November 19, 2021 - 12 min read
The world around us is surrounded by little inefficiencies. For instance, one might find oneself walking in a park on the sidewalk, only to find that a dirt path has formed in the grass where people took a shortcut and cut the corner too sharply, walking right through the lawn like others arriving previously. This phenomenon is called a desire path, and it is present in nearly everything we do, design, or create. A desire path is the path of least resistance, the most efficient and comfortable path from A to B. Interestingly, life on earth seems to naturally seek desire paths out where they can be found.
Hospitals’ inefficient management of patient records, and their legal inability to share patient data with other hospitals, is perfectly suited for a ‘crypto desire path’ to emerge. The day-to-day management of hospital paperwork requires entire departments to manage, with insurance claims having their own sub-department dedicated to handling patient claims, reinsurance, fraud incidents, seeking updated patient records, and other administrative tasks. The same inefficient models plague insurance companies, as patients experience life changes which do not make it into the databases of various entities holding patient medical or insurance records.
Patients update their records each time they visit their local clinics, but that data becomes trapped in local silos, due to both technological and legal limitations. Therefore, it is not easily shared with other healthcare or insurance providers, though it may be vital for saving patients’ lives and reducing friction during hospital admissions and billing processes. For example, patients’ medical histories may be relevant, though stored at their local hospital, trapped in a data silo.
Consider a hypothetical incident in which someone must visit a hospital while on holiday. Treatment at the new hospital may need to be done without access to the most updated and relevant medical information. What’s more, the insurance policy of the patient may not be up to date as it had been some time since the patient’s last visit to a particular location (data silo), meaning a human had not manually updated the patient’s data.
Also, the updated data which is collected at the new location is only as good as the collection methods at the time and a number of other factors, not to mention the disposition of the patient. In other words, relevant information may fall through the cracks at a number of levels, leaving doctors and patients working blindly, so to speak. This is where blockchain can add immense value to the insurance industry by reducing inefficiencies and redirecting resources towards productive measures and improved services.
Currently, insurance companies must form and maintain very specific contracts with insured patients, meaning that a variety of events must be recorded, communicated, negotiated, and approved by a collection of humans before payment is cleared and a policy claim filled. Not only is this a tedious task, but it is costly for insurance providers too. Countless employees spend their days with phones sitting on their desks, waiting on hold while an automated answering machine reads out instructions or puts them on hold before speaking to another human.
This manual process costs the employees time and the insurance company money, both of which could be better spent. To further complicate things, the U.S. federal government currently pays out over $900 billion dollars annually in subsidies for persons under 65 years old. That figure represents the amount disbursed separately from Medicare, which the U.S. federal government offers seniors as a baseline, affordable healthcare option.
Some portion of that money is being misallocated either due to insurance fraud, embezzlement, overcharging for services, the logistics of tracking and maintaining patient records and negotiating with various third-parties involved in the claims process, not to mention the accountants required to track and audit all of these finances at each institution. The technology makes the management of this data easy to do and simple to safeguard cryptographically, not to mention the amount of productivity that will be gained as the weight of data management and fraud detection become automated.
The health insurance industry employs nearly a million U.S. workers, and let us assume that they are all working as efficiently as they possibly can in their current circumstances, maximizing their potential to serve customers with efficiency and skill. As an analogy, now consider a million workers whose jobs it was to dig holes in the ground across the world as efficiently as they could, and then fill those holes again before nightfall. Everyone in such a world would be working hard, doing their jobs as perfectly as they could. However, little to no value would be created, as everyone would be too busy, tired, and irritable, to do anything really important or groundbreaking.
Keeping with the analogy, imagine if a technology emerged so great that it could dig the holes and fill them automatically, knowing exactly when the hole was dug and needed filling, or vice versa. Those people could all be employed towards more productive ventures, making them happier and more capable of successful coordination across a multitude of domains ranging from economical to social and beyond.
Considering the opportunity cost of all the inefficiencies in handling patient medical data and insurance policy information, the incentives to innovate are perfectly aligned to bring blockchain and related cryptographic technologies to the health insurance industry, among many others, over the coming decades.
The Bitcoin blockchain is lauded as the ultimate store of value in part because of its open, distributed ledger, supported by ‘miners’ that confirm new blocks of transactions and record them on the blockchain. By making the mining process artificially difficult and time-consuming, its proof-of-work consensus model would require malicious actors to control 51% of the network in order to successfully tamper with it, which has become more unlikely as its ubiquitousness has reached new heights.
The idea of an open and transparent network may seem an attractive concept for banking and financial matters. On the other hand, the same notion may arouse fear when considering one’s medical records being stored in an open and transparent database. For example, one’s medical history could potentially be placed on a distributed ledger that hospitals were able to share and access, and smart contracts could be drawn up to settle insurance or reinsurance claims, not to mention check for fraud easily.
Insurance providers could become much more efficient, but it would come at the cost of everyone’s medical data being put at-risk. It should be worth asking the question: is a more-efficient health insurance industry worth sacrificing the privacy of one’s medical history and data? Fortunately, that trade-off is completely avoidable as a result of blockchain’s evolution during the previous decade.
Instead of just putting one’s data on a fully-public and transparent ledger, one can now do so but with a password-protected key that users could generate in order to allow viewer-access to only the relevant data. This is where it is important to understand what a permissioned blockchain is. Permissioned blockchains essentially create access-restricted areas of a respected blockchain, and are increasingly being implemented by industrial-level enterprises.
