HA 620 Unit 2 payer mix analysis example

Nine Thousand Discharges, Five Payers, Two Revenue Columns: A Payer Mix Analysis Showing Where a Community Hospital's Money Actually Comes From

Student Name

Health Care Administration, Herzing University

HA 620: Healthcare Economics, Finance, and Resource Management

Instructor Name

January 22, 2026

Nine Thousand Discharges, Five Payers, Two Revenue Columns: A Payer Mix Analysis Showing Where a Community Hospital's Money Actually Comes From

The Organization and the Data

The composite 180-bed community hospital used in this course had 9,000 inpatient discharges in its last fiscal year. The analysis uses inpatient data only, for clarity; outpatient revenue follows a similar but not identical pattern. Figures are rounded to the nearest hundred dollars per discharge and the nearest thousand dollars in totals. One simplifying assumption is stated up front: average cost per discharge, $13,200, is treated as equal across payers. In reality, case mix differs by payer, and a full analysis would use cost per discharge adjusted for case mix.

Volume by Payer

Discharges by payer category, with percentages that total one hundred.

Revenue Shown Twice

Gross charges are what the hospital bills at list price. Expected collections are what it expects to be paid after contractual adjustments, discounts, and bad debt.

Reading the Gap

The two revenue columns tell different stories. By charges, Medicare fee-for-service is the largest payer, at 36.78%. By collections, commercial insurers are, at 41.03%, although they account for only 28% of discharges and 25.99% of charges. The reason is the collection rate: commercial contracts pay about 45 cents on each dollar of charges, Medicare about 24 cents, Medicaid about 20. The gap has grown over time; one national analysis found that private insurers' inpatient payment rates rose from roughly 10% above Medicare's in the mid-1990s to about 75% above by 2012 (Selden et al., 2015).

Against an average cost of $13,200 per discharge, collections per discharge give each payer a margin: commercial $5,700 above cost; Medicare Advantage $700 below; Medicare fee-for-service $720 below; Medicaid $5,600 below; self-pay $10,800 below. Across all payers the hospital collected $116,087,000 against costs of $118,800,000, an inpatient shortfall of about $2.7 million, which outpatient services and other revenue must cover. The Medicare Payment Advisory Commission has reported negative aggregate Medicare margins for hospitals in recent years (Medicare Payment Advisory Commission [MedPAC], 2025), which is consistent with this hospital's position.

Checks on the Figures

Three checks were made before relying on these numbers. First, every percentage column was summed; discharges total 100.0%, charges 100.00%, and collections 100.00%, with the last digit of one category adjusted where rounding would otherwise leave 99.99% or 100.01%. Second, expected collections were compared with actual cash received for the year, net of the change in accounts receivable; the two agreed within 1.5%, which suggests the collection rates are realistic rather than optimistic. Third, the self-pay line was split into patients later found eligible for financial assistance and those who were not. Of the $1,080,000 expected from self-pay patients, about $260,000 came from patients who paid in full under the uninsured discount, and the rest from partial payments; financial assistance write-offs are counted as charity care rather than as bad debt, which keeps the self-pay collection rate honest about what these patients could pay.

Sensitivity: What a Small Shift Would Do

Payer mix matters more than volume. Suppose a large local employer closes and 450 discharges move from commercial coverage to Medicaid, a shift of five percentage points. Volume is unchanged at 9,000. Collections fall by 450 × ($18,900 − $7,600) = $5,085,000. The inpatient shortfall nearly triples, from about $2.7 million to about $7.8 million, with no change in the care provided. Conversely, a two-point shift from Medicare fee-for-service to Medicare Advantage would change collections by only 180 × ($12,500 − $12,480) = $3,600, because the two pay nearly the same per case here.

The analysis shows why hospital finance officers watch commercial share more closely than total volume. It also shows the limits of this hospital's position: it depends on a minority of commercially insured patients to offset shortfalls on the majority. The method follows the course finance text's treatment of payer mix and contractual allowances (Pink & Song, 2020). The same table, rebuilt each quarter, would show early whether the mix is shifting before the annual budget reveals it. The hospital and figures are composite.

What Management Can Act On

Three levers follow from the analysis. The first is commercial contract terms. With 41% of collections coming from 28% of discharges, a one-point improvement in the commercial collection rate is worth about $1.06 million a year, more than any feasible change in Medicare or Medicaid rates. The hospital's five percentage-of-charges contracts, discussed in the policy course, are candidates for conversion to case rates that track cost more closely. The second is Medicaid enrollment for self-pay patients. Some of the 450 self-pay discharges belong to patients who are eligible for Medicaid but not enrolled; each one enrolled moves collections from about $2,400 to about $7,600. The third is cost per discharge. Because Medicare and Medicare Advantage together pay close to cost, reducing average cost by even 5%, or $660 per discharge, would shrink the losses on those payers to about $40 to $60 per discharge across 4,410 discharges, worth about $2.9 million a year, and would improve the margin on every other payer by the same amount per case. None of these levers changes the underlying mix, which is set largely by the local economy; all of them change what the hospital does with it.

References

Medicare Payment Advisory Commission. (2025). Report to the Congress: Medicare payment policy.

Pink, G. H., & Song, P. H. (2020). Gapenski's fundamentals of healthcare finance (3rd ed.). Health Administration Press.

Selden, T. M., Karaca, Z., Keenan, P., White, C., & Kronick, R. (2015). The growing difference between public and private payment rates for inpatient hospital care. Health Affairs, 34(12), 2147-2150. https://doi.org/10.1377/hlthaff.2015.0706