Industry Insight: The Payment Process

Every company makes payments. They make payroll payments, vendor and supplier payments, and perhaps stockholder dividend payments. These payments are a byproduct of conducting business. However there is one industry that exists primarily to make payments, the insurance industry. An insurance company writes contracts with their policyholders, collects premium payments from the policyholders, invests these payments, and processes claims, paying the premium money back out to policy holders or claimants and other trading partners. The insurance company's main pressures are to get as many policies as possible, to invest the premium money as wisely as possible, and to carefully process the claims so as to only pay what is warranted.

Starting in 1996 with the passage of the Health Insurance Portability and Accountability Act (HIPAA), the healthcare industry was required to comply with regulations intended to revolutionize the claim payment process. Amongst other requirements, the new regulations specify the electronic delivery of the remittance advice.

The profitability of the insurance industry is affected by the efficient operation of these four business functions. In the 1990's, record low premium growth, increased catastrophe losses, and declining investment income led to deterioration in the industry's overall results. 2002 reveals an industry recovering from the terrorist attack of September 11, 2001, and the cumulative effects of anemic premium growth . But the insurance industry recovery remains far from complete; operating costs rose 13.7% and the overall rate of return remained low compared to historical norms and other industries.

Many of the insurance companies of today started early in the history of the United States, some with charters dating to the mid 1800's. As they evolved, modern methods and technologies were applied sparingly. It is only over the past several years that the industry has made concerted efforts to apply technology to administrative operations. "The use and leveraging of technology to reduce administrative costs and improve customer service is one of our core goals," says Marshall Jones, WellPoint's CIO. The focus of these efforts has been to address better means of interacting with providers and consumers, primarily in the area of claim submission. The payment side of claims processing is only now starting to be addressed.

Modernize The Payment Process

Within the workers compensation, group health and auto insurance industries, an estimated $250 billion is spent annually on the paperwork to process some seven billion healthcare insurance claims that results in close to 1 billion payments. Only 44% of these claims are currently submitted electronically. Electronic payment processing is virtually non-existent, only occurring in the government sector and some Blue Cross carriers. This results in an enormous number of payments still being disbursed using antiquated print and mail methods.

According to NACHA an Electronic Funds Transfer (EFT) transaction costs $0.14 versus $1.90 for a paper check. A transition to Electronic Funds Transfer (EFT) and internet based delivery of remittance advice and EOB / EOR data can reduce the direct costs from $2.60 per payment to close to $0.25 per payment. This is a potential savings of $2.35 per payment.

According to benchmark studies done by the Institute of Management & Analysis and the Gartner Group indirect costs, including exception processing and dispute resolution, can account for an additional $10 to $20 per payment. An ability to eliminate these indirect costs could make this savings even greater.

Why It Isn't Happening

The federally mandated HIPAA program is a good illustration of the reluctance in the insurance industry to adopt new technology. HIPAA requires that claim and remittance information be exchanged electronically using standardized formats with appropriate security and privacy protection. It is estimated that transitioning from a paper based system to the electronic system required by HIPAA, would provide a saving to the healthcare industry of approximately $30 billion, although implementation costs could reduce this savings closer to $12 billion over 10 years . The passage of HIPAA by congress in 1996 should have been motivation enough for the industry to adopt the technology, yet despite the potential cost savings and two congressional deadlines, most healthcare payments are still disbursed by print and mail.

The solution needed to modernize the payment process must be economical to implement and cost effective to operate. A typical solution requires an Information Technology (IT) implementation effort that runs as much as $500,000 or more, ties up valuable resources needed for strategic imperatives, and still does not address the administrative cost of payment disbursement management.

Answer: Use Business Process Outsourcing

The answer is to provide a service that is simple to implement and addresses both the direct and in-direct cost issues. A simple IT outsourcing service for the print & mail and the EFT functions only addresses the direct costs. To affect the indirect costs, the outsourcing service will need to encompass the entire payment disbursement problem. The service will need to include the business processes associated with: dispute and problem resolution, provider recruitment, government healthcare regulatory conformance, changes to federal tax rules, and banking account management.

Datamonitor recently stated "...advocating that the future of Business Process Outsourcing (BPO) is in the sub-process and niche market. There may be some windfall, end-to-end deals that set the market abuzz, but those deals will be few and far between. Instead, vendors should focus on creating success stories around relative competencies and marketing themselves as subject matter experts. By the year 2006, Life BPO will comprise over 65% of the total US BPO (Business Process Outsourcing)."