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Understanding Payer Mix

Physicians and hospitals get paid from many different sources including commercial insurance, Medicare, Medicaid, self-pay patients, etc. The percentage of payments from each of these sources is called the payer mix and can vary widely between different physicians and different hospitals. Payer mix is the single most important factor in determining income for physicians and financial well-being for hospitals. Knowing your payer mix and understanding the factors that affect payer mix is essential for anyone managing healthcare operations. Note: “payer” mix and “payor” mix are both correct spellings and can be used interchangeably; in this post, “payer” will be used.

How is payer mix defined?

Broadly speaking, the payer mix is the percentage of various payers in a hospital or physician practice. In most practices, the main payers are Medicare, Medicaid, a variety of commercial insurance companies, and self-pay patients. Depending on the physician practice or the hospital, less common payers can include worker’s compensation, CHIP, the Department of Veterans Affairs, the Department of Defense, the Department of Indian Affairs, vocational rehabilitation, research grants, disability-granting entities, etc.

There are several ways that these percentages can be expressed and it is critical to know the method being used when analyzing a practice’s payer mix. Each method has advantages and disadvantages so it is best to use more than one when analyzing the business operations of a physician practice or a hospital.

  1. Payer mix based on the population of patients in the practice. In this method, the total number of patients in the practice is determined and the payer mix is expressed as the percentage of patients in the practice with each type of payer. If there are 1,000 patients in the practice and 450 of them have commercial insurance, 300 have Medicare, 150 have Medicaid, and 100 are uninsured, then the payer mix would be 45% commercial, 30% Medicare, 15% Medicaid, and 10% self-pay. This is a very simple way to express payer mix but it suffers from a serious flaw. Because not all groups of patients receive the same types of medical services, it does not tell you much about income or physician effort. For example, because Medicare patients are by definition either disabled or over age 65, they have more physician office visits per year, more hospitalizations, and undergo more surgeries than younger patients covered by commercial insurance. Similarly, uninsured patents are less likely to undergo expensive elective surgeries such as joint replacement or spine surgery.
  2. Payer mix based on receipts. In this method, the total annual income for the practice is determined and the payer mix is expressed as the percentage that each type of payer contributes to the practice’s income. For example, if the same practice’s total annual receipts from billing for clinical services is $100,000 with $50,000 from commercial insurance, $30,00 from Medicare, $19,000 from Medicaid, and $1,000 from self-pay patients then the payer mix would be 50% commercial, 30% Medicare, 19% Medicaid, and 1% self-pay. The advantage of this method is that it tells you where your money is actually coming from. However, it does not give accurate information about the time, effort, and expense it takes to care for patients since some payers pay considerably less than others and self pay patients pay little or nothing at all for healthcare. It also does not help you when trying to determine write-offs for charity care.
  3. Payer mix based on charges. In this method, the total amount of charges is used in the denominator and the percentage of those charges allocated to each type of payer is calculated. The major criticism of this method is the charges are generally based on the practice’s listed price for every service and procedure and no one actually pays the list price. Every hospital and physician sets their list prices for some amount higher than the amount that their best-paying payer will pay them to perform that service or procedure. That way, the practice never leaves money on the table. No matter what the listed price is, Medicare will only pay the physician the standard Medicare physician fee schedule – the same goes for Medicaid. Similarly for hospitals, Medicare will only pay the hospital the Medicare standard reimbursement for the DRG diagnosis of the patient, regardless of the hospital’s listed price per diagnosis or per hospital day. The majority of self-pay patients are too poor to afford health insurance and those bills are either written off as charity care or reduced to some nominal amount based on the patient’s income.
  4. Payer mix based on patient days. This method applies to hospitals and not to physician practices. The hospital first determines the daily census (usually defined as the number of patients in the hospital at midnight) and then looks at the payer for each patient in the hospital that day. This is repeated for every day of the year and the payer mix is expressed as the number of total patient-days for each payer over the course of the year. This method will generally show a higher percentage of Medicare and a lower percentage of Medicaid and commercial insurance in the payer mix than other methods because Medicare patients are older with more complex medical conditions that result in longer hospital stays than younger patients. As a result, nationally, 18.9% of hospital revenue comes from Medicare but 35.6% of patient days are attributed to Medicare. On the other hand, 13.5% of hospital revenue comes from Medicaid but Medicaid only accounts for 9.4% of hospital days due to Medicaid patients tending to be younger with fewer chronic medical conditions.
  5. Payer mix based on RVUs. For physicians, this method can provide important information. It tells you what the payer mix is for the actual time and effort that the physician is practicing medicine. For example, if a physician generates 4,000 wRVU in a given year and 1,600 were billed to commercial insurance, 1,200 billed to Medicare, 800 billed to Medicaid, and 400 billed to self-pay patients, then the payer mix would be 40% commercial, 30% Medicare, 20% Medicaid, and 10% self-pay. On the surface, it might seem using RVUs would give similar results as using charges. But charges do not necessarily correlate with actual physician effort. For example, a multi-specialty physician group might set their charge for an hour of critical care at 250% of Medicare reimbursement and set their charge for a new outpatient primary care visit at 150% of what Medicare would reimburse. For this reason, payer mix based on RVUs provides different information than payer mix based on charges for physician services.

