Cogitations and Calculations Over the Medicare Medical Home Demo

Unable to stay away from the reimbursement numbers in the Medical Home Demo slide set, the Disease Management Care Blog broke out the protractor and asked just how much in the way of savings (from reduced utilization) would be necessary to make participation in the Demo worth the effort of smaller physician owned practice. In 'demo-speak,' this would be a ‘Tier 1’ practice that assumes the duties of a medical home, establishes policy for ready patient access, tracks patients, uses care plans, provides patient education and support and tracks tests and referrals. It also doesn’t have an electronic health record. As a result, it would qualify for a fee of $40.40 per member (a.k.a., Medicare beneficiary enrolled in the Medical Home) per month.


The DMCB started with the Milliman report on FFS Medicare and found that the average 2006 Medicare beneficiary with chronic disease can expect to have a ‘per member per month’ (PMPM) cost of $1473. That’s how much the Medicare program spends on average for every chronically ill Medicare beneficiary per month.

Let’s assume (and underestimate) that the small primary care practice gets 100 of its Medicare fee-for-service patients to sign up for this Demo. The expected monthly cost of this group of patients to the Medicare program is $1473 times 100 or $147,300. The Demo is willing to pay the physician practice a blended monthly fee of $40.40 for the Medical Home services for each patient. That works out to $48,483 per year. Let’s also assume for the sake of argument that the cost in the following year is not increasing thanks to cost inflation, etc. Many observers also believe a practice might have to hire a nurse to act as a care manager, health coach or telephonic advisor. A last assumption is that the DMCB's back of the envelope calculations have not been compromised by a major case of late night arithmetic brain block.

The DMCB mapped out three scenarios: a savings of 2% versus 5% versus 8% off that monthly baseline cost of $1473. The Table below shows the monthly savings, what happens when the Medicare Program takes 2% off the top and shares 80% of the remainder after subtracting the Medical Home fees. This scenario also assumes a nurse was hired to provide care management services (at $60,000 per year).

Savings have to approach about an 8% reduction in base line cost before the practice makes any money:

The DMCB did the same thing for a Tier 1 practice that signs up 250 patients. Savings still have to exceed 5%:

Based on this admittedly limited analysis, the DMCB would offer up a few observations:

1. This is clearly a game of:

a) Aggressive cost reduction. An 8% reduction in claims expense for FFS Medicare is possible, but daunting. Assuming an average Medicare hospitalization costs around $11,000, a practice with 100 signed up participants would need to avoid 1 or 2 hospitalizations to make it happen. On the other hand, not all hospitalizations are controllable and it's very easy to get burned by a random increase in hospitalizations.

b) Economies of scale. The more beneficiaries get signed up, the more likely a practice is to turn a profit.

c) Cost control. Practices may be tempted to rely on personnel that are already in place and not hire a new nurse FTE. Given how financially tight things are in primary care practice, however, the DMCB suspects the numbers and qualifications of persons available to primary care practices is already minimal. If a nurse is tasked to care management, who is going to take over all the other duties of an office nurse?

2. Practices will be tempted to 'cherry pick' participants. While the Demo has a risk adjusted payment, physicians intuitively understand which patients will "get it" and work with them to reduce hospitalization and ER rates and which patients won't. This is a key difference from the star-crossed MHS demo and may turn out to be their 'ace in the hole.'

3. In the experience of the DMCB, nurse case loads in case or care management and/or disease management can range from 30 patients to more than 200. If a practice intends to sign up even more patients than the scenario above, then it may be obliged to hire a second FTE, which will erode margins.

4. Note that a few percentage points, cost assumptions, local cost factors and utilization stats make all the difference in a program that makes a profit versus lost money. Toss in other known assumptions as well as the myriad unknowns and the win-loss ratio could shift significantly.

5. Last but not least, random utilization spread around a mean virtually guarantees there will be a number of physician practices that "win." The challenge will be to sort out those practices from the ones that have the secret sauce of optimal care management.

The DMCB could sure use the insights of others here. Can anyone see any holes in this logic?