The Opportunity for Payment Integrity in the US Healthcare Market & Creating the Right to Win

The Healthcare Costs Problem

On a per capita basis, US healthcare is twice as expensive as most other wealthy nations with over $4 Trillion in annual spends. Additionally, national health expenditure is estimated to grow at a rate of 7.1 percent over the next five years from 2022 to 2027, compared with an expected economic growth rate of 4.7 percent. In aggregate, this would equate to healthcare expenditure growth in excess of economic growth of 2.4 percentage points. (Source)

Health outcomes for Americans, however, are on a decline with the US ranking low on life expectancy, one of the highest on number of avoidable deaths, and among the highest for number of hospitalisations from preventable diseases, compared to several other wealthy nations. Oncologists have invented a term, “financial toxicity,” to consider along with biochemical toxicity in deciding on the appropriate treatment. (Source). Warren Buffett called medical costs the “tapeworm of American economic competitiveness.” The burgeoning healthcare cost is borne by employers in the US who are passing larger proportions of it directly onto their employees driving the burden of a fractured health system to consumers.

Within this context of rapidly ballooning costs, a staggering opportunity has presented itself - nearly a third of this spend or >$1 Trillion of healthcare costs is considered waste. The adverse impact of this waste includes significant strain on the federal budget since 34% of health funding comes from the federal government and increased consumer debt since 20% of the population has medical debt.  

This waste can be broken down into six key categories, as illustrated below.  

A significant portion of this waste, to the tune of ~$100B or 10% of total healthcare waste,  comes from improper claims payouts as well as deep administrative costs across the eligibility, coding, submission, and rework cycles on the insurance front. The National Health Care Anti-Fraud Association estimates that tens of billions of dollars are lost due to health care fraud.This is because payer functions responsible for processing claims, called payment integrity teams, are lacking technologically advanced and efficient solutions. Of the ~$100B lost as a result of this, $84B comes directly from fraud and abuse costs while $15B comes from administrative waste resulting from outdated payment integrity solutions. Every inappropriately paid claim represents a cost that takes away from resources that can be dedicated to member care, and errors continue to erode the payer, provider, patient relationship. The scale of this problem demands that insurers take responsive action and implement strategic solutions.

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The Role of Payment Integrity and Ongoing Evolution in the Industry

Payment integrity is the process by which health insurance companies scrutinise medical bills during the payment process to identify errors or verify charges. It includes both pre-pay and post-pay strategies. Payment integrity functions cover three essential stages in the claims review process.

Stage 1 comes pre-adjudication when member verification is conducted and eligibility criteria are defined. This is critical to prevent incorrect claims from entering the system in the first place.

Stage 2 is prepayment, where eligibility of each claim is determined and inaccurate ones are denied or flagged for revision. The figure below shows the flow of a claim that is denied in prepayment. Claims eligibility analyses need to be rigorous since there are several factors to consider while reviewing. One such function is coordination of benefits which determines which of multiple payers has primary responsibility for paying the claim.

Stage 3 is post payment / recovery when a claim paid is determined to be inaccurate after payment by the payer and efforts are made to recover the paid amount from providers. Post-pay includes fraud, waste, and abuse (FWA) analytics to identify additional claims savings as well as an overpayment recovery program.

This niche industry has existed for nearly 25 years. Once considered “found revenue,” payment integrity is now an essential aspect of health plan operations as payers collectively process ~400B of claims annually. The evolution is seen by the shift of payment integrity from a single department to a large-scale strategy that involves many key aspects.

A big chunk of the evolution has come in the past decade, since until about five or 10 years ago, PI focused on post payment savings and was described as simply fraud, waste and abuse. Hence, payment integrity was mainly retrospective in the past. Mary Catherine Person, president of Blue General Partners, LLC, recalls that, “PI started to become more sophisticated during those years when edits would be built into systems to prevent specific issues from recurring”. Recently, payers have been focusing on improving prepayment systems to catch claims early, since it is a lifeline in reducing administrative costs and provider abrasion.