What is the average payer mix?

To understand the financial health of a practice, you must be able to benchmark its payer mix to some regional or national standard to know whether the practice has a healthy payer mix. If the payer mix is better than the benchmark, then the practice is likely to be financially sustainable. On the other hand, if the payer mix is substantially worse than the benchmark, then the practice is likely to be unsustainable without other sources of financial support. Once again, there are several methods to determining the benchmark.

Payer mix based on insurance coverage of large populations.

In this method, the payer sources for a large population of people is determined, for example, the payer sources for all Americans. This can be a reasonable benchmark for a practice that cares for a broad demographic of patients, for example, a family medicine practice that cares for all ages of patients. However, this benchmark is irrelevant to a pediatric practice that would be expected to have no patients under age 65 and thus no Medicare patients. Similarly, a geriatric medicine practice would be expected to have few or no patients under age 65 and thus would have no patients with CHIP coverage and few (if any) uninsured patients or patients with commercial insurance as primary coverage. One of the best estimates of payer mix for the entire United States comes from table HIC-4_ACS on the U.S. Census website and is summarized in the graph below.

Note that because some Americans have health insurance from more than one source (for example, both Medicare and Medicaid), the total number of all of the percentages exceeds 100%. Overall, 67% of Americans are covered by commercial health insurance, either from an employer, by direct purchase, or through TRICARE. 37% of Americans are covered by publicly funded health insurance, either Medicaid, Medicare, or Veterans Affairs. 8% of Americans were uninsured in 2022. There are notable geographic differences within the U.S. that can arise due to differences in the percentage of retired individuals in a state, whether the state participated in Medicaid expansion, the poverty level of the state, and state-specific universal health plans. For example, the percent of uninsured state residents varies from a low of 2.4% in Massachusetts to a high of 16.6% in Texas. Table HIC-4_ACS from the U.S. Census also reports healthcare coverage for each state in the U.S. and is summarized later in this post.

The problem with using population at-large as a benchmark is that not all groups of people utilize healthcare equally. For example, patients with Medicare coverage are by definition older and consequently have more medical problems, see doctors more often, and are hospitalized more than younger patients who are insured by commercial insurance. On the other hand, uninsured patients often avoid routine outpatient healthcare because many physician practices require advance payment by uninsured patients before they are seen in the practice and most uninsured persons cannot afford to pay out-of-pocket. Commercially insured persons are predominately working adults younger than 65 and their children; these individuals are generally the healthiest Americans and utilize healthcare services much less than Americans on Medicare.

