Cash Pay Practices

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As mentioned previously, rising health insurance premiums and higher deductibles will drive a consumer’s need and desire to “shop” for healthcare services, particularly on the low end of medical complexity. As long as one believes in the thesis that high-deductible forms of health insurance will continue to grow in the US (driven by an aging population), one must consider that a private /self / cash pay healthcare market is growing and will likely form the basis for a new infrastructure that will distribute healthcare services for many years to come.

Expanding on the concept of patients paying providers directly, a loose phrase used to categorize this patient-provider payment model is direct primary care. Depending on who you talk to, direct primary care, or DPC, has taken on a variety of different meanings and is really a grab bag of different underlying business models. Said another way, it might seem like a small thing to lump a concierge practice (i.e. patient pays a provider a concierge membership fee and the provider bills the patient’s health insurance) with a cash practice but they are vastly different operationally. Given that we are in the early innings of this cash pay healthcare ballgame, however, it will have to do to use DPC as a categorization until the new business models are more prominent and fleshed out. The distinction that gives it great utility is that it largely highlights stepping away from having a third party foot the bill and challenges the concept of a bureaucracy determining medical necessity.

One concept that has proven to be an interesting subcategorization under the concept of DPC is the colocation of medical offices near pharmacies inside of retail stores – so-called retail healthcare. The idea was reborn in the early 2000s with the rise of in-store medical clinics and has since seen rapid growth. Today, major pharmacy players such as CVS and Walgreens are active in the space and often run the clinics in conjunction with local providers. Somewhat dismissively referred to as “doc-in-a-box” operations, these clinics were initially set up to handle minor conditions at a fixed, cash price but have evolved from there to accepting insurance and as extensions of the larger regional healthcare systems.

From a business standpoint, the in-store clinic pioneers hypothesized that the foot traffic coming to a pharmacy would benefit from being able to get their prescription right next to the pharmacy. Unfortunately, the initial players in the space have been largely absorbed by the major pharmacy chains and it seems as if getting the business model to work proved difficult for standalone companies. Pharmacies, on the other hand, continue to invest in the model, likely from the holistic view that they can recoup any losses through fulfilling prescriptions and other items purchased in the stores.

The next generation of innovation in this space should lead to more standalone players gaining traction, particularly should the adoption of high-deductible health insurance plans continue. Independent retail medical offices are showing up and are providing traditional medical care defined in scope by what can be priced accurately.  I served as one of the first doctors at this medical center, for example, and believe that places like it have potential to end up as a chain of branded franchised practices built around the concept of delivering specific types of medical care at transparent prices.

Defining the scope of service around medical needs that can be priced mandates that only specific types of care are delivered through this type of model. By examining the menu of services, one can see the emphasis on minor services such as vaccinations, minor urgent care and other wellness offerings (e.g. vitamin B12 shots). In contrast, complex cases involving symptoms such as abdominal pain are rightfully referred to facilities that have the capability of appropriately managing such patients. Also, patients benefit when cash practices like this one define the scope of service and prices accurately on the website as a patient can easily move on to an alternative venue for treatment rather than wasting time walking into an office and being told that they need to seek a higher level of care.

From the perspective of a doctor or a medical provider like a nurse practitioner or physician assistant, a cash-only model like this one has appeal. Rather than spending good chunks of your day filling out medical charts a certain way so that a billing company can attempt to optimize your reimbursement from a patient’s health insurance company, you have more time to focus on medical care and charting in a way that’s aligned around patient care. Additionally, for those who own medical practices, a cash-only model improves financial visibility as the risk of not getting paid by an insurance company 60 days after a patient visit is removed.

A cash-only model is not all roses, however. For one thing, finding patients who are interested in using your practice can be expensive.  While traditional practices acquire patient volume resulting from being in-network with an insurance company’s network, cash practices have to figure out how to bring patients in the door on their own. This not only requires knowing where and how to advertise, but it also means delivering a quality experience during all parts of the patient’s visit. An unhappy patient at a cash practice will seek care elsewhere whereas that same patient may be forced to return to an unsatisfactory practice again and again when using health insurance for payment as it may be the only option in the area. Given the many moving parts, lots of experimentation and refinements are required which can challenge even the most dedicated entrepreneur.

Additionally, a cash-only practice often has the added challenge of convincing a patient that the service is worth it given the historical context of patient payments during office visits. In the past, a patient could walk into a medical office and pay a copay of say $0 or $5, get treated, and leave without receiving a bill. The medical office would bill the insurance company and everyone would be happy. If this is the patient’s context for how much a healthcare visit should cost, a cash-only provider has the added difficulty of convincing the new patient that their reasonable office visit fee of $100 (given that they provider is not billing anyone else) is worth it. While the days of the $5 copay seem to be disappearing for most, it still is a lingering context and perception in the minds of some.

