Why Don’t the Carriers Reimburse Sufficiently?

Author: Marc Grossman

Every physician at one time or another has asked this question and those even beginning the process of considering a retainer or fee for service model are often obsessed with it. The easy answer is that the Insurance companies are greedy and only care about their bottom line. While they are in business to make money, that is much to simplistic an answer.

A large part of their justification for their reimbursement levels is based on the cost structure they use for a medical practice. In these models, the typical office is run very efficiently. They do not believe that they should pay for the physician’s inefficiencies; however, based on my experience, an efficiently run practice is the exception rather than the rule. Part of the cause is that unlike most small businesses there is no high level person who considers it their main task to run the business. The doctor(s) are medical practitioners first and foremost and the office manager is neither trained nor compensated to be equivalent to a COO.

Since it is unrealistic for small practices to invest in the level of employee necessary to always be efficient, there are really two options. First, which happens quite often, is that doctors join together in larger groups or hire extenders in order to achieve some sort of economy of scale. However, unless the group is large enough and smart enough to hire the true skilled COO level person, they are just going to multiply the problems.

The other possible solution is a type of physician union. The main advantage the Insurance companies have over the doctors is size and resources. Any one physician or practice is never going to have enough leverage against the carrier or enough influence to affect the regulators. A thousand doctors with the same specialty in the same geographic area is another story. A consortium like that will have enough data to perform a statistically significant study. With the assistance of the correct lawyers, lobbyists, actuaries and consultants could compete on even footing with the Insurance industry. Over time I have mentioned this idea to many physicians and they are always interested but never motivated enough to do something about it. I think the time is coming that those physicians who are not lucky enough to have a patient base which that can switch over to a retainer based practice will have no choice but approach the issue as large groups and not as individuals.

What is one patient worth?

Author: Marc Grossman 

This perception is one of the issues that physicians we at GSC have worked with have had the toughest time overcoming when transitioning to a concierge practice. In a concierge practice, the worth of a patient almost cannot be overestimated. Let’s take for example a practice whose annual revenue is $1700 per patient. ($1500 retainer and $200 average in insurance billing and co-payments). Assuming we are talking about on on-going practice that has already has enough patients to cover its major fixed costs (rent, staff, etc.), we can say conservatively that 90% ($1,530) of this amount can be considered profit.

Evidence shows that a well run concierge practice retains 80-90% of its patients from year to year (including deaths, moving, and voluntary exits). If at most only 20% of the patients leave every year, then the average patient stays in the practice for 5 years.

Therefore, a new patient is worth $7,650 (1,530 x 5) in average profit to the practice – Not an inconsiderable sum and one worth some investment of time and money to secure. This figure is especially important to keep in mind when you are first embarking on a transition and you are trying to justify marketing, staffing, office space, and consulting costs that would have been out of the question in a traditional practice.

If I build it, will they come?

Author: Marc Grossman 

Since most physicians are not fortunate enough to have a mysterious voice coming from a corn field to give them accurate advise, they are (and should be) concerned about if there is a enough interest in a concierge practice within their current patient base to create critical mass in the new practice.

Most physicians start off trying to answer this question with the obvious method – they ask some of their patients. However, human nature skews these results – a person is more likely to ask someone who they have a good relationship with instead of a random person and patients are not comfortable telling doctors directly to their face that they are not worth the retainer amount.

The other half of the problem occurs when trying to apply the results to your patient population as a whole to determine how many patients to expect on opening day of the new practice. First, you have the issue of who is actually still in your practice. At any given time in a traditional primary care practice, 15 to 40% of the patients who have had an appointment in the last year are never planning to come again and probably have not bothered to tell anyone in the doctor’s office about it. While there is a slight chance that your concierge practice might appeal to them, it is unlikely. Also, there is a major step between seeming to like the idea of concierge medicine and actually writing the check. This drop off must be accounted for. And the list goes on and on. A thorough demographic analysis of the practice and the surrounding community is required to come up with reasonable answers to these questions.

Finally, how many of them will need to come in order to make the practice viable? The biggest variable is this is what is each going to pay. Two hundred patients at $2000 a piece generates more revenue than 250 patients at $1500. And because the practice has a maximum number of patients, the retainer price is directly related to the maximum revenue the practice can generate. On the flip side, a lower volume at a higher price is not always better – a critical mass is required to pay the bills as well as to provide word of mouth advertising.

Ergo, the high level exploring of “If I build it, will they come?” just generates more questions. The only way to come to a realistic answer is to perform a comprehensive patient survey and demographic and financial analyses. Maybe they will come to the same conclusion as your gut instinct – but they are a lot less risky.