Monday, April 28, 2008

The New American Solution

Here is another quote from the Feb 7 2008 NEJM article of Robert Kuttner, a journalist and member of a political advocacy group, with the misleading name "Market based failure, a second opinion on US health care costs"

"Defenders of commercialized health care contend that economic incentives work. And indeed they do — but often in perverse ways. The privately regulated medical market is signaling pressured physicians to behave more like entrepreneurs, inspiring some to defect to "boutique medicine," in which well-to-do patients pay a premium, physicians maintain good incomes, and both get leisurely consultation time. It's a convenient solution, but only for the very affluent and their doctors, and it increases overall medical outlays."

And indeed economical incentives work. Who would have thought so? Money is the most direct connection to everybody's mind and heart. The author recognizing the effectiveness, but immediatley moves away to the supposed drawbacks ..."it works in perverse ways". It mihgt be counterproductive intially, when people do not go to doctors to save money, but sooner or later they will recognize that it is better to have a mammogram, rather than having to treat breast cancer at some point in time. Poeple have to learn that prevention is good, we cannot force them. We cannot regulate, administrate intelligence and cost efficient behaviour. It is simply impossible. People will have to learn.
We do not force everybody to start saving at age 15, and invest the interest back into the savings account. Right? Even though regular saving or investing with adding back the interest is one of the most powerful instruments to accumulate wealth, we do not force everybody to do it.
Why is health care so different? Why do we have to try to administrate our way to perfection in health care? Why do we not trust anybody with their own decisions?
We are on our own when we buy cars and take care of our cars. If we neglect them, they will rust, they will fall apart earlier and we will have to replace them earlier. People know this and take care of their cars. Why is health care different?

Apparently personal responsibility is undesired in health care, too many of us want to "have it all covered" and pay a high price for it, a price that, as it turns out, gets higher and higher every year.
The only solution to cost control in health care is to have consumers pay directly, cash. Only then will physicians be asked "Doctor, what is the most cost effective way to deal with this problem?"
Until we decide to go this route, health care costs will continue to climb and climb and climb, seemingly "unstoppable".
Well, not unstoppable at all. Health care costs are going up in exactly the same way in ALL countries in Europe and most countires around the world, yes exactly the same way as here in the US....
and why? Because the all use the "third party payer" system, that isolates the consumer from any kind of knowledge and responsibility of health care cost.
It is not the weird "market" here in the US, that is not even a real market, that dribves cost up, because cost goes up in single payer systems such as Canada and in three tier systems such as Germany. These systems are not the solution. They all struggle with cost increases. Why look to Europe when they have the same percentage of cost increases and the same range of dissatisfaction with their health care systems.
Are we not the greatest nation? Why would we look to the other ones for examples? Should we not lead instead of following?
We should lead by being the first country to institute cash care! Direct medicine. Responsibility and Affordability.
Capitalism is not the cause of the problems that plague our health care system, it is the CURE
More to follow

Kuttner is wrong. WE do not have a health care market and therefore it has not failed

Sometimes you find a particularly flawed article. In early February I read an article in the New England Journal of Medicine by a journalist and member of a political advocacy organization. The article is called

Market-Based Failure — A Second Opinion on U.S. Health Care Costs

And it was written by Robert Kuttner

You can read it here .

A few comments:

Market Based Failure" is a misnomer. It is the “health management concept” in its present form that has failed. This failure should be attributed to the government that has set up the system in the first place. I would call this more accurately a "government based failure". It is surprising that someone who has been writing about the health care system and about politics for many years lacks the most basic knowledge about economics and about health care. We do not have a "health care market". It does not exist. Any 18 year old can see that. We have a very (!) limited market for "health insurances". Just that. Not for health care services, which is exactly the problem with our system. To postulate that we have a "health care market" is either plain stupid or cynical. For Mr.Kuttner's sake I assume he is being cynical and just tries to make a pro-government-monopoly point. A bit cheap though...

Here is what the past governments have set up: patients and physicians are blinded to the costs of all transactions. This alone shows that our health care system is not a "market". You cannot shop without knowing prices.

A powerful oligopoly of insurances dominates and overpowers individual physicians, which are not permitted to unite, unionize or even communicate in any way concerning pricing. Physicians can either participate at the conditions of the HMOs and Medicare or drop out of the system altogether. It is a “bad contract-no negotiation-take it or die” situation for physicians. Physicians are rewarded only for volume, not for quality, service or efficient use of resources. The healthcare consumer, the patient, not only has no idea at all what happens with his money, has also has no influence whatsoever on how his money is spent. This discourages cost efficient behavior to say it mildly. And neither physician nor patient is really held responsible for any cost, another major factor in increasing costs.

So, this is what the government has set up. Mr.Kutter believes that this government produced system has failed. With a rather incomprehensible logic he now wants to turn the whole system over to those people who have failed - the government. Go figure.

I believe we do not have a market in healthcare and I think we should finally have one. A market where costs are transparent, where everybody knows where the money is going, how it is spent.

The reason why every system around the world fails to contain cost is:

The consumer has no feedback about his spending. The consumer does not have skin in the game. The consumer is spending “other people’s money”

Americans (and Europeans equally) demand the best health care other people’s money can buy. As long as the “third party payer” system is intact, the spiraling health care costs will not be contained.

The author certainly is aware of the complete absence of true market characteristics in US health care. This makes his “second opinion” invalid. But let’s try something different:

"News are vital, and inconsistent quality and lack of informative value warrants a reform. All TV and radio stations, print media and Internet outlets will be merged into the government run "Federal News Department" (FND). The FND will the exclusive employer for all journalists and pay salaries mirroring the postal service. This will free journalists to focus on their work. Since they do not have "expectations of earnings", they will be just fine.

The FND issues comprehensive guidelines: All news have to follow templates, the number of words and paragraphs have to be consistent with formulas proven efficient in conveying information. Only words from federal vocabulary lists are permissible. We do not know how to measure performance, but we will cut salaries if "performance measures" are not met. I am sure, Mr. Kuttner, that you enthusiastically support my reform proposal!”

To dump health care into the lap of the government is the helplessly-throw-your-arms-in-the-air-and-give-up-version of reform, some people would call it the EEYORE version of reform.

Think before you support something stupid!

Why Health Care is expensive

This is an excellent article that I found, and to my surprise it was published on the website of the CATO Institute. I completely agree with the conclusions of this analysis, which was published in 1994. Some things do not change......It is about time that more people take this analysis to heart, otherwise nothing will change for the better. The bottom line is: everybody spends generously when someone else is paying. This is one of the biggest reasons why the cost increase in health care seems unstoppable - besides the other reasons such as aging population and technical progress.
Very, very, very important, neither capitalistic HMO bureaucracy nor socialistic single payer as in Canada or in the UK are the answer. Both these systems are battling the same problem (and loosing). Both are failing. It is time to use the system that has made America great, the system that works so well for 5/6 of our economy, the system that made so many come to America: the free market! Capitalism is not the cause of our health care problems, it is the cure!

Begin quote:

Why Health Care Costs Too Much

by Stan Liebowitz

Stan Liebowitz is a professor of managerial economics in the Management School of the University of Texas at Dallas.

Health care costs have increased dramatically over the last few decades and are now thought to be excessively high. That has caused the current political reevaluation of our health care system, including its funding and performance.

This study is an analysis of the causes of the increase in health care costs. The major culprit in the seemingly endless rise in health care costs is found to be the removal of the patient as a major participant in the financial and medical choices that are currently being made by others in the name of the patient.

The increasing share of medical bills paid by third-party payers (insurance companies and governments) and the disastrous consequences are documented. Patients overuse medical resources since those resources appear to be free or almost free. Producers of medical equipment create new and more expensive devices, even if they are of only marginal benefit, since third-party payers create a guaranteed market. Attempts to rein in those costs have led to a blizzard of paperwork but proven ineffective in controlling costs.

The cure for the present problems is straightforward: the patient must once again be made the central actor in the medical marketplace. Patients need to be given the same motivations to economize on medical care that they have to economize in other markets. Tax laws need to be rewritten. The use of medical savings accounts needs to be promoted. High-deductible health insurance should be encouraged.

Returning the patient, and normal market principles, to center stage is all that is necessary to bring the costs of health care under control.


One would practically have to be a modern Rip van Winkle not to be aware of the fact that the percentage of the gross national product devoted to health care has been rising for several decades. That fact figures prominently in the claim that health care is devouring too many of America's resources and that, therefore, the health system needs to be overhauled. The infamous growth of medical care relative to GNP is shown in Figure 1.

Fig 1
Source: Health Care Financing Administration

The focus on the share of GNP devoted to health care is somewhat unusual. For example, there does not seem to be any concern over the share of our wealth that is devoted to shoes, or automobiles, or housing. Moreover, there are many products, such as recreational activities, whose share of GNP rises as our wealth increases, yet there is no concomitant clamor to reduce our expenditure on them, as there is on health care.(1) The increasing share of GNP devoted to health care, by itself, is not evidence that the health care market is in need of repair.

More telling are attributes of the health care delivery system that make it inefficient, foremost among which is the

reliance on third parties (insurance companies and the government) to pay most medical costs. In 1990 third parties paid 77 cents of each dollar of medical expense. Because patients pay an average of only 23 cents on each dollar of medical expense, there is only a weak linkage between any consumer's use of medical resources and the payments made by that consumer. When the direct linkage between use of medical facilities and payment is broken, medical consumers lose their incentive to economize on their use of medical resources.

Another factor that usually portends inefficiency in any market is a high degree of government intervention in it, as the extensive literature examining government organizations has demonstrated.

