Archive for April, 2010

Setting the Price for Medical Services in a Family Practice in Houston, Texas

Saturday, April 24th, 2010

The usual way of setting prices for services in a Family Practice is by defaulting to the fee schedules of the commercial insurers, Medicare, and Medicaid. That is a faulty method for assuring enough income to run a stable medical practice. It is entirely dependent on forces and decisions outside of the physician’s control. It is also an unnecessary default that leads to the invasion of privacy for both the patient and the physician. That privacy is at the heart of a sound and ethical medical practice. No encounter between a physician and a patient need be seen by a third party in such a way as to personally identify the patient and his or her health problems or concerns, particularly corporations and government who could and do exercise extraordinary power over individuals through knowledge of their health statuses and weaknesses.

Physicians think, wrongly, that their maximum income is gained through negotiation of an adequate or greater fee schedule agreement from third party payers. In practice, physicians lose in these negotiations more often than they gain. The result is negative in two ways: (1) if they decline the contract, a large number of their patients who are insured by that declined payer will be directed to go to another physician and they will likely do it, or (2) if they accept the contracted fee schedule, the payer will try to make it progressively under the market price to the extent that the payer controls large numbers of patients and can influence them to change physicians. It is what could be called “gray listing.” Insurers do not have to “black list” physicians with whom it is hard-to-negotiate, they just have to show patients their big directory and the other door to another “preferred provider.”

Among other types of professionals pricing is more easily managed. In the cases of engineers, scientists, teachers, and business managers their salaries are their prices. In a capitalist system those salaries tend to be about two or three times the average wage. Those who collect and count money (bankers, brokers, and traders) have found ways to get a hundred times the average wages through contracts and political power. That option is closed to physicians in practice. They do not work for commissions. The fee charging professions like lawyers, CPAs, and “consultants” force their clients into accepting unmonitored hourly rates in the ranges of $100 to $600 per hour. None of the ways in which other professionals set their prices will work for a Family Practice. The physician could work for a salary of about $160,000 a year (the average in Houston in 2012), but could earn that independently without answering to any boss. So, most physicians don’t want to work for others unless they can work less and more slowly. That way of working, of course, will lead to conflicts with the employer who intends that the employed laborer deliver a profit to the “corporate practice.”

If the physician wanted to follow the examples of lawyers and CPAs, they would find they are not “unmonitored” and that their rate will not fit any fee schedule from insurers and that patients will only want to pay for the brief times in which they actually encounter the physician. If the physician sees a patient, records the medical examination, thinks about the problems, researches the solutions, prescribes treatments, then monitors the care, most of that activity will not be apparent to the patient nor to a patient’s insurer. So, when he or she presents the bill for 10 hours work at $300 per hour, like a lawyer would do, the patient and the insurer will baulk. The patient will say,” I didn’t see him for 10 hours, it was more like ten minutes,” and the insurer will just send back the claim with $0 payment as “not clean.”

What can be done? The Family Practice must progressively withdraw from the third party reimbursement system and establish direct payment agreements with patients not based on fee-for-service. This has become much easier to do because insurers, public and private, often do not pay for basic health care services, preventive care, thoughtful and intuitive work, or the administrative burdens they create by their claims processes. Further, the cost of primary health care for a patient is never a catastrophic expense and can be easily managed by a family or through informal community support. Consequently, the way to establish a price for the services of a Family Practice is by bottom-up budgeting and proper allocation of labor, supplies, and equipment. Most of the time, in the past, physicians have never approached the problem of pricing in this way. They have begun with a fee schedule and just expected it would produce the revenue needed to run their business. It would “fit the market” and not conflict with the “insurance system.” That is an irrational business assumption, but so common that the nonsense of it is not quickly grasped.

