Importance of Payor Mix in Your Private Practice Financial Strategy  

As a healthcare provider, your payor mix is an essential component of your financial strategy that can significantly impact your financial success. This blog post will help you understand why your payor mix is so important and what you can do to improve it. 

Who is a Payor? 

In the healthcare industry the term "payor" refers to people or organizations paying for services provided by healthcare providers. Payors include private insurance companies, state and federal governments (Medicare and Medicaid), and self-paying patients. Healthcare providers need to know what type of payors they will be working with to create effective strategies for their businesses. 

What is Payor Mix? 

The payor mix is the percentage of a practice’s revenue from private insurance versus self-paying patients versus public insurance programs (Medicare & Medicaid). The payor mix can directly affect the health of your business. Understanding how much each type of insurance will pay you can help you run a successful healthcare organization, improve cash flow, and forecast future financial trends. 

The Importance of Payor Mix in Healthcare Financial Strategy

Private practice organizations can experience difficulties with their financial health if they do not understand the importance of payor mix.  A private practice has separate agreements with each payor, which can result in different reimbursements from payors for the same service provided.

To get started, determine your current payor mix. Look at total numbers of patients and total visits for a certain period.

Next, it is important to understand your reimbursement rate from each payor for your most frequently billed (top 5-10) CPT codes. Medicare reimbursement rates can be calculated using the Medicare Fee Schedule and Medicaid reimbursement rates from your state’s rate and fee schedules. Commercial insurance typically pays more for healthcare services then Medicare and Medicaid, and it is based on the agreement the practice has with the commercial insurance carrier. Once you determine your reimbursement rate for each payor for specific services, it is important to compare this to the cost. To operate profitably, the reimbursement rate needs to be higher than the cost.

There are several tactics to consider to optimize your payor mix:

1. Review your contracts annually. Is there room for negotiation to acquire a better reimbursement rate using your current volume as leverage? The busier your practice is, the more leverage you have.
2. Determine which insurance carriers your practice will accept. Think big picture here. Medicare reimbursement may be lower than your cost for your fifth most billed CPT code level, but may be significantly higher than your cost for all other CPT codes.
3. Cater your marketing and advertising to Zip Codes that contain an ideal age population or by targeting employers who offer your most profitable insurance plan.
4. If a payor is reimbursing 100% of your fee, look at your fee schedule to determine if increases are needed.

Knowing your payor mix will help you understand and budget for your organization. If a commercial insurance carrier typically does not pay out claims for two months – this will help you to manage your cash flow. You also will be aware of CPT codes in which the cost to perform is higher than the reimbursement. Try to limit these procedures, if possible.

Work With the Best

Lutz has been a trusted resource for physicians for many years. We offer a full range of accounting and consulting services, including tax preparation and compliance, benchmarking analysis, preparation of financial statements, and operations analysis to clients. To learn more about how Lutz can help your private practice organization, contact us or visit our website.