A Cure for Health Insurance “Sludge”

(Jeffrey Pfeffer and colleagues at the Stanford Graduate School of Business recently found that administrative “sludge” in health insurance costs employers and the economy billions of dollars in squandered work time, employee stress, absenteeism and reduced productivity. In this post, we suggest that the use of computable contracts technology can help mitigate this problem.)

photo of health insurance paperwork

In November 2018, I visited my physician for an annual check-up. During that visit, my physician recommended that I get an injection of a vaccine as a preventative measure. I asked him how much it would cost. He said that he did not know. Upshot: I skipped it, planning to find out later and get the injection if it was not too costly. I called my insurance company, but trying to get through to an appropriate agent was so time-consuming that i gave up. I never got the injection, at a possible risk to my health. This is the state of health insurance today.

On another occasion, I was talking with an agent for my health care provider and asked about the cost of a procedure. I was told that the provider and my health insurance company were in dispute over whether their existing contract covered that procedure. So she was not permitted to answer my question. This is the state of health insurance today.

Subsequent to these events, I found myself trying to decide which insurance company to use in the next year. As a test, i tried to discover how much of the cost a company would cover for a specific injection. Unfortunately, the sales representative did not know that detail; and, when I tried to get that information from the company, i could not reach the person who could answer that hypothetical question since I did not yet have a contract. This is the state of health insurance today.

Most everyone i know has stories like these. A recent article by researchers in the Stanford Graduate School of Business discusses the challenges of managing health insurance – the phone calls, the forms, the unnecessary payments and subsequent refunds or lawsuits. They refer to these cumbersome activities as health insurance “sludge”. And problems like these are not restricted to health insurance. There are similar problems in auto insurance and homeowners insurance.

The insurance ecosystem today is fundamentally a world of contracts – contracts between insurance companies and insurees, contracts between insurance companies and contractors (health care providers, home builders, auto repair shops, etc.), and contracts between insurees and contractors.

The sheer number of contracts and their complexity makes it difficult for the parties in this ecosystem to function optimally. Insurees frequently experience insurance as opaque, slow, expensive, and inflexible. Contractors are frustrated by lack of transparency and payment delays. And insurance companies miss opportunities that would arise from better management of these contracts.

One approach to mitigating this problem is to replace ordinary textual contracts with “computable contracts”. A computable contact is one that is specified in sufficient detail that it is possible to determine the compliance of any relevant set of circumstances with the terms and conditions of the contract. Importantly, it must be possible for a person or a machine to make this determination in a purely mechanical way – without the help of human experts and without further clarification from the contracting parties.

Practical computable contracts technology would provide benefits for all. Insurees would be able to get answers to questions about real and hypothetical scenarios and would be able to select and customize coverage. Health care professionals would benefit from easier reporting and payment, and physicians would be able to help their patients understand trade-offs. Insurance adjustors would be able to process claims more efficiently, and insurance companies would find it easier to author and analyze new insurance products.

Insurance sludge is not inevitable. Some forward-looking insurance companies (such as Allstate and AXA) are aware of the problem; they see the potential offered by the technology of computable contracts; and they are beginning to work actively toward transforming their industry. And CodeX has recently established an “Insurance Initiative” to facilitate this effort and nurture the creation of suitable technologies – a contract definition language, software for processing contracts encoded in this language, and a contract management infrastructure. (See https://law.stanford.edu/projects/stanford-computable-contracts-initiative/.)

Citation: Genesereth, Michael R.: “A Cure for Health Insurance ‘Sludge'”, Complaw Corner, Codex: The Stanford Center for Legal Informatics, 2021, https://law.stanford.edu/2021/03/31/a-cure-for-health-insurance-sludge/.