Milliman: A $60 PMPM DPC fee buys an employer a zero ROI.

An actuarial study brings employer direct primary care to a turning point.

Milliman’s actuaries insisted that DPC cost reduction data without risk adjustment is essentially worthless. A second prong of Milliman’s analysis suggested that the direct primary care model is associated with a 12.6% over-all reduction in health services utilization*. Then, working from that number, Milliman went on toward a third suggestion: that an employer who buys into DPC at an average price of $60 PMPM would likely have an ROI of zero.

That is not a very good deal for either an employer or a DPC practice.

For an employer, entering into a break even deal would mean foregoing other investment opportunities, while incurring inconvenience of change and probably a loss of good will from a number of employees who might be, or feel, forced or financially pressured into a narrow primary care network. Why bother?

For a DPC provider, $60 PMPM works out to $432,000 per year for the patient panel of 600 members that DPCs like to brag about. But an average PCP compensation package in, say, Anderson, South Carolina comes to about $276,000. That leaves about 36% of revenue for all overhead. That’s not much.

The American Academy of Family Physicians tells us that overhead for family physician practices runs around 60% of revenue. The most recent peer reviewed study of the subject (2018) indicated billing and insurance (BIL) costs for primary care came out 14.5% of revenue. A somewhat earlier peer reviewed study came near this, finding that physician practices had BIL costs of about 13% of revenue. Even if, say, 15% of revenue can be eliminated in direct pay, D-PCPs could still expect overhead to be 45% of revenue.

In the direct primary care employer clinic, moreover, billing costs do not fall to zero; patient rosters need to be kept up to date, matched to employer records, and processed. In addition, most direct primary care physicians also provide a significant measure of separately paid goods and services for which an employee, employer, employer’s insurer, or a TPA may require documentation and billing. Moreover, much of the data attributed to billing and insurance costs in an FFS setting has a counterpart in direct primary care collection of metrics needed to demonstrate value to an employer.

Accordingly, even for a non-insurance direct primary care clinic, overhead of 36% of revenue is scanty.

At the same time, DPC practitioners have — and regularly express — a very high opinion of themselves and the care they give. As group, they seem distinctly unlikely to settle for merely average levels of compensation.

The most profitable path forward for direct primary care is to persuade employers that paying PMPMs over $60 will do more than break even. Historical brags, based on data that was not adjusted for risk, claimed employer savings from 20% to 40%. A DPC thought leader recently published a book on employer DPC that collected references to such seven studies, including one that claimed to have reduced employer costs by 68%.

Now that real actuaries have weighed in, those days are numbered.

So now they just fake it.

* I believe that Milliman’s 12.6% figure vastly overestimates the reduction in health services utilization association with direct primary care. As explained here, DPC may even result in an increase in health services utilization. Is it really plausible that taking a scarce resource — the time of PCPs — and spreading it thickly over tiny patient panels would NOT result in net economic loss?

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