Direct primary care and medical loss ratio will impact health insurers

With my extensive health care background, many people have asked for my opinion during the health reform debate. My response has been that the only way to really “reform” the system is to blow it up and start over, which isn’t politically feasible.

After delving deeper into the current legislation, I believe that we are going to see something close to a “blow up” ; something that isn’t being predicted by the pundits who know little of the inner-workings of health care.

Two portions of the Health legislation have received little attention yet will have a huge effect on bending the cost curve: 1. Medical Loss Ratio (MLR); 2. Direct Primary Care (aka “Medical Homes”).

MLR requires that insurance companies spend at least 80 to 85 percent of their collected premiums on medical services, while the Direct Primary Care provision will offer an affordable alternative that by-passes insurance companies altogether. Taken together, these two provisions could have a long term effect that is likely to be devastating to traditional health insurance companies.

Regardless of the legislation, people will continue business as usual until people realize there’s a better way as most believe traditional health insurance is the only option. Fortunately there is a better approach. Let me explain the two components of the new law that pack a potent punch. The first is the new “Medical Loss Ratio” (MLR) minimum requirement. The second is allowing flat-fee direct primary care practices, a form of the patient-centered medical homes that the health law initiated pilots around, to compete within the state-based insurance exchanges. These so-called Direct Primary Care models have a membership model that isn’t insurance and thus avoid 40% or more of the costs associated with insurance that don’t help patient well-being. They must be coupled with a high deductible “wrap around” policy to be in the exchanges.

Medical loss ratio will drive insurance companies to spike rates or opt out

The new law requires health insurers, starting in 2011, to spend at least 80 to 85 percent of the premiums they collect on medical services or activities that improve the quality of care or else they have to rebate money back to consumers. (That percentage is the MLR.) The remainder can be allocated to administration or profits that don’t benefit patients (e.g., overhead, salaries, advertising).

From the insurers’ standpoint to make this requirement, when they may be operating at a 65% MLR (common in the individual and small business market), the logical response will be to either jack up their rates or opt out of serving that end of the market. [Note that the large group market is closer to the target already.] It’s not hard to imagine that a small business or individual will look for an alternative if they are faced with the 50% rate increase we’ve begun to see when some of the new provisions kick in and notification of new rates begin. The better alternative for the consumer is Direct Primary Care.

Direct primary care can lower costs by 40% or more

Allowing for Direct Primary Care in the new law is the only element that I believe can actually bend the cost curve, as it removes 40+% of the cost out of the equation. Previously, that has gone to insurance overhead and profits. A relatively little-known provision in the law creates an affordable new choice for individuals and businesses by allowing flat-fee direct primary care practices to compete within the state-based insurance exchanges. This is where many Americans and small businesses will be able to shop for health coverage beginning in 2014 although there’s no need to wait until then from a consumer perspective.

This provision enables Americans to elect a more affordable health care option compared to traditional insurance plans — an alternative in which patients and/or employers pay a flat monthly fee directly to a primary care provider for all primary and preventive care, chronic disease management and care coordination throughout the entire health care system. Under the new law, a flat-fee direct primary care medical home membership can be bundled with a new, lower-cost “wrap-around” insurance plan that covers unpredictable and expensive services outside its scope, such as specialist care, hospital stays or emergency room visits. Not unlike a health club membership, many of the direct primary care practices allow unlimited use. Further, since primary care providers don’t have to spend so much time billing, they are able to spend far more time with their patients (30-60 minute appointments vs the 8 minute appointment common in Fee-for-Service.

Today, flat-fee practices offer affordable, high-quality health care at up to 50 percent less than the cost of traditional insurance, even when combined with a lower-cost “wrap-around” insurance plan. Benefits of direct primary care membership vary by provider, but typically include many of the following:

  • Unhurried 30- to 60-minute office visits
  • No limits for pre-existing conditions
  • No deductibles or co-pays
  • Open 7 days per week, with 24 hour cell phone and email access to a physician
  • Low, predictable monthly fees plus savings on third-party wrap-around insurance plans
  • On-site x-ray, laboratory and “first-fill” prescription drug dispensary
  • All routine care including vaccinations, routine blood tests, women’s health services, pediatric care, on-site procedures and ongoing management of chronic

When you start with a situation where two of the three parties (the patient and primary care physician) involved with a critical transaction are confused or unhappy and the cost to the consumer of that service is going up 20-30% every year, it is ripe for disruption. Talk to virtually any primary care provider and they will tell you how challenging their professional lives have become. This has led many to leave their practices in record numbers and fewer going into the field out of Med School. Most still love the patient interaction side of the equation but are extremely frustrated with how insurance has taken away their freedom to practice as they believe is best for their patients. Some physicians operating in this model describe how they felt they were only using 40% of their medical training in the hamster-wheel model so common in fee-for-service practices.

To understand just how convoluted our health payment system is today, it helps to draw an analogy. What if homeowner’s insurance was like health insurance and was used for regular house upkeep such as having an appliance serviced. Each time we had an appliance serviced, it would require the same inspection, approval, paperwork, and billing hassles that we endure after a fire or major incident at our home. When you had the appliance guy come, he wouldn’t be able to tell you how much it was going to cost. Worse, he wouldn’t even know until he found out whether you were an entrepreneur or worked for a larger employer. If you happened to not work for a large employer, you would likely pay 30% or more than if you’d worked for a large employer since they get price breaks. Home contractors would spend an extraordinary amount of time filling out forms and negotiating reimbursement for every appliance serviced. The overall cost of homeowner’s maintenance would increase exponentially to cover the business overhead. Fewer Americans would be able to afford homeowner’s insurance, laying the ground work for a national crisis. Sound crazy? This is how it America health insurance works today.

