A “direct” practice is one where the patient pays a pre-determined periodic fee directly to the physician in exchange for the physician’s promise to care for the patient at no additional charge. There are, of course, some variations on this theme, but this is the essential element common to all direct practices.A typical attribute of a direct practice is that the physician has opted out of Medicare. The reason for this is that Medicare, of course, controls how much a physician may charge for “covered services,” and charging a Medicare patient a predetermined flat fee for future medical services would almost certainly violate these billing limits. The Medicare billing rules could also prohibit a non-opted out physician from operating a practice in which her non-Medicare patients are “direct” patients but her Medicare patients are not. These “hybrid” direct practices have to deal with the Medicare billing rule that prohibits a physician from billing Medicare an amount greater than the amount he usually charges for the same services to non-Medicare patients.4
These billing restrictions cause virtually all direct-practice physicians to opt out of Medicare.5
III. What is the central legal issue with direct practices?
It is now common to classify concierge practices as either “fee for non-covered services” (“FNCS”) practices or direct practices. The one factor that distinguishes one from the other is that in a direct practice the patient receives medical care without paying anything more than the predetermined periodic fee, while in an FNCS practice medical services are billed in the traditional fashion.6
This fundamental difference gives rise to the one major legal risk of direct practices: that they might be insurance.The theory behind this assertion is that, by accepting a predetermined fee in advance (the “premium”) in exchange for the promise to provide all the primary medical care the patient (the “insured”) needs during the term of the agreement, the physician (the “insurer”) is underwriting a risk. The best example of the official assertion of this principle is from the Maryland Insurance Commissioner, who in 2009 issued an opinion declaring that virtually all direct practices were subject to Maryland’s insurance code.7
Another example is the case of Dr. John Muney, where the New York State Insurance Commissioner (“NYIC”) asserted that Dr. Muney’s direct practice violated the New York insurance laws. Dr. Muney agreed to settle the dispute by agreeing to charge $33 per “sick visit,” a modification that in the Commissioner’s mind transformed his practice from an insurance company into a run-of-the-mill physician’s clinic.Implicit in the NYIC’s position and the eventual settlement of the matter was a concept that is instructive in contemplating the “risk” element that leads some to argue that direct practices should be regulated as insurance companies – the distinction between a “well visit” and a “sick visit.” Although Dr. Muney did not distinguish between the two, his practice, like virtually all direct practices, called for a predetermined periodic fee (in Dr. Muney’s case a monthly one) that entitled the patient to an unlimited number of visits. “Well visits” means “preventative” encounters with a physician or at least visits that do not arise because the patient is sick or injured. A “sick visit” is when the patient is sick or injured and needs treatment or advice, an event that is not volitional – the patient has no choice in the matter, as she would if she were to decide to visit the physician for a preventative examination or discussion (that is, a “well visit”).Apparently the only part of Dr. Muney’s arrangement that was offensive to the NYIC was that which allowed the patient, when sick or injured, to visit the physician an unlimited number of times without any further payment. In a March 6, 2009, letter to Dr. Muney’s attorney, the NYIC restated the settlement terms that had been reached with Dr. Muney and drew the distinction between “those services stemming from non-fortuitous events” (well visits) that were included in the Muney package and “those services stemming from fortuitous events [sick visits] that require an additional fee.” This additional fee, which the Commissioner required for the “fortuitous” visits, was $33 per visit. The Commissioner also noted Dr. Muney’s agreement to limit the “$33 sick visits” to fifteen per year, after which the patient would be expected to pay the regular, non-discounted rate for an office visit.
Clearly the NYIC was not concerned with “well visits,” and rightly so. As hard as it might be to claim that a physician agreeing to treat a sick or injured patient for a predetermined, one-time fee is operating an insurance company, it is much harder to reach the same conclusion just because a physician agrees to see a patient as often as the patient likes to discuss matters of preventative health.
