Contribution margin by payer: how to calculate and use it
Billing a lot to a payer does not mean earning from it. Contribution margin shows how much each payer really leaves for the hospital.
Contribution margin by payer shows how much each health plan or payer leaves for the hospital after denials and the costs that vary with patient care. It is the most useful indicator for deciding where to grow, what to renegotiate and where the hospital is, in practice, paying to provide care.
The formula
Contribution margin = payer revenue − (denials + payer variable costs and expenses)
Typical variable costs of an encounter are:
- supplies and drugs consumed;
- implants and special materials;
- volume-based physician fees;
- other costs that vary directly with care, such as outsourced tests.
The margin can be read in amount (how much is left) and as a percentage of revenue (how much is left for every 100 billed).
Example
| Payer A | Payer B | |
|---|---|---|
| Revenue | R$ 1,000,000 | R$ 600,000 |
| (−) Denials | R$ 60,000 | R$ 12,000 |
| (−) Supplies and drugs | R$ 380,000 | R$ 150,000 |
| (−) Physician fees | R$ 220,000 | R$ 120,000 |
| (=) Contribution margin | R$ 340,000 | R$ 318,000 |
| Margin % | 34% | 53% |
Illustrative figures. Payer A bills more, but B leaves almost the same margin in amount, with a fifth of the denials and a much higher percentage. With the same bed and the same staff, growing with B is more profitable.
Why not use full cost?
Full cost includes the fixed structure (fixed staff, building, maintenance), which exists with or without that payer. Allocating that structure among payers depends on debatable criteria and can lead to poor decisions, such as dropping a payer that pays more than its variable cost and helps cover fixed cost. Contribution margin avoids that problem.
What usually pulls a payer's margin down
- Outdated price tables for supplies and drugs, especially high-cost items.
- High denials, administrative or technical. See hospital claim denials.
- Packages with longer stays or higher consumption than expected.
- Procedure mix concentrated in low-margin items.
- Physician fees above what the payer reimburses.
How to use it in negotiations
Take to the negotiation with the health plan the margin by payer, by specialty and for the highest-volume procedures, compared with last year. Items with negative margin, recurring denials and long payment terms are the objective points of the conversation. Each payer's collection period also matters: see average collection period.
How to track it
Margin by payer should be tracked every month, with the ability to drill down to specialty, procedure and patient account. In Clic Health, the Payers, Payer Analysis and Patient Account dashboards follow that path. For the full financial view, see hospital financial BI; with Tasy data, financial KPIs.
Related questions
Should SUS be included in the margin analysis?
Yes. SUS often has a lower or negative contribution margin on many procedures, and knowing that number helps size incentives, contracts and SUS's share of the result.
Are physician fees a variable cost?
When paid by volume, yes. When the physician is on a fixed salary, they are a fixed cost.
How often should margin by payer be recalculated?
Monthly, with the trend over the last 12 months, and always before a negotiation.
Written by the team behind Clic Health: accountants, controllers and developers with more than 20 years of work in hospital management.