Dr. Gray's Straight Talk

Honest and blunt healthcare discussion and advice.

The Rising Cost of Health Care – Part One

Posted by Dr. Gray on Tuesday, October 28, 2008

The “rising cost of health care.” How many times have you heard that rhetorical statement made to make a political point? Being that relatively few of you are in the health care field, I thought I might shed a little light on the inner financial workings of a private health care office. Not too detailed, just a simple exploration.

I have a small health care practice in a suburb of Kansas City. While, technically, a “small business,” we are comparably considered one of the busier offices in the area. When I take into account all of my overhead just to open the doors of my office, and factor in the cost per patient associated with that cost, it costs me $27.00 every time a patient walks through the front door. If that patient converses with the front desk, then turns and leaves, I just lost 27 bucks.

Now, for reimbursement… if my normal office charge is $50.00, that’s a profit of $23.00, of which I’ll pay roughly 38% in taxes. So, I’ve just made roughly $14.00 for risking my career, reputation, livelihood, and ability to support my family in that one visit. Now… multiply that by the number of patients seen per day, week, month, etc. and you can begin to see the amount of risk (not to mention time, money, and effort that must be expended in order to achieve the education level of doctorate) that must be taken in order to make a significant living as a doctor.

However, that’s only if we’re talking on a cash basis and 100% collections. The fact is that nearly 83% of my patients have some form of insurance coverage for my services. For most doctors, that percentage is higher. The two most common scenarios encountered in our office involve “in-network coverage” and what is known as a “global fee cap.”

Although a living can be made operating “out of network,” it is more difficult, marketing intensive, and involves more direct cost to the patient. Also, the mentality of patients is that if they are paying for insurance, they’re damned sure going to go in-network to take advantage of it. That can be argued as a positive for the doctor in that they have easier access to the patient. Therefore, we remain “in-network” providers for the majority of insurance plans offered in our area (therefore, cash basis does not apply).

In order to be “in-network” we are forced to sign a contract agreeing to a discounting of fees, “peer review,” and relatively little legal recourse regarding foul play by the insurance company due to forced arbitration agreements. This discounting of fees averages to approximately a 32% fee cut, and can be arbitrarily changed by the insurance company at will (again, little recourse due to forced arbitration and unlimited legal and financial resources of the insurance companies). “Peer review” refers to an employee doctor that is hired by the insurance company to deem care as medically unnecessary, thus not reimbursable and not collectible. This accounts for another approximate 10% cut to the collectible portion of services rendered. Another 10% cut can be attributed to unpaid deductibles, copays, or cash portions.

Therefore, the majority of collectible services in the average health care office is only 48% of the actual fee for service rendered (after speaking with several other doctors, this percentage is sometimes much lower). In our original estimate of a $50.00 office charge with $27.00 in overhead, I would lose $3.00 every time I treated a patient. So, in order to make that same paltry $14.00 profit margin, my fee for a simple office call must be $103.29. You following me here? {14 = 0.62(y*.48 – 27)}

“Global Fee Caps,” on the other hand, are a whole new animal. In the past couple years, United Health Care, Coventry, and others have seen fit to institute (remember the arbitrary nature discussed above with which they can change reimbursements) this monstrosity on the health care world. A “global fee cap” is the determination that every visit, regardless of what services are rendered is capped at an arbitrary, pre-set amount. The rate is currently set at $42.00. So, no matter what situation the patient presents with, and no matter what services are necessary, the reimbursement is capped at no more than $42.00. Need a quick consultation? $42.00. Need a complete examination, with x-rays, and therapy for the reduction of pain? … 42 bucks. That’s it.

“But you would lose money on every patient, why remain in-network?” you say. Here’s the rub. These patients have been hit with a $35.00-40.00 copay per visit, therefore, there is an immediate profit of $8.00 – 13.00. So… the patient pays, let’s say, a $35.00 copay at the time of service… we provide the least amount of care possible, yet still responsible, because any service beyond $42.00 is non-reimbursible (and not billable to the patient)… and the insurance company decides to react in one of two ways: they pay the $7.00 balance, or they initiate the “peer review” process to determine if they can get out of paying it by declaring it medically unnecessary. Want another rub? If they declare it “medically unnecessary,” they not only don’t pay the balance, but they demand you reimburse the copay to the patient… even if the patient disagrees with the determination.

The decision to remain in these networks is multi-faceted, even though the compensation is small. First, is the sincere desire to help as many patients as possible. Second, is in the opportunity to stimulate referrals of other patients who not only need care, but may have a different insurance plan. Third, is the fact that the patient may have never chosen to come to my office in the first place if I wasn’t “on their plan.”

What’s worse? Some of these plans have now increased the copay amount above the level of the “global fee cap.” In essence, the patient has been sold phantom coverage in which the insurance company is not really providing anything, but is collecting premiums.

Why are health care costs “rising” in this country?

Pure and simple… the insurance industry, and the public’s mentality about what and how insurance should be used.

More about this topic in part two… when we’ll begin to discuss how “universal health care” will fit into this mess. In the meantime, please feel free to comment.


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