Payer mix based on healthcare expenditures of large populations.

In this method, the total U.S. healthcare expenditures in a year are calculated and then broken down by who paid for these expenditures. This gives a better assessment of the payer mix of Americans who actually utilize healthcare and also more accurately assesses those Americans who disproportionately utilize healthcare more frequently (such as those over age 65). CMS reports annual U.S. healthcare expenditures on its website. In 2022, Americans spent a total of $4.46 trillion on healthcare. Of this, $1.35 trillion was spent on hospital care and $0.88 trillion ($880 billion) was spent on physician services. The remaining $2.23 trillion was spent on a variety of expenditures including prescription drugs, nursing homes, dental care, non-physician professional services, home health care, medical equipment, etc. If we drill down on the hospital and physician services expenditures, we see that private health insurance accounts for the largest percentage of U.S. healthcare expenditures, followed by Medicare and Medicaid (graph below). However, when all federal and state government programs are considered together, 47% of physician services and 55% of hospital services are paid for by government sources.

Reimbursement varies by payer

If everyone in the U.S. paid the same amount for a given medical service, then there would be no need to look at a practice’s payer mix. But the reality is hospitals and physicians charge different groups of patients different amounts for the same service or procedure. If you have ever looked at a medical bill, you will generally see something like “Hospital Charges“. Consider this to be the sticker price. Below that will be an amount for something like “Insurance Contractual“. This is what the insurance company has negotiated with the hospital or physician to be paid for the service or procedure. Next will be an amount for “Current Balance” or something similarly phrased. This is your co-pay for the service or procedure, that is, the amount you pay out-of-pocket and will determined by the terms of your health insurance policy. Last, there will be an amount for “Adjustments” or something similar. This is the difference between the hospital charges (sticker price) and the amount that you and the insurance company actually pay.

No one actually pays the sticker price.

In the past 10 years, there has been a consumer movement to require hospitals to publicly report their charges for various procedures and services. The problem with this is that no one actually pays these hospital charges. If a patient has Medicare, Medicaid, or some other government source, it doesn’t matter what the hospital’s sticker price is – Medicare will only pay a standardized amount and the patient will only be held to their usual Medicare co-pay. In other words, for a Medicare or Medicaid patient, the sticker price is totally meaningless.

Commercial insurance works similarly. Every insurance company negotiates payment rates with every hospital and every physician in the country. These negotiated rates are NOT publicly available and are considered trade secrets by the insurance companies. The reason for this is simple – insurance companies pay different hospitals different amounts to do the same thing depending on how well a hospital can negotiate for higher rates. The same goes for physicians – one insurance company will pay different doctors different amounts to perform the same service or procedure. In a future post, I will delve into the factors that affect commercial health insurance reimbursement for hospital and physician services. But to simplify, the more an insurance company wants a particular hospital or physician to be included in the insurance company’s in-network list, the more that insurance company will be willing to pay that particular hospital or physician. In the case of commercial insurance, the “Insurance Contractual” amount on a patient’s medical bill is the amount that the insurance company has contracted with the hospital or physician for that particular service or procedure and the “Adjustments” amount will be the sticker price minus the contractual amount.

Every hospital and every physician negotiates in secret with every insurance company individually. As a physician, I don’t want Aetna to know how much I get paid to do a bronchoscopy by Medical Mutual. Otherwise, when I negotiate rates with Aetna, they will demand the same or a lower rate as Medical Mutual. It is sort of like not showing the other guy your cards when you are playing poker. Hospitals and physicians cannot negotiate rates with insurance companies that are higher than their sticker prices. For that reason, hospitals and physicians always set their charges (sticker prices) higher than the amount that their best-paying commercial insurance company will pay. If a patient gets medical care from an out-of-network doctor or hospital, their heath insurance will cover less of the charges than for an in-network doctor or hospital. This can result in the patient paying a much larger co-pay or in some situations, be responsible for the entire charge.

