In Components of Healthcare Variances, five high-level components of revenue variance were identified. Those five components are fees, work days, pure volume, payer mix, and acuity. In Components of Healthcare Variances Part 2, it was shown that three of the five high-level components of revenue variance are contingent on volume. Of the three volume components, only the work day component is readily identifiable. This post will present a method for calculating the pure volume and payer mix components.

Before presenting the calculation it's important to understand the current state of Healthcare today. At a very high level and from a financial perspective there are only two types of patients. The first type of patient can be called a "Nominal" patient. Patients in the Nominal group generally carry insurance or pay cash for services performed by the healthcare provider. Each year healthcare providers can pass increases in their costs to the Nominal patients by raising fees. The cost side includes salaries and benefits for the healthcare provider's employees, general inflation, supply and drug costs, building costs, etc. The second type of patient can be called a "Government" patient. Government patients generally carry Medicare or other government provided healthcare plans. The problem with the Government group is that healthcare providers historically have not been able to pass their costs on to this group. Fee increases for Medicare must be approved annually by Congress. Historically the increases that are approved do not keep up with general inflation let alone increases in salaries for physicians, nurses, pharmacists, and other technical staff, general supply and drug costs, etc. As a result, many healthcare providers are trying to shift their practices away from lower reimbursing patients like the Medicare group to higher reimbursing Nominal patients just to stay in business. Shifts from Nominal to Government or Government to Nominal patients are refered to as changes in payer mix.

In the example below, the total volumes of procedures performed and workdays for the Nominal and Government payer groups are given. Those numbers are input into the yellow shaded cells.

The first step to calculating the pure volume and change in payer mix is to calculate the total volumes and the change in total volumes. The total volume can be calculated by simply adding together the Nominal and Government volumes. The change is simply the percentage difference in the two years i.e. 2007 vs. 2006. Those calculations are highlighted in green below.

Step 2 is to identify the "pure volume" change. Pure volume is the change in volume exclusive of any change in work days. In the example above, total volumes decrease by 0.3%. However, that change includes an increase of 0.4% in work days. As a result, the pure volume change must be something less than -0.3%. The cells shaded green below show the components of the calculation of pure volume.

The formula in cells H12 and K12 is:

=($N$8-$N$10)/(1+$N$10)

The calculation can be proven by the following:

Pure Volume Change + Work Day Change + (Pure Volume Change * Work Day Change) = Total Volume Change 

or

-0.7% + 0.4% + (-0.7% * 0.4%) = -0.3%

Step 3 is to calculate the payer mix percentages in 2006 and 2007 for each payer group. Using the Nominal group for 2007 as the first example, the components of the payer mix calculation as shown below in green:

The formula in cell F14 is:

=F8/$L8

Continuing step 3, use the Government group as an example. Again, the components of the payer mix calculation as shown below in green:

The formula in cell I14 is:

=I8/$L8

Moving on to step 4, calculate the percentage change in payer mix percentages. The components of these calculations are shown in green below:

The formula in cell H14 is:

=IF(ISERROR((F14-G14)/ABS(G14)),0,(F14-G14)/ABS(G14))

The formula in cell K14 is:

=IF(ISERROR((I14-J14)/ABS(J14)),0,(I14-J14)/ABS(J14))

Finally, step 5 computes the components of volume associated with each of the three areas of variance within each payer group. In other words, we can now calculate and assign volumes to the pure volume, work day, and payer mix components of variance within the Nominal and Medicare groups. In the screenshot below, match the colors in the variance analysis range F19:G25 against the percent changes above. The volumes associated with each component of change is a simple multiplication on the individual component of change.

Note how the change in payer mix (shown in row 24 - cells shaded green) nets to zero. By definition a change in mix only shifts volumes between groups. The net change of zero is exactly what to expect.

Now that the analysis is complete what does it reveal? Total volumes dropped by -0.3%. However, there was one additional work day in 2007 vs. 2006 which accounted for a volume increase of 0.4%. As a result, pure volume decrease by -0.7%. Finally, there was a favorable shift in payer mix. There were 1,045 units of volume that moved from the lower reimbursing Medicare group to the higher reimbursing Nominal group.