Analysis indicates that our high medical costs are the result of various government policies that have removed patients as purchasers in the medical marketplace. While that state of affairs may be no more than the unlucky result of misguided policies, it is detrimental to the health of medical markets and, if improperly diagnosed, may eventually prove deadly to the literal health of many Americans.

Unfortunately, the proper diagnosis of our medical problems has been obscured by the demonizing of certain components of the medical industry. For example, the Clinton administration has at various times blamed the pharmaceutical industry, medical specialists, and health insurance companies for causing high prices and excessive medical expenditure. Such charges miss the underlying reasons for the current poor health of the medical delivery system, and diminish our ability to repair it. The failure to understand the causes of increased medical costs is apparent also in the Clinton proposal to revamp our health care system, which unabashedly increases our reliance on government and third-party payments.

Several competing proposals, however, have been suggested. Among them are some that adopt, at least in part, the medical savings accounts and tax-law changes proposed by John Goodman and Gerald Musgrave in Patient Power.(2) Central to the Patient Power approach is the weakening of third-party payment mechanisms and the reestablishment of the patient as both the consumer and the purchaser of medical services. By putting consumers back in control of their money, we can restore the vitality of the medical sector.

The Varieties of Excessive Costs

The excessive costs of our current medical system can be classified into three major categories:

• The first, and by far the largest excess cost, is due to the current overuse of medical resources by patients. Overuse is the rational response of consumers who do not have to pay the entire cost of the medical services they use. The causes of those excess costs are Medicaid, Medicare, and tax laws that provide incentives for individuals to have their employers purchase their medical care in the form of private health insurance.

• The second category of excess cost consists of administrative and paperwork costs that are unnecessary for the provision of health care, but that have come into existence because of the current patchwork of third-party payers and their attempts to control their increasing costs by closely monitoring the behavior of doctors and patients. Even worse is the fact that those cost-containment activities do not seem to have contained costs very well.

• The third excess cost is associated with the fear of malpractice suits. Administering medically unnecessary tests and procedures helps to insulate doctors and hospitals from the potential wrath of patients or their families when inevitable accidents occur in medical treatment or when treatments just do not work.

In some sense each of those costs has been brought about by the retreat from a market-based system of medical delivery. The first two of them could have been avoided if patients had been given incentives to make their own choices about medical care. The third cost could have been controlled if the courts had allowed patients and medical providers to use market contracts to detail liability in case of unforeseen accidents.

The Cost from Overusing Medical Resources

Largely ignored in much of the current debate over health care is the excessive use of medical resources by ordinary Americans. No politicians are giving speeches blaming the average citizens of the country for overusing medical care. There are no fireside chats with the president asking citizens to stop seeing doctors so often, asking parents to have their children "tough it out" and not see the doctor for every little scratch, asking the elderly to give up that extra year or two of life. Politicians are not so foolish.

But turning a blind eye to the consumption of medical resources by patients is a mistake. If the country is overusing medical resources, patients must bear responsibility for much of that overuse. We cannot cut our medical expenditures without reducing our consumption of medical resources. Fortunately, we know why patients overuse medical resources, and we know how to solve the problem. Unfortunately, the political will to enact correctives to the problem is not as easily come by, and the current administration in Washington seems to prefer to make empty promises to reduce costs while at the same time increasing medical services.

The concept of "excessive" medical use has a very precise meaning in economic analysis. When the marginal value of the resources used in a medical treatment is greater than the marginal value provided to the patient by the medical treatment, then the medical treatment is classified as "excessive." Note that the economic concept does not require that the medical treatment be without value altogether.

That definition needs to be contrasted with that of the medical community, which typically defines "excessive" treatment as a treatment that is not medically beneficial, as in the claim that cesarean sections are performed in many cases where they serve no positive medical purpose. The medical definition of "excessive" is similar to that of "fraudulent." Patients purportedly accept unneeded treat ment because they are misled by doctors. Yet the economic concept of "excessive" does not require any deceit or fraud at all. It merely requires that patients receive treatment that the patients themselves value at less than the cost of the treatment.

The economic concept of excess use of medical resources is illustrated in Figure 2, which is a version of a simple diagram that can be found in virtually any introductory economics textbook. In Figure 2 medical care is simplified into a single unidimensional concept for the purposes of illustration, but the ideas contained in the diagram are perfectly general and can apply to any particular medical procedure. The downward sloping line represents the value to patients of increasing amounts of medical care. Not all patients have the same value for a given procedure: some patients are not likely to live a useful or productive life, even with treatment; others expect to be able to live many productive years afterwards; still others prefer to preserve resources for their children and forgo treatment. Various persons, therefore, will have different values for identical medical procedures, since the impact of the procedure on their lives will be different. Their differing values for the medical service are arrayed in order, measured by dollars, from highest to lowest, in Figure 2. In the jargon of economics, it is a demand curve.

Fig 2

The upward sloping line represents the value of resources that are used when providing medical services. Doctors, nurses, hospitals, and the other resources currently used in providing medical care could be productively put to use in other activities. Thus, the provision of medical services is a cost to society, in the sense that resources that are used to provide medical care cannot then be used for something else. The measure of the value of lost resources is known as the opportunity cost of producing medical services.

In Figure 2, the cost of providing additional units of medical service is shown by the upward sloping line, which is usually called a supply curve. It is shown to slope upward because it is often (but not necessarily) thought that the resources used first in this market are best suited for medical uses relative to other uses, and those used last are poorly suited to medical uses.

It is a simple matter to determine the optimal quantity of medical services in a diagram such as Figure 2, and students in introductory economics classes have been doing so for decades. The quantity of medical services Q* is the optimal amount of medical service.

That can be understood by examining the implications of other quantities of medical service. For quantities of medical service greater than Q*, a unit of additional medical service is of lower value to patients than is the cost of providing it. In other words, patients would prefer cash equal to the value of the resources used to provide the medical services to receiving the medical services. Thus, it impoverishes patients and society to produce medical services when the recipient of the service would prefer those resources to be used for a different purpose. Similarly, for quantities less than Q*, patients value an additional unit of medical service more than they value the resources used to provide that unit of medical service. Producing the extra unit of medical service would enhance the well-being of patients and society. Thus, if the extra unit is not produced, society is deprived of a potential gain. Therefore, the quantity Q* is the efficient output. At Q*, the net value (value to consumers minus resources used up) of medical services is maximized.

Unfortunately, the current medical system does not induce patients to choose the efficient quantity Q*. Because patients largely have their medical bills paid by third parties, it is rational for them to consume medical services even when the value of those medical services is less than the value of the resources used to provide them.

Third-party payments are of two forms. First, most patients have private health insurance, usually provided by their employers.(3) A typical feature of such insurance is that when insured patients go to doctors, or hospitals, they pay only a small part of the actual cost of the visit, known as a copayment. Second, most patients without private health insurance are covered by government health insurance, either Medicare or Medicaid. Those patients also pay only a portion of the actual costs of the medical resources they use. As a result, there are very few persons who actually pay their entire health care bills out-of-pocket.

Figure 2 can be used to illustrate the situation in which patients pay zero out-of-pocket expense for medical procedures. Although zero out-of-pocket expense is something of an exaggeration (such expenditure is actually 23 percent), that assumption makes the issue easier to understand. In that case, patients have no reason to refuse any medical procedure, no matter how little the value of the procedure might be to the patient.(4) The quantity of medical services that patients will request will be Q1. The extent of the unnecessary medical services is given by the difference between Q1 and Q*. Those excess medical procedures have some value (given by area D), but their value is too low to justify the expense of the procedure.

The unshaded rectangle in Figure 2 represents the expenditures that society would make for medical care if it were provided in a fully functioning marketplace. It is merely the product of the price P* and the quantity Q*. The shaded region represents the excessively high expenditures that occur when third parties pay for all medical care. It is equal to the product of the excess quantity, Q1, and the higher price of medical care, P1, minus the product of P* and Q*.

Some of the excess expenditure goes to sellers of medical services, indicated by areas B and C. The extra revenue going to providers may explain why they have been willing participants in the movement away from consumer payment for medical care.(5) Some of the excess expenditure produces value to consumers, given by area D. But some of the excess expenditure is pure waste, known to economists as deadweight loss, and given by the triangular portion of the shaded area indicated as A.

The excess consumption at a point such as Q1 will likely take the form of excess quality since, in some sense, quality and quantity are interchangeable. Too many hospitals might contain expensive state-of-the-art equipment; too many patients might occupy singleor double-occupancy rooms rather than wards. Overall, the quality of care will be too high, even though there clearly is some value in the additional care. We have chosen a Cadillac of health care systems when a Chevrolet is more in line with our willingness to pay. It is understandable that some commentators are reluctant to characterize the problem of excess quality as a "crisis." Of course, it is not really the quality of health care that is in crisis; it is the financing. Making monthly payments on a Cadillac can seem like a crisis to someone making Chevrolet wages. Too much of an economic good can be as harmful as too little.

The Impact of Third-Party Payment on Medical Spending

Measuring excessive use of a product is a difficult and usually imprecise task. The best that can be hoped for is a crude estimate, and even that will require some rather broad generalizations, such as lumping many disparate medical resources into a single whole.

The analysis consists first of measuring the relationship between third-party payments and changes in the use of medical resources. Then the current use of medical resources is compared to the resources that would have been used if patients had paid for their own health care (Q* in Figure 2). The difference measures the excessive use of medical resources.