The only group of patients that are actually charged the sticker price are uninsured patients. In rare cases, a wealthy patient will be uninsured and will have to actually pay the sticker price (for example, a Saudi billionaire coming to the U.S. for heart surgery). But far, far more commonly, uninsured patients are poor and do not have the financial resources to pay their medical bills. The majority of the nation’s hospitals and physicians will make allowances for this with substantially reduced charges if patients can provide documentation of having a low income. The bottom line is that practically no one pays the sticker price.

From a payer mix standpoint, hospitals and physicians strive to keep the percentage of self-pay patients as low as possible. Physicians consider a self-pay patient to equate to a no-pay patient. Strategies to keep the percentage of self-pay patients in the payer mix as low as possible include not accepting self-pay patients into outpatient physician practices, encouraging self-pay patients with moderate incomes to obtain direct purchase commercial insurance through the the Insurance Marketplace at the Healthcare.gov website, and assisting low-income patients to sign up for Medicaid coverage.

Medicaid rates.

Medicaid reimbursement as a percent of Medicare reimbursement for all medical services for all states

Medicaid is government health insurance for low-income Americans. In most states, Medicaid pays doctors less than Medicare for any given service or procedure. Because it is funded partly by the federal government and partly by individual state governments, the amount that Medicaid pays to hospitals and doctors varies from state to state. Overall, the U.S. average for Medicaid reimbursement for all medical services is 72% of what Medicare pays. However, this varies by specialty – Medicaid reimbursement for primary care services is 67% of Medicare reimbursement whereas Medicaid reimbursement for obstetric care is 80% of Medicare reimbursement. The average Medicaid reimbursement for all medical services compared to Medicare reimbursement for each state is listed in the table to the right (click on the table to enlarge).

Because Medicaid reimbursement is so low, many physicians do not accept any patient with Medicaid in their practice and other physicians limit the total number of Medicaid patients. Currently, about 1/3 of U.S. physicians do not accept Medicaid patients. From a payer mix standpoint, a lower percentage of Medicaid patients is better from a financial standpoint in most states.

Commercial insurance rates.

It turns out to be difficult to get information about commercial health insurance reimbursement since both insurance companies and hospitals consider their negotiated rates to be trade secrets. However, there have been a few published studies in the literature that shed light. In general, hospitals get paid more by commercial insurance companies than by Medicare. Indeed, most hospitals lose money on Medicare and Medicaid patients and then make up those losses by charging commercial insurance companies higher rates. This can be seen in the following graph from the Congressional Budget Office:

In 2018, Medicare reimbursement only covered 86.6% of the cost for hospitals to provide services whereas commercial insurance reimbursement covered 144.8% of hospitals’ costs to provide the same services. According to the Milliman consulting firm, currently, on average, commercial insurance pays about 148% of what Medicare pays for professional services. Therefore, the larger the percentage of commercially insured patients in a hospital’s payer mix, the better off that hospital will be financially.

Physicians are similarly dependent on higher reimbursement from commercial insurance to make up for losses from self-pay patients. In a previous post, I outlined how Medicare reimbursement to physicians has not kept up with inflation and in fact, when adjusted for annual inflation, physicians are currently being paid only 1/3 as much per RVU as they were in 1992. For this reason, most physicians cannot sustain a clinical practice from Medicare patients alone. Since Medicaid pays physicians even less than Medicare, high commercial insurance rates are necessary for a physician to stay in business. Like hospitals, the larger the percentage of commercially insured patients in the physician’s payer mix, the better off that physician’s practice will be financially. However, because these commercial rates are negotiated individually with each physician group, smaller physician groups with less bargaining power often end up with commercial insurance rates that are similar or even less than Medicare rates.

Payer mix varies by hospital size

In general, the larger a hospital, the higher the percentage of commercial insurance and Medicaid is in the payer mix. The graph below shows payer mix in small versus large hospitals based on the 2023 Medicare Cost Report. Note that in this report, commercial insurance is combined with self-pay patients. In this graph, payer mix is expressed as hospital patient-days.

