In the winter of 2021, actuary Gayle Brekke penned a four–part–blogpost–series arguing that the cost of insurance primary care delivery in the insurance system is at least 50% higher the cost of delivering primary care through subscription model DPC. Notably, Brekke’s work was theoretical rather than empirical; she attempted to compute the relative costs of primary care under the two models, rather than simply measure them. In this post series in response to Brekke, I argue that the measured version of reality came out differently than the reality she computed because of analytical errors and omissions, mistaken presumptions, and misinterpreted references on Brekke’s part.
Health Care Cost Institute data presenting the 2017 primary care costs of millions of insureds shows an average annual primary care spend for 25-50 year olds of just less than $450. The total costs of paying for primary care are larger because they include, in addition to the spend, the amounts that insurers are allowed, under medical loss ratio (MLR) rules, to cover associated administrative costs and profits up to 25% of the insurers’ share of that spend. As direct primary care advocates point out with remarkable regularity, however, annual deductibles result in a disproportionate and large share of primary care costs being paid by insureds rather than by insurers.
Therefore, assuming insurers administrative and profit allocable to primary care medical loss spend are a full 25% of 100% of primary care medical loss spend, then taking 125% of the primary care medical loss spend should be a safely over-generous estimate of the total cost of paying for primary care through insurance. That would come to $565 per year.
For the same period, the cost of direct primary care for same-aged subscribers was $900. Although you might consider direct primary care for its concierge-like (or concierge-lite) features, direct primary care hardly seems a cheap way of meeting primary care needs; in fact, primary care delivered under the $900 subscription model appears to cost at least 50% more than that under the $565 insurance-based model. But I’m not an actuary.
Provider-side billing costs savings from direct versus insured pay.
A certain Dr Bujold made an observation relating to overhead in a JAMA letter; specifically, when he began doing fewer low overhead hospital calls, his practice-wide percentage overhead went up. Duh.
Since the same kind of shift would have occurred whether he was an FFS-PCP or D-PCP, Bujold’s observation has no implications whatsoever for determining the effect of different payment model on billing and insurance costs. There’s nothing in Bujold that indicates any effort or intention to compare insurance based and direct pay overhead costs. If you want to waste your own time trying to figure out why Ms Brekke cited Dr Bujold’s article as one of two references footnoted as if to support her computation that sets FFS-billing and insurance at nearly 60% of FFS-provider overhead, be my guest; it beats me.
The “actual” numbers on which Brekke bases her computation of provider-side billing savings come from her second, and her only other, cited source. In an AAFP practice profile , a certain Dr Forrest contrasts a somewhat widely accepted 60% figure for total overhead in family practices to what he claims are 25% overhead costs in his own, solo direct pay practice. If you know enough about accounting to giggle when you read his explanation for excluding from his computation any cost for the nurse-practitioner who works with him during patient visits, your sides may split when you also note that he actually claims that his overhead for office space is negative. If recognized principles of accounting were applied, Forrest’s overhead would plainly be vastly higher than he claims. And Dr Forrest accounts himself a significantly bad-ass cost reducer across all of the overhead board, for example, buying bargain basement equipment and supplies and taking out his own trash.
Most importantly, most of the tactics Forrest identifies for reducing overhead are independent of his payment model choice. Forrest could equally use both zero-cost nurse-practitioners and negative overhead medical space arrangements (if such things existed) while taking his own trash out of the door of an FFS practice. Forrest gives us no basis to determine how much of the purported 60% to 25% overhead cutdown is simply an artifact of his bizarre accounting methods, how much the result of his having perfected parsimony, and how much the result of his decision to ditch insurance as a payment model.
The only thing that can reasonably be inferred from the Forrest article about how much direct pay reduced Forrest’s billing and insurance costs is that the amount was significantly smaller than a 60% to 25% cutdown.
But Brekke took the full 35% cutdown as if every penny represented provider side billing and insurance costs savings. She also assumed that Forrest’s practice (despite his claim to be paying negative office rent and taking out his own trash) was typical of DPC practices. Her resulting computation came up with a net provider-side billing and insurance cost burden of nearly 30%, a step that by itself accounts for most of the money in her final computation that insuring direct primary care imposes a 50% drag on primary care.
On this calculations page, I have set forth of Brekke’s calculation and a parallel calculation in which I have substituted a value derived from an alternative to Dr Forrest’s one-off personal saga. Look at this 2014 quantitatively detailed, peer reviewed academic study by Jiwani et al of “Billing and insurance-related administrative costs in United States health care“. Its evidence-based figure for billing and insurance-related costs in physician practices puts it at thirteen percent (13%) of gross revenues. This works out to a bit under 22% of a 60% overhead.
If you know a better study, let us all know by posting it in the comments. I will give it its own column in the calculator.
Brekke cast her computation in terms of finding a payment that would leave a direct pay practitioner with $60 in compensation; according to Brekke such a visit would cost $75 with direct pay and $96 with insured pay which she computed to be $96 using the values she derived from Forrest’s bizarre accounting. Using the values from Jiwana, I compute that such a visit would require a direct pay practitioner to charge $88.20.
Accordingly, using the result based on actual published, peer-reviewed research, additional provider side administrative costs when insurance is used would appear to be no more than 9%.
Based on her own misconstruction of already dubious figures from Forrest’s practice small solo practice, Brekke built the foundation of her argument on a number that was inflated at least three-fold.
Furthermore, the 9% figure based on the Jiwana paper, represents an upper limit on possible provider-side admin costs saved by ditching insurance. For the computation shown, I made the assumption that all billing and insurance costs would be eliminated under direct pay. But eschewing insurance pay does not remove all the provider side billing costs; in fact, direct pay can add some provider-side non-medical costs all its own.
Direct pay physicians have non-zero billing cost. For subscription direct PCP’s, there are both monthly fees to be billed and collected, and fees for primary care services not covered by the monthly fees. Direct pay physicians are not able to lean on insurers for items like enrollment and roster maintenance, patient identification cards. A look at subscription DPC social media, meanwhile, should make clear that direct pay physicians have had to be more active in recruiting patents. On the other hand, direct pay FFS-PCPs still must still bill and collect for itemized services.
Furthermore, many D-PCPs seek and enter contracts with self-insuring employers, some with multiple self-insuring employers. There’s plenty of administrative burden to go around, including reporting quality metrics to a myriad of employers.
Patients who rely on insurance for downstream care will still need their direct primary care physician, whether subscription or cash FFS, to document the clinical information needed to justify high priced downstream services for which insurers ask prior authorization. In other words, direct pay does not eliminate the PCP-side administrative costs of prior authorization.
Factors like these indicate that net PCP-side additional administrative costs when insurance is used are appreciably less than the 9% from our calculations page. Brekke’s result may be off by four-or-more-fold rather than three-fold.
Before we leave this discussion of Part 1, take a second to note that a frequent claim of direct primary care advocates is that provider-side insurance related savings are sufficient to fuel a tripling the length of primary care appointments. Even the 35% figure Ms. Brekke used falls far short in that regard.
Further commentary on Brekke’s series can be found here: