How to pay for health care

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As the presidential campaigns heat up, all the candidates are talking about fixing the health-care crisis in America, but no one is addressing how to pay for it.

American health-care expense are projected consuming 20 percent of the gross domestic product by 2015, up from 16 percent in 2004.

Spiraling health care costs threaten the competitiveness of U.S. companies and the economy's long-term prospects. Companies are forced to increasingly transfer health-care expenses to employees and retirees. And the federal budget is burdened by the more than 45 million Americans who can no longer afford health insurance.

Ironically, the single biggest cause of this growing expense is not the delivery of health care itself, but the highly manual, paper-intensive processing of these medical transactions and payments between health insurers and medical service providers.

In fact, the delay of payment to is so long (on average 60-90 days), that this debt is often sold in the financial markets as an asset-backed security. This lag time is why medical service providers increasingly require customers to pay upfront for medical care and employer co-pay requirements are growing.

Health-care costs are projected to run in excess of $2.5 trillion yearly by 2015, and about one-third of that expense (or between $655 billion to $800 billion) will be incurred due to the error-prone and manual process of handling medical claims and payments to medical service providers.

A recent study by the Harvard Medical School supported this point, finding that 28 percent of health care expense in California went to administrative paperwork.

The question of how to pay for health care, therefore, is quite simple. We have to automate and leverage greater efficiencies out of the current system. If we can save $600 billion a year by eliminating costs associated with manually processing medical claims, this could substantially offset the health insurance costs of 250 million Americans. Just do the math.

The health insurance industry, historically, has lacked incentive to achieve this type of efficiency in settling payment of claims. Delaying payments allows the industry to make use of premiums for other investment purposes. Secondly, the industry lacks an automated and centralized infrastructure, linking insurance carriers with all of their trading partners (e.g., hospitals and medical service providers).

Ironically, the financial services industry was threatened with a similar paperwork crisis more than 30 years ago. The New York Stock Exchange (NYSE), which traded only 15 million shares each day, had to shut down one day a week to catch up with processing paper records associated with trading securities. Today, on a peak day, there can be 11 billion shares traded across all equity markets.

The financial services industry realized that lower costs, greater efficiency and growth were possible only by creating a centralized clearing corporation to automate and streamline payment of financial obligations.

National Securities Clearing Corp. (NSCC) and The Depository Trust Co. (DTC) were created in the 1970s to bring about this automation. The Depository Trust & Clearing Corp., the corporate parent of NSCC and DTCC, last year settled in excess of $1.8 quadrillion in securities transactions.

Creating a Health Care Clearing Corp. (HCCC) modeled on the successful experience of the financial services industry could be a significant step in cutting health care costs. Today, the health-care industry looks like a big plate of spaghetti. Many insurance carriers and medical service providers have internal back-office technology systems, but few connect with anyone else. Much communication between parties is cumbersome and manual.

An HCCC would operate more like the hub of a wheel with spokes electronically linking medical service providers and insurance companies to a central point where data can be processed and exchanged.

The HCCC would eliminate the need for medical service providers and insurance companies to manage separate procedures and processes to submit claims. And standardizing data exchange and recordkeeping would speed payment of claims.

Health-care insurance carriers incur huge costs today by distributing millions of individual checks to cover their obligations to hospitals and physician groups. In contrast, firms in the securities industry pay for all their stock trading once a day, using the Federal Reserve"s Fed wire system for electronic funds transfers.

In the coming presidential campaign, health care will be among the three issues (next to the economy and global leadership) deciding the election. Regardless of political party or persuasion, the answer to the rising tide of health-care costs lies not within the stars, but in forcing greater efficiency out of the current system.

Stuart Z. Goldstein is a financial services executive in New York with a background in health-care issues.