On Payers

The leaves are falling in the northeast, which can only mean one thing—it's open enrollment season. Time to wade through excruciating details in order to choose the level of health coverage that you deem necessary, covering every possible (high) price point. Why do people in the United States do it this way? A few months ago, we wrote about the historical accident that is the current employer-sponsored healthcare insurance system in the US. Today, we explore another idiosyncratic feature of the American healthcare system, its payer system. What is a payer? How does it interact with other actors, like providers and pharmacies? How is it evolving?

In healthcare, a payer is an entity responsible for financing medical services and covering the costs associated with healthcare delivery. Payers can be public or private, and their role is crucial in determining how healthcare is accessed and paid for. They typically set service rates, collect payments, process claims, and pay provider claims.

Health care in the United States is currently a hybrid, multiple-payer system:

1. Private Health Insurance
Individuals and employers purchase insurance plans from companies such as Aetna, Blue Cross Blue Shield, or UnitedHealthcare. The plans vary in terms of coverage, cost, and provider networks. As we explained in our earlier piece, tax rebates for employer-sponsored insurance subsidize, in large part, this type of private payer.

2. Government Payers
In many ways, the US healthcare system includes elements of single-payer systems that we can find in countries such as Canada, the UK, or Australia, with Medicare (for seniors and certain disabled individuals) and Medicaid (for low-income individuals and families). Taxpayer dollars fund these programs (at the Federal level for Medicare and the State and Federal level for Medicaid) and provide coverage for eligible beneficiaries, although some beneficiaries also contribute through premiums.

3. Self-pay
Individuals also make out-of-pocket payments for healthcare services not covered by their insurance plans.


Over the past few years, much political debate has focused on whether the US should shift to a universal single-payer system. While we can argue about the virtues of such a system, some contend that the terms “single payer” and “multi-payer” can be misleading. Instead of counting payers, as the terms single- and multi-payer suggest, paying attention to which organizations in the system are buying health care and whether they pay the same prices can help better describe complex dynamics.

If various payers pay the same prices, they are in a de facto monopsony—a market where there is effectively only one payer. This applies to some multi-payer systems (in France), true single-payer systems (in Canada or the UK), and, typically, all universal healthcare systems (in Scotland, Japan, Austria, Taiwan). These systems all combine some form of monopsony where the government helps control prices and ensures everyone has basic health coverage at a given price. As a result, the politics of systems labeled “single payer” and those labeled “multi-payer” will often look quite similar because they share key features, such as universality, government accountability, monopsony, and price controls.

As such, the primary difference between the US and universal systems is that the US relies heavily on fragmented private health insurance companies that will negotiate prices with providers and pharmacies and offer a multitude of bundled products to their clients. Some have touted the advantages of having the ability to price care more freely. They cite a great choice of coverage and providers and more innovation in both how medicine is delivered and cutting-edge drugs.

While competition was supposed to keep costs to patients in check, letting some version of the invisible hand take care of the healthcare market comes with disadvantages:
– Heightened administrative costs due to the complex billing and claims processing associated with multiple private insurers;
– Higher costs of care in general as countries with universal healthcare often employ cost-control measures, such as negotiating drug prices and regulating healthcare fees, to keep healthcare costs in check; and
– Some coverage disparities as the US faces challenges in ensuring equitable access to healthcare

It is worth spending a moment on administrative costs. Recent studies identified administrative complexity as the single biggest component of excess U.S. spending compared to other OECD countries. More specifically, health spending associated with administrative costs of insurance — such as determining eligibility, coding, submission, and rework—accounts for about 15% of the excess spending. Similarly, administrative costs borne by providers—general administration, human resources, complex billing procedures, and quality reporting and accreditation—account for roughly another 15% of the excess  spending (see here for a good study comparing these costs).

To cut these costs and expand their businesses, some insurance companies scaled up their claim rejection rates, while some of the largest payers in the US started integrating their insurance practices with care and services providers and pharmacy benefit management companies (PBMs). As such, these organizations provide health care in facilities they control with physicians they employ to patients they insure. The UnitedHealth Group is a great example of verticalization on the private side with UnitedHealthcare as the payer and Optum as the medical care and services provider. This model has had its successes on the public side with socialized medicine, where the government provides all aspects of health care: it employs healthcare professionals, runs healthcare facilities, and pays for all care. In this respect, the US Department of Veterans Affairs is a perfect example of socialized medicine.

Within the complex landscape of the American healthcare system, payers play a pivotal role in determining the price of care, deciding what procedure or medication will be reimbursed, and controlling some of the care delivery. The very high cost of care in the US compared to the rest of the world is in part due to the fragmented nature of who is setting the cost of care. But at least Americans are afforded the sublime pleasures of reading the fine print in order to choose between PPOs, POSs, and HMOs.

– Jonathan Friedlander, PhD & Geoffrey W. Smith



First Five
First Five is our curated list of articles, studies, and publications for the month.

1/ Orange is the new growth
We all know the carrot gets its orange color from the presence of carotenoids. What a new publication from Nature Plants uncovers is when the orange carrot became the overwhelming norm. Through deep genomic analysis, researchers retrace the history of carrot domestication and improvement, highlighting how the orange color was selected serendipitously alongside other more important traits related to growth.

2/ A new map of the brain at unprecedented resolution
By combining non-invasive imaging techniques, investigators have created a comprehensive cellular atlas of a region of the human brain known as Broca's area at micrometer resolution. Mapping brain cells precisely will allow a better understanding of neurological processes and diseases. They published their impressive study inScience Advances.

3/ The gene for good parenting (in mice)
Whether one is a good parent might be in one’s genes!  At least, this is what a new study published in PLoS Genetics shows in mice. The team of researchers was able to trace whether a mouse was a good or bad parent back to imprinted genes in key neurons in the "parenting hub" in the brain.

4/ Let’s try to understand why the kids are not alright
Because so many parameters are present, it is methodologically hard to show how Social Determinants of Health (SDOH) may influence child development. A large study in JAMA achieves this goal by showing that an unbiased quantitative analysis of multidimensional SDOH can permit the determination of how these determinant patterns are associated with child developmental outcomes. Unsurprisingly, children exposed to socioeconomic deprivation showed the worst outcomes relative to other SDOH categories.

5/ A window into the heart
Following our post on Seeing Biology, we would be remiss not to mention the result of the Reflections of Research science image competition. This year, the British Heart Foundation recognizes the work of Dr. Marina Strocchi from King’s College London. She created a computer-generated image mapping the thousands of muscle cells that make up the wall of the heart. Not only informative but beautiful.



Engineering Biology
Jacob Oppenheim, PhD, and Entrepreneur-In-Residence at Digitalis Ventures, writes Engineering Biology at Digitalis Press:

Remember big data? How could companies discern things about you, you didn't even know just from your online habits? Jacob wrote about how this endeavor fell short, where and why big data has failed to meet expectations, and how the web became a panopticon of tracking tools. In a follow-up piece, he proposes a new way of thinking about how to pair the need for privacy with the serious benefits of population-level datasets.



Digitalis Commons
Catalyzing Health

Digitalis Commons is a non-profit organization that builds frontier-advancing, scalable solutions that have an outsized impact on important problems in health and health care.

Coming in November is the inaugural Notes on Catalyzing Health, a bimonthly newsletter from the Digitalis Commons. Stay tuned for new and expanded content from the Commons team.


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