Legacy payment integrity companies like Optum (a diversified healthcare company) and Cotiviti (a leading healthcare analytics provider) hold the majority of the market currently and act as third party technology providers to fulfill payment integrity needs of payers. They act across the value chain and offer a broad range of specific services in both pre-pay and post-pay. However, these solutions are far from adequate and there is still a significant upgrade needed to solve the claims related losses plaguing the industry. An upcoming payment integrity startup, HealthEdge, tried to define the whitespace in the market by recently commissioning independent research firm, In90group, to survey more than 100 health plan leaders. Respondents represented all types and sizes of health plans along with leaders from virtually every department, and here is what they had to say about the current state of payment integrity:

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What Creates the Right to Win in Payment Integrity

In the last few years, there has been substantial startup activity in payment integrity to tap into the whitespace due to the lack of effective solutions. Some of the leading new-age solutions include Rialtic and our portfolio company, Coverself. Our close examination of this space has helped us develop our viewpoint on what it takes to succeed in this landscape. Coverself’s success in building a product garnering interest from the largest payers, has converted our thesis on this space into action and provided a proof point on what succeeds in this market.

• Horizontal vs Vertical Focus: While most large players are offering services covering the breadth of the payment integrity landscape, the success has come on the back of first vertically integrating for each specific step they cover. New market entrants cannot start with a broad offering since consolidation at the cost of accuracy at any stage of claims review will not sell in this market. Substantial resources will have to be deployed for perfecting the solution for claims editing, coordination of benefits, overpayment recovery, and FWA analysis respectively. While developing a solution, it is essential to focus on one step at a time and achieve specialisation compared to existing players within that, before moving onto the next sub-function of payment integrity.

• Accuracy Improvement is a Hook: The financial benefit of even a slight accuracy improvement in claims editing / reviewing is enormous. This is due to the vast volume of claims processed by health plans, with the top 20 insurance providers in the US having annual claims totalling to about $255B. For players in claims editing, the higher value is unlocked by moving left towards pre-payment from post-payment. However, players first need to prove their ability to generate additional savings on top of existing players in post-payment to penetrate the market and have a chance at displacing an existing player in pre-payment in the long run. Proven accuracy improvement is the best strategy to move to prepayment, since payers benefit significantly from “pay-and-chase” cost savings by catching inaccurate claims early and reducing costs involved with recovering inaccurate claims caught after payment. Optimizing “pay-and-chase” costs is a priority for payers since they amount to 20 - 30 cents of every dollar recovered. Additionally, given that pricing for payment integrity solutions are in the form of a contingency fee based on savings, accuracy is a key driver of revenue.

• Dynamic Libraries with AI/ML: The robustness of the library being used determines the effectiveness of the payment integrity solution. Hence, keeping the library updated by using AI/ ML features is a valuable feature for enhancing the product. AI helps with real time analysis of claims to suggest new additions to rules libraries, and enables change tracking in regulation to keep libraries updated with legal changes in the ecosystem. Companies across the payment integrity landscape that have leveraged AI to improve their library have been rewarded with valuation premiums in the industry.

• Need for Transparency and Payer Control: With increased emphasis on reducing waste from claims savings, payers are demanding more transparency into and control of their payment integrity program. Hence, insourcing of payment integrity solutions is one of the biggest priorities for payers, with 59% of surveyed payers planning to implement this in the next 1-2 years. This is a big area of innovation for new age solutions since existing legacy players like Optum and Cotiviti exist as a black box and offer players little to no control over the process of claims editing. New age solutions are offering platform-based solutions that can be used in-house by payment integrity teams. These platforms are easy to use by domain experts and provide ideation features that empower payers to access and edit claims libraries themselves. This enables loopholes in the library to be fixed immediately, saving millions of dollars in pay-and-chase costs from delayed implementation of new rules. The impact from providing payment integrity teams control is immense, since a significant cause of wastage in claims processing is due to the 2 month period it takes legacy solutions to make library changes. This aspect of upcoming solutions is essential to payers since 43% of surveyed payers stated that legacy technology is not flexible enough to meet their specific needs.

