Applying Precedents Thinking to the Intractable Problem of Transaction Costs in Healthcare

Citation: Brooke Istvan, Perry Nielsen Jr, Megan Eluhu, Bryan Kozin, Walt Winslow, David Scheinker, Kavita Patel, Kenneth Favaro, Stefanos Zenios, Kevin Schulman. 2024. Applying Precedents Thinking to the Intractable Problem of Transaction Costs in Healthcare. Health Management, Policy and Innovation (www.HMPI.org). Volume 9, Issue 3.

Link to the paper: https://hmpi.org/2024/11/19/applying-precedents-thinking-to-the-intractable-problem-of-transaction-costs-in-healthcare/

Authorship note (as stated in the paper): Professors Stefanos Zenios and Kevin Schulman are co-senior authors.

Note:  This research review presents an analytical synthesis of the referenced paper, focusing on its core mechanisms and underlying logic.

1. Research Question and Motivation

The paper addresses the high administrative cost burden in the U.S. healthcare market. Administrative costs account for nearly one quarter of the $4.8 trillion spent on healthcare services, and estimates suggest that at least $265 billion annually could be eliminated by reducing this administrative burden.

The paper frames the problem as difficult to solve because of market and process complexity, including 317,987 different health plans, 599,204 codes for products or services, and 57 billion negotiated prices. The authors also note that among OECD countries, the United States spends nearly ten times the average on healthcare administrative functions per capita. Additional contributors include contracting complexity, compliance costs, digitized analog processes (including reliance on phone calls, faxes, and paper/PDF transmission), and the lack of a regulatory body overseeing the market. The academic and policy literature is characterized as suggesting little opportunity to change due to lack of a catalyst, weak market forces demanding change, and limited oversight mechanisms.

The central research question is stated as:

How to create the standardization and infrastructure that’s needed to reduce administrative waste in healthcare?

2. Conceptual Framework: Precedents Thinking

The study applies Precedents Thinking, described as a methodology in the business literature that builds from the observation that innovative solutions are creative combinations of prior innovations (“precedents”) from different businesses and markets that faced similar challenges.

The methodology follows three steps:

1. Frame the problem statement and its key elements (“deconstructions”).

2. Search for precedents relevant to one or more deconstructions.

3. Combine precedents into the best possible workable solution.

A stated motivation for using Precedents Thinking is that large-scale innovation requires substantial investment (money, time/effort, and policy attention), which can be hard to mobilize for “intractable” problems; one theory proposed is that limiting innovation to proven solutions may de-risk the effort sufficiently to attract the investment required.

3. Methods

3.1 Problem Statement and Deconstructions

The problem statement and deconstructions were developed through a workshop using a modified Delphi consensus process with expert facilitation. Participants included research team members, selected outside advisors, and the two developers of the Precedents Thinking methodology. Two breakout groups generated problem statements and deconstructions, which were refined into a workshop consensus statement and refined further over the course of the effort (with the final version reported).

3.2 Precedent Generation and Selection

Using the workshop consensus problem statement and deconstructions, the team searched for precedents with the goal of developing an exhaustive list of firms or markets that had successfully implemented relevant solutions inside and outside healthcare.

Precedents were included if they were:

• highly relevant to at least one deconstruction,

• supported by strong evidence of success beyond luck, and

• more detailed than a common best practice.

Precedent generation included brainstorming, expert interviews, and a final step using ChatGPT, run with prompts based on the problem statement and each deconstruction until the output became hallucinatory or nonsensical.

Each precedent was described with background, insights, and outcomes, and classified by industry, governance (public, private, public-private), and primary mode of change (digitization, centralization, standardization).

To reduce items to a priority set, the team assessed:

• impact (capacity to simplify the system and reduce process complexity),

• feasibility (including governance structure and mode of change),

• trust-building capacity, and

• applicability to the problem statement.

For applicability, the team used a graphical approach to item summarization, applying precedent summaries to the problem statement and deconstructions in 2×2 matrices where each dimension reflected the level to which the precedent solved each deconstruction. Precedents were ranked and a subset of 26 high-priority precedents emerged.

3.3 Creative Combinations

Working group members created creative combinations of two to three precedents that addressed the problem statement through at least one deconstruction. The team refined these into consensus sets and combined them into a final set of precedents and creative combinations for each deconstruction.

3.4 Data Analysis

The authors used descriptive statistics to summarize the precedents.

4. Descriptive Patterns from the Precedent Set

The study generated 82 precedents. A majority (72%) were drawn from Finance, Healthcare, Public Services, and Technology. In governance terms, 57% were private sector solutions, 22% public sector solutions, and 21% public-private partnerships. Regarding mode of change, 49% used standardization, 29% digitization, and 22% centralization as a primary mode of change. 35% were thought to have improved trust.