On permissioned blockchains, users’ identities and roles must be defined for them to access certain sensitive data on the blockchain, adding another layer of security in addition to those already overt in cryptography. In other words, both providers and patients can host and share critical data on a decentralized and transparent ledger, but with the additional benefits of protecting patients’ and providers’ privacy rights. IBM is already offering Digital Health Passes on its blockchain for users to upload their COVID status or health credentials and share it when mandated in a way which is verifiable to authorities.
Despite the proliferation of online brokers and insurance providers’ own web applications, patients often call insurance policy brokers by phone to negotiate and purchase new policies. Likewise, their use of physical paper contracts or legacy technological infrastructure means they require human supervision, and are prone to error, corruption, or security breaches. After all, the process of tracking and auditing all of this data is tedious and overwhelming.
This combination makes it difficult to simply keep up, let alone detect anomalous behaviors. As a result, insurance providers are obligated to allocate tremendous resources in order to track, trace, and log user data, not to mention calculate an individual’s risk, which relies on timely and up-to-date information.
Given the complexity of the insurance industry and the amount of capital involved, fraudulent and malicious actors are a constant nuisance. According to the FBI, the cost of insurance fraud in the U.S. may be up to $40 billion per year. This would cost the average family between $400-$700 in the form of added premiums, per year. Even ignoring the effects of inflation on such costs over time, it is clear that there is a need to shore up oversight when it comes to insurance fraud.
Blockchain addresses these and other inefficiencies by automating the KYC and anti-fraud detection processes, storage of and access to sensitive personal information, and the issuance of policies and filing of claims. For example, storing insurance claims of many insurance providers on a distributed ledger would make the detection of suspicious behavior quicker and more effective.
Currently, insurance providers’ ability to share claims information and detect fraud is all but crippled by data privacy constraints; unfortunately, the result is insurers passing the cost of their losses on to their customers with higher premium prices. Therefore, the adoption of blockchain technology should drastically curtail bottom line costs while improving services. Early adopters of the technology will be able to offer insurance products at rates that are unfeasible using legacy network systems, as will be described below.
The question now is, at what point on the bell curve are we currently at in Q4 of 2021? According to Geoffrey Moore’s Crossing the Chasm (1991), a main distinction between the “early adopter” and “early majority” phases of technological adoption is the presence of a clear market leader or “gorilla.”
In the early majority phase, he says, the question is not a matter of picking winners and losers, but more a matter of getting exposure to the technology before the market passes one by. Though early adopters have already established themselves comfortably in the space, it is not clear that blockchain insurance has gained enough mainstream understanding or acceptance for one to declare Moore’s “big scary chasm” is behind us.
In the adoption of private blockchains by insurance providers, the market is probably in the late stages of Moore’s “early adopters,” or perhaps already knocking at the doors of early mainstream adoption. Most likely, the biggest roadblocks will come in the form of regulation, education, and time itself. Nevertheless, once the chasm has been crossed, mainstream adoption of the technology will go parabolic as late adopters will no longer be able to compete with those who have embraced blockchain.
IBM’s Open Insurance Data Link (OpenIDL) was the first blockchain platform to be deployed on a broad scale by insurers, beginning in 2018. The American Association of Insurance Services (AAIS) began its use of IBM’s blockchain network to connect insurance providers via the exciting new technology.
To participate, insurers have several options for node operation: managing their own OpenIDL nodes, using a multi-tenant system managed by AAIS, or utilizing another AAIS-managed analytics toolkit to publish extracted information. To be clear, nodes are simply network participants which validate newly proposed transactions against their copies of the blockchain ledger.
This blockchain network harmonizes data from numerous sources and makes it accessible to state regulators, while keeping competitors from viewing sensitive information. Each and every company is protected on their own private, permissioned channels on IBM’s Hyperledger Fabric, meaning only those with permission may access secure data.
By securely aggregating and indexing insurance carrier policies, claims, and transactions, OpenIDL and AAIS may drastically reduce their regulatory compliance burdens, catalyzing a shift towards improving the customer experience and the development of new products and services. In addition to health insurance, life, auto, disaster, and homeowners insurance products will become ubiquitous after the first early movers begin establishing market dominance.
The insurance industry’s mutually exclusive information silos, and the funds required to maintain and facilitate the flow of information between them, is a colossal waste of resources which can be addressed by blockchain technology, smart contracts, and data oracles. By finding the most efficient desire paths for the flow of information and capital, emergent Web 3.0 technologies are set to fundamentally change the industry as we know it.
Technology analysts at the Exponential View newsletter and podcast have described the rate of change as far outpacing our institutional abilities to adapt to these changes. Founder Azeem Azhar calls this institutional sluggishness “the exponential gap.” Think of video-conferencing technology. Not long ago, it was found in Hollywood movies as dreams for the future. In 2021, it has almost become the standard in many places for patients to substitute an in-clinic visit for an online consultation.
To further exponentiate things, the composability of Web 3.0 constitutes a powerful synergism from various innovations integrating with one another. As smart contracts and oracles have arisen, so too have new retail and commercial use cases become available.
In addition, hyper-efficiencies made possible by the aforementioned technologies will create entirely new business models unthinkable in the past. By reducing bottom line costs and employing people towards highly productive tasks instead of inefficient and tedious ones, new and competitive rates will be offered by innovators and early adopters in the space.
This will disrupt the status quo by offering innovative and superior insurance products at rates which undercut legacy providers and laggards in Web 3.0 adoption. Major players like IBM have already awoken and made major moves in the insurance space, and are now positioned to spearhead the blockchain revolution in the health insurance industry for years to come.
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