Third-party payment mechanisms are now very common, although before World War II individuals generally purchased medical services just like any other economic commodity and paid for them just like any other economic commodity--out of their own pockets. But during the war many companies began to offer medical benefits as a way to avoid price controls and to take advantage of the tax code. As shown in Figure 3, there was an explosion of private health care coverage shortly after World War II.(6)

Fig 3
Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

In addition, 1965 was the year in which the government introduced Medicare and Medicaid, which pay for much of the medical care of the elderly and the poor. The combination of the increased use of private health insurance and in creased government payments in the last few decades has reduced the out-of-pocket expenses of consumers dramatically. Figure 4 shows the fall in out-of-pocket expenses since 1960.(7)

After 1960 the fall in out-of-pocket expense was mainly due to increases in government expenditure. Although not shown, there was a significant decrease in out-of-pocket expenses due to increases in private health insurance in the 1940s and 1950s. The overriding conclusion to be drawn from Figure 4 is clear, however. The role of third-party payment has increased significantly in the last few decades.

Some of the most compelling evidence that third-party payments alter the use of medical resources comes from a study performed under the auspices of the RAND Corporation in the late 1970s.(8) That study assigned families to four health insurance plans with differing coinsurance provisions and deductibles. Coinsurance is the percentage of medical bills paid out-of-pocket by the patient. The deductible measures the maximum total dollar amount that a family will pay out-of-pocket before the plan will drop the coinsurance requirement and pick up the entire medical bill. Some families had zero coinsurance, meaning that the plan paid all of their medical bills, while other families had to pay up to 95 percent of the cost of their medical bills, until their bills reached a total deductible level of $1,000 in 1973 dollars, which is the equivalent of approximately $2,850 in today's dollars.(9)

Fig 4
Source: Based on data form Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

The RAND researchers observed how the different coinsurance rates influenced the use of medical resources by 2,500 families for three to five years. They found very pronounced changes in the use of medical resources, depending on the extent of third-party payments. In particular, families with no coinsurance (complete third-party payments) used 53 percent more hospital services (measured in dollars) and 63 percent more visits to doctors, drugs, and the like than did the group that paid 95 percent coinsurance. Overall, the total use of medical resources was 58 percent greater for the group with no coinsurance. Thus, there is clear indication that the use of medical resources by patients varies dramatically with the existence of third-party payment mechanisms.

Figure 5 shows the relative medical expenditures for each of four groups in the experiment. As the share that patients pay drops below 50 percent, the use of medical resources increases dramatically. It is interesting that this experiment did not find increased use of medical resources as the out-of-pocket share dropped from 95 percent to 50 percent. That may mean that consumers do not begin to overuse medical resources seriously until they pay less than half the cost, or it may just be a statistical anomaly, as the authors of the RAND study point out.

Fig 5
Source: Data from RAND health insurance experiment, cited in Joseph Newhouse et al., "Some Interim Results from a Controlled Trial of Cost Sharing in Health Insurance," New England Journal of Medicine, December 17, 1981.

The decrease in use of medical resources by families with high copayments might have been thought to decrease their health. One of the criticisms that has been made of high-deductible, high-copayment medical plans is that they discourage inexpensive preventative medicine, causing higher medical payments down the road. But the RAND study found no significant difference in health outcomes. In addition, a study by Robert Brook and others, reported in the New England Journal of Medicine, concluded that free medical care did not appear to improve the health of the participants.(10) Thus, it appears that the excessive costs associated with excessive use of medical resources do not materially improve the health of those receiving that care, a result that should not be surprising. Most persons are likely to be willing to pay for inexpensive medical services that provide enhanced future health. Moreover, the prevention of disease is most often associated with activities that individuals engage in for their own reasons, and that are not strongly related to visits to doctors (e.g., they stop smoking or they exercise).

It should also be noted that the RAND study was conducted in such a way as to underestimate the impact of third-party payments on total medical expenditures, because the impact of third-party payments in the experiment could not appreciably influence the price of medical resources, since the number of participants in the study was too small a percentage of the market to have influenced market prices. However, if the measured increase in use of medical resources found by the RAND researchers were duplicated throughout the country by millions of patients, as more and more of them switched to third-party payments, the price of medical resources could be expected to rise, and the increase in expenses could be expected to be larger than that found in the RAND experiment.

The RAND experiment is not the only estimate of the response of consumers to medical payments. A large number of other studies conclude that medical consumers do respond to price changes, and the degree of response found is often similar to that reported in the RAND study. There is virtual unanimity in the belief that higher levels of third-party payment will increase the use of medical facilities by patients.(11)

In the RAND study patients responded within a few years to changes in third-party payments. Yet it is likely that, for society as a whole, the complete reaction to changes in third-party payments might take a longer time to work through the system. Once third parties pay for a large share of total costs, technologies that might not have been cost effective when the patient was paying the full cost will be demanded by patients.

A simple analogy can be used to illustrate the impact of third-party payment on the growth rate of medical expenses. If the government told citizens that it would pay 80 percent of the cost of each automobile purchased, most citizens would march right out to their local dealerships and order very expensive cars. Automobile manufacturers, sensing profits in the air, would begin to offer far more standard equipment and would begin to offer more new types of equipment than they had previously. What was formerly a luxury car would become commonplace, and new, more luxurious automobiles would be produced. The newest technologies would be used (rather like those used in jet fighters), since the cost to the consumer would be only a fraction of the actual cost. Thus, the growth in automobile expenditures caused by the third-party payments could go on for many years.

A similar story can be told about the health care industry. Although the RAND experiment indicated that consumers responded quickly to third-party payments, the longer run consequences might continue for decades. It is possible to examine that hypothesis by comparing the growth in expenditures over several decades for various medical products that have considerable variation in the degree of third-party payment. As most persons who have experienced the choices available with different health insurance policies can testify, medical services related to dental and vision care (eyeglasses) and drugs or medical appliances tend to have much higher out-of-pocket expenses than hospital stays or visits to doctors. Figure 6 indicates that major differences exist in the share of out-of-pocket expenses borne by the patient for various categories of care.(12) In 1990 third parties paid virtually all hospital bills (95 percent), making hospitalization essentially a free good for most Americans, and only 20 percent of physicians' bills were paid by patients. On the other hand, 53 percent of dental bills, 74 percent of drug expenses, and 68 percent of eyeglasses bills were paid by patients.(13)

If third-party payments influence the growth of medical expenditures, then the increased use of medical resources in the past few decades should differ for the various types of medical services. That prediction is generally borne out, as shown in Figure 7, which shows the growth in each of the medical sectors, relative to their 1965 amounts, after controlling for the effects of inflation. Thus, the total costs of hospitalization increased more than 350 percent from 1965 to 1990, even after controlling for general inflation. During the same period, physician payments went up almost 250 percent, yet costs for dentists, drugs and appliances, and vision care went up only 150 to 200 percent. At the same time, real GNP went up by 94 percent.(14) It should be no surprise, then, that medical costs are gobbling up larger and larger shares of GNP.(15)

Fig 6
Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

Fig 7
Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

It is particularly ironic that drug manufacturers have been singled out by the Clinton administration as being responsible for the spiraling costs of health care in light of the fact that the growth in drug expenditures is far less than the growth in overall medical costs, particularly hospitalization. The relationship between growth in expenditure and out-of-pocket payment is more clearly seen in Figure 8. For five categories of medical care, the share of costs paid by patients is related to the growth in real expenditure over a 25-year period. The relationship is as expected: medical categories with low levels of third-party payments (high out-of-pocket expense) had the smallest increase in total expenditures. Although there are only five data points--and the small number of observations requires that we be cautious in trying to generalize the results--it is still noteworthy that the results indicate a powerful relationship between the level of coinsurance and the growth of medical expenditures.

Fig 8

The three medical categories having a relatively small third-party payments--dental services, drug products, and vision products--also show growth rates that are not a great deal higher than the overall growth of GNP (194 percent). The two categories with the greatest level of third-party payments experienced the greatest growth. The rank correlation between the growth of medical costs and the share of the medical bill paid out-of-pocket is perfect.

The line drawn through the points is a linear regression line.(16) It is almost a perfect fit through the points, and its interpretation is straightforward: the larger the share of medical expense paid by the patient, the smaller the growth in expenditure on that medical product.(17) Extrapolating the line to a point where patients pay completely for medical services would lead to the conclusion that medical services would grow at a rate only slightly greater than the overall growth in GNP.(18) Table 1 gives the expected share of GNP devoted to medical care in 1990 for various levels of third-party payments, based on the results shown in Figure 8.

Table 1
Medical Care's 1990 Share of GNP for Different
Third-Party Payments (1965 base)
If Patients Had Paid (%) Percentage of GNP in 1990 Would Have Been
100 6.8
75 8.7
50 10.6
25 12.6
0 14.5

Thus, the evidence indicates that if the effect of third-party payment had been eliminated, the growth in medical expense would have been much smaller than it actually has been. The reality is that medical expenditures have risen from 4.4 percent of GNP in 1950 to 12.2 percent in 1990 to over 14 percent today. That increase has occurred under a regime of increasing third-party payments. Yet without third-party payments, the growth rate of medical care would have been much smaller, and the "crisis" in health care would not have been a crisis at all.

But even the figures in Table 1 estimating the importance of medical care under regimes of low third-party payments will, to some extent, overestimate the importance of medical care as a percentage of GNP. That is because the base year, 1965, was already severely tainted by the influence of third-party payments, and thus the level of medical spending was already significantly higher than it would have been had third-party payments not been as high as they were.

Finally, it is disconcerting to note that two of the three categories that have experienced the smallest increase in total expenditure--dental and vision products--are going to be brought under the umbrella of third-party payments in the proposed Clinton health plan, a policy that will ensure that our current problems will get worse. Instead of trying to duplicate the relatively good performance of dentistry, eye care, and drugs in the relatively profligate categories of hospitalization and physician payments, the Clinton administration appears determined to impose the egregious performance of hospitalization and physician expenses on the few areas not currently suffering from an explosion in costs.

