2003 Is Not Going To Be a Good Year for Doctors  

By David Gibson, MD


Beginning in January 2003, physicians in private practice will begin to experience a precipitous drop in their office cash flow.  They will see an explosive increase in their accounts receivables and they will witness an uncontrollable accumulation of uncollectible debt.

It is now universally recognized that the “wheels are coming off the wagon” for America’s employer based underwriting system for health care.  Seventy-five percent of all U.S. adults under age 65 get their health insurance through the workplace.  The LA Times recently editorialized that “the growth in health-care premiums and in the numbers of people without insurance represents an economic drag that business cannot long endure and a level of unnecessary suffering a civilized nation cannot in good conscience allow.”

Employers, stunned by double-digit increases in health insurance premiums, are desperate for cost-stabilizing alternatives. Here is the political reality that is emerging.  If the high deductible indemnity products, described in this article, that are now being embraced by employers do not stabilize cost trends, employers will simply no longer support the current private health care underwriting system.  The combination of a business/labor coalition coupled with the usual entitlement expanding choir (the American Association of Retired Persons and the Democratic Party) will represent an unstoppable political tsunami that will produce a national single payer system similar to Medicare.

Health care cost trends

Clearly, health-care costs have taken a dramatic turn for the worse during the past five years, rising more than 50 percent, with no end in sight. As a result, employers consider this unrelenting rise their most serious business problem and they are responding.

Large employers have been stunned by a twelve-fold health-care premium increase in the last decade.  These companies will spend an average 15 percent more on the cost of health coverage for employees next year, according to a study recently released by Hewitt Associates. The cost of health insurance for large employers will increase 15.4 percent in 2003, compared to a 13.7 percent rise this year. Health insurance premium rates for HMOs will increase 16 percent, and those for preferred provider organizations will increase 15 percent, the study found.

Forty-six million Americans work for small employers.  These individuals typically have less access to coverage than those in large firms.  California small to medium sized employers generate over half of all jobs.  They have been receiving premium increases for 2003 that run up to 60 percent.

Where is the market going?

During the last price spiral in late 1980s, employers turned to managed care, but the latest round of health inflation has exposed the folly of its claims to control costs.  There is now a growing momentum away from “first dollar coverage” managed care plans.  HMO enrollment shrank by 640,000 this past year with the trend accelerating into this year and beyond.  In fact, other than government employees covered under union bargaining agreements, no insurer, other than Kaiser, is selling new HMO accounts in California today.

As a result, managed care is both consolidating and imploding.  All of the regional health maintenance organizations (Omni, Health Plan of the Redwoods and Lifeguard) have exited the market.  By the end of 2002, California will have 17 HMOs writing commercial policies, down from 21 in March.

Employers are embracing indemnity products with high deductibles in an effort to align inflationary rates for health care benefits with wages.  Deductible limits for PPO products increased 37 percent in 2001 according to the data published by the Kaiser Family Foundation.  Market data indicates that the deductible has been increasing exponentially during this year and beyond.

To monitor the dynamic movement of the health underwriting market, one must visit with the employers who make payroll each month and the brokers who work directly with them.  Over the past several weeks, I have had the opportunity to engage many of these individuals in informative conversation.  The following summarizes the profound restructuring of the health care underwriting system they indicate is now well underway here in California and across the nation.

The dominant product now being embraced by the small to medium sized employer market is high deductible ($1,000 per year with a $2,000+ out of pocket beyond the deductible) catastrophic health insurance.  The policy covers hospital services only.  Office visits are not covered.  In patient professional fees are covered at 20percent of the negotiated fee after the deductible.  There is no pharmacy benefit.

Employers can choose to purchase “wrap products” that will enhance the catastrophic product’s coverage.  These wraps limit their liability for drugs and or ambulatory professional services typically at $500 per year per beneficiary.

The following table summarizes how this indemnity catastrophic coverage product compares with existing managed care products this year.

The just completed legislative session here in Sacramento produced a string of successes for the Democratic Party's core constituent groups.  As a result, California’s employers are facing significant increases in their costs for doing business.  Governor Davis has signed legislation that mandates increases in workman’s compensation, altered existing labor law and enriched family leave benefits.

All insurance costs from liability to fire and casualty have increased.  Now employers face continued significant increases in health benefits.  The differential per year between the catastrophic or basic product described above and the HMO product is a $1 thousand per employee and $4.2 thousand per-family.  For PPO products the differential is $1.5 thousand and $4 thousand respectively.

