Pushing checks out of U.S. health care will be hard, payment firm exec warns

Rectangle — a Valhalla, New York-based company with ties to Fifth Third, Wells Fargo and U.S. Bancorp — is keenly interested in EFT methods.

The company recently introduced a paper-free health care payment service based on a virtual credit card framework.

Peluso said health plans and health care providers now face a big obstacle to dumping paper checks: They've focused on what Rectangle believes to be the wrong electronic funds transfer strategy.

Today, he said, many providers are relying on ACH-based payment systems that separate patient health information messages from the payment messages.

"Accessing extended patient data is crucial for payers and providers in order to accurately and efficiently process payments," Peluso said.

The backdrop: Congress made the paper check a dominant payment system in the United States by enacting the Negotiable Instruments Law in 1881.

EFT-based payment methods began to cut into checks' market share in the 1990s.

U.S check processing volume peaked at around 79 million checks per day in late 1992. This year, volume has fallen to about 11 million checks per day, according to the Federal Reserve Board.

ACH transactions: NACHA began to develop the ACH-based EFT standards in the 1970s.

Many health care organizations that want to reduce use of paper checks shift to ACH payments, Peluso said.

ACH service fees are low, but the payment message format lacks space for the information health care organizations need to send along with payments, Peluso said.

Health care organizations also have to send separate patient health information messages because the health data privacy regulations in the Health Insurance Portability and Accountability Act of 1996 do not apply to ordinary financial institution payment messages, Peluso added.

"Banks avoid this data to limit risk, because handling health-care-specific remittance data does not provide them with business value," Peluso said.

Because of the split between the payment messages and the health information messages, health care providers now need expensive, error-prone efforts to connect the health information messages with the ACH payment messages, he said.

The card strategy: Rectangle built its new system around a virtual credit card framework. The company believes that's a better approach, because a virtual card transaction can include the payment information and the patient health information in the same HIPAA-compliant message, Peluso said.

Processing of a virtual credit card system is also faster than ACH transaction processing, and the network for processing a virtual card transaction can detect fake or incorrect numbers automatically, he said.

The market: One obstacle to virtual credit card adoption is some providers' concerns about credit card network processing costs.

The American Medical Association posted a comparison in 2023 showing that the processing costs for a $5,000 transaction could be just 34 cents for an ACH transaction and $250.10 for a virtual credit card transaction.

The Centers for Medicare and Medicaid Services said in 2022, in an answer to a frequently asked question, that a provider can ask a health plan to make payments for care through the ACH network rather than through a virtual credit card system.

But Peluso has argued that the ACH-based strategy to collecting payments is so difficult and time-consuming that the full burden of using an ACH-based system is heavier than the cost of virtual credit card processing fees.