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If you plan to sell something and want to know how much money you will make you, must figure out how many people will buy your product, and multiply that number by how much you are charging per item. That gives you revenue.
A Simple Revenue Example
Let’s say McDonalds sells a hamburger value meal for $3.49. They believe they will sell 1000 meals next week. How much money will they make next week on hamburger meals? To figure it out they’ll need to take the price, 3.49 and multiply it by the number of meals they will sell 1000. That will tell them they can expect $3490.00 next week in hamburger meal revenue.
Calculating Revenue - Same Service, Different Prices
What makes things complicated in a hospital is that not every person pays the same price for the same service! Let’s look at another example and this time let’s make it a little harder.
Let’s say you help fix your friends’ cars as a side job, and you charge $10 to change their oil. But, you have some really close friends, and maybe your family members, who you like to give a discount to. For them, you only charge $8. Now you want to figure out how much money you’re going to make by changing oil this week. You think you’ll do 5 oil changes. So, 5 oil changes multiplied by $10 per oil change gives you…well wait a second. Do you know that you’re going to get $10 for each oil change? What if one of those 5 people is a family member? Then you only get $8 for that oil change. So if you estimate that you’ll do 5 oil changes, you don’t yet know enough to project how much money you’ll make. You need an idea of what percentage of your customers will be full-paying customers and what percentage will get the “family discount.”
The same thing is true in a hospital. Different people pay different amounts for services. To figure out revenue, hospitals have to know which kinds of people are coming through the door, and how many of each kind there are. They call that a “payor mix.”
So, the next step in figuring out revenue for a new hospital service is to figure out a payor mix for that service. And to do that, a hospital starts with a payor mix for the whole hospital and uses that to estimate the payor mix for a particular service. We’ll get to the details of that later. First, let’s look at the differences in what people pay at a hospital.
Payors
Payor is a term used to describe who pays for the services patients receive in a hospital. If you go to the hospital to have stitches, for example, and you write the hospital a check for stitching you up, then you are the payor. If however, you have health insurance, then your insurance company will pay the hospital for giving you your stitches, and that makes the insurance company the payor.
Payor Mix
A payor mix is a way of talking about the different kinds of patients that come to a hospital. Different patients carry different kinds of insurance. Some are Medicare, some are Medicaid, and so on. If you look at each kind of payor as a percentage of the total number of patients who come to that hospital, like “8% of the patients use Medicare,” and you look at all of the different payors put together, that’s a payor mix. Here’s an example.
| Payor Mix per Year |
|
| Medicare |
8.0% |
| Medicaid |
10.0% |
| TriCare |
2.0% |
| Managed Care - discounted FFS |
72.0% |
| Managerd Care - capitated |
0.0% |
| Commercial |
2.0% |
| Self Pay |
6.0% |
| Total |
100.0% |
What that means is that 8% of the patients use Medicare, 10% use Medicaid, 2% use TriCare, and so on…until you’ve accounted for all 100% of the patients. A hospital can determine its payor mix by adding up all its patients, sorting them by the type of insurance they carry, and determining what percentage of the total patients each insurance group represents.
Why Payor Mix Matters
For any company to stay in business, they have to keep being able to sell whatever it is they sell, whether it’s hamburgers or oil changes. Companies are always looking for ways to keep selling to their customers and to offer new things that will attract new customers, all to keep their business going strong. Part of planning for the future means knowing about how your business is doing in the present. A business needs to know who their customers are, what those customers like and what keeps them coming back.
A hospital is like any other business; they need to plan for the future and to do so they must understand their business in the present. Knowing its payor mix tells a hospital who their patients are and helps them plan for the future. For example, if a hospital knows that the majority of its patients are on Medicaid, then it wouldn’t be a good strategy to grow the hospital’s business by adding services Medicaid doesn’t cover. Without a solid understanding of their payor mix, hospitals cannot effectively analyze investment opportunities and make growth decisions that will be attractive to their patients.
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