The Future of Electronic Funds Transfers in Healthcare: Insights from Mike Peluso
In a recent email interview, Mike Peluso, the Chief Product and Strategy Officer at Rectangle Health, made a bold prediction about the future of electronic funds transfers (EFT) in the healthcare industry. With the Trump administration aiming to eliminate the use of paper checks in federal transactions by the end of the 2025 fiscal year, the pivot towards electronic transactions is more pressing than ever.
The Push for Electronic Funds Transfers
The administration’s goal is clear: by fiscal year 2026, every federal department and agency is expected to maximize the use of electronic funds through networks like the National Automated Clearing House Association (NACHA). This shift marks an essential evolution in government operations, aligning with a broader trend towards digital transactions.
Rectangle Health’s Role in the EFT Revolution
Rectangle Health, based in Valhalla, New York, has been at the forefront of this shift. Partnering with major financial institutions such as Fifth Third, Wells Fargo, and U.S. Bancorp, the company has introduced a paper-free healthcare payment service built on a virtual credit card framework. Peluso emphasizes that this innovative payment method could solve some of the biggest issues that have hindered the transition from paper checks.
Challenges with Current EFT Strategies
Peluso points out that many healthcare providers still rely heavily on ACH-based payment systems, which present their own challenges. A significant limitation of these systems is that they split patient health information messages from payment messages. This segregation complicates the payment process and can lead to inefficiencies.
"Accessing extended patient data is crucial for payers and providers to accurately and efficiently process payments," Peluso explains. The insistence on separating these messages is not just an inconvenience; it contributes to a complicated web of errors and costs that healthcare organizations must navigate.
Historical Context: Paper Checks vs. Electronic Funds Transfers
The dominance of paper checks in the U.S. dates back to the Negotiable Instruments Law of 1881, which helped establish checks as the primary form of payment. However, the tide began to turn in the 1990s as EFT methods started gaining traction. The processing of paper checks peaked in 1992 with about 79 million checks being processed daily, but has since plummeted to just 11 million checks per day, according to the Federal Reserve Board.
With the advent of ACH transactions, which started gaining momentum in the 1970s, healthcare organizations began to explore more efficient payment systems. However, as Peluso points out, while ACH service fees are low, the payment message format limits the ability to include vital health data.
The Limitations of ACH Systems
The separation of payment and patient health information is compounded by healthcare regulations, such as the Health Insurance Portability and Accountability Act (HIPAA). Under these laws, health data privacy regulations do not apply to standard financial transactions, forcing organizations to send separate health information messages.
Peluso highlights that banks often shun this healthcare-specific data because it does not enhance their business value, leading to further complications in processing payments. This disjointed approach necessitates cumbersome and error-prone efforts to connect the dots between payment messages and accompanying health information, ultimately driving up costs.
The Virtual Credit Card Solution
In response to these challenges, Rectangle has developed a virtual credit card framework that offers a more integrated solution. This system allows for both payment information and patient health data to be sent in a single HIPAA-compliant message. Peluso notes that processing through a virtual credit card can be more efficient than ACH transactions, reducing the risk of errors and delays.
The virtual card approach also offers additional security benefits. The network can automatically detect fraudulent or incorrect numbers, further streamlining the payment process.
Market Resistance and Cost Concerns
Despite the advantages, Peluso acknowledges that the transition to virtual credit cards faces hurdles. Many healthcare providers express concerns about the processing costs associated with credit card transactions. Notably, the American Medical Association recently indicated that the processing fees for a $5,000 transaction could differ significantly—34 cents for ACH versus $250.10 for use of a virtual credit card.
Additionally, the Centers for Medicare and Medicaid Services (CMS) has stated that providers can request payments via ACH rather than virtual credit cards. However, Peluso argues that the burdensome nature of the ACH system means that the overall costs extend beyond transaction fees, making virtual card processing a more viable option despite the higher upfront costs.
Conclusion: A Shift in Perspective
While the path to electronic funds transfers in healthcare remains fraught with challenges, Mike Peluso’s insights offer a glimpse into a future where virtual credit cards could significantly simplify and enhance transaction processes. As the healthcare industry gears up for this transformation, it may ultimately lead to a more efficient and patient-centered approach to payments.