IV. Are direct practices really insurance?
On December 19, 2008, the Maryland Insurance Commissioner (“MIC”) held a public hearing to determine whether concierge medicine practices in Maryland “constitute the business of insurance.” The conclusion as to direct practices was that in almost all cases they were, subject to a few modest qualifications. Taking off on the idiom “the devil is in the details,” the MIC concluded that8
one way or the other any determination would have to be made on a case-by-case basis because “the devil is in the contract” (between the physician and the patient).In order to examine the question of whether direct practices are indeed the “business of insurance,” let’s create an example of a prototype direct practice that would now certainly be considered insurance in Maryland. Consider a direct practice of Dr. Martin, our hypothetical family physician. She agrees to provide her patients with all the family medicine services they need for the ensuing year in exchange for an up-front payment of $1,200 each. Dr. Martin has 400 patients, so her practice generates $480,000 a year from these flat fees, and she does not bill insurance companies or Medicare. Indeed, she has opted out of Medicare. If we assume that all the fees are collected on the first day of the year, Dr. Martin is holding $480,000 to start the year and has the obligation for that year to furnish her 400 patients with all the primary care she can personally provide.Insurance laws are designed to protect the public from undercapitalized or unscrupulous companies agreeing to provide payments or other benefits to insureds. They are intended to ensure that insurance companies are appropriately capitalized and sufficiently reputable so as to be able to meet their obligations when their insureds file claims. In Dr. Martin’s case, she has 400 people who have paid in advance for the right to have primary medical care for an entire year, with no assurance that she will survive the year, remain financially or physically able to perform her end of the deal, or simply become too busy to meet the demands of all 400 patients.So is Dr. Martin’s practice an insurance company? Well, it is a bit too soon to know, for there is at least one major bit of information we need – which state she is operating in. What is or is not insurance is a matter of state, not federal, law, and without knowing which state she operates in, we might have to examine the law in all fifty states, virtually an impossible task and one not likely to yield any useful results. Indeed, we would likely come up with more than one answer, with different states placing emphasis on different aspects of the physician’s patient arrangement (the “devil in the contract”) or analyzing the risk-sharing principles much differently.
Without making this difficult state-by-state inquiry, the author would advance a calculated guess that on our assumed facts Dr. Martin is likely to be found to be engaged in an insurance enterprise. Maryland and New York have publically announced that that would be their position, and Oregon, West Virginia, and the State of Washington have taken that position by enacting legislation regulating such practices.9
V. What legal principles might make Dr. Martin’s practice the “business of insurance”?
While each state may have its own cases and statutes dealing with the definition of insurance, some uniform general insurance principles do exist. In 1979, the United States Supreme Court decided the case of Blue Shield of Texas v Royal Drug
, 440 US 205. Blue Shield had issued insurance policies to policyholders that allowed them to buy at a discount prescription drugs from pharmacies that had signed up with Blue Shield. If a pharmacy wanted to participate in the program, it signed an agreement with Blue Shield calling for it to sell prescription drugs to a policyholder for $2 per prescription. Blue Shield was then required to reimburse the pharmacy what it had to pay to purchase the drug. For instance, if a Blue Shield-contracted pharmacy paid a drug manufacturer $10 for a particular drug, and if that drug were then purchased by a Blue Shield insured, the pharmacy would receive $2 from the insured and $10 from Blue Shield. The total of $12 would cover its direct cost and a $2 profit.Some Texas pharmacies that had not signed on with Blue Shield sued claiming that Blue Shield and its affiliated pharmacies were in violation of the federal antitrust law (Section 1 of the Sherman Act, 15 USC Sec. 1) by fixing the retail price of drugs. Blue Shield argued that it and its pharmacies were protected by the provisions of the federal McCarran-Ferguson Act (59 Stat. 34, 61 Stat. 448, 15 USC Sec 1012(b)), which exempted activities involved in the “business of insurance” from the antitrust laws. The trial court found for Blue Shield, holding that its arrangement with the pharmacies amounted to the “business of insurance” and therefore was protected by McCarran-Ferguson. The Court of Appeals reversed, holding that Blue Shield was not engaged in the business of insurance and therefore was subject to an antitrust claim. The Supreme Court agreed.Although the Blue Shield
case ultimately involved the question of whether the pharmacy arrangement violated the antitrust laws, the outcome of the case turned on whether the arrangement was or was not “insurance.” The Court ultimately held that it was not, and in the process discussed the common law elements of insurance.Initially, the Court said that “The primary elements of an insurance contract are the spreading and underwriting of a policyholder’s risk”10
and went on to quote Couch, the Cyclopedia of Insurance Law:
It is characteristic of insurance that a number of risks are accepted, some of which involve losses, and that such losses are spread over all the risks so as to enable the insurer to accept each risk at slight fraction of the possible liability upon it.
