Cash-Only Practices: Doctors Are Rethinking Their Objections

Neil Chesanow

 Feb 10, 2012

Introduction

Cash-only (also called "direct-pay") medical practices, in which doctors shun managed care contracts and are paid in cash by patients, are gaining adherents -- admittedly slowly, but surely. And while there have been philosophical and logistic criticisms of the model, some of those are steadily breaking down.
One reason is that low insurance reimbursements, particularly from Medicare, are making it harder to meet practice overhead expenses. Another is that increasingly more doctors, particularly primary care physicians, seek greater control over their patient visits and patient relations.
"How do you create a practice model where your patients are your payers, where you get doctor and patient back into a real relationship, and where patients can trust in the way doctors work and how they do business?" asks Alan Dappen, MD, who has a cash-only solo practice in Vienna, Virginia.

Cash-Only: Making a Real Impact?

How many doctors are going the cash-only route? It depends on whom you ask.
"The cash-only movement is growing exponentially," asserts Brian Ray Forrest, MD, an adjunct professor at the University of Carolina School of Medicine at Chapel Hill; President of the North Carolina Academy of Family Physicians; and founder of Access Healthcare, a direct-pay practice in Apex, North Carolina. "In the next 5 years," he predicts, "25% of doctors will convert to a cash-only model."
Formal surveys of doctors who have no managed care contracts tell a different story, however. "According to our 2010 Practice Profile Survey, taken from our active members, only 3% of respondents were practicing in a cash-only, direct-care, concierge, boutique, or retainer medical practice," says Glen Stream, MD, president of the American Academy of Family Physicians (AAFP). That comes to fewer than 3000 doctors out of the AAFP's 97,000-plus membership.
As the AAFP's president, Stream has the opportunity to interact with a great many family physicians. Even though only 3% of AAFP members have opted out of managed care, are a far greater number considering it? "Absolutely," he says.
The Center for Studying Health System Change in Washington, DC, has been tracking the number of doctors without managed care contracts since the mid-1990s. Ann S. O'Malley, MD, MPH, a senior researcher there, says that on the basis of periodic surveys the center conducts, the number of cash-only practices grew from 9.2% in 2001 to 11.5% in 2005, an increase of only 2.3%.
"Despite anecdotal reports that many physicians have dropped out of insurance networks, the vast majority of physicians -- 87.6% -- had managed care contracts in 2008, the year our most recent survey was published," O'Malley observes.
Still, that would mean 12.4% of physicians are in some form of direct-pay practice. The Association of American Medical Colleges estimates that the number of US doctors now totals about 954,000. Could it be that 118,000 physicians currently accept only cash?
Kathryn Moghadas, RN, CHBC, principal of Associated Healthcare Advisors in Winter Springs, Florida, doesn't believe it. "This has been touted as being highly successful," she says. "Most of what I see is doctors failing at it."

Direct Pay Does Not Equal Concierge Medicine

The biggest objection to the direct-pay model is that it is elitist: It violates the ecumenical spirit of medicine and creates a 2-tiered health system in which only healthy, affluent patients who can afford to pay cash -- and a lot of it -- would benefit at a time when there is a critical shortage of primary care physicians. "This is a return to fee for service," Moghadas says. "Who is in a position today to pay cash for their medical care?"
It is commonly assumed that direct pay is synonymous with concierge medicine. In this, patients pay an annual retainer fee of $1000 to $2000 or more, as well as a fee per visit, Moghadas explains. In exchange, doctors may reduce their panels from as many as 3000 patients to as few as 250, with the promise of same-day appointments, 24/7 cell phone access to physicians, and ample preventive care. Retainer patients receive gold-plated treatment, and the doctors generally do well financially.
However, concierge practices are only one faction of the direct-pay movement. "I don't see concierge medicine as the biggest part of the movement," says Stream. "What I see instead is a movement toward delivering and financing care that is actually very much directed at working people who are underinsured, have no insurance, or are unemployed." The focus, in other words, is on affordability.
As is typical of the nonconcierge faction of the direct-pay movement, Forrest posts his rates right on his Website. Office visits cost $56 to schedule. Work physicals are $49, plus any laboratory tests, if needed. Sports physicals are $29. House calls normally cost $199.