When faced with a 50% increase in premium costs for a model they aren’t particularly satisfied with, it’s not hard to imagine individuals and employers moving en masse to a model that not only costs less but delivers a dramatically higher level of service. As a result, the MLR combined with Direct Primary Care is likely to blow a gigantic hole in insurance companies’ business.

Dave Chase is a health care consultant who previously worked at Microsoft as Worldwide Healthcare Industry Director and Managing Director for Industry Marketing & Relations for the Digital Media industry, and was a senior consultant with Accenture’s Healthcare Practice.  He can be reached on Twitter @chasedave.

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  • Medical blog

    It will be interesting to see how this evolves. Many primary care providers can offer some of these services, but few at this time can provide the xray aspect. Some can provide labs. How flexible will the wrap around policies be, and how available will they be. It will be interesting to see how widespread this becomes.

  • Dave Chase

    In response to your question, to my knowledge, the most developed of these models is Qliance out of Seattle. The link below references a study they did. One of the impressive things has been how they have demonstrated with their significant panel to have reduced surgical, ER and specialist visits by 40-70%. They’ve also shown a significant drop in hospital days. Read more below…

  • Mike

    Dave – These Direct Primary Care options sound incredibly promising for cost containment. But even if we totally get rid of health insurers (and their evil profit incentive, socially destructive ways), wouldn’t we still as individuals be left to deal with the cost of expensive medical care beyond that which primary care or routine check-ups can manage (break a leg, Caesarean section birth)? Medical care in which, even today, the hospitals and doctor groups set the prices for payment or reimbursement? I am no fan of insurance companies, but they do offer to spread individual risk out beyond what we as individuals could accomplish. Even if we could get rid of the third payer system in the US, it is no panacea for the rising cost of care (physician priced). Moreover, individuals will be left to pay for all their medical expenses alone (as companies drop health benefits in favor of sending employees to exchanges) and, via increased taxes, shoulder a greater portion of the expense of others who are supported by government subsidized care. Will higher MLR ratios and Direct Primary Care alternatives solve these issues too?

  • Dave

    I think primary care docs would love to do more. But, I think liability also prevents them. If you do a procedure and something goes bad, you’ll be roasted in a lawsuit where they claim you are unqualified compared to a specialist that also performs the procedure. That said, if it does work and malpractice insurance isn’t too expensive, I think a lot more people will do primary care if they expand the scope of practice/decrease the whole “primary care docs as referral machines”.

  • Dave Chase

    Mike – I wrote a piece for the Huffington Post entitled “Do it Yourself Health Reform” ( that spoke to the “in-between” issues such as breaking a leg that you mention. I go back to the car insurance analogy as it sheds light on how we’ve tainted what insurance does well (covering catastrophic/rare events) with the day to day facets of health. In effect, with our cars we “self insure” for the equivalent of breaking a leg – e.g., transmission goes out. It’s a bummer but won’t necessarily financially ruin you the way cancer or a major car accident would – i.e., appropriate uses of insurance.

    More detail is at the link above but for the “break a leg” scenario, if you had a HSA you’d get a tax advantaged way to pay for that which you don’t get for your car transmission going out.

    An issue to overcome is most people are illiterate when it comes to health economics as historically one’s employer worried about that. I believe that has to change and there’s an economic imperative that didn’t exist before that will compel people to become financially literate. The last figure I heard is that for people with employer-provided insurance, the average amount they have to pay is 30% of the premiums. That percentage has rapidly risen as employers couldn’t absorb the insane premium increases every year. Even a bigger motivator is the growing cohort I’m in. That is, it’s estimated that nearly 1/3 of the workforce will be permanent contractors/consultants/entrepreneurs who have ZERO expectation of employer provided insurance. It’s also worth noting that in our economic recovery, despite record corporate profits, companies are being very conservative in hiring people back. In many cases, they’ll opt to hire contractors, etc. One can debate the merits of that, but the evidence is clear that it is happening.

    I have nothing against insurance companies doing what they do best – covering catastrophic stuff. However, as a consultant to providers I’ve been in the middle of what I describe as a Gordian Knot designed by Rube Goldberg (i.e., our health payment model). It’s not an exaggeration to say one pays a 40% insurance bureaucracy “tax” when it comes to day to day healthcare. One couldn’t design a more convoluted system with costs on all sides – provider, insurer AND patients. This doesn’t even speak to what it does to care. It hit me like a punch in the stomach when primary care docs practicing who had practiced in the hamster-wheel model of 8 minute apptmts told me they believe they only used 40% of their medical training practicing in that model and thus why they shifted to direct pay.

    At a personal level, my wife and I saw the impact via a great Family Physician she’d gone to for over 20 years. He was a gem – great at what he did and obviously enjoying it. He sold his practice and was subjected to the productivity-measurement model and he became an inferior doctor in our opinion and he seemed beaten down. We left him and went to a direct pay model and once again had a great patient-clinician relationship. Those of us over 40 remember those great Family Physicians we grew up with. We loved them. They made a nice living. As a congenital optimist, I think we’re going to return to those days. What’s not to like?

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