• Streamlined Team Coordination: Platform based features like workflow automation are valuable in saving extra time and cost spent by payment integrity teams to manage several payment integrity vendors and divide tasks among themselves. The right solution will also act as a collaborative workspace between various teams within the organization as payment integrity becomes more of an enterprise level initiative with multiple departments involved. Hence, new age solutions can save a sizable amount in operational costs and free up the team’s bandwidth for higher value add tasks like analytics and identification of new rules for generating additional savings. Given the increasing scale and complexity of payment integrity functions for payers, achieving operational efficiency is also a critical measure of success for payment integrity solutions.

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The Future of Payment Integrity

The value proposition of payment integrity for payers has been clear for a while, with most payers devoting more resources to it and several startups building for payers to process claims more effectively. With the evolutionary trends in healthcare and new age solutions increasing the efficiency benchmark in the market, the demand for payment integrity from industry participants is bound to increase. Two drivers of the growing market opportunity are as below:  

Greater demand from Third Party Administrators (TPAs)

‍TPAs are a critical partner for self-funded insurance plans that are provided by employers directly instead of being provided through insurance companies. Self-funded plans have grown rapidly since they enable employers to design more flexible health benefit plans for employees and save on insurance premiums paid to payers. In 1984, about 8% of employer provided plans were self-funded, while as of 2020, the Kaiser Family Foundation Survey of Employer Health Benefits reports that 67 percent of employed, insured workers are covered under self-insured, or self-funded, arrangements. TPAs are becoming increasingly important and demand for new-age payment integrity solutions from them is expected to increase.

• The argument for the slow adoption of payment integrity solutions by TPAs has long been that their financial compensation is structured as a fee for service, creating no financial incentive for them to improve claims accuracy. However, with employers demanding increasing transparency and greater accountability for cost containment, TPAs too will need to optimize claims costs further going forward to be a long-term partner for their customers. In fact, it would be reasonable to even expect TPA pricing to evolve in the future to receive rewards for higher accuracy of their payment integrity services.
• New age solutions better optimizing for operational efficiency are especially beneficial for TPAs since they have operationally heavy business models from processing a large volume of claims for employers with self-funded health plans. Digitization and automation of manual tasks is an important cost containment initiative for TPAs. The workflow and ideation features in new age models in the form of SaaS platforms are especially beneficial here, since they save several hours wasted on coordination of payment integrity functions among team members.

Increasing focus on customer value in healthcare

• While several plans are finding ways to quantify and measure patient outcomes to shift to value based care models, the first step is to reduce incorrect medical bills paid by patients. According to the Consumer Financial Protection Bureau, incorrect bills could be costing Americans ~$88B annually. From a consumer’s standpoint, the application of more accurate payment integrity solutions to reduce consumer spending on health could not be overestimated.
• Consumers are increasingly making choices in various aspects of their lives to manage healthcare spending. A sizeable portion of the US population chooses employers based on health coverage. 51% of US employees state that health coverage is a driver of retention for them and ~50% of employees are dissatisfied with their current health coverage.

The need for tech transformation in payment integrity is real and startups are constantly introducing new features like AI integration, greater transparency, and consolidation of services. However, while prioritizing among features and identifying the truly value-additive ones, one needs to remember the two key words in payment integrity - accuracy and operational efficiency. Any development to such solutions should be analyzed from the perspective of the ability to generate quantifiable savings through the two key ways to generate value in this space.

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Product Evolution

New age solutions visualise and create the product to be simple, flexible, accurate, and interoperable. In order to achieve success in creating a robust product that meets these needs of payers, companies are focusing on the tech upgrades detailed below:

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In the evolving landscape of payment integrity, new solutions are increasingly designed to be user-friendly, flexible, accurate, and interoperable, aligning with payer requirements. Companies are harnessing AI and ML for advanced analytics and predictive modelling to pinpoint claim inaccuracies, enhancing the effectiveness in pre-payment, post-payment, and FWA (fraud, waste and abuse) analytics. There's a shift towards embedding payment integrity solutions with payer's internal processes, as SaaS platforms gain traction over traditional third-party vendors. Complaint management and appeals often involve tedious provider communication and dispute resolution, creating operational bottlenecks and driving up costs. Automation tackles these challenges, streamlining processes and significantly reducing operational expenses.