The effect of the imminent Train Wreck on the financial markets is an area we haven't examined. (The train wreck cannot be avoided, though CMS could certainly take steps to mitigate the impact. But that's another email.)
Like other aspects of the transition, this financial market impact will take place because what is the logical thing for an individual entity to do could have a "tragedy of the commons*" effect for the industry as a whole.
Many commentators (Andy Melczer of the Illinois State Medical Society being one noteable example) have suggested that the first item in a provider contingency plan for the October transition should be, "Secure a line of credit." Based on situational analysis and anectdotal evidence, this would seem to be good advice. A reputable source at the WEDI conference told me of a large provider network that converted to a new billing system and subsequently failed to make payroll when their claims could not be processed. She suspected that it had to do with an inability of the system to send non-X12 claims -- or X12 claims that the recipients agreed were 100% complete and error free. (Bet they wish they'd added Contingency Planning to their To Do list.)
But, as with the "paper claims avalanche" there are broader implications. As many are fond of repeating, we're talking about the foundational transactions that undergird an industry that represents 1/7 of the US economy. What are the implications of significant portions of this population simultaneously seeking credit?
Imagine you are a banker. On Monday, a cardiologist comes in and says, "Sir or Madam, I'd like to secure a line of credit for my practice. We're undergoing a systems upgrade that might temporarily affect my receivables, and I'd like to guard against any disruption."
Tuesday, a radiologist comes in with a similar request. Wednesday it's a small hospital, Thursday, two more physicians.
At first you'd probably be pleased to extend the loans. Loans are, after all, how banks make money. But after a pattern emerged, you might wonder whether there was an underlying risk. Maybe, as a local banker, it would be too much for you to fully research. So you'd call the home office. Funny, though, the home office is getting similar calls from every branch.
Suddenly, health care providers are deemed an industry at risk. There isn't enough available capital to extend credit to them all.
Maybe this wouldn't happen right away. After all, the number of providers who are "hip to HIPAA" are relatively low. Would that save us Hipsters? Would it save the others? I don't think so. It will be those providers who wait (intentionally or not) until late in the game -- maybe September -- maybe November, when things really start hitting the fan -- that cause a serious run on available capital resources.
Where will the money come from?
Well, the obvious answer is, "From all those unsettled claims!" The insurance industry will be awash with cash -- though costs will be rising for them, too. And the cash won't necessarily be theirs to play with, since it will be encumbered by unsettled, and perhaps unsubmitted, claims.
The AHA has suggested a muddled system of "contingency payments." Sounds like a good idea, in theory. But when I suggested such a plan to my Business Office manager, he said that would be a nightmare. How would he ever be able to reconcile the payments?** The efforts necessary to settle the payments (thousands of individual loans, actually) with dozens or hundreds of payers would, down the road, be another immense burden on an overstretched business office staff.
In an effort to simplify, I came up with what I call Marty's Hare-Brained Financial Scheme.
My thought is that the insurance industry would use some formula (such as the AHA's "average daily claims/average daily payment" calculation) to make deposits into a capital pool, which would then be used to secure lines of credit for the provider community. Beyond involving thousands -- maybe millions -- fewer transactions, there are some built-in incentives:
- Payers could collect interest (such as it is) from their deposits, helping to ameliorate any increase in costs for paper claims processing.
- Providers, on the other hand, would be forced to pay interest on any credit extended, which would urge them more quickly toward compliance.
- Payers might also be more willing to agree to a solution that involves them "paying themselves" rather than turning loose of trainloads (get it?) of cash that they know they will eventually need to settle claims.
- If the whole "train wreck" doesn't happen, or more likely, if CMS steps up to the plate and takes some serious action to mitigate the damage, then the need for credit and deposits would scale down automatically, minimizing disruptions on both sides of the equation.
Now, I don't know diddley-scoot about banking, or setting up financial instruments, etc. But I know something about transactions and the costs they incur. In my hare-brained scheme, there is a "no harm, no foul" aspect -- if the impact doesn't affect an entity "too much" -- ie a payer's ability to process claims doesn't drop significantly, or a provider manages to send out perfect transactions every time, then the impact on them personally is correspondingly reduced. And instead of making "pseudotransactions" with all their trading partners (eek!), the parties simply go to the bank and either deposit money in their own account, or withdraw money as they need it. No mess.
The overall costs of the contingency is dramatically reduced, because the need to make external transactions (apart from the existing claims and remittances, etc.) is nearly eliminated. After a decent interval (maybe 12 months, maybe more), the capital pool could dry up. Payers get their money back (whatever is left, since they would only deposit an amount equivalent to unexpected, unsettled claims), and providers, if they still need credit, could secure it the old fashioned way -- put up their Lexus for collateral.
A Challenge, and a Confession
And if anyone can provide credible reasoning (not, "Marty, you're just plain wrong!" which is credible, but not reasoning) why there will be no impact on financial markets, I'll be glad to entertain it. After all, my last Econ class was twenty years ago, and money might have changed since then. I'll admit to being an amateur.
Things We're Not Talking About Now
But don't ask me about what happens to health care premiums when all the insurers' actuaries realize they don't have enough data from settled claims to accurately price current contracts. Uncertainty equals risk, after all, and risk costs money. And let's also not talk about what happens to rates of fraud when markets are thrown into chaos. All of that nastiness is not necessary -- if CMS starts to read the writing on the wall, instead of reciting the implementation guides as if they were holy writ. And if we providers and payers, clearinghouses and software vendors also need to come up with some innovative approaches to reduce the impact.
But on the financial side, something will need to be done. Soon.
* Thank you, Peter Barry for bringing this metaphor into the discussion. The tragedy of the commons was first observed in the public grazing areas or "commons" of rural England. It was to each shepherd's individual advantage to add sheep to his flock, but the collective effect was to deplete the community grazing area, as all shepherds were subject to the same incentive model. When the commons could no longer sustain the increase of the flocks, all the herds were decimated, and the economy of the village was destroyed. Makes you kind of appreciate that mountain of paper claims, though -- imagine what their mountain was made of!
** This is not to suggest that my Business Office manager, or my hospital, would turn away contingency payments. We'll figure out what to do with the money, if we must!
Martin Jensen
Project Manager
St. John Health System
918-744-3234
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