The cost differentials for 2003 that are now being quoted to large employers are summarized as follows:

Large employers are facing 15percent trends in their health premiums.  This produces annual cost differentials for the HMO vs. the catastrophic product of $1.2 thousand for the individual and $4.8 thousand for the family.  The differential for the PPO product is $1.78 thousand and $4.64 thousand respectively. It should be noted that the employer can avoid premium trends beyond the general inflation rate for the catastrophic product by adjusting upward the deductible limit.

The following table demonstrates the reason for the rapid movement to catastrophic by the small to medium employer market.  These employers are facing 60percent increases in their group health premium costs for 2003.

Thus, the small to mid sized employer that generates over half of all jobs in California faces a cost differential next year between the catastrophic and the HMO product of $2.15 thousand for the employee and $7.97 thousand for family coverage.  The differential for the PPO product is $2.96 thousand and $7.65 thousand respectively.

Physicians are small employers.  Their options next year are rather limited.  They can either drop coverage for their employees or absorb the increases summarized above.  The option of moving to a catastrophic product will be hard to resist.

Uwe Reinhardt, PhD, professor of health economics, Princeton University, sees an evolving trend whereby employers, health insurers and the government are all intent on pushing more health care costs onto consumers, a situation he expects could create an enormous backlash against doctors and hospitals over the next two to three years.

The implications of a high deductible indemnity insurance product on the physician’s practice

The high deductible indemnity products that are now cannibalizing the market during the current open enrollment season for 2003 coverage will have profound effects upon the physician’s practice.  Unless the altered business fundamentals these new products bring to the market are factored into the physicians business planning for next year, the physician will likely experience significant reductions in cash flow, run-away accounts receivables that will never be collected and an inability to meet business obligations.

If you now have a significant portion of your revenue generated by capitation contract; then prepare in advance for a substantial cash flow reductions.  The following cautionary tale is illustrative.  At the time of writing this article, the San Jose/Good Samaritan Medical Group, the largest doctors' group in the South Bay, has just announced bankruptcy.

The San Jose Medical Group, founded in 1955, is a cornerstone of Silicon Valley health care, at one point serving more than 170,000 patients. In recent years, it has faced mounting financial problems due in part to declining reimbursements from health insurers and the federal government. Those problems were exacerbated by a sharp decline in the clinic’s capitated HMO patients, from 90,000 in 2001 to 60,000 in 2002.

Going into a capitation contract is profitable.  An individual physician or medical group enjoys increased cash flow resulting from first of the month capitation checks along with residuals from their previously developed accounts receivables.

Coming out of a capitation contract is another matter.  Cash flow is immediately reduced when the capitation checks stop and it takes 60 to 90 days to receive payment from accumulated accounts receivables.  This reality is at the core of the San Jose Medical Group’s bankruptcy.

Carefully evaluate the liability associated with your network (IPA) contracts.  Network contracts, the staple of managed care, do not translate well into the high deductible indemnity market.  You may have many more of these contracts than you realize.  There is a vigorous secondary market where these contracts are bought and sold on the national market.  These contracts dictate that the physician can only collect co-payment funds from the patient after the claim has been adjudicated by the insurance administrator.  Unless the employer has purchased a wrap product, the catastrophic policy contains no liability for professional services in the ambulatory setting.

Thus the physician is bound by contract to provide service but can not collect until the carrier confirms non-coverage.  The likelihood of the physician collecting from the patient will significantly decay after a 60 to 90 day adjudication cycle.

Payment at the time of service or arrangements for payment over time is an absolute requirement for financial survival in the coming business environment for physicians.  Continuing to perform services under your existing IPA contracts will only guarantee an out-of-control accounts receivable and ultimately insolvency for the physician’s practice.

Invest in your front office staff.  You will need someone who can provide financial assistance to your patients as they receive your unexpected bills for professional services.  This front office financial assistant must be able to set-up payment arrangements for patients lacking the funds to pay for the services they receive.  The very survival of your practice depends upon the interpersonal and financial skills of this individual.

Develop a close business relationship with your bank.  Physicians should not be in the business of consumer debt financing.  Work with the bank to have them rate debt, assume these consumer debt liabilities and manage the collection process.


The "managed care'' revolution in the 1990s transformed health care delivery by imposing a leaner, meaner approach to business. Tough economic times now threaten the most financially fragile health care businesses which include most physicians’ practices.

Physicians are both health care professionals and small business men & women.  The very fundamentals of the business of medicine will change dramatically beginning in January, 2003.  To not recognize this reality is to invite insolvency for both individual and group practices in the immediate future.

© David J. Gibson, MD 2002