There is growing consensus that primary care physicians, providing best-practice care, can dramatically lower healthcare costs through new organizational mechanisms, such as patient-centered medical homes (PCMHs). These savings can be further enhanced by creating health insurance incentives for insured individuals to align themselves with primary care physicians, not only for the direct care the physicians provide, but also for coordination of all the care the individuals receive, including referrals to specialists who also provide best-practice medicine. 

A major barrier to maximizing such gains is the prevailing fee-for-service (FFS) revenue model, which penalizes anything—including a PCMH—that increases operating costs or reduces billable patient volume. However, a solution lies in non-FFS, savings-capture revenue models that financially reward primary care physicians and their employers for reducing avoidable, expensive hospital and outpatient utilization. To date, most successful models have been variations on per-capita provider payments—commonly (and sometimes notoriously) known as “capitation.”

To understand the potential for the financial power of primary care physicians, consider the following. A single primary care physician treats, on average, a patient panel of 2,300 patients, each of whom accounts for an average $7,087 in total annual medical costs.a Thus, each primary care physician has the potential to coordinate (and effectively control) about $16.3 million in annual medical spending. Under capitation-based revenue models, a primary care physician who generates a readily attainable 5 percent in savings from improved patient management would generate $815,005 in savings. This savings would be available to increase primary care physician compensation, to reward physicians’ employers, and even to reduce insurance prices.



Under capitation-based revenue models, the primary care physician becomes the critical generator of medical savings.  

This analysis was developed by Steve Hyde, Mike Fleischman, and Eric Shell, principals for Stroudwater Associates, Portland, Maine. For more information, contact Steve Hyde.

a. For the average number of patients per primary care patient panel, this analysis uses the figure reported in the results of a 2005 study (Alexander, G.C., Kurlander, J., and Wynia, M.K., “Physicians in Retainer [‘Concierge’] Practice,” Journal of General, Internal Medicine, December 2005). The average cost per patient used in this analysis is based on an estimated $2.19 trillion in U.S. personal healthcare spending in 2010, as noted in a report by the Medicare Payment Advisory Commission (see Chart 1-3) divided by the U.S. census count for 2010, reported to be about 309 million . 

Publication Date: Wednesday, May 01, 2013

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