Hospital size also affects the payer mix for physician practices. Physicians who practice in a smaller hospital will be expected to have a payer mix that mirrors the small hospital payer mix and physicians who practice in larger hospitals will have a payer mix similar to the large hospital payer mix.

Payer mix varies by type of hospital

Different types of hospitals care for different populations of patients and these populations can vary by age, income, and the degree of chronic medical conditions. The graph below shows payer mix expressed as hospital patient-days.

Once again, the type of hospital a physician practices in affects that physician’s own payer mix. Consequently, physicians practicing at a psychiatric hospital tend to have a relatively high percentage of commercially-insured patients and a low percentage of Medicare patients due to a younger age of hospitalized psychiatric patients (averaging 42 years of age). Physicians practicing in a critical access hospital will have a high percentage of Medicare patients and lower percentage of commercially-insured patients in their payer mix.

In the graph above, pediatric hospitals are not listed separately but would be expected to have a very low percentage of Medicare in the payer mix and a higher percentage of Medicaid, CHIP, and commercially-insured patients. Pediatric hospitals (and pediatricians) should have a very low percentage of self-pay patients since most families that earn too much to qualify for Medicaid but not enough to afford commercial insurance will qualify for CHIP to provide healthcare for their children.

Payer mix varies by geography

Click on table to enlarge and open in a separate window

Every state has a different payer mix determined by the age of the state’s population, the presence of military installations, the poverty level, employment opportunities, and whether or not the state participates in Medicaid expansion. Because these population subgroups have different healthcare coverage, the overall population payer mix of the state will be affected. Consequently, a state with a high percentage of retirees over age 65 will have a high percentage of Medicare patients whereas a state that people tend to leave after retiring will have a lower percentage of Medicare patients. For example, 23% of Florida residents are on Medicare but only 12% of Vermont residents are on Medicare. Similarly, states with a lot of military bases will have a high percentage of the population covered by TRICARE. For example, 8% of Hawaii’s residents are covered by TRICARE due to its numerous military installations whereas only 1% of Michigan’s residents are covered by TRICARE. The table to the right shows population health coverage data from CMS for 2022 (note that some persons have coverage from more than one payer source so the percentages add up to >100%).

The ideal payer mix

We have now seen that different methods for expressing payer mix provides different types of information. We have also seen that commercial insurance usually pays better than Medicare, Medicare pays better than Medicaid, and Medicaid pays better than self-pay. The ideal payer mix would be 100% commercial insurance. However this is not achievable for a variety of reasons. Non-profit hospitals and non-profit physician practices are required to provide some amount of charity care to maintain their tax-exempt status and thus must have some percentage of self-pay and/or Medicaid patients (for-profit hospitals and physician practices do not have this requirement and can refuse self-pay and Medicaid patients). Only a very few hospitals in the U.S. do not accept Medicare and the EMTALA law requires hospitals participating in Medicare to provide emergency care to any patient, regardless of payer source. Furthermore, most physicians and hospitals have a sense of obligation to the communities that they serve and would be uncomfortable limiting their care to only commercially insured patients.

So, for the hospital or physician practice that is attempting to balance the need to serve the entire community with the financial pressures to maintain a large number of commercially insured patients, there are ways to optimize payer mix but must first determine what that optimal payer mix should realistically be.

  • First, look at how the population in your area is covered for healthcare. The table above showing population coverage by state is a good starting point.
  • Next, adjust that population coverage based on the type of patients you care for. If you do not provide care for veterans or military personnel, then you can eliminate percentages of VA and TRICARE from your desired payer mix.
  • Next, look at the age range of the type of patients you care for and adjust payer percentages accordingly. For example, a geriatric medicine practice should have nearly all patients who are on Medicare with some also having commercial insurance. There should be no self-pay patients in a geriatric practice except for low-income non-U.S. citizens who are not eligible for Medicare.
  • Next, adjust each payer group based on the size and type of hospital you practice in using the graphs shown above. Smaller hospitals and critical access should have a higher percentage of Medicare patients than larger hospitals. Larger hospitals and psychiatric hospitals should have a higher percentage of commercially-insured patients than smaller hospitals.
  • The result will give you rough idea of what the average hospital or physician practice’s payer mix should look like based on the state’s patient population.