Evaluating Excessive Output

The historical evidence just examined indicates that with no third-party payments, the medical bill for the nation would be less than 7 percent of GNP instead of the current level of 14 percent. Stated another way, current spending is approximately double the level it would have been if third-party payments had not existed. However, since insurance for calamitous medical bills is valuable, so is some level of third-party payment. Assuming that the alternative to the current system will still leave thirdparty payments in the vicinity of 25 percent implies, based on Table 1, that the share of GNP devoted to medical care would be in the range of 8 to 9 percent. In dollar terms, that translates into a conclusion that for 1992, under a system with third-party payments in the vicinity of 25 percent, medical spending would have been approximately $300 billion less than the actual payments.(19) That is not to say that the excessive $300 billion provides no value, but that it provides less value than cost and would not have been spent if patients had been making the financial decisions.(20)

Although that estimate of excessive expenditure may seem like a fairly enormous sum, it is actually quite conservative. Other analyses in the literature provide a much larger estimate of the increased use of medical resources. Martin Feldstein estimates that for hospital care, the largest single component of health care, the increase in expense that would be caused by a change from complete out of-pocket expenses to complete third-party payments might be as high as 250 percent.(21)

Even the RAND study, which provided an underestimate of the impact of third-party payment, concluded that virtually complete third-party payments would increase medical costs by at least 60 percent relative to what they would have been with much lower third-party payments, a result not far from that found in the historical data.

Excessive Costs of Monitoring

Much of the public debate over health care centers on the amount of paperwork that is required. Hospitals and doctors fill out a plethora of forms for health insurance companies and for the government. But in fact the paperwork (administrative) costs of the current system are not the largest unnecessary costs in our medical system.

It is possible to gauge total administrative costs by focusing on the administrative costs of health insurance, the component of administrative costs that appears to be most precisely measured. Comparing those costs to the other costs of the health care system (Figure 9) makes it clear that the measured administrative costs of running health insurance companies are not a large proportion of the total. Indeed, in 1990 they came to 5.81 percent of the total cost of our health care system.(22)

However, health insurance administrative costs are only a part of the true administrative costs of the current system. After all, hospitals and physicians have enormous amounts of paperwork, much of which they send to the health insurance companies. Yet only the costs to the insurance companies are included in Figure 9. Still, the administrative costs of running health insurance companies should mirror the costs that hospitals and physicians incur, since the forms go back and forth between those parties. If so, then the growth of one category of administrative costs will reflect the growth in other categories of administrative costs.

As a first approximation, administrative costs could be expected to grow at about the same rate as other medical costs, since some administration is necessary. If administrative costs are excessively high, and if the excess has not been in the health system from the beginning, then we should find that administrative costs have increased by more than other medical costs. Figure 10 compares the growth of total medical costs with the growth in the cost of administering private health insurance since 1965.

Fig 9
Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

Fig 10
Source: Based on data from Health Insurance Association of America, 1991 Source Book of Health Insurance Data.

Figure 10 indicates that administrative costs increased slightly less than overall medical costs from 1965 to 1975, but that since 1975 they have grown very rapidly.(23) Thus, there is some evidence to indicate that administrative costs might be too high. It is important to understand just why those costs might have started to grow so rapidly after 1975.

The most likely explanation seems to be the emergence of Professional Standards Review Organizations (PSROs) in 1972 and Professional Review Organizations (PROs) 10 years later. Those organizations are privately contracted agents of the government that review the decisions made by doctors and other health professionals, purportedly to save taxpayers money on Medicare and Medicaid cases by eliminating unnecessary or wasteful expenditures. Since private health insurance companies act as fiscal intermediaries for the government's Medicare program, the reviews are bound to affect their costs as well. The flip side is Utilization Review (UR), a system very similar to PROs, in that private health insurance companies hire third parties to review the behavior of doctors. All three systems give doctors incen tives to document all aspects of care, since otherwise they might not be compensated by the third-party payer.

If the entire difference in the growth of administrative costs and other medical costs since 1965 were taken to be excess administrative costs, then 50 percent of current administrative costs would be excessive. And it is inter esting that there is no evidence that the extra administrative costs have lowered overall medical costs, so that the supposition that the new administrative costs do not provide any value seems plausible. Of course, the true test of whether the additional administrative costs are worthwhile requires comparing actual medical costs with what the costs would have been without the additional administrative costs, a test that I do not attempt here, nor am I aware of any such calculation by others. Since administrative costs for health insurance were somewhat less than $50 billion in 1990, and doctors and hospitals must duplicate those costs, we can conservatively assume that total administrative costs are at least $100 billion. Then, if the costs were 50 percent too high, the excessive administrative costs would be $33 billion.

There are many estimates of the excess costs of administering health care, as might be expected given the difficulty in measuring them.(24) It has been claimed that current administrative costs are twice as high as they should be, and that as much as 10 percent of medical expenditure is excess administrative costs. Still, even those estimates indicate that excessive administrative costs are small ($83 billion in 1992) compared to the excessive use of medical resources due to third-party payments.

The current Clinton heath plan claims that there will be large savings in administrative costs and that those savings will help to cover the cost of health insurance for some 37 million Americans who are thought not to have health insurance at any moment.(25) But those cost savings are predicated on there being fewer forms to be filled out, since there will be fewer insurers. But if the additional administrative costs are due to wasteful utilization reviews by third-party payers, there would be no reason to expect administrative costs to fall, given that the Clinton plan expands the role of third-party payers. The Clinton plan also adds entire new layers of government bureaucracy, which, if history is any guide, seems most unlikely to reduce overall administrative waste.

How Patient Power Lowers Health Care Costs

The Patient Power plan avoids excessive costs--both those associated with excessive use of medical care and those associated with excessive administrative burdens. It reduces medical expenditures by giving patients an incentive to use medical care efficiently, rather than overusing it. To that end, tax laws would be altered. The tax break extended for the purchase of health coverage would be allowed only for basic, no-frills catastrophic insurance policies. No longer would patients be faced with a choice of having their employer pay for small medical bills with before-tax dollars or paying out-of-pocket costs with aftertax dollars. Thus, there would be no reason for them to prefer to have insurance pay for most medical bills, and insurance policies would no longer carry small copayments. As we have seen, that is the most crucial element in stopping the soaring increase in health care costs without clumsy, government-imposed price controls.

The Patient Power plan would allow patients to selfinsure (meaning that patients themselves pay for the treatment of their illnesses) for many potential medical bills through medical savings accounts that would go hand in hand with the tax changes. It typically costs an employer more than $4,800 to provide health insurance for a worker, her spouse, and two children. Under the Patient Power plan, employers would purchase only catastrophic policies for workers, and workers would deposit the savings in premiums in medical savings accounts. The medical savings accounts could be used to pay for small, routine medical bills not covered by catastrophic health insurance. If the account was not used to pay for medical bills, the owner could roll it over into an IRA to be used for other purposes after retirement. Patients would have an incentive not to use their medical savings accounts except for medical care that they deemed worth the money, since they would benefit directly from economizing on medical care. In addition, selfinsurance eliminates the paperwork involved with having third parties pay medical bills. It also eliminates the costs of having third parties monitor the transactions between patient and doctor, thereby greatly reducing administration costs generated by PSROs, PROs, and URs.

Second, Patient Power would reduce state regulations that currently mandate many benefits that must be provided by each health insurance policy sold in a state irrespective of patients' wants or needs. Such regulations drive up the price of health insurance and make the purchase of a policy less attractive for persons who are not interested in the extra benefits mandated by the state. If consumers are allowed to purchase insurance that is tailored to their specific needs without having to comply with state mandates, they will be happier and will save money.

Finally, Patient Power would reform tort law to allow patients and doctors to contract in advance to rationally insure against accidents or errors.


The moral of this story is crystal clear: third-party payment mechanisms have raised the total consumption of medical resources to unprecedented levels. The excessive use of medical resources due to third-party payments was estimated to be over $300 billion and the excessive administrative costs to be in the vicinity of $33 billion.

To lower the currently very large medical expenditures in the United States, the third-party payment system must be reined in. Putting the patient back in control of the medical purchasing decision is the most effective way to control third-party mechanisms, while still providing a safety net for Americans.

The worst policy that we could follow would be to increase third-party payments and reduce copayments. Yet that is exactly what is proposed by the Clinton administra tion. The evidence makes it abundantly clear that the current increase in medical bills will only be exacerbated by the Clinton plan and that rising costs will quickly run into the spending caps contained in the Clinton plan. That plan would be greatly improved if it were to impose high copayments on patients instead of low copayments, and if it were to keep predictable and relatively inexpensive medical costs, such as dentistry and eye care, out of the thirdparty payment system. But even if those changes were made, the Clinton plan would still create a large government bureaucracy controlling and limiting consumer choices, and it still would contain the dreadful idea of spending caps as a means of reducing medical costs.

The Patient Power plan is much more likely to reduce health care costs.


(1) Recreational expenditures, relative to disposable in come, increased from 5.0 percent in 1958 to 7.1 percent in 1988, according to statistics reported in Harold Vogel, Entertainment Industry Economics (Cambridge: Cambridge University Press, 1990), p. 348.

(2) John C. Goodman and Gerald L. Musgrave, Patient Power: Solving America's Health Care Crisis (Washington: Cato Institute, 1992).