Other Options for Direct-Pay Arrangements

Also common among direct-pay practices charging reasonable rates is that patients are given the option of investing a certain sum up front in a subscription service, which helps to stabilize cash flow for a cash-only practice, in exchange for reduced rates. For instance, Access Healthcare patients can purchase an "Access Card" for an annual fee of $439. The price includes a comprehensive physical examination, wellness screening, and blood work. Thereafter, Access Card holders pay only $20 for a scheduled office visit for the ensuing 12 months. There is no extra charge for most basic lab work or any additional charge for a visit.
About 55% of Access Healthcare's patients have no insurance; the rest do, even though Forrest has no managed care contracts.
"They come here anyway," he says. At one extreme, he has patients who drive Porsches. "If you ask them why you would come here when you could go anywhere, they say, 'I can't pay a doctor enough to spend the kind of time you spend here with me.'" At the other extreme, he has patients who are homeless. When asked why they come, they reply, "This is the only place I can afford to go."

Criticisms of the Direct-Pay Model

The cash-only movement has its critics. They say that the direct-pay model would contribute to fragmented care; reduce a physician's scope of practice to treating acute problems, because insured patients with chronic illnesses are less likely to want to pay out of network on an ongoing basis; and that chronically ill patients who can't afford insurance tend to avoid routine preventive care.
"Patients opting for a full-retail doctor might delay getting care because of the cost," notes Jeffrey J. Denning, a principal of the Practice Performance Group in La Jolla, California. "We see the same behavior in physicians. They don't call their accountants and attorneys when they should because they're going to be charged by the minute."

Excellent Results for Some Patients

But that depends on the doctor, and his or her patients. Last year, for example, Forrest's charts were audited by the Consortium on Southeast Hypertension Control, whose mission is to improve the disproportionate hypertension-related morbidity and mortality throughout the region.
On the basis of these audits, 32 cardiovascular centers of excellence were identified. Access Healthcare led the list. As a result, Forrest says, "the Centers for Disease Control and Prevention sent some folks up from Atlanta last year to see what I was doing right."
By his own estimation, what Forrest does right does not stem from his being a good doctor. "It's the model," he says. "When you spend more time with patients -- my patients get at least 30 to 45 minutes minimum, and a lot of them get an hour -- you can really take time to fine-tune their medications and regimens. So the quality is a ton better, too."

The Economics of Going to Cash-Only

It's not hard to see how a concierge practice with a wealthy clientele could turn a tidy profit, but what about a cash-only practice geared toward patients with limited means?
Take Vern S. Cherewatenko, MD, a family doctor in Renton, Washington, who started SimpleCare in 1997. This national organization matches patients with cash-only local doctors who are committed to charging fair rates. An annual membership costs $29 per patient or $39 per family. For providers, the cost is $125 for the first year and $50 per year thereafter. The cost includes educational materials for both doctors and patients.
SimpleCare doctors bill SimpleCare patients at up to 50% off normal retail billing rates, says Cherewatenko. They can afford to do this because patients pay in full at the time of service, so the doctors don't have to tack on a lot of extra administration fees.