The Court confirmed that the essential element of insurance is “transferring and distributing risk” – from the insured to others through the contractual workings of insurance policies. The insurance company accesses the actuarial probabilities relating to each insured’s risk and assigns a value to it, and then, once a sufficient number of policyholders exist, the “law of large numbers” takes over, allowing the insurer to distribute efficiently one policyholder’s risk among all policyholders. Considering these general principles of insurance, one can better understand the rationale behind the actions of the New York and Maryland insurance commissioners, the public officials of the two states that have taken public positions adverse to direct practices without specific legislative authority (such as exist in West Virginia,11
Utah, and Washington State13
).In its report, the MIC focused on direct practices (which the MIC called the “Bundled FFS14
Model” of concierge medicine) and concluded that a practice of the nature of our Dr. Martin’s would indeed “constitute the business of insurance.”15
Resisting the temptation to paint with too broad a brush, the Commissioner stated that “seeking to define the outer boundaries of what is insurance . . . is subject to an important qualification that ‘the devil is in the contract’.” (Page 5).It is fair to start from the position that if one attempts to apply the standard rules and definitions of insurance to Dr. Martin’s practice, then the conclusion will likely be that her practice violates insurance laws (her hypothetical practice was constructed in a way to make it fall within the MIC’s condemnation). Anecdotal evidence suggests that some state insurance commissioners never get to the point of applying these principles to direct practices in their states, instead applying the “no harm, no foul” rule; they appear to take the position that direct practices that involve one or two physicians are not the sort of things that need regulation, these practitioners being little more than sole proprietors working out financial dealings with customers (patients) in whatever manner they chose.The comfort afforded by this regulatory attitude, if it is does indeed exist, goes only so far, however, since it adds little for the practitioner who does not want to violate the law, no matter how unlikely any enforcement effort, or to exist under a cloud of uncertainty. Moreover, in many cases operators of direct practices want either to expand their operation or rely on mass marketing techniques16
that make them look more and more like insurance companies. It is one thing for a single physician to work out an arrangement with her patients as to how the patient will pay for medical services the physician will provide; it is another when that same physician employs a marketing organization, adds physicians, and tries to mass-market through arrangements made with employers. Such practices quickly start to mimic things that are insurance products, and that can attract regulatory interest.
VI. Can we save Dr. Martin’s practice?
The best way to address the question of what could be done to alter Dr. Martin’s practice in order to bring it back from the brink of insurance is to examine it closely to see what makes it insurance in the first place. The first step in the inquiry is, of course, to identify what “risk,” if any, is being transferred from Dr. Martin’s patients to her.Clearly, there is a risk, namely the onset of a patient’s need for primary medical attention during the contract year. That is the “fortuitous event” over which the patient has no control and for which Dr. Martin has agreed, in exchange for the payment of the advance fee, to provide the necessary care.If this is the risk Dr. Martin assumes, is she spreading it around? In a pure insurance context, this sort of risk is spread by requiring many, many other insureds to pay for the assumption of the same or similar risk. Actuarially, some insureds will have more claims than expected, and some will have fewer, or maybe none at all. The law of large numbers will reward an insurance company who has bet correctly. One could make a persuasive argument that much the same is happening in Dr. Martin’s practice. She is taking a $1,200 payment from 400 patients and is hoping that the actual office visits they require is the number she has picked as the average. Assume that she believes the average patient may need three “sick visits” per year and that the average cost per visit is $300. Dr. Martin agreeing to see a patient the average of three times17
during the course of the year, for a prepayment of $1,200, does not therefore present much of a risk, or so she thinks. She is hoping that for every patient who actually has four sick visits per year there will be a patient who requires only two, one patient consuming more and the other patient less of her time. She makes money on one patient and loses the same amount on another.Note that Dr. Martin’s fee structure was created in a way so that, if her assumptions are all correct, she will have excess
revenue of $300 per patient. (Three visits times $300 is $900, and the annual cost to the patient is $1,200.) So if her assumptions pan out, she’ll have $300 per patient left over. She hedged her bets a bit, erring on the side of patients requesting more visits than the average.