(3) Ibid. That appears to be an outgrowth of two factors. First, during World War II price controls were in place at a time when employers were looking to increase the pay of workers. Providing additional fringe benefits allowed employers to circumvent price controls, and fringe benefits thus became a common part of an employee's compensation. Second, tax laws allow employers to deduct medical insurance premiums, whereas individuals have no such right (unless their medical bills are large enough for them to declare them as itemized deductions, which is certainly not the usual case). Obviously, those factors provide a strong incentive for most employees to purchase their medical insurance through their employers.

(4) Note that the inconvenience of the medical procedure, lost wages, pain, and so on, are taken into account in the patient's valuation of the medical procedure. Thus, a patient will request any procedure for which all "psychic" costs are less than the benefits, ignoring the monetary costs of the procedure itself.

(5) Although the leadership of the American Medical Associa tion originally opposed Medicare in 1965, they were against it for philosophical reasons and actually predicted that it would increase revenues going to doctors. Their opposition ended when most doctors realized the bonanza that it provid ed. See Edward Annis, Code Blue (Washington: Regnery Gate way, 1993).

(6) Health Insurance Association of America, 1991 Source Book of Health Insurance Data (Washington: HIAA, 1992), Table 2.2.

(7) Ibid., Table 4.4.

(8) Joseph Newhouse et al., "Some Interim Results from a Controlled Trial of Cost Sharing in Health Insurance," New England Journal of Medicine, December 17, 1981.

(9) Using the GDP deflator found in Robert J. Gordon, Macro economics (New York: Harper-Collins, 1993), appendix A.

(10) Robert Brook et al., "Does Free Care Improve Adults' Health? Results from a Randomized Clinical Trial," New England Journal of Medicine, December 8, 1983.

(11) Alan Sorkin reports on 20 estimates of price elasticity for various medical services. Price elasticity measures the responsiveness of consumption to changes in price. The majority are between 0.2 and 1, which is consistent with the RAND experiment. Sorkin, Health Economics (New York: Lex ington Books, 1992), p. 31.

(12) Health Insurance Association of America, Table 4.1.

(13) A large portion of expenditures on drugs is for overthe-counter products, which most medical plans do not cover.

(14) Ibid., Tables 2.2, 4.1, and 4.4; and Gordon, appendix A.

(15) There were three other categories of expenditure that were not included: nursing home expenditures, other health services, and other professional services. Since the con tents of categories with the term "other" is unclear, and might change dramatically over time, I followed the common practice of removing them. Nursing home expenditures in creased dramatically over the period, but that is probably more attributable to the decline in the extended family and the increase in life span than it is to any increase in medical use. Nursing homes, after all, generally do not respond to specific health problems so much as to old age and general inability to look after oneself. (Younger family members used to look after elderly relatives.) In addition, regulation of nursing homes during the period raised their costs significantly, according to Goodman and Musgrave, p. 107. Had those categories been included, the statistical confidence in the relationship between out-ofpocket costs and growth in expenditure would have weakened considerably, although the direction of the relationship would have been the same.

(16) Obviously, the change in expenditures on those catego ries of medical care are likely to depend on many variables other than just the change in copayments. Some of those factors are changes in age cohorts, changes in medical technology (which itself is likely to be affected by the copayment rate), and changes in diet and exercise. Never theless, these results are consistent with those of prior studies, are statistically significant, and are not related in a clear way to potential left-out factors.

(17) Regressing on the share of out-of-pocket expenses (OOPE) gave the equation: Growth in Expenditures (GIE) = -255 _ OOPE + 478. The t-statistic on OOPE is 12.34 and the rsquared (adjusted) is .97. Those coefficients imply that if out-of-pocket expenses had been 100 percent, medical expen diture would have grown in 1990 to only 223 percent (478 255) of its 1965 value. The GNP in 1990 was 194 percent of its 1965 value, so medical care would have remained almost constant as a percentage of GNP.

(18) This estimate implies a higher growth in medical expen diture than some others suggest. For example, Sorkin re ports that most estimates of income elasticity of medical care are in the range of .5 to .7, meaning that medical expenses would be expected to grow only 60 percent as fast as income, holding everything else constant.

(19) In 1992 spending on medical care was approximately $830 billion. Assuming that our best alternative is to have third-party payments in the vicinity of 25 percent, we would expect current spending to be approximately 60 percent too high. Thus, for 1992, under a system with smaller thirdparty payments, medical spending would have been only $520 billion, and, therefore, slightly over $300 billion in health care spending was excessive.

(20) Measuring the actual deadweight losses associated with excessive expenditures is an imprecise task. Martin Feld stein calculated the possible deadweight losses from the overuse of hospitalization. On the basis of the 1969 outof-pocket expense of 33 percent, he estimated that the dead weight loss ran from a low of 23 percent of total hospital revenues to a high of 67 percent of total revenues. Felds tein, Hospital Costs and Health Insurance (Cambridge, Mass.: Harvard University Press, 1981), chap. 6. With current outof-pocket expenses for hospitalization running at only 5 percent, we would expect even larger deadweight losses than he found. Feldstein reports (p. 99) that Mark Pauly mea sured welfare loss at $450 million for 1963, which is 15 percent of 1963 total health expenditures, as reported in Health Insurance Association of America, Table 4.4.

(21) Feldstein, p. 66. He reports estimates that the elas ticity of hospital days with respect to price is between .5 and .7. Assuming that .6 is the appropriate number, and assuming that it is an arc elasticity, decreasing payment from the market price to zero would increase usage by 250 percent.

(22) Health Insurance Association of America, Table 4.1.

(23) It should be noted that using data on personal consump tion expenditure, which exclude Medicaid and some other government spending (public health, research, construction) and which go back to 1950, there is no evidence that admin istrative costs grew more rapidly than other medical expens es from 1950 to 1965.

(24) Some of the higher estimates come from Steffie Wool handler and David Himmelstein, "Administrative Costs of U.S. Health Care," New England Journal of Medicine, May 2, 1991; they claim that about 20 percent of medical spending is administrative in nature. They also claim that health care administration costs in Canada were only about 10 percent of health care spending, and conclude, therefore, that about half of the U.S. administrative expense was wasteful. They also note that there was a very significant increase in wasteful administrative costs between 1983 and 1987, for which they blame the increased use of cost-containment mechanisms. There are good reasons to be suspicious of those results, as reported in a critique of the study by the Health Insurance Association of America in the May 30, 1991, issue of Medical Benefits.

(25) Although approximately 37 million Americans may not have health insurance on any given day, only about 7 million fail to have health insurance for an entire year. Most uninsured individuals are only temporarily uninsured.

Published by the Cato Institute, Policy Analysis is a regular series evaluating government policies and offering proposals for reform. Nothing in Policy Analysis should be construed as necessarily reflecting the views of the Cato Institute or as an attempt to aid or hinder the passage of any bill before Congress. Contact the Cato Institute for reprint permission. Printed copies of Policy Analysis are $6.00 each ($3.00 in bulk). To order, or for a complete listing of available studies, write to: Policy Analysis, Cato Institute, 1000 Massachusetts Avenue NW, Washington, D.C. 20001. (202)842-0200 FAX (202)842-3490 E-mail

© 1994 The Cato Institute

End of quote

Micropractices, a great idea for Physicians and a step towards free market in health care

The Journal of the American Academy of Family Medicine has published this article under the tag "Robin Hood Practice".

A fitting header, since Robin Hood stood up against the evil sheriff of Nottingham and...won.

Cash medicine is the way of the future, better than insurance hassles and abuse, better for the patient.

This is a quote!

Begin quote:

Seven years ago, I was a contented doctor in what I considered to be an above-average practice. Our group of seven family physicians earned incomes well above the national average. I had a panel of 2,600 patients and was taking six to eight weeks of vacation per year.

But our profitability came with a cost. We were passing patients through the office faster and faster, with more and more things falling through the cracks. Worst of all, many of my patients who lost their health insurance were no longer able to pay for the care they needed. I came to realize that I wanted something more for my patients and myself.

In a moment of inspiration, I decided to create a cash-only, low-overhead, technology-enabled, retainer-model practice in which I could care for patients who could afford to pay out-of-pocket for enhanced service as well as uninsured patients who could pay little or nothing at all. The practice's feasibility depended on a simple concept. I would recruit a small panel of patients willing to pay an up-front annual fee in exchange for extended patient visits (30 to 60 minutes), exceptional service, same-day access for all needs, direct access to me via electronic messaging or cell phone, and 24-hour on-call coverage. From these patients' enrollment fees, I could earn enough to spend half of my time providing primary care at no cost to uninsured patients who were ineligible for government health programs. It would be the ultimate self-sustaining nonprofit clinic. With this setup, I would regain my status as a physician whose paycheck was signed by his patients and not by third-party payers.

Formulating a plan

The more I thought about the idea, the better it sounded. I was fairly sure it would work, but I was nervous about making the leap. Then, in early 2002, my motivation increased after reading a series of articles in FPM by Gordon Moore, MD, on going solo in a small, low-overhead practice. I shared my idea with another family doctor from across town. He suggested we open the practice together. I realized that a two-physician practice would remove many of the concerns I had about cross-coverage for vacation and sick days. We could also share the overhead of hiring one medical assistant.

It was time to crunch the numbers. I knew from 14 years in a mostly capitated practice that my patients visited me an average of 3.6 times per year for 15-minute appointments. To provide the quality of care that we believed patients would expect in exchange for the retainer fee, we determined that we would need to be able to provide each one (we call these patients "benefactors") with approximately five 30-minute visits per year. We figured we needed about $600,000 in revenue per year to run the practice and pay ourselves and our medical assistant. At five visits per benefactor per year, we could see a total of 600 benefactors per year. To take in $600,000, we would need to charge an average of $1,000 per benefactor per year. For a breakdown of all of these calculations, see "How we did the math," on page 15.

