Revenue is money coming in. It is how much money you make when you sell a product or perform a service. Keep in mind that revenue is not profit. You don’t get to keep all your revenue, because you still have expenses to pay. Either way, you still need to figure out what your revenue is first, and then worry about expenses later.

In Step Two: Determine the Payor Mix, you learned that revenue is the number of products sold/procedures performed x price per procedure. With the work you’ve already done, you know that there are different categories of payors and each category is bringing in a different amount of money for the same service. So you need to determine the amount of revenue made by each payor category, and then you’ll be able to add all of that up to get the total revenue.

An Example – the X-ray Machine
Let’s continue looking at the new X-ray machine the hospital is thinking of installing. Here’s what we know so far:

• Total annual demand in year one is 15,000 procedures.


• The hospital charges $100 per x-ray.

They make the following, per payor category:

The normalized payor mix is:

Let’s calculate how much money the hospital will make by performing x-rays on Medicare patients. First, we need to know how many procedures will be performed on Medicare patients, so we look at our normalized payor mix and see Medicare patients represent 7.1% of patients who get x-rays. We take 15,000 procedures multiplied by 7.1% (or .071) and we find out that we are performing 1065 Medicare procedures.

15,000 x .071 = 1065

From there we can determine how much the hospital will charge Medicare patients for those procedures. If they have 1065 procedures, and the hospital charges $100 per procedure, then multiplying those two together will give the total money that the hospital could make from those procedures:

1065 x 100 = 106,500

This calculation tells us that the hospital will charge Medicare patients a total of $106,500.

But even though this is what the hospital charges, we know they don’t actually make this much, because Medicare doesn’t pay 100% of the price. Medicare patients only pay 30% of the total. To figure out how much the hospital will really make, we take the total charge of 106,500 and multiply it by 30% (or .30), the amount Medicare pays.

160,500 x .30 = 31,950

Now we know that for the 1065 procedure the hospitals performs for Medicare patients, they will bring in $31,950 in revenue.

Let’s look at those formulas one more time:

Total number of procedures x payor category percentage = demand by payor category

Demand by payor category x procedure price = total charge for procedures

Total charge for procedures x percentage paid by payor = revenue for payor category

Adding Up Revenue from all the Payor Groups
You need to perform these calculations for each payor group. Once you know how much revenue comes from each group, you can add up all the groups to get the total revenue that comes from that service.

In our example, we can complete the calculations and learn that the hospital makes the following:

So the total revenue the hospital will bring with the new X-ray machine during year one is $892,110.

Once you have determined the revenue for year one of the project, you should calculate it for each year of the project.