Your Facility Has The Following Payer Mix: Commercial Insura ✓ Solved

Your Facility Has The Following Payer Mix40 Commercial Insurances25

Your facility has the following payer mix: 40% commercial insurances, 25% Medicare insurance, 15% Medicaid insurance, 15% liability insurance, and 5% all others including self-pay. Assume that for the time in question, you have 2000 cases distributed according to these proportions. The average Medicare rate per case is $6,200.

Commercial insurances average 110% of Medicare, Medicaid averages 65% of Medicare, liability insurance averages 200% of Medicare, and the others average 100% of Medicare rates. Calculate the individual reimbursement rates for all five payers, the expected rates of reimbursement for each, and the total expected reimbursement. Determine your expected accounts receivable (A/R), the charge rate you should set for all services, the total charges, and analyze the difference between the total charges and expected A/R. Assess if collection is feasible and discuss what happens to any shortfall.

Identify which costs are fixed versus variable, and which are direct versus indirect. Calculate the contribution margin per case given specific costs, determine fixed and variable costs, and compute the breakeven volume of cases. If a $150,000 profit is targeted for this period to fund NICU expansion, estimate the required case volume and determine the optimal payer mix to achieve this goal.

Sample Paper For Above instruction

Introduction

Managing financial performance in healthcare facilities necessitates a comprehensive understanding of payer mix, reimbursement rates, costs, and profit margins. This paper analyzes a hypothetical facility with a specific payer distribution and evaluates financial metrics to inform strategic decisions. The primary aim is to estimate reimbursement rates, compare expected revenues with costs, and identify the optimal payer mix for profitability and sustainability.

Distribution of Cases and Payment Proportions

Assuming the facility handles 2,000 cases proportionally distributed based on payer mix, the number of cases per payer is as follows: 40% commercial insurances (800 cases), 25% Medicare (500 cases), 15% Medicaid (300 cases), 15% liability insurance (300 cases), and 5% all others including self-pay (100 cases). These distributions facilitate precise calculations of revenue and costs per payer category.

Reimbursement Rates per Payer

Given the Medicare rate of $6,200, reimbursements are calculated as follows:

• Commercial insurance: 110% of Medicare = $6,200 x 1.10 = $6,820
• Medicare: $6,200 (baseline)
• Medicaid: 65% of Medicare = $6,200 x 0.65 = $4,030
• Liability insurance: 200% of Medicare = $6,200 x 2.00 = $12,400
• All others/self-pay: 100% of Medicare = $6,200

Expected Reimbursement for All Cases

The total expected reimbursement is obtained by multiplying reimbursement rates by the number of cases per payer:

• Commercial: 800 x $6,820 = $5,456,000
• Medicare: 500 x $6,200 = $3,100,000
• Medicaid: 300 x $4,030 = $1,209,000
• Liability: 300 x $12,400 = $3,720,000
• All others/self-pay: 100 x $6,200 = $620,000

Total expected reimbursement: $5,456,000 + $3,100,000 + $1,209,000 + $3,720,000 + $620,000 = $14,105,000

Expected Accounts Receivable (A/R)

Assuming contractual agreements limit collection to contracted rates, the maximum collection per payer is their agreed rate. For self-pay or others, the full amount can potentially be collected, including any difference from billed charges.

Charging Rate for All Payers and Total Charges

To determine the uniform charge rate, divide the total charges by the number of cases. Using the total expected A/R as a basis, the total charges are calculated by applying a charge rate that ensures coverage of costs and profits. In this case, the total charges are estimated at $14,105,000, leading to an average charge per case of $7,052.50.

Difference Between Charges and A/R

Assuming the billing process captures all charges as planned, the difference between total charges and expected collection represents potential uncollectible amounts or contractual write-offs. These uncollectibles are typically written off unless the patient pays directly. Any difference impacts cash flow and profitability.

Cost Analysis: Fixed vs Variable and Direct vs Indirect

Fixed costs include wages for salaried staff (nurses, technicians), licensing fees, and insurances (malpractice, business). Variable costs include utility expenses, materials (gowns, drapes, bedsheets), medications, and per diem staff. Direct costs are those directly attributable to patient care, such as wages, materials, and medications. Indirect costs include utilities, licensing, and insurances.

Contribution Margin and Breakeven Analysis

The contribution margin per case is calculated as total sales minus variable costs: $14,105,000 - ($3,395 per case x 2,000 cases) = $14,105,000 - $6,790,000 = $7,315,000. Hence, contribution margin per case = $7,315,000 / 2,000 = $3,657.50.

Fixed costs are assumed to be $4,350,000. The breakeven volume is Fixed Costs divided by contribution margin per case: $4,350,000 / $3,657.50 ≈ 1,189 cases.

Profit Planning for Expansion

To achieve a profit of $150,000, the total contribution margin needed is fixed costs plus profit: $4,350,000 + $150,000 = $4,500,000. The additional cases needed are calculated as: $4,500,000 / $3,657.50 ≈ 1,230 cases, meaning the facility must see approximately 1,230 cases to meet this profit target.

Optimal Payer Mix

Maximizing profitability involves optimizing payer mix to favor payers with higher reimbursement rates—particularly liability insurance and commercial payers. Adjustments to payer proportions might increase overall revenue, but must balance patient access and contractual agreements.

Conclusion

Effective financial management in healthcare depends on detailed analysis of payer mix, reimbursement rates, costs, and profit margins. By understanding these factors, facilities can strategically set charge rates, control costs, and plan for growth—ensuring sustainability and capacity for expansion like NICU enhancements.

References

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