My colleague and I began meeting weekly to outline the details of our plan. We formed a mission statement with concise goals. As practicing Catholics, we wanted the practice to have a distinctly Catholic flavor. We discussed the idea with our bishop's representative and later received a letter of his spiritual (but not financial) support. We began to contact friends and acquaintances with special skills who were willing to volunteer their time to the project: an accountant, two attorneys, a small-business consultant, an insurance broker, a priest and a graphic designer. We formed a board of directors and committed to an ambitious start date just 12 months away.


St. Luke's Family Practice is governed by a board of directors that meets regularly. Pictured are (from left to right) Douglas R. Hibl; J. Peter Herrmann, MBA; Dr. Forester; Terrance P. Withrow, CPA; and John Dunn, JD.

The nuts and bolts

The AAFP book On Your Own: Starting a Medical Practice From the Ground Up (available for purchase at provided a helpful outline for building our new practice from scratch. The attorneys on our board of directors helped us with articles of incorporation and bylaws. We applied for federal tax-exempt 501(c)(3) status as a nonprofit public benefit corporation.

Next we verified details of our status with several PPOs, Medicare and TRICARE, to be certain that when we made referrals or ordered tests for our benefactors that those providers' claims would be paid. The insurers repeatedly emphasized: "Yes, but you won't be able to bill us at all. Your patients will be wholly responsible for paying for your services." After a while, we quit trying to explain that we didn't want to bill insurance companies.

We developed a corporate identity, including a logo and an information pamphlet. We began designing a Web site ( that we would use initially for marketing and later for online scheduling, password-protected electronic messaging and patient education.

Seven months before opening, we told our respective physician partners of our plan. From our current lists of patients, we selected prospective benefactors and contacted them to explain our new practice concept. Three months out, we mailed pamphlets that included an invitation to upcoming informational meetings. We held three such meetings at local churches. They were well attended, with 50 to 100 people at each. About two-thirds of attendees were existing patients. We developed a 20-minute slide presentation to explain the basic idea behind the practice. After we made the presentation, we answered questions for 20 to 30 minutes. Enrollment pledges began to trickle in.

At the same time, we began preparing to provide free care to the uninsured (we refer to these patients as "recipients"). We wanted to offer our services to patients for whom other forms of financial assistance weren't available, so we met with the local directors of Medi-Cal (California's Medicaid program) and our county's Medically Indigent Adult Program and developed a simple checklist that we could use to confirm that a patient is not qualified for these or other government programs (e.g., Medicare or Veterans benefits).

Finally, we began to prepare the office itself. We decided on a modest 970 square feet space in a favorable location. We rolled the cost of our tenant improvements into a five-year lease. We selected an electronic health record (EHR), ChartWare, and began with very basic software programs for electronic patient management (Quicken and Microsoft Office). We financed the EHR and a simple computer network (one server with three desktop computers) over two years. A local medical supply company donated a significant amount of quality used equipment for startup. We were on our way.


One of the characteristics of his practice that Dr. Forester appreciates most is not being rushed during office visits. Most visits are at least 30 minutes long.

Successes and setbacks

As our grand opening neared, we spent many nights cleaning, painting and preparing our new office. When we opened our practice on Jan. 1, 2004, we had more than 250 benefactors prepaid for the first year's care. The local newspaper wrote two articles that generated community interest. We made about 30 presentations to service organizations throughout the community, but most important, our practice grew by word of mouth.

For the first three months, we strove to get every benefactor into the office for a comprehensive exam and entered into our EHR system. We worked out the bugs in our Web site messaging and scheduling system. Three months later we began offering services to the uninsured. After one year, we had more than 400 benefactors between us and had conducted almost 900 office visits for uninsured patients. We were able to pay all our expenses, and we each took home a net salary of $78,000.

During the next year, the practice grew. Our net incomes in 2005 were $178,000. Last year they were $177,000, plus we made $15,000 deferrals to our retirement accounts. As we finish our fourth year of operations, we have about 550 enrolled benefactors. Since our inception, we've conducted 6,250 uninsured office visits and provided $500,000 in free care.

Our benefactors have chosen our practice for a variety of reasons. Some of them had an established relationship with my partner or me. Some wanted to support us out of a concern for the uninsured. Some were techies who loved the idea of electronic messaging with their doctor and scheduling appointments online. Many business owners and business travelers appreciated our capacity to be flexible about their appointment times and to treat them promptly.

Regardless of what initially drew them to us, our benefactors seem to like St. Luke's. After the first year, we had a 96-percent re-enrollment rate. Our billings are a snap - we send out one statement in mid-November, and by Jan. 31, we have collected over 80 percent of the year's charges with no additional effort.

Our biggest unforeseen challenge was securing nonprofit 501(c)(3) status for our practice from the Internal Revenue Service (IRS). The IRS had rules for nonprofit community hospitals, nonprofit emergency rooms, nonprofit drug treatment and counseling centers, and nonprofit educational programs, but they claimed never to have come across a nonprofit medical office. Very few nonprofit medical organizations give even 10 percent of their care at no cost, but we were giving 50 percent. We were small and different, and the IRS seemed content to bury us in unrelenting paper work and requests for further information. Our local attorneys and accountant had done about everything they could do when one of our new benefactors, a local developer who wanted to assist our efforts to help the uninsured, offered to contact a friend who was the principal of a high-powered Washington law firm specializing in charitable and philanthropic works. We quickly sent them our documents for review, and they agreed to help. After a few more months corresponding with the IRS, we flew to Washington for a meeting with the IRS attorneys, addressed their concerns and hammered out the final details.

On Dec. 21, 2005, almost two years after the start of operations, we were granted nonprofit 501(c)(3) status retroactively to our date of inception. The principal of the law firm generously wrote off his fee, and the benefactor's family foundation paid the fees of the other two attorneys - all because they believed in our practice's mission.

I would encourage other practices that are interested in following this model to apply to the IRS for nonprofit status. Any physician who wishes to apply can cite this article as support that such a model exists. We would also be happy to provide any similar organization our IRS determination letter or other information related to our application process.

How we did the math

The following equations demonstrate how we calculated the number of benefactors we would need to enroll in our new practice and the average amount we would need to charge them to meet our revenue goal of $600,000 per year.

Number of available visits per year:

48 weeks/year x 4 days/week x 7 hours/day x 2 patients/hour x 2 doctors = 5,376 weekday visits/year (This number was rounded to 6,000 visits to account for weekend, holiday and after-hours calls.)

Number of benefactors we could accommodate per year:

3,000 benefactor visits/year ÷ 5 visits/benefactor = 600 benefactors (The remaining 3,000 visits would be used by uninsured patients.)

Average amount we needed to charge per benefactor:

$600,000 ÷ 600 benefactors = $1,000/benefactor

We then estimated the age demographic of our benefactors and developed our payment schedule:

Children < 19 years


College students < 23


Young adults < 35


Adults 35 to 60


Seniors > 60


Practicing rewarding medicine

One of the greatest joys of St. Luke's Family Practice is taking care of people who have no other viable medical care option. Though at first we were intimidated treating those with uncontrolled diabetes and severe mental disorders as outpatients, with time and experience we became more comfortable doing so through close follow-up. Some of our most important and rewarding new referrals have come from local emergency departments and hospital discharge planners requesting that we provide outpatient follow-up for uninsured patients.

Perhaps I became soft after 14 years of middle- and upper-middle-class practice, but one of the things I have really appreciated about caring for the uninsured is seeing more significant pathology. When someone doesn't seek a doctor's care for 10 or 20 years and then suddenly feels an urgent need, the problem is usually significant. Over the past four years, we have made more than a dozen diagnoses of life-threatening diseases at treatable and curable stages among our uninsured recipients.

Through our experiences, we have also learned about other community resources we can work with to help patients get the care they need, such as medications, immunizations and cancer screening. A few colleagues in subspecialties provide phone consultations liberally and occasionally see our uninsured patients for a small fee or no charge. When a patient's medical needs become so acute as to require emergency or inpatient services, they are frequently covered by the emergency Medicaid benefits. (For more details about our practice, see "Answers to Frequently Asked Questions About St. Luke's Family Practice," page 16.)

answers to frequently asked QUESTIONS ABOUT St. Luke's Family practice

Q. Why have you focused on outpatient care for the uninsured?

A. Primary care cognitive services are not the biggest health care expense for patients; however, getting patients into the primary care doctor's office is often the first and most important step to better health care. Providing free care to the uninsured offers basic health care services to those who might not otherwise go to the doctor due to financial concerns.

Q. What procedures and services do you provide?

A. The lab tests we provide include urinalysis, microscopy, blood glucose, A1C, urine pregnancy and hematocrit. The diagnostic procedures we perform include ECG, spirometry, pulse oximetry, audiometry and PPD for tuberculosis. We also provide influenza and tetanus-diphtheria vaccinations, and corticosteroid, ceftriaxone, antihistamine and promethazine injections. Casting and splinting, as well as office "lump and bump" surgery, are also performed in-house. We pay for all the supplies and charge nothing for the service.

Q. What about payment for other labs and diagnostic studies?

A. Because we see patients more frequently and spend more time on the history and physical exam, we can sometimes order fewer lab tests. We send patients to the county facility to pay cash for labs (e.g., $15 for complete blood count, $30 for a comprehensive metabolic panel, $38 for a lipid profile). For radiographs, our patients get a 50-percent discount at a local radiology office for cash payment at the time of service. Most plain radiographs are $30 to $100. An upper GI runs about $120. Pelvic and abdominal sonograms run about $100 to $120. Most CTs are about $300 without contrast.

