First Posted at Practically Particular on 9/6/2012
There is a lot of talk about direct primary care (DPC). This model of paying for primary care is not new. It was inspired by concierge care – which was unpopular because it was only affordable to the wealthy. Rather, DPC is intended for the average Joe who is not rich. But unless something significant changes in the healthcare market place, this model will never reach the masses. Much like a gym membership, the price for direct primary care must be the same for the guy who goes once a year and for the guy who works-out 5 times a week.
It’s All About the Low Utilizers
Wealthy and high utilizers of primary care have already benefited greatly from DPC plans. But for DPC to gain market traction, the low utilizer must sign-up. Let us define low utilizers as those individuals who go to see their primary care doctor fewer than 4 times in a year. In the U.S. 62.1% of the population fits this description (i). Clearly, if the annual cost of DPC is more than the cost of one primary care visit, someone who only goes to the doctor once a year will have no incentive to sign-up for a DPC membership. Let us also agree that the average out of pocket expense for a primary care visit is roughly $175 for an individual with a high deductible plan (ii). Then the maximum monthly membership fee our hypothetical low utilizer would be willing to pay is $175/12 = $14.58, which we will round to $15.
A pure DPC clinic would not be willing to charge a fee as low as $15/month for patients to have unlimited visits, even if 62.1% of the patients were expected to have 3 or fewer visit per year. The reason is because a doctor needs to generate at least $450,000 in revenue per year to cover her salary, 1 administrative staff salary, malpractice insurance, and overhead expense in a pure DPC environment. (In states with higher premiums for malpractice insurance the required revenue per physician will be higher.) At $15/month per patient, this translates to 2,222 patients. Although a patient panel of this size is not uncommon under traditional health insurance reimbursement models, it will not work for DPC.
A Hypothetical Single Doc DPC Clinic
Under DPC, office visits are longer. Let us say the average office visit is 20 minutes – some are longer, some are shorter. Under DPC, there is significantly less administrative work, about 20.6 hours per week less, so the doctor has time for longer visits and visit prep (iii). Therefore, if a doctor works a 9-hour day, taking an hour for lunch, 2 hours for phone/email visits, with an average of 12 minutes before each office visit to prep, the doctor could see roughly 11 patients face to face each day. If our doctor works 230 days a year (6 weeks worth of vacation and holiday), she could complete roughly 2,604 office visits per year. If the average length of an e-visit is 15 minutes, she can complete 1,840 virtual visits a year. This gives us a total of 4,444 visits per year; 59% in office and 41% virtual.
Data suggests that 50%-70% of non-preventative primary care visits could be handled virtually by a live doctor (iv). Since email, phone, and video visits are central pieces to direct primary care, our estimate above of 41% of visits being virtual is reasonable for a DPC-only doctor.
Now the big question is: How many patients can the doctor see under these constraints? For simplicity’s sake, suppose our primary care doctor’s panel is composed primarily of adults. Let us assume her patient panel’s utilization follows this distribution (v):
|% of Patients||Avg Visits/Year|
Using this distribution of utilization and our 4,444 max visits per year from above, we end with a maximum patient load of 1,189 patients. In order for a doctor to generate $450,000 in revenue per year, she would need to charge her 1,189 patients $32/month.
In the most efficient market for DPC, there will be a platform provider upon which doctors or clinics compete for patients on price and membership features – just like a gym. These platform providers will ideally charge a flat fee per member per month to administer the membership so the doctor can focus on providing good customer service. These platform providers will be very similar to AirBnB, Travelocity, Etsy or Heroic, the only difference being the recurring fee. Network effects will make it attractive for physicians and patients to purchase via the platform. Let us assume the monthly fee charged by the platform provider is $8 per member per month. So now the monthly fee for our patients is $40 per month.
What Must Happen for DPC to Gain Traction
So the question is: What must happen for a low utilizer to be willing to pay $40/month for a DPC membership?
The answer is wrapped in our warped health insurance industry. If I were to buy an individual high deductible policy for myself it would cost roughly $150/month. But for our low utilizer, like me, who only goes to the doctor once a year, and has no catastrophic events, this is a bad deal. I am paying $150 x 12 = $1,800 a year to go to my primary care doctor once! One may argue that a portion of this premium is for protection against certain financial apocalypse in the event that I had a medical emergency. My retort would be, why does catastrophic health insurance cost more than my home insurance or car insurance?
If the current health insurance companies or a new entrant to the health insurance industry would create a new product that carves out primary care and only covers catastrophic or infrequent events, they could lower the premium. In fact, the health insurance company would only need to lower the premium by the amount our DPC doctor needs per month, namely $40/month (vi). If the average monthly premium for a high deductible health plan were lowered by $40, then our low utilizer would be happy to buy health insurance and sign up for a DPC membership priced at $40/month. (Note that under the individual mandate, which goes into effect in 2014, even the currently uninsured will be happy to buy these two products together.)
The lowest high deductible plan premiums that I could find in MN in about 30 minutes of online searching were around $85/month. So in the best case our low utilizer is paying $1,020 a year in health insurance premiums to see the doctor once or twice. Under DPC, the low utilizer pays $40/month for DPC plus $45 in premiums totaling $85/month. For the same total cost our patient now has unlimited access to their primary care doctor for one low monthly fee without the hassle and stress of co-pays, co-insurance, and health insurance claims. The more visits a person has in a year – the higher the value proposition of DPC when paired with our new type of catastrophic only health insurance plan.
i Health care visits to doctor offices, emergency departments, and home visits within the past 12 months, by selected characteristics: United States, selected years 1997–2009” National Center for Health Statistics. Health, United States, 2010: With Special Feature on Death and Dying. Hyattsville, MD. 2011
ii Based on 2011 claims of 40,000 patients at one clinic across 3 different payers.
iii Future of Medical Practices, Jeff Goldsmith PhD, 2012
iv Based on the percentage of visits that are common and non-complex at a typical clinic for which I conducted data analysis services.
v Health care visits to doctor offices, emergency departments, and home visits within the past 12 months, by selected characteristics: United States, selected years 1997–2009” National Center for Health Statistics. Health, United States, 2010: With Special Feature on Death and Dying. Hyattsville, MD. 2011
vi In reality, it should be more because there is an over abundance of literature that supports the notion that stronger relationships with primary care doctors leads to lower overall medical expenses. These savings will accrue to the health insurer; therefore they should lower the premium by more than $40/month.