• Implementing complementary health care reforms. The efficiencies gained through a health information service would help and be helped by related health care policies. A standard requiring health insurance companies to spend a minimum percentage of revenues on care, for example, would incentivize participation in an information network that reduces overhead costs in the long run. Similarly, a health information network would provide the mechanism for a secure yet modern exchange of health data, such as electronic medical records.

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