Why do doctors contract with large networks to provide care at a deep discount? Do they expect to get more business from those relationships? If so, does that additional business ever arrive at their examining room? How many other physicians in their area are also contracted with that network? If there are many, are they merely joining to maintain their patient base?
Have they actually done the math to determine the impact of the discount on their finances?
Here’s an admittedly simplistic analysis of the financial impact of a discounted patient visit.
- The “non-discounted” price would be $100
- The discount is 20%
- The net profit on the average patient visit (non-discounted) is 30% (an unreasonably high number, but easier to work with for our purposes)
The doctor makes a profit of $10 per discounted patient visit, and therefore must see three times as many patients to justify that 20% discount. And that’s before one factors in the additional fixed costs associated with the larger patient load – more parking, more staff, a larger waiting room, more examining rooms, and more of his/her professional time.
Perhaps more physicians are “doing the math”, and that is why managed care firms are having a much tougher time getting discounts.
The network deep discount model has other fundamental flaws, flaws that are only now beginning to be fully appreciated.
The wide geographic variation in treatment has received extensive coverage in the Medicare and group health arenas, with one of the most-cited studies coming from the Dartmouth Medical School. The Dartmouth Atlas of Health Care uses Medicare data to illustrate the difference in frequency and utilization across states and MSAs, and is required reading for anyone pursuing this subject.
One of the questions raised by the Atlas is “does this variation also occur in other lines of coverage?” While there is not nearly as much data available on this subject, two fairly recent studies in Texas indicate that disparities in cost are not limited to the Medicare world.
The Research and Oversight Council’s (ROC) Analysis of the Cost and Quality of Medical Care in the Texas Workers’ Compensation System provides an excellent (and brief) summary of the two studies, one by the Council itself and the other by the well-respect Workers Compensation Research Institute (WCRI). Of note, the ROC’s study indicates that the average annual medical cost per claim range from $4242 in the Dallas/Fort Worth area to $2835 in San Antonio/Austin.
Undoubtedly this variation exists in other states as well. This raises some interesting issues, including:
–In states with regulated rates, do underwriters select risks based on lower-cost medical areas? If not, why not?
–Can payers focus their managed care efforts on high cost areas and away from low cost areas, and if not, why not?
–What is going on? Are treatment patterns different? Are costs higher? Are injuries or illnesses different? Is there a different mix of providers?
Clearly, medical care is delivered in different amounts, by different types of providers, via different procedures, in different areas. That being the case, why are managed care programs so generic? And could that be one of the reasons why they are both frustrating to the provider and ineffective at moderating health care cost increases?