HA520 Unit 5 Hospital Payer Mix Analysis Example

Twenty-Seven Percent of Charges, Forty-Three Percent of Revenue: A Payer Mix Analysis Converting a Composite Hospital's Charges to Cash Payer by Payer and Pricing a Likely Drift Toward Medicare Advantage and Self-Pay

[Student Name]

Purdue University Global

HA520: Health Care Financial Management

Unit 5 Payer Mix Analysis

[Instructor Name]

[Date]

The hospital, its charges, collection rates and scenario are composite and bracketed; real payer behavior varies by market and contract.

Two Definitions of Payer Mix

By gross charges, payer mix shows how much of the hospital's billed activity each payer accounts for. By net revenue, it shows how much cash each payer actually supplies. Because payers pay very different shares of charges, the two can differ sharply. A hospital that reports only the first understates how heavily it relies on commercial contracts (Cleverley & Cleverley, 2018).

Table 1: Charges to Cash

Gross charges total [$1,075.8] million. For each payer, share of charges, collection rate and share of net revenue:

1. Traditional Medicare: [34] percent of charges, [$365.8] million; collection rate [27.0] percent; [$98.7] million, [31.6] percent of net revenue.

2. Medicare Advantage: [16] percent, [$172.1] million; [26.0] percent; [$44.7] million, [14.3] percent.

3. Medicaid, including managed care: [18] percent, [$193.6] million; [16.0] percent; [$30.9] million, [9.9] percent.

4. Commercial: [27] percent, [$290.5] million; [46.0] percent; [$133.7] million, [42.8] percent.

5. Self-pay and other: [5] percent, [$53.8] million; [8.1] percent; [$4.4] million, [1.4] percent.

Reconciliation

The weighted collection rate is [29.0] percent, and the five payers' net revenue sums to [$312.4] million, the net patient service revenue reported on the statement of operations. The reconciliation lets the reader trust the table before any scenario runs. Commercial insurers supply nearly as much cash as traditional Medicare and Medicare Advantage combined, although they account for less than a third of charges.

Reading the Table

Commercial plans pay about [46] cents per dollar of charges; Medicare and Medicare Advantage about [26] to [27] cents; Medicaid about [16] cents; self-pay patients about [eight]. A dollar of charges moving from a commercial plan to any other payer loses the hospital at least [19] cents.

The Scenario

Two shifts are plausible next year:

1. Aging: [three] points of charges move from commercial plans to Medicare Advantage as residents turn 65 and choose plans.

2. Coverage loss: [two] points move from Medicaid to self-pay as some enrollees lose coverage at renewal.

Effect of shift 1: [$32.3] million of charges move from a [46.0] to a [26.0] percent collection rate, losing about [$6.5] million. Effect of shift 2: [$21.5] million move from [16.0] to [8.1] percent, losing about [$1.7] million. Total: net revenue falls by about [$8.2] million before any change in denials.

Adding Denials

Medicare Advantage plans deny more claims after the fact than traditional Medicare, often through prior authorization and medical necessity reviews. A federal review found that some Medicare Advantage denials of prior authorization requests were for services that would have been covered under traditional Medicare (Office of Inspector General, 2022). Research has also documented how widely Medicare Advantage enrollees are exposed to prior authorization requirements (Marr et al., 2026). Applying a [4] percent write-off to the larger Medicare Advantage revenue raises the loss to about [$10.3] million.

What [$10.3] Million Means

The hospital's operating income last year was [$5.5] million. The scenario would turn operations to a loss unless costs fall or other revenue rises.

Sensitivity to the Assumptions

If only [two] points move to Medicare Advantage rather than three, the first shift costs about [$4.3] million instead of [$6.5] million. If Medicare Advantage denials run at [6] percent rather than [4], the total loss rises to about [$11.4] million. The result is most sensitive to how fast commercial patients age into Medicare Advantage, which the hospital can estimate from the age profile of its commercial population.

Why the Shift Toward Medicare Advantage Matters Twice

Medicare Advantage pays about the same as traditional Medicare per dollar of charges, so the first loss comes from leaving commercial rates behind. The second comes from administrative friction: authorization reviews, slower payment and post-payment denials that traditional Medicare rarely applies. A hospital that treats Medicare Advantage as simply Medicare with a different card will underestimate both.

Where the Data Came From

Charges by payer came from the patient accounting system's year-end summary; net revenue by payer came from the general ledger after contractual allowances and bad debt. Collection rates are the ratio of the two.

Responses

1. Strengthen authorization and denial management for Medicare Advantage claims.

2. Help self-pay patients apply for Medicaid, marketplace coverage or financial assistance.

3. Negotiate Medicare Advantage contracts with clearer authorization terms and penalties for late payment.

4. Grow services that attract commercial patients, such as outpatient surgery.

Limits

Collection rates are averages; service lines differ. The scenario assumes no change in volume or contract rates. Denial rates vary by plan.

Conclusion

The hospital's finances depend on a commercial share that supplies far more cash than its charges suggest. Modest drifts toward Medicare Advantage and self-pay could erase operating income, which makes payer mix a strategic issue, not only an accounting one.

References

Cleverley, W. O., & Cleverley, J. O. (2018). Essentials of health care finance (8th ed.). Jones & Bartlett Learning.

Marr, J., Trivedi, A. N., & Meyers, D. J. (2026). Prior authorization in Medicare Advantage: Beneficiary exposure and plan disenrollment in 2021. Health Affairs, 45(7), 756-763. https://doi.org/10.1377/hlthaff.2025.01373

Office of Inspector General. (2022). Some Medicare Advantage organization denials of prior authorization requests raise concerns about beneficiary access to medically necessary care (OEI-09-18-00260). U.S. Department of Health and Human Services.