For the 26 high-priority precedents, Exhibit 1 reports the distribution across industries and shows higher shares in private governance (65%) and increased centralization (38%) relative to the full set; 54% of high-priority precedents were classified as improving trust.

These statistics characterize the precedents identified and prioritized in the selection process, rather than demonstrating measured reductions in healthcare administrative costs.

5. Creative Combination: Proposed Solution Architecture

The final creative combinations aim to solve both deconstructions—contract standardization and payment infrastructure—using a consensus set of precedents identified by the working team.

The precedents explicitly listed as informing the core solution are:

Modularized machine-readable contracts:

• Standardized mortgages

• Mobile phone SSOs

Payment infrastructure:

• SWIFT

• Stripe

• SMART on FHIR

• State utility commissions

• FAA

(With Exhibit 2 in the Appendix providing the complete summary of relevant precedents.)

6. Solution Part I: Modularized Machine-Readable Contracts

The first part proposes implementing modularized machine-readable contracts in a digital and unified manner. The paper notes that payer–provider agreements refer to similar business processes but do not follow standardized structure or fully digital processes; novel features such as value-based payment models can further individualize contracts and often result in analog transactions.

Building from mortgage standardization, the authors propose a single, modularized digital contract format designed to be digitally adjudicated, with a standard structure and set of contract terms (illustrated in Exhibit 3). Typical contract elements include billing processes, payment terms, prior authorization processes, quality reporting, confidentiality, and regulatory compliance. The contracts are defined as modularized rather than uniform: they may be customizable by health plans, but customization cannot alter the requirement for complete digital adjudication. Exhibit 3 further clarifies that differences between contracts would be captured with standardized categories of inputs and outputs, variables, and functions, while edge cases not captured in contractual logic could continue to be handled as in the current state.

To determine final content and technical supporting details, the authors propose an SSO-like process, potentially requiring SMART on FHIR APIs for digital transactions. The SSO could be industry-based (e.g., AHIP) or constructed through the federal government (e.g., HHS or Commerce). The paper also discusses incentive and compensation challenges for collective participation (noting that contract elements may not be patentable, unlike standard-essential patents in telecom).

7. Solution Part II: Uniform Digital Payment Infrastructure

The second part argues that standardized contracts would enable a uniform digital transaction platform for healthcare payments. The paper notes that today health plans use their own claims-processing platforms or rely on clearinghouses, and that heterogeneity contributes to underinvestment in infrastructure—an issue highlighted by the Change Healthcare cyberattack.

Using Stripe and SWIFT as precedents, the paper describes how a consistent payment processing infrastructure could be envisioned that is accessed via APIs and houses (and implements) the digital contracts to ensure integrity of the payment process. The paper highlights that critical infrastructure often requires initial investment followed by self-sustaining financing (e.g., transaction fees), with fees likely to be substantially lower than current per-transaction costs.

The authors also emphasize governance risk: a purely private platform could be subject to rent-seeking over time. As a pathway, the paper discusses creating a public entity or a public benefit corporation to develop and oversee the platform, with public oversight mechanisms supporting transparency and accountability. The FAA and state utility commissions are referenced as precedents for infrastructure governance and regulation.

8. Dynamic Effects: The Virtuous Cycle

Exhibit 4 presents a conceptual mechanism in which adoption of modularized machine-readable contracts and unified digital payment infrastructure catalyzes a virtuous cycle. Standardized, centralized digital payments reduce transaction friction, easing market entry of new firms and products, increasing competition and investment, improving value (quality/outcomes/cost), and generating further investment in digital payment infrastructure over time.

9. Governance Pathways

The paper outlines governance vectors for implementation, including use of existing legislative authority under HIPAA, the Affordable Care Act, and CMS, as well as executive actions around AI to support safe contracting and payment infrastructure. Alternative governance roles include agencies such as the U.S. Labor Department (via employer health plan fiduciary obligations) and the Commerce Department. The authors note that new legislative authority may be required for full implementation and discuss state-level pathways (including Medicaid) as potentially faster routes for piloting and scaling.

A central governance challenge is balancing standardization with heterogeneity: enabling too much complexity risks diluting the economic benefits of standardization, while over-standardization may constrain innovation. The paper discusses SSOs and broader industry–government collaboration as mechanisms to manage this tension and guide adoption and change management.

10. Limitations

The paper identifies three limitations:

1. Other efforts applying the same method could identify different solutions (selection subjectivity).

2. The precedents search could have missed key innovations in the U.S. or globally.

3. The assumptions that solutions generalize to healthcare and scale are untested.

11. Conclusion

The authors conclude that high administrative costs need not be an intractable feature of the U.S. healthcare market. Applying Precedents Thinking, they identify modularized machine-readable contracts and a digital payment infrastructure as a solution that can address transaction costs at scale, while acknowledging remaining questions around governance, piloting, and scaling.