Updated: Mar 14, 2021
How much can we save by using insurance properly?
The unaffordability and poor value of health care and health insurance are top concerns for many of us. This issue causes us to keep a job we don’t really like because of the medical benefits, and it might influence who we vote for. Let’s examine the fundamentals underlying the affordability and value of health care and health insurance by starting at the beginning, with primary care. Primary care is the beginning in the sense that it’s where most people engage the health care system and it’s where around 80% of medical services happen. Additionally, primary care is very important to health and to the proper functioning of the health care system. People that use more primary care and less specialty and emergency care are healthier and spend less than those whose utilization patterns are the opposite, even after adjusting for health status and chronic conditions.
The principle of insurable events is top of mind for me since using insurance to pay for things that are aren’t actually insurable causes considerable challenges in our health care system. Insurable events are those that are unlikely, unpredictable and very expensive. Your home burning down is an insurable event; it is the sort of risk that insurance is designed for. It is unlikely to happen to a given house, which house it happens to is unpredictable, and the cost to the person it does happen to is very large. Most people could not afford to rebuild their home out of their savings. The cost to insure your home against fire and other insurable risks seems very affordable compared to the cost of rebuilding your home. The essence of insurance is the pooling of similar risks so that the costs of insurable events are spread out over a large number of policyholders (homeowners in this example) and the costs of fires and other losses are small for each person if we take the total losses and spread them out over all policyholders, making coverage affordable
In health care, we do use insurance to spread out the cost of catastrophic events akin to losing your house in a fire. However, we also use the mechanism of health insurance to pay for routine care that, strictly speaking, is not insurable. Health care examples of insurable events would include cancer and serious injuries from a car accident among many others. But we also use health insurance for medical events like primary care that are akin to furnace filters and lawn mowing for home owners. No one uses insurance to pay for furnace filters and lawn mowing because it doesn’t make sense; it would make everything more expensive and inconvenient. See here and here for a two part blog post entitled, “If Auto Insurance Worked Like Health Insurance, We Couldn't Afford to Drive.”
One of the chief problems we create by insuring routine events such as primary care is that we end up spending considerably more than if we just paid for them directly. There are a number of reasons for this. We’ll examine two of them in this series of blog posts.
We use health insurance for medical events like primary care that are akin to furnace filters and lawn mowing for home owners. No one uses insurance to pay for furnace filters and lawn mowing because it doesn’t make sense; it would make everything more expensive and inconvenient.
First, when we use insurance to pay for primary care, we are adding a large number of additional steps that have to be done, and people have to be paid to do these steps although arguably they don’t improve care. Second, people behave differently when they have insurance and in the case of routine care, these different behaviors lead to more health care spending. Improper use of insurance has big consequences for spending; I’d say it’s one of the main reasons we spend so much for health care and health insurance in this country.
The remainder of this post will compare visit prices when primary care is paid for directly and when it is paid for with insurance. Part 2 of this blog post will examine how insurance premiums differ when primary care is paid for directly and when it is paid for with insurance. In part 3, we’ll explore how people change their behavior when insurance is present, and how these behavior changes increase health care spending.
Here we suppose that a primary care physician only accepts direct payment from patients. She uses computer systems to document patient records and run her business. As she does not accept payments from insurance companies, Medicare or other third-party payers, her computer systems and workflow are streamlined and efficient. She spends most of her time with patients and doing things on their behalf to improve care, such as researching their medical conditions or consulting with specialists. Her practice overhead is low as she does not need to employ staff to do paperwork, pre-authorizations, quality reporting or other third-party payer requirements. A direct doctor in solo practice might employ one part-time nurse and no administrative staff. Suppose this doctor charges $75 for an office visit.
Paying with insurance
A typical traditional primary care practice (one that accepts third-party payment) employs nearly 3 administrative staff for each physician (White, 2017). But even with administrative staff, traditional physicians do not escape the administrative burden of the third-party payment system. Traditionally practicing PCPs spend only about 25% of their time in face-to-face interactions with patients in the exam room because of administrative tasks they must complete (Sinsky et al., 2016). Traditional practices must use expensive and complicated electronic medical record (EMR) systems to track and report a myriad of variables if they are to get paid by third-party payers. Between administrative staff, EMRs and other practice expenses driven by third-party payers, the overhead for a typical traditional practice is about 2.4 times higher than the overhead of a typical direct practice*.