Dr. Martin indeed assumed the risk that some of her patients would require more, maybe a lot more, than three sick visits per year. For instance, if a few of her patients became seriously ill, they might require three sick visits per month, not per year, and that could put a strain on her ability to provide the agreed-upon services to her other patients.
In a classic medical insurance situation, the company agrees to pay professionals to take care of the insured/patient (that is, to pay the insured’s medical bills). The downside for the insurance company betting wrong is financial – it has to pay more in claims than it is taking in in premiums. (It is worth noting at this point that this is NOT a risk to which Dr. Martin is exposing herself.) A major purpose of state insurance regulation is to protect consumers from companies who accept and manage risks but do so carelessly, understating their exposer to risk – hence insurance regulations that require a minimum amount of capital, financial reporting, and control of elements of policies themselves.18 When trying to structure Dr. Martin’s practice so it is not insurance, the element we want to focus on is that of risk, for in all of the actions by the states against these practices, they will all focus on the element of risk being transferred by the patient to the physician.
a. Change risk.
Remember that the risk for Dr. Martin is that a patient will require more sick-visits per year than expected (say three per year). One thing we might do is to allow Dr. Martin (and the patient, for that matter) to terminate the patient agreement at any time. If a patient developed a serious chronic illness and needed weekly visits with the physician, Dr. Martin could just cancel the contract, thereby terminating her obligation to see the patient. If that were the case, there is no risk assumption at all. And our patient is no better off in terms of protecting himself against the fortuitous onset of the need for frequent office visits. Indeed, it would be clear from the outset that the contract the patient is signing does NOT provide for any assurance that it will not be terminated.This is not to comment on the probability of Dr. Martin actually terminating the contract under these circumstances.19
But that probability should be irrelevant for purposes of determining whether Dr. Martin is running an insurance operation. The issue is whether the patient has succeeded in transferring a risk to the physician in exchange for a prepaid fee and can contractually enforce his rights against the physician; it is not whether the physician will or won’t terminate the relationship given the freedom to do so.Nor should the possibility that Dr. Martin would terminate the contract be unacceptable to the patient. After all, that is almost certainly the relationship the patient already has with his physician – his physician can, subject to abandonment issues, terminate him at any time.
b. Financial risk.
One reason why a patient might object to signing a contract giving the physician an unrestrained right to terminate it at any time is that at the same time he is paying the physician in advance
for medical services. In Dr. Martin’s case, she receives $1,200 on the first day of the contract year in exchange for signing an agreement that gives her an unlimited termination right. If she terminates the agreement on July 1st, for instance, then she will be required to refund half the annual payment, which means that the patient needs to rely on Dr. Martin’s financial integrity and stability to meet that refund obligation. The risk that Dr. Martin may be unable or unwilling to refund the fee is the same sort of consumer risk insurance regulation was designed to address.This consumer risk could be eliminated by providing that the patient would pay for the services AFTER the period of time for which they were available. It is not financially reasonable to assume that the patient should be allowed to wait until the end of an entire year to pay the amount for the preceding twelve months. A better approach would be to have the patient pay the fee monthly on the last day of the month for the preceding month,20
or perhaps quarterly on the last day of the quarter. If Dr. Martin were to terminate our patient’s contract as of June 30th, the patient would have paid only through the end of May at the time of termination. At that time he would still owe Dr. Martin for the month of June, the last month of the contract. It is then Dr. Martin, not the patient, who is at risk for the contract’s June obligations.If both the patient and the physician can terminate the contract at any time, and if there is no prepayment of any fees, it is hard to see why the arrangement would meet the threshold test for insurance – the transfer of risk to, in this case, the physician.