What is a fair price to get paid for what I do?
-- Vern S. Cherewatenko, MD

"This isn't discount or poverty medicine," he hastens to add. "Instead, doctors should think: What is a fair price to charge to get paid for what I do, pay my staff and overhead, and have some profit left over? That's the name of the game."
Because SimpleCare doctors work on a cash-only basis, they needn't bother with the 7500 Current Procedural Terminology codes that insurers require for reimbursement of services rendered, or pay for a coder. Instead, SimpleCare uses only 5 time-based codes for a visit: brief (10 minutes), short (15 minutes), medium (20 minutes), long (30 minutes), and extended (60 minutes). Prices range from $50 for a brief visit to $300 for an extended visit.
"You come to me for a cold," Cherewatenko offers by way of example. "Say you're not a SimpleCare member. So I charge $79. If I took insurance and you had an insurer, I would use CPT code 99211 (for a level-1 established patient encounter) and send the insurer a bill for $79. After a month, they might send me a check for $43. To spin that wheel -- to bill the insurer, have the computers, etc -- costs me $20/claim. So now I'm down to $23. My overhead -- the staff, the lights, me -- costs $30. So I've lost $7 to treat your cold. With SimpleCare, a cold is a brief visit. That's $50. So you pay $29 less. That's a win for you. And I've gone from losing $7 to a $20 profit, because my overhead is still $30."
As is common with cash-only practices, Cherewatenko has forged the relationships needed to offer SimpleCare patients the deep discounts on labs, x-rays, and other specialty services that may be required. Specialists and vendors are open to such relationships because they, too, are paid in cash, eliminating insurance hassles.
LabCorp, for instance, offers SimpleCare doctors a "client-billed price," Cherewatenko explains. It's about 20% of the retail fee for lab tests. For example, a full "well man's" panel -- including complete blood count, chemistry analysis, dehydroepiandrosterone, testosterone, thyroid, and A1c -- would cost an uninsured patient $980, he says. Through SimpleCare, the price is $120. "We can get an MRI for $250," he boasts. A mail-order prescription-drug supplier in California will ship generic drugs to SimpleCare patients for $10 to $15 a script.
In 2009, SimpleCare had 1200 providers and 40,000 patients as members. Today it has about 1500 member providers and 60,000 member patients, although not all of them are active, Cherewatenko admits. He receives 2 to 3 calls a day from doctors across the country who are interested in learning more about the direct-pay paradigm.

How Much Can You Earn?

How well doctors do charging fair prices to patients on a direct-pay basis do? Alan Dappen, MD, left a 5-office, 50-doctor, insurance-based family medicine group in 2002 to found DocTalker, a cash-only solo practice in Vienna, Virginia. Dappen started with zero patients when he opened his cash-only solo practice 9 years ago. He has since added another physician and a nurse practitioner and built his panel up to 4600 registered patients, of whom 2000 to 2500 are active.
"None of us is earning market rates yet," he confesses, "but we're making steady progress. We're out of the red zone and steadily in the black. We're all getting paid. None of us are starving anymore." In 2011, Dappen earned $100,000.
Forrest contends that charging fair rates can be far more lucrative. He has appeared in national medical business journals as both an article author and an article subject, advocating cash-only practice. He has appeared on The Oprah Winfrey Show and National Public Radio and has written for the Fox News Website. As a result, he was inundated with 200 emails a month from physicians across the country who wanted to know how to run a direct-pay practice.
About half a dozen doctors from across the United States flew to North Carolina to spend a half-day with Forrest to learn the ropes. At first, he saw them gratis. Then he began to charge -- first $2000, then $3500. "They still kept coming," he says. He estimates that in the past 5 years, he has helped at least 50 practices transition to a cash-only model.

Teaching Doctors to Go Cash-Only

To handle the volume, Forrest launched a subscription-based website in 2010. It offers video tutorials, interactive forums, and a documentation library for starting a direct-pay practice. Limited-access membership, intended for doctors who are still making up their minds, costs $79 per month. Full-access membership, for committed doctors, is $300 per month. Fifty doctors joined the site in the first month, and membership is now nearly 300.
Venture capitalists took notice. They helped Forrest fund a network of affiliate family medicine practices that pay a fee for direct-pay operational software and integration with a website that Forrest maintains for prospective patients. Nine affiliate practices are currently listed, spanning from East Windsor, New Jersey, to San Antonio, Texas. "Others have not been made public yet," he says. "The will likely be hundreds more opening in the next year or 2."
Forrest has just launched a direct-pay family practice franchising operation as well. "It's totally turnkey, with all the medical supply, laboratory, specialist, and radiology contracts in place," he says. The first franchise opened last December.