Q. How do patients get prescription medications?

A. Our practice strives for an evidence-based medicine approach that usually requires fewer and less expensive medications. We try to be price-sensitive when prescribing. A local pharmacy donates bulk medications (doxycycline, atenolol, metformin, hydrochlorothiazide and glyburide) that we divide into appropriate units and dispense free of charge. For medications with difficult substitutions, we provide limited pharmaceutical samples (e.g., thiazolidinediones, angiotensin receptor blockers, some antidepressants, atypical antipsychotics, nasal steroids). We also direct patients to a local pharmacy that offers selected prescription medications for $4. Additionally, we use patient assistance programs through the Partnership for Prescription Assistance (

Q. Do you provide inpatient care?

A. We provide care at all sites for our benefactors - office, home, hospital, or rehab or skilled nursing facility as needed. We do not offer that same level of care for our recipients. It would take too much time away from outpatient care, which is what we feel we do best.

Q. How do you make sure recipients really don't qualify for other programs?

A. The county has a network of eligibility workers who work to sign up as many people as possible for Medicaid. Sometimes patients take advantage of our practice, but we concentrate our efforts where they can do the most good.

Q. Do the recipients pay anything?

A. The medical assistant asks recipients if they would like to make a donation at the end of their visit. If they ask us to suggest a donation amount and are from a working family, we suggest one hour's wage. On average, we collect about $12 per visit. The donations we receive from recipients are almost enough to pay our medical assistant's salary.

The payoff

Throughout our practice's creation and development, there have been trade-offs and challenges. Trying to practice medicine in the 21st century on a very limited budget can be difficult. But like anything else, our confidence and skills grow with practice. We no longer have to review insurance contracts, attend IPA meetings or scrutinize insurance aging reports.

One of the best parts of our practice model is that everyone who comes to St. Luke's wants to see us and hear our opinion. Without feeling rushed, we have the time to carefully listen to complaints, ask the necessary questions and perform thorough clinical examinations. We can fully utilize the Internet and electronic decision-making software to help us in real time. We also have time to call consultants and ask their advice as necessary.

We never could have created our practice without the initial inspiration, the support and confidence of our board of directors, our benefactors, our community and our families. After four years of success, we are glad we tried.

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About the Author

Dr. Forester practiced in a conventional office for 14 years before co-founding St. Luke's Family Practice with Dr. R.J. Heck in 2003 in Modesto, Calif. Author disclosure: nothing to disclose.

End of quote!

For Physicians: How to Move to a Consumer Driven Practice and work on Reforming Health Care at the same time

Simple Action Plan

We have been working more and more for less and less. We are being suffocated by ever increasing regulations, which usually turn out just to be new tricks to pay us less (e.g P4P). Many primary care colleagues are at the edge of viability of their practices. The demand for physicians is said to go up, some even talk about a "physician shortage", yet, in contrast to the most basic economical rules, our reimbursements continue to go down. We have lost 60-70% of our earning power since the 80's, a unique situation without precedent.

Patients perceive us as "rich", the media portrays us as making a most comfortable living in the top 5% of incomes.

The media also prefer to report on errors and scandals, on our weaknesses and failures rather than medical success.

For politicians we are part of the problem, not part of the solution. We have no friends in politics, since physicians only amount o 1% of voters. Americans in general consider us "rich" and "too expensive" and one congressman mentioned that "all health care problems would be solved if we could just get the doctors to be satisfied with 75,000 a year".

Insurances earn by not paying us or by delaying payments. They have successfully applied salami tactics for 20 years to reduce reimbursements.

The organisation that is meant to represent us, the AMA, has long bought into the status quo, has surrendered in every important issue and keeps busy tweaking minutia. The "solutions" the AMA offers are anemic and pathetic, and they lack the guts to confront the root problems.

We have no friends and we have no allies. Nobody will help us. If we want change, we will have to do it ourselves.

Always remember that we are the ones with the knowledge, the skills and the expertise! We do not need anyone to diagnose and to treat. Those who have pushed themselves into the patient-physician relationship do not know medicine, and they are only able to harass us, because we have signed contracts allowing them to do so. Without us, they are nothing!

We have to remember that we have signed the contracts that allow them to withhold, deny, restrict, control, demand pre-authorization, delay and defraud us. We can cancel these contracts. And, with the coming "shortage of physicians" there is no better time. We have to remove the control of medicine from the third party payers. And we have to do it ourselves. Fortunately, this is not hard and may even be not just rewarding, but fun.

Here is a simple action plan. The actions complement each other, each strengthens the other. The plan is flexible, you can start wherever you want and you can go as far as you want. Going just a little step is good for you, going far helps your colleagues as well. the more physicians participate, the larger the impact on health care overall will be.

After putting our personal finances in order, we take a close look at our practice and see which third party payers (and yes, that includes Medicaid and Medicare) are loosing propositions. We gradually, deliberately, smartly drop third party payers based on an economic analysis of our practices. This shrinks the networks of HMOs and reduces their power and market appeal. At the same time we unite into large groups working under one tax ID to bill together and negotiate together ("group practice without walls"). This increases our numbers and direct negotiation power with the remaining HMOs until we drop them too. At the same time we educate our patients about alternatives to HMOs, so that they favor more attractive options of insurance coverage, such as HSA, HRA, cooperatives, individual tax deductible health plans etc. We offer cash services at a very competitive price. We can do this since we would greatly benefit if we received the same amount of money in cash right from the patients - rather than from an HMO that pay us only after a lot of administration hoops, shenanigans, withholds and months of delay. "Carecredit" and other options may make it appealing to the patient. The more patients drop HMOs, the weaker they get. And finally, we talk to our colleagues about these issues to come to common concepts and understandings, to unite us. One of the possible ways to do this is Sermo, the physician-only online community founded in Cambridge in 2006.

This is the plan:

1. Get your personal finances in order first

Consider a fee-only financial advisor. Fee-only advisers are paid by the hour and consequently have less of a conflict of interest than advisers who live on commission. Go over your personal finances, make a long term plan and a mid-range plan. Determine how much income you need as a minimum, what kind of drop of income you can afford while you drop HMOs, and for how long. Initially your income may decrease when you drop the low paying plans, although it does not have to.
Secondly, talk to your partner to get his or her agreement. While dropping HMOs may reduce your income initially, this is temporary and it will to a greatly improved quality of life in the long run. It is essential to have the support of your partner during this time.
Consider postponing larger purchases that put you in debt such as a new car, new home etc. Don't fall for the myth that "doctors are rich and can afford luxury". Living above your means will chain you to the third party payers. Limit your luxury purchases and spend wisely in general. Limit your monthly payments (new car, renovation of condo or house etc).

2. Streamline your practice finances

Sit down with your office manager, your accountant and/or your billing service. Write a business plan! The business plan should include your mission is and your financial goals. Write into the plan what you want to earn on a monthly and yearly basis. Look at your overhead. Based on your planned revenue and your overhead you can now calculate what you have to collect, what you have to earn for each visit and what you have to earn for your most common services. Note those figures. This is a standard business process that astonishingly is not done by many physicians.

Now make a spreadsheet with the ten most common procedures or services in your field. List what each third party payer reimburses you for these services. Calculate which payers will allow you to reach your business goal and which payers do not! Plan to drop the payers that do not allow you to reach your business goal! This is a crucial step.

You may also calculate what each third party payer contributes to your overall collections to help you with the decision about which payer to keep and which ones not to keep. Calculate the average payment for each visit from each payer. Consider the number of patients from each payer. Calculate the accounts receivable for each payer - as a fraction of the charges after 30 days and after 60 days. That informs you about their delays and denials, about the hassle and sleaze factor. Decide which third party payer makes no sense economically and also which payer gives you the most hassle.

3. Drop third party payers that threaten your financial viability

A colleague wrote the following: "I started with the lowest paying HMOs. It is a 2 year process. First I stop taking any new patients from that HMO. Then 1 year prior to dropping them, I will send out a letter to the patients with that insurance informing them that I will be dropping that insurance the following Jan. I send out this letter with the labs that I send to them prior to their physicals. They come in for their physical and they have the opportunity to ask me why I am dropping their plan. I inform them. I tell them which plans I will be taking and that they can still see me if they have out of network benefits. I would say that most patients change insurance or continue out of network with me."

Send certified return receipt cancellation letters to those third party payers that drag your practice down. It is likely not feasible to drop all third party payers at the same time. Start small, gain experiences, then drop more. Remember that you are not "abandoning patients", you are merely becoming an "out of network physician". You are supporting HSAs and high deductible insurances. You are moving your practice towards "consumer directed health care" or towards "cash medicine" or towards concierge medicine". Promote HSAs coupled with high deductible health plans (also called catastrophic coverage) to your patients by several means, such as those described in Neil Baum's book. We will talk about this more later.

The following two books are extraordinary useful and well written: "Think Business" by Owen Dahl, $69, a kind of mini-MBA for physicians written by a veteran of medical management, and "Marketing your medical practice" by Neil Baum, $89, a fantastic book by a successful urologist in private practice. And of course there is "Medical Economics" magazine....

Legal disclaimer: Do not coordinate this purely economical plan with your colleagues, since this might be misconstrued as a "conspiracy". In the past acting as a group to flex our muscle or to influence prices was deemed illegal for physicians, since it might "worsen patient access to health care" or "might increase prices" - something that actually never happened. This was ruled "illegal", since obviously the consumer is a higher priority than physician income or influence. This is a hidden compliment and an acknowledgment of our power.