There is some irony in the fear many direct practice advocates have of becoming ensnarled in the insurance issue while at the same time packaging themselves as products to be offered along with and as part
of a formal insurance program. These advocates have long wanted to enter the mass healthcare market by inspiring insurance companies to develop high deductible health plans specifically designed for and wrapped around the direct practice concept. Essentially, the concept would have the direct practice cover the first dollar of a patient/insured’s primary care, with a high-deductible21
policy covering the patient’s specialty and hospital care. For instance, Physician Care Direct (http://physiciancaredirect.com/
) and Qliance, a direct practice leader in Washington State, along with Puget Sound Family Physicians and Family Care Network, recently announced a new product offered by Physician Care Direct (called Employer Health Ownership Plan (“EHOP”)).22
This courting of the insurance regime results from the natural business pressure experienced by direct practice physicians – the first business necessity is how to get people to become their “direct” patients. Compared to its birth-mate the FNCS model, direct practices have a more difficult time justifying their costs to patients. In the FNCS model, all the patient has to do is recognize that what he is really buying are simple amenities and greater, more meaningful access to his physician, something he is not currently paying for (or getting) as part of his financial arrangement with his regular physician (and insurance company). In the direct practice setting, however, the physician is offering the same service as before (healthcare), but just providing it, and charging for it, in a different way.23 It therefore becomes easier for a patient to compare an apple to an apple than in an FNCS environment. This, coupled with the current impenetrable maze of insurance subsidies, rates, deductibles, copays, and the like, makes the explanation of the comparison of a direct practice to the patient’s current situation very difficult even for the most market-savvy practitioner.
Direct practice physicians quickly learned that it is far more difficult to acquire a patient by virtue of one-on-one communications than it is to acquire many by working through employers who are attracted by imaginative (and cost-efficient) healthcare alternatives for their employees. But for a direct practice to sell its services in this fashion makes it look an awfully lot like a participant in the overall regulated insurance market, and that cannot be good for direct practices whose only real legal vulnerability is insurance regulation. While they might not in fact involve any risk transfer (like the high-deductible insurance policy they marry), the more they associate with insurance offerings, the more likely it is that insurance regulators will take notice.
VIII. General comment on state regulation.
It is conventional wisdom that there is almost no commercial activity in a state24 that a state government cannot regulate if it really wants to. And in the area of direct practices, a state’s insurance commissioner effectively has the power to declare a given physician’s direct practice to be an illegal insurance enterprise even without specific statutory authority to do so.25 The State of Maryland’s recent exercise, outlined above, is a good example. At first blush, it is hard to see how any physician could meet the Maryland Insurance Commissioner’s tests for direct practices, even though Maryland’s Insurance Code is virtually indistinguishable from most state codes around the country and contains nothing that specifically condemns direct practices.
In short, considering there is virtually no law on this subject, physicians need to beware of state insurance commissioners (like Maryland’s) who, without any specific legislative guidance or direction, and perhaps out of a political bias,26
decides to attack direct practices.
A little over a year after the ASCP was formed, it changed its name to the Society of Innovative Medical Practice Design (“SIMPD”)
. Since January of 2010, SIMPD has been known as the American Academy of Private Physicians
See, for example, comment of Bradley Allen, The Wall Street Journal
, November 5, 2013, Obamacare 2016: Happy Yet?
