How Could America Get Its Medical Debt Problem in Check?

American consumers are deep in debt, and the lion's share of it -- more than a third -- is medical debt. A recent study by personal finance website NerdWallet found that $21 billion in medical debt was collected from consumers in 2012, representing 38 percent of debt in collections.

Unlike most types of debt, medical debt is not usually the result of frivolous decision-making, and is rarely acquired willfully. Who, then, is to blame for this problem affecting 1 in 5 American adults? More importantly, what can be done?

It's Complicated

The majority of health care systems in the U.S. run on a fee-for-service basis. That means every exam, blood test, medication and doctor encounter is billed separately. A coding system is used to classify each service, diagnosis and hospital department to a different cost level. Then the items are tallied by code and result in the final medical bill.

A criticism of the fee-for-service model is that since physicians and hospitals make a cut of each charge, they are motivated to perform more services. This ordering of more tests and services than may be needed can increase charges to health insurance providers and patients.

Even when boiled down to the simplest explanations, health care finance is complex. In 2010 the Affordable Care Act was implemented as a means to control costs, not simplify them. The law extends health insurance, requires universal health coverage ( with some exceptions) and expands Medicaid. In many ways, the ACA made the current system more complicated. Even so, it is projected to save money on health care spending in the long run, according to the Congressional Budget Office.

Seeing firsthand how health care works (or doesn't) has prompted several studies, reports and position statements on possible solutions. Since the U.S. is unlikely to convert to a socialized medicine model, the focus here is on innovation within the current system. Here are two examples and one theory on how to control health care spending and cut costs, thereby reducing medical bills for millions of consumers.

Paying Hospitals a Different Way

One of the most recent examples comes from Massachusetts, a state whose health care reform preceded the national effort. In a study published in the New England Journal of Medicine in October, health insurer Blue Cross Blue Shield compared a new type of payment model with fee-for-service charging. It's called an alternative quality contract, which pays hospitals a global budget, rather than an adjusted fee each time a patient is seen.

The study compared the AQC model with traditional employer-based health coverage from surrounding states. Paying hospitals a global budget reduced costs, and quality of care was increased across all four years the study was run. Physicians were paid flat fees to participate in the program, so the financial incentive to overorder tests for profit was eliminated.

Housing for Complex Patients

Insurance companies aren't the only ones trying new ways to lower health care costs. The Hennepin Healthcare System in Minneapolis has been housing homeless patients with complex medical needs.

It's part of an initiative that pairs housing coordinators with homeless patients who land in the emergency room three times over a year. The coordinators find and arrange rentals for the patients, and Hennepin Health picks up the tab, according to a study published last month in the journal Health Affairs.

Much like the Blue Cross Blue Shield AQC program, Hennepin's initiative came in response to health care reform laws. In this case, it's part of the Affordable Care Act's expansion of Medicaid that penalizes hospitals with high readmission rates. By housing patients who are chronically ill, Hennepin aims to reduce those rates.

But the health system also reduced overall emergency room visits by 9.1 percent and has increased outpatient visits by 3.3 percent. That means more patients are seeking preventive care and need less costly emergency care, thus driving down costs for patients and losses for the health system.

Eliminate Waste

Altering how insurance pays hospitals and how hospitals care for complex but poor patients might result in huge savings if the changes are implemented broadly. However, a former administrator of the Centers for Medicare and Medicaid Services has bigger ideas.

In a joint position paper published in JAMA, Donald Berwick outlines six distinct causes of waste in health care. They include care failures in delivery and coordination, overtreatment, fraud and abuse, overpricing and needlessly complex procedures.

In the paper, Berwick and co-author Andrew D. Hackbarth of the Rand Corporation argue that by eliminating just one of these causes of waste, the health care system stands to save billions per year. If all six were eliminated, the authors estimate savings in the range of $558 billion to $910 billion per year.

The authors go on to say that by eliminating waste at a rate of 4 percent each year, health care costs could be controlled over a period of eight years. Over that period, they project savings would be $11 trillion for all health care payers, including insurance, out-of-pocket payments and Medicaid and Medicare.

The Takeaway

Not all methods of reducing health care costs are feasible everywhere, and some would be difficult to implement nationwide. Solutions do exist, however, and controlling overall health care costs may well be the best way to get America's debt problem under control.