The Cash Market in Healthcare

One year ago Criterion Ventures began investigating the problems associated with debt caused by medical bills to consumers.  Over that time our analysis has led us to see this as a social issue rooted in a broader market failure: a stunted cash market in healthcare.

Understanding the Cash Market

The cash market for healthcare consists of healthcare bills not covered by either public or private insurance, approximately $265 billion per year.  This figure includes charity care and other expenses written off by providers as well as the bills actually paid by consumers.  Large bills for catastrophic care incurred by the uninsured or underinsured are included in this figure, but should not be part of the cash market.  They are better understood as a failure in the insurance market.  What does remain—primary care, urgent care, co-pays, and deductibles—is a market that is ill formed, with opaque and inflated pricing structures, confusing billing practices, few helpful intermediaries, and few appropriate financing options.

The inefficiencies of the cash market are highlighted by looking at three factors: how services are priced, how the cash market affects the delivery system, and the financial services that intermediate the process of payment. 

Currently, the consumer is faced with a fragmented and opaque pricing system (co-pays, deductibles, stop-losses, etc.), which are a result of intense negotiations between insurance companies and providers.  The resulting fractured pricing system makes it difficult for the consumer to understand costs, to plan for expenses, and to make informed decisions about care. These results have a disproportionate impact on those most vulnerable in our communities, those disenfranchised from banking services, unable to access insurance, and ineligible for the cost-savings created through bulk purchasing agreements.  Typically the uninsured pay three times the price for a procedure as the insured.

The cash market is also creating barriers to access.  Patients are avoiding doctors they owe money to, doctors are turning away patients without insurance, and large providers are offering services that are more likely to be covered by insurance — like care for heart attack victims — than programs less likely to be covered, like wellness programs that prevent heart attacks.

With the increasing demand placed on patients to finance their own healthcare, there has been an influx of financing options.  Consumers have several choices to cover medical costs, including credit cards, health finance cards, health savings accounts, and flexible spending accounts.  These payment options vary in their costs and complexity to the consumer in accessing them, making them more or less effective. 

In order to create a more effective cash market, we will need to construct more effective forms of intermediation that go beyond collection agencies and credit card offerings.  These intermediaries will be able to provide financial services that link savings options to credit offerings and that aggregate buying power to negotiate lower transparent prices and billing systems that cut through the current opacity in the system.  In some cases credit may need to be offered at rates consumers can afford.  This may mean finding ways to adjust risk downward through the use of subsidies, risk pooling, etc.

By creating a cash market with transparent pricing and billing that utilizes appropriate delivery systems and offers consumers effective financing and payment options, we will be able to lower the overall cost of care within the cash market.  This will not only save consumers and providers money but also will allow for greater access to care overall.

A Plan of Action

Rationalizing the cash market for healthcare will take the introduction of new products, services, and other innovations.  Luckily, most of these tools and services already exist and just require realignment and repackaging.  Rather than targeting one consumer at a time, affinity groups (such as large employers, unions, congregational networks, and small business associations) are needed as a way to manage risk, build power, and provide leverage in negotiating with large local players.  Customized solutions that will include a combination of common financial products, including lines of credit, individual savings accounts, shared savings accounts, and prepayment of services designated for a group can be created for each affinity group.

Of course, rationalizing the cash market may produce unintended consequences, the most obvious of which is an actual expansion of the market resulting from employers who shift more of the cost burden onto employees.  However, we believe the opposite will happen.  Either way, the consequences in the system—intended and unintended—need to be monitored closely.  The action plan aims to increase the value of the dollar but not shift the burden to the consumer. 

Moving forward will involve building partnerships in order to offer products and services, adapted from other markets, with the intent of rationalizing the cash market in healthcare.  Engaging groups locally but coordinating them nationally, will achieve the cost benefits of scale, diffuse local-level risk, create standards for the entire market, and get to the critical mass needed to create systemic change.  By rationalizing the cash market for healthcare, we will be able to increase the value of the cash dollar in healthcare, empower consumers to make wiser choices, and lay the groundwork needed to support new and innovative delivery systems. 

The above was excerpted from a full-length research report titled "The Cash Market in Healthcare," from Criterion Ventures. To read more about the cash market in healthcare, you may download the full report in the Free Reports section of insideARM at http://www.insidearm.com/go/free-reports/the-cash-market-in-healthcare. For further information please contact Elizabeth McCance, Project Manager, at mccance@criterionventures.com or Michael Klozotsky, Analyst, at mklozotsky@kaulkin.com.