What the goal should be is to have each patient pay directly to the practice an amount of money per year that assures that the practice will be open and that the physician will be available to advise and treat the patient routinely and at times when care may be urgently needed. The patient is never paying fees-for-services, but is paying a retainer to the practice for availability of services to the extent of the ability of the physician, his or her staff, and their resources. Such a retainer can be paid monthly, but should be an annual agreement so as the make it possible for the practice to be financially stable and to amortize its expenses over the year. The positive side of this arrangement or agreement between the patient and the physician is that it removes the financial incentive from the delivery of care for both the patient and the provider. It means that when the patient is asked to return for a follow-up visit so that treatment can be managed and improved, the patient does not fail to return because he or she wants to avoid another fee charge. Also, the physician has no incentive to do tests or procedures that are not needed in the diagnosis or treatment of the patient. Lastly, since there is no third party paying the bill, the privacy of the patient record is protected.

We have provided an example of the pricing method below. It will result in more income for the practice than in the current fee-for-service insurance systems. Patients will easily pay more under this pricing system than the practice can collect through traditional means. In the allocation of labor the practice should plan for about 5,000 patient encounters per year per physician. More encounters would probably result in patient dissatisfaction over the time available for their care and advice. Practices that have more equipment and do more testing and procedures will likely have a higher annual retainer fee, but we have been surprised by how little that cost has varied between practices. In the transition between having an insurance based fee-for-service business and a retainer type business many patients not on retainer will need urgent care and have infrequent encounters. If the retainer is based on bottom-up budgeting and comparison with past revenues then such patients in the practice will cause the starting average retainer to be higher than normal and in the long run will result in fewer patient encounters and greater annual revenue.

As more people are converted to the retainer system the capacity for patient visits can increase. A base of 1,500 patients per physician could expand to 2,000 without much stress on the office. Reports on the average annual gross revenues of a physician in Family Practice in Houston, Texas in 2012 were $454,000. Fifteen hundred patients paying a physician $324 per year would result in $486,000. Two thousand patients paying $324 per year would be $648,000. That kind of income would result in physician compensation that is greater than other professionals who have spent the same amount of time, effort and expense in qualifying for their work. Consequently, a simpler pricing system that is better for the physician and the patient should be adopted.

PCM Practice Economics Chart

Physician's Salary 156,000 38.61%
Staff Salaries* 83,200 20.59%
Employment Taxes 21,528 5.33%
Health Benefits 16,260 4.02%
Liability Insurance 5,850 1.45%
Property Insurance 2,730 .68%
Rent 21,450 5.31%
Utilities 9,750 2.41%
Phone and Internet 7,800 1.93%
Medical Supplies 17,550 4.34%
Office Supplies 3,900 .97%
Billing, Claims & IT 12,000 2.97%
Equipment Leases 1,170 .29%
Licenses & Fees 6,240 1.54%
Auto 15,600 3.86%
Lab 7,800 1.93%
Depreciation 2,730 .68%
Other Taxes 1,560 .39%
Other Expenses 10,920 2.70%
Total Annually 404,038 100%

* Staff includes a receptionist and two medical assistants at $12 per hour and @14 per hour respectively

Usual Income from a Fee-for-Service Practice

Adults 1300  
Children 200  
Seniors 300  
  Visits Revenue
Level 1 3000 61,740
Level 3 1200 90,000
Level 2 1800 81,000
Procedures 1400 202,260
Total   435,000
Margin over expenses   30,962

What if instead of the usual Fee-for-Service income the Practice was paid a monthly fee from each patient

Patient Monhtly Payment Plan

Adults 1300  
Children 200  
Seniors 300  
  Monthly Fees Annual Income
Adults 27 421,200
Children 27 64,800
Seniors 40.5 145,800
Total   631,800
Margin over expenses   227,762

If the Practice wants to test the income it would get from patient monthly payments as opposed to the usual Fee-for-Service
then it can calculate it’s average monthly income per patient by dividing its collected annual income by the number of patients
actually seen (not the number of encounters) and then divide by 12 months. Examples of such a calculations are as follows:

Example of average monthly income per patient

  Example 1 Example 2 Example 3
Collected Annual Income 435,000 465,000 500,000
Number of Patients Seen 1800 1900 2000
Average Annual Income Per Patient 241.67 244.74 250.00
Average Monthly Income Per Patient 20.14 20.39 20.83

