Question

Why is payer mix so important in healthcare strategic financial planning? What could happen if a healthcare organization’s payer mix changed greatly from one year to the next?

Answer 1

Payer mix refers to the percentage of hospital revenue coming from private insurance companies versus government insurance programs versus self-paying patients. Payer mix is an important metric to track because self-paying patients and private insurance companies compensate hospitals at a higher rate than government programs like Medicare. Government programs often pay hospitals less than the actual cost of patient treatment, causing hospitals to lose revenue.

Implications of Payer mix changes

Premiums are set to rise for many individuals as actuaries for the big insurance companies assess the impact of lower than projected participation rates and as initial government subsidiaries begin to diminish. These rising premium costs likely will force many individuals and their families to choose the lower cost, lower tiered option, causing an increase in the patient's responsibility for services provided by hospitals and physician practices.

The increased volume of large deductible health insurance plans is also a major contributor to the potential growth in patients' responsibility for services provided. Healthcare costs are continually rising, and for many employers, large deductible plans are a popular solution to mitigate these rising employee benefit costs. Individuals are increasingly required to pay a significant amount out of pocket before insurance companies begin to pay a share of services provided.

These two factors combine for a potential shift in payer mix for many hospitals and physician practices, causing an increased percentage in the self-pay pay class in their accounts receivables; this, in turn, will increase the risk of nonpayment. Many hospitals and physicians practices should evaluate their exposure for unfavorable shifts in payer mix and build this exposure into their operational budgets and their forecasts for revenues and cash flows. Hospitals and physicians practices should review their payer mix and ensure any shifts are considered in assessing the collectability of their accounts receivables.