You can then compare your actual payer mix to this average payer mix to determine how your payer mix compares to your peers. If your payer mix is worse than the average for your peers, then you need to take steps to improve your payer mix.

Improving your payer mix

It is hard to change your payer mix once you have an established practice. Hospitals are generally tied to the demographic characteristics in their local community. It is difficult for physicians to just stop providing care for patients already in their practice. However, there are some tactics that can improve payer mix in certain situations.

  • If the percentage of self-pay patients in your practice or at your hospital is too high, devote administrative resources to assist eligible low-income patients to enroll in Medicaid and assist higher-income patients to enroll in the Insurance Marketplace at healthcare.gov during the annual open enrollment period from November 1 through January 15. When Ohio began participating in Medicaid expansion, by using this tactic, our hospital self-pay percentage fell from 13.5% to 3%.
  • For self-pay patients who do not qualify for Medicaid or direct-purchase commercial insurance, set up an income-based reduced payment plan and require advance payment for non-emergency services.
  • If these measures are unsuccessful, determine whether it is possible to limit new self-pay and Medicaid patients in the physician practice.
  • An option for some physician practices with large numbers of Medicaid patients is to apply for supplemental payments through the Medicaid Upper Payment Limit Program. The UPL programs are state-specific and allow certain physicians (often state-employed physicians) to be paid commercial insurance rates for seeing Medicaid patients. I was one of several physicians who went to our statehouse 15 years ago and lobbied our state legislature to allow physicians employed by the Ohio State University to be eligible for UPL payments. We were successful and our payer mix improved dramatically overnight.
  • If the percentage of commercially-insured patients is low, expand the type of medical services offered by the hospital or physician group that attracts patients younger than age 65. These can include breast cancer screening programs, colon cancer screening programs, psychiatric services, bariatric & weight loss programs, and transplant programs.
  • Offering free wellness programs directed toward members of the community who are younger than 65 can attract commercially-insured patients into the practice.
  • It is essential that there is adequate access for new primary care patients since these are often young adults new to the area who once captured into the practice, can be a source of commercial insurance for decades in the future.
  • Advertising that is directed to consumers under age 65 can result in new commercially-insured patients. Liaising with employers and trade unions can also help to recruit more commercially-insured patients.
  • Because educated, working adults are more savvy with information technology than uninsured patients, enhancing the practice’s IT experience including a robust patient portal within the electronic medical record, ability to schedule on-line, and a digital payment system can draw commercially-insured patients.
  • Negotiate favorable contracts with commercial insurance companies. In a future post, I will outline this in more detail but suffice it to say that every contract needs to be approached as a bargaining session and the key to being in a more favorable bargaining position is to know your hospital’s or practice’s strengths and capitalize on them. Contract negotiation is a skill and in most practices, only a few individuals possess sufficient skill and experience to negotiate successfully. Try not to settle for the insurance company’s “standard fee schedule” which is often lower than Medicare’s physician fee schedule.

It takes money to make money

Monitoring, analyzing, and improving payer mix requires a lot of resources including administrative staff time, advertising, IT upgrades, and contract negotiation. And those resources cost a lot of money. Larger physician practices and hospitals are better able to invest in payer mix management and the effect on reimbursement can make the difference between a thriving practice and a struggling practice.

June 10, 2024

By James Allen, MD

I am a Professor Emeritus of Internal Medicine at the Ohio State University and former Medical Director of Ohio State University East Hospital