While it may not be obvious, patients actually benefit in several ways from utilizing a cash-only practice. Excluding the behavior of less reputable medical practices, one will not receive bills from the practice because the health insurance company or government payor did not pay for a delivered service. Additionally, because the practice depends on positive customer experiences, there is a healthy tension created in which the provider has more of a desire to deliver customer service on top of quality care. At its extreme, one could argue that this could lead to suspect behavior (e.g. overprescribing controlled medications to make a patient happy) but this does not seem to be the case in most patient encounters.

Looking forward, a substantial opportunity exists in medical operations that wish to serve healthcare patients on a cash basis. Not only do we have a rapidly growing segment of the population that is seeking value in their healthcare purchases as a result of being on a high-deductible health plan, but we can see the difficulty with getting access to appointments or services driving even well-insured people to pay cash for convenience.

Pricing & Healthcare Products

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The pricing of healthcare services in the US healthcare system is of great interest to me. Despite attempts to achieve price transparency, creating a simple, accurate pricing system that we see delivered daily in stores and online has been elusive. While the answer for why that is the case is not complex, achieving a system that delivers it is going to take time.

The fundamental reason that healthcare pricing is not readily achievable today is because most of payments in the US healthcare system occur through third-party payors. The government is the major payor followed by the large health insurance companies. In contrast, today, only a tiny percentage of healthcare costs are paid directly from the patient to the provider.

To highlight why this is so important, think about how you consume a meal at a restaurant.  You go in and review a menu of prices for products. Depending on your interests and your budget, you might select an appetizer, an entree and a drink to go with it. You roughly know the total amount that you are going to pay ahead of time and, when the bill comes, you reach into your own pocket and pay from your own wallet.

Contrast this with one’s experience getting a healthcare service in the United States. You walk into a medical office and the first thing you do is present your insurance card. Based on the information on the card, the office has a decent, but highly imperfect, sense of what will be paid for (“covered”) by your insurance company on your visit. The complexity of determining coverage in advance is magnified by the fact that no one knows what services will need to be paid for until you are actually evaluated by your doctor or medical provider (“provider”).

Once in the patient room, you will be evaluated by your provider.  The provider will perform an assessment and, as needed, order from a wide range of lab and imaging studies to make a diagnosis. Theoretically, it is a mixed blessing that the provider typically does not know the prices of the services being ordered. On the one hand, the provider can order everything that is necessary without shortchanging the patient’s care. On the other, when the final bills are tallied, it can result in a massive sticker shock for the patient if the services are not covered.

Continuing the visit, the provider might write a prescription for some medications to help you with your illness. Again, the price of the medications (particularly branded ones) are unknown until you actually go to a pharmacy and pick them up. At that time, you will again present your insurance card and, depending on what benefits have been negotiated previously, pay a price ranging from zero to hundreds of dollars. If you try to look up information on drug costs ahead of time (this is slowly changing), you are stymied by the complexity in the system. As a data point, it is interesting to note how many links one has to click through just to get basic information about drug coverage through Medicare.

Applying this sort of operational logic back at our restaurant can make one’s head spin. Instead of how we dine out now, what if we were to go into the restaurant and present a card that represents our membership at a restaurant-payment company (“RPC”). Rather than looking at the prices of services, we just ate whatever we wanted and, once we were done, the restaurant would send a bill to our RPC.  The restaurant would have a better chance of getting paid if they were a preferred restaurant (“in-network”) to the RPC. Additionally, the restaurant would need to make sure that our meal was coded in the paperwork sent to the RPC correctly and that they could justify what we ate as necessary for our sustenance.

As health insurance premiums go up, our system is slowly shifting from the traditional model to the restaurant model. Generally speaking, we as humans use vastly more healthcare resources as we age (no surprise) and, as the US population ages, health insurance premiums continue to rise in an effort to absorb many of those costs.  As premiums rise, consumers are forced to choose between maintaining comprehensive insurance or shifting to less costly, high-deductible plans. As one would expect, many are choosing the latter option which is why we are seeing growth in these types of plans as a way to get some relief from the higher premiums.

At an individual level, having a high-deductible health insurance plan changes purchasing behavior. Now, the first $1,000 or even $10,000 of medical care is paid directly out of one’s pocket. If one is generally healthy and not planning on hitting their deductible in any given year, the result is that the individual will price shop for any necessary healthcare services before buying. As the population of people shopping for first dollar healthcare services expands, expect to see new cash pay healthcare service operations form to fill this demand.

As anyone who has spent time on the internet knows, one can find many websites that review and discuss healthcare pricing for specific services. While product review websites have existed for some time to help people like doctors navigate the options out there, the number of websites that actually deliver healthcare services at defined prices is quite small (but growing). For example, services like Accesa Labs enable one to research and order lab tests online at cash prices and get tested at major national laboratories. Rather than eating a full buffet at a medical restaurant and dealing with the sticker shock later, services like this one enable people to know what they are paying for ahead of time and making purchasing decisions based on the value of lab tests delivered to them.