A Discourse on The Health Care System

Saturday, April 24th, 2010

There are many well intentioned proposals to improve the health care and health insurance plans in the United States. Ultimately, all of them rely on the participation of the majority of patients and medical care providers with the goal that everyone will have access to health care and everyone will pay their fair share of the costs. Currently, our public and private systems do not collect nor distribute the money they get from taxes and from premiums so as to assure that everyone has health insurance and access to quality health care. Those who currently control the political process do not want to replace the private system and do not want to pay for universal health care if they have to make sacrifices in other domestic and military budgets. It does not appear that the health care reform desires of the general public and the medical care providers are going to be met by political means. Consequently, organization of patients and providers of medical services will be needed at the local level to solve the problems related to caring for all patients in a given community. Usually, existing associations and churches take the lead in such needed grass roots developments. TBT is that kind of grass roots organization.

TBT is a faith centered group of men and women who recognize that Christ has called his people to be the light of the world. Our goal is to help the poor and do works of mercy. One of those works is to make health care available to those who need it. Unfortunately, our current health care system does not adequately meet the needs of the uninsured and underinsured. It does not really meet the needs of anyone since it leaves those who can afford it at great risk, in that they could lose their fortunes just in trying to stay healthy. It may be that there are many reasons why health care in America has failed to care for everyone, especially the poor. But human being have never been absolved of the responsibility to care for either their communities or for the poor. It is also a great truth that the church – the community of faithful people – must meet many of these needs through intelligent and careful use of its resources.

TBT understands that the problems with healthcare exist both on the local and national level. While much of our attention is focused on how to address the local needs, we also hope to demonstrate that there are better models for health care than those we see being used.

Getting care for everyone will require improvements in our health care financing and delivery systems. Among our members and friends are people who have learned the art of medicine, the administration of health care facilities, and the art business. We believe that by God’s grace, we will be able to make the needed improvements. We know that in the United States the problem is a failure to include everyone in a system that makes health care services available regardless of employment or insurance. In other countries the total lack of money, physicians, and facilities are the underlying causes of failure to provide health care to everyone. We do not lack these resources in our country, so we should be able to have universal health care. We want to use our best knowledge and skill to fix what is wrong in each community we serve. We have begun this work in Texas but hope to develop a model that can be used elsewhere to provide health care to everyone.

We believe that it is possible to structure physician groups in such a way that they can deliver efficient care without the influence of large insurance organizations. We have written a book about that and published it on this web site. These insurance organizations and the bureaucracy that surround them consume a large piece of the health care dollar. Local physician groups can deliver excellent care at a reasonable cost. The monies saved in effective administration can be used to meet the needs of those in the community who do not have the means to pay for health care.

One of the expected problems in reaching our goal of reform is the natural inclination people have to acquire material wealth. Having more income and saving on expenses are the two most obvious ways to achieve this naturally desired wealth. In health care, that means doctors usually want more income while patients and their insurers want to pay less in fees. Because most people in the United States use insurance systems for funding health care, these natural inclinations must be controlled. Insurance is budgeting and sharing costs. If it is to be the way in which health care is financed, then the patients and their employers who pay fees — and physicians and hospitals who receive fees — must, together, accept primary responsibility for budget management. Neither party can shift budget management to a third party, such as an insurer. That shift, which has been characteristic of the health care system in the United States, causes the insurers to take a much greater portion of the available health care funds than distribution of funds and accounting requires. It has led to systems of third party control that interfere with the rights of patients and physicians. At the same time, both physicians and other types of health care providers overcharge for their services and over-utilize health care facilities and diagnostic procedures. Finally, patients who are not paying directly for the health care they receive have little regard for its cost and much demand for services.

Solutions come from actions based on the virtues of love, peace, truth, tolerance, and cooperation. The virtues listed have been included in the incorporated name of Tomorrow’s Bread Today. It is a reminder of who we must be and what we must do to reach our goals.