If we adjust the $75 direct visit to account for the higher overhead in the traditional practice, the visit charge becomes $96**. You are paying $21 extra for extra people to do extra tasks unrelated to the care you receive. And this is not the only place where there are extra costs to paying for primary care with insurance. In part 2, we’ll compare the cost of insurance premiums in our direct and traditional primary care delivery scenarios.
When you pay for a primary care visit with insurance, you are paying more than 25% extra for extra people at the doctor's office to do extra tasks unrelated to the care you receive. And this is not the only place where there are extra costs to paying for primary care with insurance.
There are many interesting points that we could delve into further in the comparison of direct and traditional primary care delivery. Some might argue that certain requirements such as quality reporting improve the care that traditional PCPs offer and therefore traditional delivery is superior to direct delivery in that way. I am not convinced. For one thing, as most quality metrics are based on meeting specific targets for specific diseases (such as hemoglobin A1c level for diabetic patients), they cannot reflect the variation and complexity of care provided in primary care (Heath, Rubinstein, Stange, & van Driel, 2009; Young, Roberts, & Holden, 2017). Another difference is that traditional primary care visits may be rushed or short (Bodenheimer, Berenson, & Rudolf, 2007) while direct visits may average 30 minutes or longer (Alexander, Kurlander, & Wynia, 2005); perhaps direct visits are superior to traditional visits in that way. While the nuances of direct and traditional primary care delivery are worth exploring, the starkest difference may be how much more it costs to pay for primary care with insurance than if you’d pay directly. In part 2, time we’ll compare the cost of health insurance with and without primary care.
* Using overhead of 25% for direct and 60% for traditional primary care delivery (Bujold, 2017; Forrest, 2007)
** This assumes that the cost to the practice of doing the visit and the profit are the same for both practices. Backing out 25% overhead from the direct visit gives us $60 visit costs & profit. For the traditional practice, overhead is 60%, so they need to charge $60 x 1.60 = $96 for the same visit to cover their visit costs and profit the same way that the direct practice does.
- Alexander, G. C., Kurlander, J., & Wynia, M. K. (2005). Physicians in retainer ("concierge") practice. A national survey of physician, patient, and practice characteristics. J Gen Intern Med, 20(12), 1079-1083. doi:10.1111/j.1525-1497.2005.0233.x
- Bodenheimer, T., Berenson, R. A., & Rudolf, P. (2007). The primary care-specialty income gap: why it matters. Ann Intern Med, 146(4), 301-306.
- Bujold, E. (2017). The Impending Death of the Patient-Centered Medical Home. JAMA Intern Med, 177(11), 1559-1560. doi:10.1001/jamainternmed.2017.4651
- Forrest, B. R. (2007). Breaking even on 4 visits per day. Fam Pract Manag, 14(6), 19-24.
- Heath, I., Rubinstein, A., Stange, K. C., & van Driel, M. L. (2009). Quality in primary health care: a multidimensional approach to complexity. British Medical Journal, 338. doi:ARTN b1242, 10.1136/bmj.b1242
- Sinsky, C., Colligan, L., Li, L., Prgomet, M., Reynolds, S., Goeders, L., . . . Blike, G. (2016). Allocation of Physician Time in Ambulatory Practice: A Time and Motion Study in 4 Specialties. Ann Intern Med, 165(11), 753-760. doi:10.7326/M16-0961
- White, B., Twiddy, D. (2017). The State of Family Medicine: 2017. Retrieved from https://www.aafp.org/fpm/2017/0100/p26.html
- Young, R. A., Roberts, R. G., & Holden, R. J. (2017). The Challenges of Measuring, Improving, and Reporting Quality in Primary Care. Ann Fam Med, 15(2), 175-182. doi:10.1370/afm.2014