The Healthcare Breakdown No. 046 - Breaking down why mix matters more in a hospital than it does in your Sunday morning Bloody Mary

Brought to you by Innsena

What we’re breaking down: How to make the best cocktails. Oh, also “payor” mix

Why it matters: The mix is critical in understanding health system finance

Read time: One Bloody Mary WITH Bacon… important distinction (6 minutes for real though)

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While you were thinking about going to bartending school to become a mixologist so that you could one day open a bar with all your friends from college, health systems were working with a mix of a different kind.

The fabled “payor” mix. And the topic of our episode today.

But first, a word from our sponsor with the best dang graphics in the biz.

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This episode is brought to you by Innsena

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That was it. I know. Amazing.

P.S. If you think you can beat this amazing graphic (you can’t) by sponsoring The Healthcare Breakdown, let me know by filling out this form. I am taking limited sponsorships from only the coolest peeps. Button incoming.

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Back to the show. First, ground rules. I will no longer say, “payor” but just mix. These entities don’t pay for anything. They process claims, deny care, and charge a premium for it. Literally.

Ok, I’m calm now.

When looking at a health system’s financials you can tell a lot off the jump from it’s mix. Mix is essentially the sources of it’s revenue. It can look a couple different ways.

Here are some examples:

And here is one more type of example you may see:

This one is a little different because it shows the mix in percentages and is included to indicate credit risk of accounts receivables. It’s usually pretty close to the gross dollar mix, but can be slightly different. It’s the breakdown of dollars by source in accounts receivable.

I know, super interesting.

Moving on!

These two little old charts become pretty critical when looking at a health system’s finances. In fact, the mix is pretty dang critical when looking at any healthcare business that is accepting payment from health insurance.

And even more so when dancing with CMS, or Centers for Medicare and Medicaid, for you formal folk. I know there are a lot of black tie wearing socialites in the audience. Sir. Madam.

Why is it important? Well, first, you can’t negotiate with these people.

No seriously, you can’t negotiate Medicare rates. They are what they are.

And as we discussed in last week’s wild foray into the land of the RVU, which I know you all read, loved, and enjoyed, in the early part of the greatest decade, Medicare decided to pay based on cost, not value. Because of that, reimbursement has been all wonky. I am not going to go into all the things like facility charges and the like, we’ll leave that for another issue. Just know, that generally it seems that Medicare and Medicaid have not kept up even with costs.

So much so, that that the American Hospital Association (AHA) in its infinite wisdom, takes it upon itself, year after year, to yell about how much Medicare and Medicaid underpay hospitals.

Most recently it railed that Medicare only pays 82 cents on the dollar. Meaning it only covers 82% of expenses when reimbursing a hospital.

Here’s the infographic the unpaid intern made:

And what of Medicaid you ask?

Well, for whatever reason if you look back into the AHA archive you’ll find that they said Medicaid pays 88 cents on the dollar, or covers 88% of costs.

Look, I’m not crazy:

But since we know that the AHA is a liar, I did my own number crunching and found based on CMS cost reports that in 2021 Medicaid paid about 76% of costs.

Whether that’s totally right or not, is a little beside the point.

There are two points here. Well, one point, but a lead in to another point.

The first is that Medicare and Medicaid are not paying hospitals enough money to even cover their costs.

Well, 67% of the time… As evidenced by the intern’s infographic a couple pictures ago.

Point two: When facing “underpayment” the natural thing to do is subsidize. And that’s just what health systems do.

They hike on over to Aetna or whomever and say something to the effect of, give us 300% of the Medicare rate!

And then Aetna goes… OK. We have to spend 85% of these premium dollars anyways. Here you go.

Fine, it doesn’t totally work that way, but you get the gist. It would seem that health systems need commercial insurance to help out with the “shortfalls” of Medicare and Medicaid.

One last fun fact, well chart. I made this one. I also happen to be an unpaid intern.

This one brought to you by the fine people of the National Academy for State Health Policy (NASHP). I just put their hard work into a pink table.

This is total operating profit of all the hospitals included in the data. All 4,546 of them.

I left all the numbers long form for dramatic effect. Also, Alex keeps asking for them.

Overall, hospitals lose $20B on Medicaid a year. And only make $2.5B on Medicare.

But to make up for these losses, hospitals are raking in $235B in operating profit from commercial plans.

I know these numbers don’t add up cleanly, but this is operating income attributable to claims processors and there will be other revenue and expenses at play when determining total operating profit. Also yell at the NASHP if you got beef.

The takeaway here is that commercial plans contributed 91x to the profit margin of hospitals than Medicare.

How in the whole wide world is this possible you might be wondering?

Well, Medicare is based on cost. Commercial rates are based on who is better at arm wrestling shirtless in the Siberian winter while playing Russian Roulette. The higher the price, the much, much higher the margin.

It’s not a linear relationship.

Here’s a super basic times example.

Medicare pays $100.
Commercial pays $300.
That’s a 3x difference.

The middle finger implant procedure costs $90.

The Medicare margin is $10.
The Commercial margin is $210.
That’s a 21x difference.

Price is your longest lever. Why do you think hospitals’ gross charges are so flippin high. Yes, partially to fib about charity care. But also it’s a way to push margin up as much as possible. Costs are much harder to reduce.

It’s also why everyone has so much trouble with Medicare. You’re chasing a downward spiral where you are constantly lowering costs while Medicare lowers reimbursement. Not necessarily for hospitals as much, but certainly for independent physicians. Not cool y’all.

The takeaway here is that it’s all about the mix.

Too much Medicaid and you have an uphill battle on your hands. Maybe an impossible one. The government doesn’t see fit to pay more for people who have less. And Medicare, well that’s based on costs and hospitals couldn’t tell you their costs on anything.

Yes total costs, but go ask for the exact cost on an appendectomy and it ain’t happening. They’ll just multiply the made up charges by the cost-to-charge ratio, which is also based on made up numbers, to give you a “cost.”

I’ll leave you with one more graphic. Not that it’s needed, but I like it and had it on deck.

As you can see in the rural markets, the “Not at Risk” facilities are relying on commercial rates to keep them afloat. Without the right commercial subsidization, “At Risk” facilities are drowning in losses.

The TL;DR? It’s darn well possible to make money on Medicare. You have to be operationally tight, but it’s certainly there.

Medicaid, not so much.

And commercial goes the distance to drive maximum profitability for hospitals.

Yay?

Hope you enjoyed today’s mix tape.

Love you.