DNRS 6211 Week 8 Payer Mix Analysis Example

Payer Mix Analysis: Who Pays for Inpatient Rehabilitation, and What a Four-Point Shift Would Do to Contribution

Student Name

College of Nursing, Walden University

DNRS 6211: Finance and Economics in Healthcare Delivery

Instructor Name

Month Day, Year

Payer Mix Analysis: Who Pays for Inpatient Rehabilitation, and What a Four-Point Shift Would Do to Contribution

This analysis reads the composite 18-bed inpatient rehabilitation unit's 447 discharges from last fiscal year by payer category. It then follows one plausible change in that mix through to contribution margin, the amount left from net revenue after variable costs to cover fixed costs. No payer category is treated as good or bad; the aim is to show how much the composition of payers moves the financial result compared with the volume of care delivered (Reiter & Song, 2021).

Table 1

Inpatient Rehabilitation Discharges by Payer, Last Fiscal Year

Where the Two Share Columns Disagree

The interesting finding is where the share of cases and the share of net revenue part ways. Commercial patients are 17.9% of cases but 22.2% of net revenue. Medicaid managed care patients are 14.1% of cases but only 9.9% of revenue, and self-pay patients bring almost nothing. Medicare, paid a predetermined amount per discharge under the inpatient rehabilitation prospective payment system (Basis and Scope of Subpart, 42 C.F.R. § 412.600, 2024), is close to its case share.

This matters because the unit's costs barely change with the payer. A stroke patient needs the same nursing hours, therapy, and supplies whether Medicare, a commercial plan, or Medicaid pays. The unit's variable cost is about $9,800 per case, from the cost accounting system, for every payer. So contribution per case is $14,700 for commercial patients, $11,000 for Medicare, $4,100 for Medicaid managed care, and negative $8,100 for self-pay. The gap between Medicaid and other payers is consistent with broader evidence that Medicaid pays providers less than Medicare for the same services (Zuckerman et al., 2021).

One Shift, Followed Through

Suppose 4 percentage points of the unit's cases move from commercial coverage to Medicaid managed care, about 18 patients a year. This is plausible if, for example, a large local employer reduces its workforce and some former employees enroll in Medicaid. Total cases, and so total variable cost, do not change.

Net revenue falls by 18 times the difference in revenue per case, $10,600, or $190,800, a drop of 2.2%. Because variable costs stay the same, contribution falls by the same $190,800, from $4,434,500 to $4,243,700, a drop of 4.3%. The percentage effect on contribution is twice the effect on revenue, because the whole loss comes out of the margin. To make up the difference through volume alone, the unit would need about 19 more cases at its average contribution of $9,920 per case, a 4.3% increase in admissions from a unit already running at 85% occupancy.

What the Unit Can and Cannot Influence

A nurse manager cannot choose which payer covers a patient, and the unit admits patients by clinical need. The analysis is still useful to the unit in three ways. First, it explains results the manager will otherwise be asked about: a year in which contribution falls while census holds steady is often a payer mix year, and the variance report should say so rather than look for a staffing cause. Second, it shows where revenue is lost after care is delivered. Self-pay cases bring an average of $1,700, and a share of those patients are likely eligible for Medicaid but were never enrolled; a financial counselor screening every self-pay admission within 48 hours could move some of them into a paying category without changing who is admitted. Third, it shows the value of denial prevention for Medicaid managed care, where authorization rules differ by plan and a single denied stay can erase the contribution of several paid ones. Each of these acts on revenue already earned rather than on the mix itself, which is the part of the result the unit can actually affect.

What the Table Cannot See

The table has limits. It averages across case mix, so if commercial patients happen to be admitted for different conditions than Medicaid patients, part of the revenue gap reflects the conditions rather than the payer. It does not show acuity within conditions, which affects variable cost more than the flat $9,800 assumes. And net revenue already absorbs denials, write-offs, and bad debt, which differ by payer; a payer with a good contract rate but frequent denials may look worse here than its contract suggests. A fuller analysis would read the same table by condition group and track denial rates separately before drawing conclusions about any one payer.

Even with these limits, the direction of the finding is unlikely to change: for a service whose costs do not vary by payer, who pays moves the margin faster than how many are served.

References

Basis and Scope of Subpart, 42 C.F.R. § 412.600 (2024).

Reiter, K. L., & Song, P. H. (2021). Gapenski's healthcare finance: An introduction to accounting and financial management (7th ed.). Health Administration Press.

Zuckerman, S., Skopec, L., & Aarons, J. (2021). Medicaid physician fees remained substantially below fees paid by Medicare in 2019. Health Affairs, 40(2), 343-348. https://doi.org/10.1377/hlthaff.2020.00611