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

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

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