Figuring Out the Profits

Forrest calculates potential profitability in 2 ways: by whether patients invest in a subscription-based Access Card or pay à la carte. "Hypothetically, if you see 16 patients a day on a nonsubscription basis, then the minimum you make should be $250,000," he says. (According to Medscape's 2011 Family Medicine Compensation Report, a plurality of family doctors earn $150,000 to $175,000 per year.)
"If, however, you have 2000 patients with Access Cards, which cost roughly $500 per year, and then they pay $20 for an office visit, that would end up being about $600 per patient per year," Forrest says. (That assumes 5 patient visits per year, plus the cost of the Access Card.) "$600 times 2000 patients is $1.2 million gross."
Of course, practice overhead must be deducted to calculate net revenue. "A lot of the savings comes from getting rid of the overhead associated with filing insurance claims," Forrest explains. "Instead of needing 5 staffers for each provider, I only need 0.5 full-time equivalent per provider. You don't need to do billing or coding or claims processing." And because patients pay cash at the time of service, his collection rate is near-perfect: 99.4%.
Forrest figures that his overhead averages about 25% of that of an insurance-based practice. "Subtract 25% overhead from $1.2 million gross revenue, and that leaves you with over $900,000 net," he says.

Establishing a Cash-Only Practice Is Hard

Making this sort of money -- or any money -- hinges on a doctor's ability to attract patients in a healthcare system in which insurance-based practices are the predominant paradigm.
Dappen, for one, was convinced that taking insurance was corrupting his ability to practice good medicine. He felt that if he built a direct-pay practice, patients would come. "It was so obvious," he naively thought. "Why aren't a thousand doctors doing this?"
The answer, he learned, is that "establishing a cash-only practice is hard." When banks learned that he wasn't going to accept insurance, he couldn't get a loan. He had to take out a home equity loan for $200,000, out of which he spent $150,000 on office space, 1 to 2 staffers, malpractice insurance, phones, and myriad other expenses. Even then, he had to work at an urgent care center 2 to 3 days a week to make ends meet.
"Consumers are scared of paying cash," he reflects. "You can grow a practice overnight if you accept insurance. But as soon as you say you don't, people back away from you. Even if they know you. Even if you've been in the community 10 or 15 years."
"It takes a lot of work, which is why there aren't many doctors doing this. It was really scary. I lost a lot of sleep at night trying to figure out: Am I going to make it?"

The Forces Are Helping the Trend

This may be changing, however. For a great many potential patients today, the issue of whether to pay cash for their medical care is moot: They have no choice. More than 50 million Americans -- almost 1 in 6 US residents -- have no health insurance, according to the Census Bureau. Many workers lost their jobs during the recession, and with it their insurance coverage. And many companies have dropped employee health insurance benefits since the economy imploded in order to keep afloat.
But even America's most profitable firms, among them Wells Fargo, General Electric, American Express, and John Deere, have joined the so-called "consumer-driven health plan movement," replacing first-dollar coverage with a combination of health savings accounts (HSAs) or health reimbursement accounts plus high-deductible catastrophic health plans.
These insurance policies have lower monthly premiums because the consumer is responsible for paying the first $1000 to $5000 or more in medical bills before the insurance kicks in. For anything less than a medical emergency -- a physical examination, a pediatric ear check, diabetes or asthma management, minor wound care, a flu shot, a Pap smear -- their only option is to dip into their HSAs and pay cash.
For AAFP president Glen Stream, the viability of the direct-pay model hinges on the success of current healthcare reform efforts. "If insurance costs continue to go up, both for individuals and employers, and there's more incentive to offer high-deductible plans and pay directly for services, I think there's a good chance we will see direct-pay practices grow in number and distribution," he believes.
"I have personal friends who are involved in these kinds of practices, and they very much see this as being a solution to the insurance problem in our healthcare system. Most people I know are not in high-end concierge practices trying to make a huge income out of this. They're trying to divorce themselves and their patients from the absurd interactions with the health insurance industry that get in the way of a good interaction between patient and doctor," says Stream.
"So, if the healthcare reform effort does not make good progress, I think we will see more of this. But it won't just be people on the high end. It will be a lot of average folks who choose to get their healthcare this way."

Medscape Business of Medicine © 2012  WebMD, LLC

Cite this article: Cash-Only Practices: Doctors Are Rethinking Their Objections. Medscape. Feb 10, 2012.

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