One small step we can take to begin the reform of health care is through co-operation. The routine expenses of individuals for primary health care services are best used if not funded through insurance contracts, but through cooperation between patients and medical care providers. Families and individuals in specific geographical locations can form cooperatives in which the patient members will use member physicians and nurses to deliver primary health care. Each patient can then pay the health care providers who work at these facilities a small monthly fee for their professional services. We have determined from our experience the fee amount averages about $27 per patient, adult or child. The cooperative dues are $18 per month per household and helps to fund the charity needs of the organization’s membership. We have also determined that a single physician or nurse-practitioner has the time and capacity to serve between 1,500 and 2,000 patients a year. The lower number usual means that the patients have more serious illnesses and require more frequent attention and counsel. The predetermined fee amount was based on the usual take home earning of the physician or nurse-practitioner and his or her medical staff. That amount should be equal to or greater than what the medical professionals could earn in a private primary care practice. Of course, this is a private practice too, but without third party participation in the payments or medical decision making or an interest in the confidential medical records of the patients. The Cooperative, by taking responsibility for finding physicians, nurses and other health care providers who are willing to accept a fee schedule similar to the published Medicare prices and a monhtly retainer payment plan for patients, greatly reduces the business costs of the medical services through use of group purchasing power.

The most important thing accomplished in this division of responsibilities is the removal of any connection between financial reward and the care and treatment of patients. The financial motives and the dependence on third party payment for routine care is the most corrupting influence in health care and the cause of the misrepresentation of the medical record by health care providers. In the absence of a universal and equally inexpensive health insurance system, the cooperative is the individual’s and the physician’s best alternative.

The contractual arrangement between the patient and the primary care provider is a very simple payment agreement. An example of such an agreement is linked to this paper via the book we have published. It was drawn by an attorney for use by members of our cooperative after research into similar agreements that have been used by physicians over the last ten years. Since patients are paying an amount that is the equivalent of what they normally spend on an annual basis for primary health care there is no sharing of risk among patients. Further, they are no services guaranteed to patients beyond what can be delivered by the primary care provider in his or her facility, so there is no sharing of cost for services from other health care providers. It is not insurance but only part of the personal budget of the individual patient and the monthly collections of fees for service by the primary care provider.

The limitation of this system is that patients must sometimes use other medical care providers and facilities to solve their health problems. They could make similar payment arrangements with other specialist health care providers, but it is more likely and practical for them to purchase insurance for those occasions. It could be through three different sources, public (such as Medicare and Medicaid), private (HMOs and indemnity insurers) or charity from non-profit health care organizations. At this time, these insurance and charity systems are flawed and often difficult to access by a large part of the population. In our surveys of more than 4,000 people in the Houston area, about 40% did not have access to health care through insurance or charity. When they needed care in emergencies, getting care was an adversity that usually resulted in poor care and little or no payment for the physician or hospital provider. In these circumstances the Co-operative can at least be a patient advocate to properly guide the patient through the system and its red tape in the least adversarial manner. It can also be the vehicle for obtaining group health insurance that is without exclusions for pre-existing conditions, which the cooperative,PPC, has been able to get through the Senior Patient Association in a group policy underwritten by New Era Life Insurance.

Getting neighbors to work together cooperatively in such areas as primary health care is very difficult in our society. The relationships between people are mostly through family, schools, churches, and work. The networks of relationships extend through many geographical locations and are seldom within a single neighborhood. In some ways the cooperative forces neighborhood relationships, but it is a good way for everyone in the community to mutually benefit. We don’t need to look outside for great wisdom or support, the cooperative is neither complicated nor would it be helped by a patron regardless of how well-intentioned. The little that each of us would do for one another exceeds what could be done by any patron. Noam Chomsky said, “It’s only if we all do something a different way that we’ll all benefit a lot more. The costs to you – an individual – to work to create the possibilities to do things together can be severe. It’s only if lots of people begin to do it, and do it seriously, that you get real benefits.”