And also see a reader’s letter in the same WSJ edition.3
See Wash. Rev. Code Sec. 48.44.010 (2007) for the eventual Washington State legislation.4
There is an argument that opting out of Medicare may not be necessary in all these hybrid cases. On September 15, 2003, the Office of Inspector General (“OIG”) proposed to amend its regulations regarding physician charges “substantially in excess” of her “usual charges.” 68 F.R. 53939 (Sept. 15, 2003). This proposal was withdrawn on June 28, 2007 (72 F.R. 33430 (June 28, 2007)), but the rationale for the proposal and the discussion that followed lead to the conclusion that if a physician can show what his usual charges are to a substantial percentage of his non-Medicare patients (say half or a third), that might be enough to establish the physician’s “usual charges” so as to allow for the application of the rule that what a physician charges Medicare cannot be substantially in excess of the physician’s usual charges. The idea is that for purposes of determining what the usual charges are for the service, direct fees would be excluded, but only if the number of non-Medicare (and by definition non-direct) patients in the practice was sufficiently large. Suffice it to say that these considerations are so vague, uncertain, and complicated that it is unlikely that a single physician will want to negotiate her way through this thicket on her own. It is a lot simpler just to opt out of Medicare and avoid the problem altogether.
5The author has personal knowledge that there are some physicians who charge direct practice fees without opting out of Medicare, but they are most likely doing so out of ignorance of these complex billing rules, a belief that “flying under the radar” is the equivalent of a safe harbor, or a misplaced sense of bravado.
6See the author’s article at http://wnj.com/Publications/The-Politics-of-Concierge-Medicine-The-Vulner for a detailed description of FNCS practices.
8The report was issued in January of 2009. See note 6.
9And Utah would have taken that position prior to its enactment of legislation that defines these practices as not being insurance (the implicit assumption being that, without this legislation, operating such a practice would be illegal in Utah). See 31A-4-106.5, Utah Insurance Code. Adopted on April 1, 2013.
11W.Va.Code, Sections 16-2J-3 (2007).
12See Senate Bill 86, 2011. ORS 731.036.
14The FFS stands for “fee for service.”
15Page 5 of the Report.
16Dr. Muney’s practice, for instance.
17The MIC assumed that an average patient would need about three office visits per year. See footnote 3 on page 5 of the MIC’s Report.
19Considerations of business would likely prevent Dr. Martin from terminating a patient in the face of a legitimate need for an unexpectedly large number of sick visits. Word would travel fast, and a reputation for terminating a patient’s agreement in such a circumstance would no doubt affect the number of patients willing to deal with Dr. Martin.
20It is now common in the concierge medicine industry to use credit cards to pay periodic fees. It would be very easy for Dr. Martin to have sufficient credit card information to enable her to charge automatically each patient’s card 1/12th of the annual fee on the last day of each month.
21The term “high deductible” in this context is actually not accurate. The real distinction to be drawn is between primary care (as to which there would be no deductible) and a separate deductible for specialty physician and hospital care. If the patient truly had a high-deductible policy wrapped around a primary practice, she would be personally responsible for all specialty physician and hospital fees up to the deductible amount, but would at the same time be “covered” by the direct practice for her primary care without reference to any deductible at all.
SEATTLE, WA–(Marketwired – Sep 23, 2013) – Qliance Medical Management Inc. and Physician Care Direct (PCD) today announced the nation’s first health insurance plan for Direct Primary Care, an increasingly popular model of flat-fee medical care. The unique offering wraps a proven insurance product around an innovative primary care platform — provided by multiple Puget Sound physician groups — to let employers better manage healthcare costs while benefiting patients and providers alike.
23To be fair, most direct practices provide a real change in how medical care is provided to their patients, stressing annual checkups and preventive visits, which the patient can enjoy without limit and with no increase in periodic fees.
Pure interstate activities are beyond the power of states to regulate, according to the Interstate Commerce Clause of the United States Constitution. Local physician practices would almost never be classified as Interstate Commerce that would make it exempt from state regulation.25
Rare is a physician who has the money and time to engage an insurance commissioner, with a virtually limitless enforcement budget and a state-paid legal staff, in a legal battle over whether the physician is operating an insurance company. New York’s Dr. Muney is a good example of this – he ended up settling his dispute rather than engaging in a prolonged and expensive legal fight with the State of New York.26
See the author’s article entitled The Politics of Concierge Medicine