Efficient claims payment, claims avoidance and claims delay are all key competitive strategies for health insurance companies.
When I worked in the insurance industry our statistics indicated that every time we turned down a claim there was a 3% chance that the claim would not be resubmitted. A health insurance company paying $2 billion dollars of health insurance claims a year and rejecting 25% of those claims on the first pass can effectively add $15 million of profit to their bottom line every year. Since many claims are rejected more than once, the actual financial impact is much greater than $15 million.
As an example, Humana had a policy in place when I was COO of a large physician group in Florida requiring documentation for all neonatology level 3 or higher service level claims. The medical service level (generally 1-4) indicates the type and intensity of service performed with 1 being the lowest intensity and 4 being the most comphehensive. The purpose of the documentation in theory would be to assist Humana's medical review department to determine if the claim was properly coded.
We started submitting the documentation with our level 3 and 4 service claims to avoid the delay that was occurring when Humana would reject our initial claims along with a request for documentation.
Humana threw away the attached documentation and denied our claims. Then they issued the request for the documentation they had just throw away. I determined that Humans initial claims data entry department was not equipped to handle the documentation they required for a claim. Humana wanted us to wait for the claim to be rejected and then to send in the necessary documentation to the medical review department.
The purpose of this policy was to either coerce physicians to under code to level 2 all level 3 and 4 services or to wait 60-90 days for their claims to go through medical review. In addition, most physician billing departments are far better at submitting initial claims than processing resubmissions.
As COO of a large physician group of over 300 physicians, we had the resources to sue Humana and a history of being willing to do so. Humana quickly backed off this policy when we threatened to sue knowing that Florida's "clean claim" statute meant we would prevail in a legal action.
When I ran a benefit imaging management company administering claims for CIGNA, we determined that we were getting "flooded" with ultrasound claims from OB/Gyns that owned their own ultrasound equipment. So we issued a letter to all of the OB/Gyns in our market on behalf of CIGNA indicating that they would be required to obtain referrals for ultra sounds; even if they performed them in their own office.
We knew the OB/Gyns would not have the time to read this letter, so we were able to reject nearly every ultrasound claim for 2 months before the physicians caught up with our policy change. Eventually, the physicians caught on and the volume of ultrasounds crept up again.
So we changed our policy again. This time we implemented an appropriate policy, which limited physicians to one ultrasound per patient in their office. Additional ultrasounds would need to be referred to a paranatologist (experts in this area that generally have better equipment than OB/Gyns). Even though we paid more per ultrasound to have them performed by paranatologists than we were paying to the OB/Gyns, the reduction in volume more than compensated for the incremental cost per ultrasound and the patients needing a second ultrasound were getting a better diagnostic test.
These are two examples among hundreds of incidences that I have experienced as an executive of physicians groups or helped design as an executive of health insurance companies to avoid or delay claims payment. In the short term, it saves money for the insurance company and their customers by taking money out of the pocket of physicians that perform a medical service.
In the long term, it adds a great deal to the cost of health care by adding administrative burden to physicians that eventually works its way into the overall cost of health care.
But rejecting a medical claim costs money and if you are going to pay the claim eventually anyway, why bother?
The answer is the time value of money combined with the 3% chance that the claim will not be resubmitted. For example, a $100 rejected claim has a 3% chance of not coming back (that is a $3 profit). In addition, if it takes 60 days to be resubmitted, you have 60 more days to invest that $100. Assuming a 7% annual investment rate of return, that amounts to about $1.67 per rejection of additional investment income on the 60 day delay. This translates into savings or investment income of $4.67 on a $100 claim, the cost of processing a claim used to be about $1, but with today's systems you can process a claim for far less.
So the key for the insurance company is to develop an efficient claims system that rejects as many claims as possible at the lowest possible cost in order to lower claims cost and delays claims payment where possible to maximize investment income. The profit opportunity is obvious and hence abuse became widespread.
Now in fairness to the insurance companies, as in the examples I cited, there was some excessive use of health care services. For example, Ob/Gyns, that had their own ultrasound equipment, were generating nearly twice as many tests compared to their peer group that did not own the equipment. When we required them to refer patients to a peranatologist for a second ultrasound, the number of ultrasounds dropped to almost the exact same level as their peers that did not own the equipment.
Likewise some physicians do up code, charging higher service codes than the work they performed would justify. That said, the insurance companies are using these physician abuses to create policies, procedures, and claim edits that are equally abusive.
So what is the answer? First, the federal government should mandate that all insurance companies accept claims in the same format that Medicare accepts claims as the only documentation required to pay a claim.
In addition, they should mandate that insurance companies pay interest effective 15 days after the day that medical services were performed regardless of whether they have received a claim or not. The interest rate would equal the investment rate earned by insurance companies on the portfolio as represented in their state statutory filings.
These two steps take away the incentive for insurance companies to delay the payment of claims and increase the probability that health care providers will submit claims that have no errors. This simple requirement could lower the cost of health care by as much as 5-6%.
There are many other mechanisms that health care insurance companies can utilize to manage health care costs outside of the standard claim payment process. These mechanisms will be a topic of a future blog and are in fact more effective since they focus on the physicians who are abusing the system and not on those that are not.