Not all medical services can be priced accurately, however. People with medical conditions can be broadly classified along lines such as ethnicity and age but, ultimately, every application of a medical service ends up being custom due to the myriad of differences once one gets into the subtleties of the clinical case. As such, saying that we can price every person who has stomach pain at $150 simply does not work as your routine gastritis will mix in with more complex conditions even when larger attributes such as age and gender match up. As such, the more complicated the clinical condition, the more time, testing, and interventions required and the greater the ultimate cost.

There are some healthcare services that do have good, or increasingly improving, pricing. Drug pricing is one of them. While still dominated by large entities that control pricing behind the scene – related to contracts with health insurance companies and other 3rd-party payers – newer software companies like GoodRx have popped up to help bring more transparency to the industry.

One thing that seems to be more certain is that true price transparency in the US healthcare system has to improve. Other countries have long enabled the private, direct pay market of healthcare and entities exist that enable someone to walk in and get the studies or prescriptions they need with cash or a credit card. In the US, many would complain that this leads to overutilization of services but that argument is potentially less important in a system in which the buyers (i.e. patients) in the market are paying for the services versus payment being delivered by a third-party entity like health insurance or the government.

Going forward, I see a new market infrastructure forming that connects existing and new healthcare vendors with patients and offering their services at defined cash prices. Absent from this discussion is society’s role and obligation in funding healthcare services for its constituents and it is not one that will be touched on in this article. Big picture, as scary as change is to some, new market forces should result in a system that aligns more precisely with delivering quality medical care to patients with real, cost-driven value.

Rise of Retail Healthcare

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The US retail healthcare revolution seems to be starting. Undoubtedly, the system is in need of a major change and the regulatory efforts in recent years have not come close to delivering what they were supposed to.  For the average patient consumer, health insurance premiums and deductibles are going up and everyone seems frustrated by the lack of value and exorbitant prices for healthcare services. Driven by consumer and employer demand, it seems inevitable that price transparency is coming and, with it, large changes in the healthcare market.

A path to seeing how this change might unfold comes from humbly studying how other markets deliver value and pricing and seeing if we can apply those lessons to the healthcare market. As will likely be touched on in future posts, the regulatory environment and third-party payment system that dominates the US healthcare system are somewhat understated, yet massively influential, components of why price transparency is so hard to achieve on an ongoing basis.

There are many analogues for market pricing in non-medical environments. Fortunately, there are also areas that touch medicine and healthcare that also demonstrate how market forces can be applied in medical settings even if they are somewhat peripheral to the pricing of  healthcare services. Consumers looking to purchase medical products like medical textbooks and clothing such as medical scrubs have a myriad of review sites to visit to make high-quality purchasing decisions. As such, these consumer markets and have long demonstrated principles that align more closely with free market forces and, as such, readily demonstrate price transparency.

What makes these types of goods priceable?  In teasing out the elements of price transparency in markets such as these, it is helpful to think about what elements of books and clothing make them easy to price. Books, for example, are well-differentiated goods. While each book is unique in its content, the overall attribute of the book can be largely described using widely understood attributes such as weight, number of pages, publisher and the like. Medical clothing can be priced using attributes such as size, color, materials and thread count. Any number of suppliers can readily buy a book or a set of scrubs and resell it at a price of their choosing and sources can easily differentiate between higher and lower quality items along the lines of their unique characteristics.

Some might argue that books and clothing are pure retail goods, even if they are used in a medical setting, and lessons from those markets should not be applied to traditional medical services markets. In that case, one can move further along the spectrum in an effort to study how pricing might be utilized for more traditional medical services. One market that has a number of similarities to the prescription drug market is the medicinal compound market (i.e. supplements). Supplements have demonstrated transparent pricing for some time and, no matter how one feels about the nature of the industry, supplements have long been subject to market forces between buyers and sellers. And, because of the lighter hand that government plays in regulating it (for better or for worse), changes in pricing in the supplement market demonstrate the effects of traditional forces such as marketing, branding and distribution in establishing a competitive position. Under the assumption that a manufacturer is actually selling what’s listed on the bottle, supplements can be identified along definable characteristics such as ingredients, dosages, serving size and form. And, like the product market, supplements can be reviewed based on their unique attributes. As far as the supplement market goes, as long as customers find value in the supplements they are taking (placebo effect or not), suppliers will continue to exist in the market to serve them and transparent pricing should play a part.

Looking forward, in considering traditional medical markets, it will be interesting to dig in to see what can be uncovered and why price transparency has been so hard to nail down. Unlocking the answers to these questions will likely give insight into newer models of care that, in this time of change and frustration, will form and thrive, driving value away from incumbent players and into new places.

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