Therefore do not write emails or letter about this using any other terms than "purely economical reasons" and "supporting consumer driven health care" and use only verbal communication in private places. And understand that this is NOT done to fix prices in any way, but to move the health care system to "consumer driven" - a system that offers maximum transparency, and uses market forces to deliver cost effective, affordable, high quality medicine to everybody. Consumer should call the shots and not the insurance, and therefore consumers should holds and control the money and not the insurances. That is why we are moving away from insurances, to empower consumers.
And we are obviously doing this based on purely economical thinking. We "think business", something that we have learned from just those HMOs - remember?

Should anyone threaten, bring up or even hint at us doing something "illegal" or "conspiring", go to the media and show how this person or entity wants to cheat the consumer and wants to prevent the consumer from being in charge! Consumer driven health care is the ultimate democratic health care system and should be supported by everybody! Nobody will dare object to our move in that direction!

Stop taking new patients 2 years prior to dropping the plan because it is often the case that many other doctors are dropping the same plan. You may have a rush of new HMO patients because the panel of that insurance is drying up. It is harder dropping an HMO which is 30% of your practice than 15%.

Inform the patients a year in advance because many insurance plans require the employee or employer to sign up for the following year 6 months or more before the end of the year.

Fortunately, the amount of physicians that show third party payers the door and still provide affordable health care are increasing. More and more of us are moving towards something between consumer driven and concierge care.

Here is a very interesting article from the American Academy of Family Physicians that publishes on this: The "Robin Hood Practice". Very fitting name, since Robin Hood stood up against the evil Sheriff and...won.

4. Join or create a "Group Practice Without Walls"

This is the solution when you are faced with one or two dominating HMOs in your area holding 40 plus percent market share, which makes it very hard to cancel their contracts. This is a good solution for colleagues who prefer to have someone else handle the business aspects of medicine and for those who prefer to be employed.

Group Practice Without Walls means the physician continues to practice in his/her own facility, yet is part of a group, just not under one roof. The group does marketing, billing and collections, sometimes, but by now means necessary, also staffing and management. All members have the same tax ID. This way a large number of apparently independently practicing physicians can represent themselves as one group, buy and negotiate as one group, with the obvious advantage of using your larger numbers. The laughter of HMOs about you will become a lot softer.

I have seen this work very well in in a group of 100 plus ObGyn and Gyn physicians, to which I was introduced by chance in 2002. Since then I have spoken with half a dozen members since and they seem most satisfied with this model. Some of the points mentioned here apparently are off as I was told recently and I would be happy to correct them. But, in summary, it is an excellent model, it works and it is reality.

Joining this group gives an ObGyn reimbursements of about twice Medicare/Medicaid. For example: global fee for prenatal care, delivery and postpartum care yields $1500 from Medicaid, and members of this group receive around $3000. Same amount of work, probably even less for a non-Medicaid patient. Members of this group work in their own private offices, with their own staff, own equipment and rooms, mostly following their own clinical guidelines and decisions, own budget, own finances etc. Except: they bill together and negotiate together under one tax ID. They pay about 5% of collections for billing. Members pay an admission fee for admission to the group and would have to pay a fee when leaving the group.

The management of this group negotiates with the remaining HMOs and frequently fires the lowest paying third party payer. They achieve reimbursements of 120 to 200% Medicare. These groups can be set up so that the individual practice is an LLC within the larger LLC of the group. Billing goes through one single entity. They pool some labs and technical services such as Xray, mammography, ultrasound, bone density, but also cosmetic services, such as botox, epilation, vein therapy etc

How do you set it up? You first spread the word among the best doctors and the key players in the area offering to join you. Then you retain an attorney experienced with formation of such as group. this is expensive, but worth it in the end. You must stand up to anti-trust scrutiny. Your ultimate goal is to attract enough doctors to reach enough critical to have negotiating power, but not as many to violate anti-trust laws. Consider staying under 50% of physicians in your specialty in the area. This may take several years, but is well worth it.

5. Get support from your patients

The transition towards consumer driven health care (and away from HMOs and third party payers) will be much easier with patient support. There is a profound lack of knowledge about consumer driven health care, high deductible insurance plans (HDHP) and Health Savings Accounts (HSA). Once we help our patients understand these issues, they will help us in the transition to more economic and more responsible care!

Learn: buy a HSA/HDHP for your own employees and your family. Browse the most educational and easiest to understand websites on HSAs. Summarize the info into a one half page note. Post this in your office, hand out leaflets to your patients, leave them in your waiting room, post it on your website, in your monthly newsletter, email it to friends and colleagues, drop in mailboxes of other docs in your hospital. Ask your hospital HR to offer them, give a talk at the hospital and at the local chamber of commerce. Write a blog. Create a Google Alert on "HSA". Read and lay out Regina Herzlinger's book "Who killed health care" in your waiting room.

Teach: Educate your patients that they might save 30-40% of coverage costs, that HSAs are funded with pre-tax dollars, that they own those dollars, that they roll over to the next year and may collect interest!

Even Medicare has Medical Savings Accounts available during the current enrollment! A huge benefit - it eliminates the need for MediGap coverage.

HSAs teach the patient accountability and are the only solution to ever increasing health care costs.

Act: Offer cash services for your patients with HSAs! Patients need to know what to do with their HSAs!! Post a list of prices for your 10-20 most common services. You could even post a comparison list with the prices of a local plumber, electrician etc for comparison - an eye-opener!

Direct patients to the cheaper HDHP providers that actually save money. Traditional HMOs may price these plans so that they become less attractive. Tell your patients that every bank can administer a HSA.

Links: AMA brochure...
US Treasury Dept...

Consumers for Health Care Choices is a national membership organization, chaired by a former president of the American Medical Association. /Greg Scanlen,, tel:301-606-7364

Politicians, blissfully unaware of true details of health care, may claim that consumers actually do not know enough about and are "not smart enough" and not "educated enough" and "too weak" or "need protection" from all the other players in health care - and that of course, the "government knows best" and has only the best intentions and the best advice for consumers.

"Hi, I am from the government and I am here to help you"

A well designed HSA can save 30-40% on total coverage costs, including the HSA contribution. Further, this contribution is not lost, but owned by the individual, is rolled over into the next year and may collect interest. For the 80+% of us who are basically healthy, HSAs are a great deal. For those that are chronically ill, it is a wash. Employers like HSAs because they save money for the employer. HSAs have proven to decrease costs. Taking all risk away from the patient leads to overuse of resources because it is a lot easier to spend the insurer's money than your own money.

The vast majority of transactions can occur with a debit or credit card at point of sale, no need to file a claim.
Currently, pre-tax HSA dollars can be spent according to IRS section 213(d) which defines healthcare broadly as anything therapeutic, including "alternative medicine" or chiropractic care, while cosmetic surgery is not an "allowable expense"

The opposition to HSAs takes several forms:
1. Only the well-off can afford them
2. People with HSAs will see them as just another investment scheme, and will avoid needed medical care (including essential screening) to "save" this retirement money.
3. We have 4 or 5 generations of consumers / patients in the US who don't have a clue how much their insurance / Medicare is really paying, and will be shocked back to the old ways when they get their bills.
4. Unless they are combined with a cash-for-care schedule of lower payments (less hassle, less paperwork, lower charge) there is not much advantage to having an HSA.
HSAs would actually work great in a "health care cooperative", where physicians AND their patients unite and truly work together to combat their common enemy, disease.
Big opposition will come from HMOs, since they have the most to loose. Pharma is lobbying for a "carve out" of drug costs from the HSA dollars. If patients know the actual cost of drugs, they will prefer generics and "Direct to consumer advertising" will tank.

Unfortunately, most physicians are not offering cash services. We all should post a list of our services for cash payers - independent to the fact if we take HMOs and or Medicare / Medicaid etc. Just good business sense. You inform the patient, you give them an option and you get them thinking in the right, this is what it costs....with all the ramifications, such as why is my insurance so expensive or so cheap, could I afford this on my own without insurance? and so on

Educate your patients about alternatives to insurance, mention HSAs and high deductible plans. The AMA has leaflets on this.

Patients often think that we receive all the money they pay to their insurance. They assume we make millions. It often is an eye-opener that we receive about the same amount the HMOs keep for their administration (withholding and denying) and they are often very surprised to find out how little we get paid for services. It is incredible effective to create a list comparing our services point by point with the services and prices of an electrician or plumber - and you will find that they come out ahead! This creates sympathy from the patients and the willingness to drop HMOs

6. Get support from your colleagues

Previously we had recommended to put your own finances in order to be able to survive for a while with less income, then approach your practice from a business point of view: first establish how much you want to earn, calculate what each payer has to pay for your most common services and then drop those HMOs that do not meet your business needs. When Jack Welsh was CEO of GE her routinely dropped the two least profitable lines of business. Do the same with third party payers. This is plain economic thinking, and obviously not a plan to boycott third party payers. Start or join a group practice without walls. Encourage patients to enroll in HDHP / HSAs instead of conventional HMOs. This saves our patients money, allows them to accrue savings tax free, while paving the road for cash practice for us.

The last component is to spread the word to as many physicians as possible! Encourage your colleagues to join Sermo, to join our discussion. This way we can learn form each other how to save the health care system. Let them participate and contribute to our discussions. Keep talking about health care reform, stay in touch, write a blog, read about the issue, email a summary of the plan to friends and colleagues, drop a flyer in mailboxes of your colleagues at the hospital. Just invite them to Sermo, maybe the AAPS, the rest will follow!

Unfortunately, the AMA has given up any attempt of true representation. I am very upset that they have good ideas such as supporting HSAsand tax credits, just to be completely quiet about it! What are they thinking?

Follow the plan for yourself and it will be very helpful. Tell your colleagues about it, spread the word and the effect will multiply!