I was recently connect with two smart entrepreneurs (James Millaway and Stan Schwartz, MD) who run a company called The Zero Card. Their business is a platform where consumers and employers have access to transparent “cash” prices for a range of medical services. Providers display their best non-insurance rates and offer a fixed price for an episode of care. Individuals (or ideally self-insured employers) pay these prices directly at the time of service.
According to the founders, Zero Card is able to display pricing that is much less than the amounts paid by employers (and employees) via insurance negotiated rates.
You can search the Zero Card website for a list of procedures and their cash price, plus contact information for the provider willing to do it at that price.
Here is what you get when you search for a specific spine procedure in Massachusetts
Here is what you get when you look for a hernia repair:
It’s still early in the game and I have no doubt that the Zero Card will get more participating providers at the same time as competition causes the prices to fall even further. (There are a few other competitors in the transparency/ cash business that I’ve written about before. Look here for my take on consumer name-your-own price tools). Writer and entrepreneur Dave Chase has called out Zero Card and other companies working in the “Transparent Medical Network” space in his recent piece in Forbes. He writes that it’s a question of time before the big national surgery companies enter this space.
I like the business model: But- I’m really struck by the numbers: Zero Card claims that it can find providers willing to provide services 60-80% less than PPO negotiated prices? How?
According to Zero Card, much of the opportunity lies in decreasing administrative costs: “Zero Card providers give you cash-based prices since you’ve eliminated their costs of billing, filing claims, collection efforts and maintaining A/R”.
This is all pretty stunning because it shows how administrative cost in US healthcare has become bloat, and managing it an entrepreneurial opportunity.
Now, I have no doubt that many participating providers see Zero Card business as a marginal revenue opportunity, basically leveraging existing fixed capacity to being in a few additional cases. But providers like the Surgery Center of Oklahoma, which I’ve written about before, does most of its business in the cash world. Cash isn’t a marginal service line for them: they have actually reduced their administrative overhead enough to drive their price point down and they take almost no insurance business. I’d love to see what their back office looks like. Bet it’s pretty small and quiet with very few fax machines.
Which begs the question: Is there really so much administrative waste in healthcare that you can drop prices by 60-80% if you rout it out?
I came across two interesting papers looking at this question, each published a few years ago.
Drs. Steffie Woolhandler and David Himmelstein published a study of the administrative costs of the U.S. health system in the August 21, 2003 edition of the New England Journal of Medicine. After analyzing the costs of insurers, employers, doctors, hospitals, nursing homes and home-care agencies in both the U.S. and Canada, they found that administration consumes 31.0 percent of U.S. health spending, double the proportion of Canada (16.7 percent). Average overhead among private U.S. insurers was 11.7 percent, compared with 1.3 percent for Canada’s single-payer system and 3.6 percent for Medicare.
A second piece in Millbank Quarterly a few years ago attempted to look at waste in the US healthcare system. They quote economist Henry Aaron who decried the US system in a 2013 NEJM article. It’s:
“an administrative monstrosity, a truly bizarre mélange of thousands of payers with payment systems that differ for no socially beneficial reason, as well as staggeringly complex public systems with mind-boggling administered prices and other rules expressing distinctions that can only be regarded as weird”
The Milbank article divided healthcare waste into several buckets: administrative, operational and clinical. Administrative and operational wast are most interesting to this discussion: Administrative waste, the authors write, is the excess administrative overhead that stems primarily from the complexity of the U.S. insurance and provider payment systems. Operational waste refers to other aspects of inefficient production processes.
Private insurance generates much of this administrative cost:
Typically, 40 percent of total costs for individual or non–group health insurance policies are attributable to administrative activities, whereas for group policies this proportion ranges from 5.5 to 18 percent
Between 2000 and 2005, the administrative overhead for health insurance—the difference between premiums and claim payments—grew 12.0 percent per year, more than the average health expenditure growth of 8.6 percent. Administrative overhead represents approximately 14 percent of the total spending in private insurance but comprises only 3 to 5 percent of spending by public-sector programs such as Medicaid and Medicare
There are inefficiencies on the provider side as well:
Estimates from the Medical Group Management Association suggest that medical groups alone incur costs of $700 million per year to negotiate payer contracts. The claims paperwork is massive.
Before HIPAA, there were more than 400 separate claim forms for different insurance companies. While HIPAA reduced this to a single form, each insurance company had different data needs and thus each published its own instruction guides. There are now more than 1,000 payer companion guides—up to 600 pages in length—to help providers fill out the single claims form.
When I see a rush of smart entrepreneurs rush into a new market, I know that there is opportunity to be had. In this case, decades of paperwork, claims, credentialing, and process have led to enough bloat that providers can credibly cut out 30% (or more) of their costs and sell direct to consumer. I’d also be willing to bet that the quality of life for the providers that choose to extend these types of offerings is a far cry better than those playing by the rules.
Photo: Chris Yarzab Flikr, via Creative Commons