The US health care payment system, which processes $1.9 trillion a year, is ripe for transformation. The system is inefficient, consuming 15 percent or more of each dollar spent on health care, compared with about 2 percent for the payment system in retailing. Expenditures on the processing of bills, claims, and payments; bad debt; and other transactions total more than $300 billion a year. Furthermore, without new approaches to streamlining the payment system, the movement to consumer-driven health care plans will likely drive up administrative costs and further frustrate patients. If left unaddressed, excess spending may undermine the emerging consumer-centric model, which promises to rein in medical costs and help expand access to insurance coverage.

Exhibit 1 shows the flow of dollars between the major entities in the health care system. The inefficiency is concentrated in the $250 billion that consumers pay to medical providers, such as doctors and hospitals, as well as the $1.3 trillion that insurance companies send to them. The crux of the problem is a mix of high transaction costs and the lack of an efficient way to make consumer-to-provider payments (Exhibit 2). The processing of transactions remains fragmented, paper based, and manual, despite progress by...