Typically, an estimated payor mix doesn’t quite match a hospital’s overall payor mix. Payors shift around a bit, some payors aren’t involved at all…and as a result, we end up with an estimated payor mix that doesn’t add up to 100% (“all of the payors in the hospital”) anymore. The easiest way to adjust for this change is to “normalize” the estimated payor mix to make everything consistent.

An Example – Oil Changes
Before seeing how this works for a hospital, let’s try a simpler example, going back to the example raised in Step Two: Determine the Payor Mix. You’re charging your friends some money to change the oil in their cars. But you charge different rates to different people, giving a discount to family members. Let’s say that, overall, 80% of your “customers” pay the full rate, and 20% are discounted. So, your payor mix is:

Now, let’s say you start providing more complicated repairs on cars. You guess that a lot of friends won’t want to pay for the new service, because it’s more expensive. You predict that only half as many full-price customers will buy your new service, but all of your family discount customers will use their discount for your new service. So, your estimated payor mix for the complicated repairs looks like this:

Your estimated payor mix, relative to your whole payor mix, is a total of 60%. It’d be a lot easier if we thought of “everyone in your estimated payor mix” as being 100%, not as 60% of your original payor mix. So, can we just change the 60% to 100%? Well, yes, but then what do you do with the 40% and the 20%? Those can’t stay the same, because they’ll still add up to 60%. How do we make them add up to 100%?

If 40% plus 20% gives us 60%, then we need to expand everything such that the first percentage plus the second percentage gives us 100%, without changing the relationship between the 40% and the 20%. So how do we fix it?

We could just add 40% back onto the 40% part of the payor mix…that’d give us 100% again. But that’s where we started! So that can’t be right. We could just add 40% onto the 20% part of the payor mix to make everything total 100%, but then, we’d have 60% discount customers and only 40% full-price customers. That can’t be right, because that’d mean there are more discount customers than full-price customers, and 20% wasn’t bigger than 40%. There still have to be more full-price customers than discount customers. What do we do?

Normalize
If we somehow changed 60% up to 100%, then if we do the “same thing” to the other numbers, everything will stay the same, relative to each other. So, what did we do to get from 60% to 100%? “100%” means “all,” so what is 60% all of? 20 is all of 20, and 0.4 is all of 0.4, and 2 is all of 2, so 60% is all of….60%. What we did, without realizing it, is divide 60% by 60%, giving us “1,” or 100%. Any number is 100% of itself (sort of like you being all of you), so the translation from one scale to the other was to divide by “all,” which was 60% in our example.

Can we do the same thing to 40% and 20% to scale things up? Let’s try:

• 40% divided by 60% gives us 2/3, or 66.7%.


• 20% divided by 60% gives us 1/3, or 33.3%.

Those add up to 100%, so that’s good. Did we preserve the relationship between the two parts of the payor mix? Well, when we started, we had one of our percentages that was twice the size as the other (40% vs 20%). Do we still have that? Is 66.7 twice 33.3? Yes (except for the fact that we rounded 66.6 up to 66.7). Good. So, by dividing every number by the “old” total percentage (60%), we’ve normalized everything to the new scale. Everything adds up to 100%, and the relative parts of the payor mix are intact.

Let’s do another quick check. 20% went up to 33.3%. Why? Before, we had all of our customers. Now, we are talking about a smaller total (60% of the original). If the 20% stays the same, and we shrink the total, then the 20% is now actually a bigger part of the whole. For example, if you are one person in a group of 5, you’re 20% of the group. If two members of your group leave, you’re still one person, but now you’re 33.3% of the group, because the group is smaller. The same thing happens with a normalized payor mix if the whole mix gets smaller; each part of the payor mix, as a percentage, gets bigger because the whole mix shrunk.

An Example – the X-ray machine
So, let’s try a more complicated example with the hospital. This is the estimated payor mix for the new X-ray machine referred to in the earlier example.

To normalize the parts of the payor mix, we take each one and divide it by “all,” or 85%. What you end up with is the following: The Normalized Payor Mix for our example is:

When you calculate the normalized percentages, you may find that you do not get even numbers. In the example above you see percentages like 7.1, 1.2, 5.9, etc. You should round your percentages so your total is an even 100%.