Introduction
Per-member per-month (PMPM) cost is an important metric used in different spheres. It is often utilized to calculate premiums for group health insurance or capitated payments to providers. The present paper aims at estimating the PMPM rate for Bay Pines Medical Center and analyzing how reductions in base case utilization and total cost characteristics influence it. The analysis is expected to help to understand how to calculate individual premiums for group insurance.
PMPM Utilization
PMPM metric applies to revenue or cost for each enrolled member each month. It is calculated by dividing the units of service or product by member months. Many calculations use PMPM as a descriptor, including group insurance premiums, capitated payments to providers, cost of care, and any other revenue or cost for each enrolled member each month. PMPM can be used for research purposes to estimate how an intervention has influenced the cost or revenue per person. For instance, Johnson et al. (2017) use PMPM to calculate inpatient spending before and after the implementation of a significant CMMI/HCIA initiative.
The objective of the study was to assess “whether a primary care practice transformation that used population health strategies and predictive modeling to match clinical resources to patient needs to reduce inpatient and total spending while maintaining or improving quality and patient experience for adult Medicaid and Medicare patients” (Johnson et al., 2017, p. 10). The results revealed a 1.7% reduction in PMPM spending on healthcare in Denver Health (Johnson et al., 2017). Therefore, it may be stated that PMPM is a widely used metric that can be used to measure cost or revenue per member month.
PMPM is the primary method to calculate individual premiums in a group health insurance (GHI) plan. In GHI plans, every member that decides to enroll factors in the cost for the company and the employees, since the company usually pays 50% of the premiums (Redmond, 2018). In order to calculate the premiums, the employer needs to divide the total annual cost of the plan by member months, which is the number of enrollees multiplied by 12 months (Redmond, 2018). After that, the company authorities decide which part of the premiums they want to pay and announce the cost to their employees (Redmond, 2018). In summary, PMPM is an efficient and easy-to-use method to calculate premiums for a GHI plan.
In the present paper, the PMPM rate is used to calculate capitation premiums paid to a medical center. Capitation is an alternative to the pay-for-service principle, which is used to control health care costs.
According to Alguire (n.d.), “capitation payments control the use of health care resources by putting the physician at financial risk for services provided to patients” (para. 1). Capitation is a fixed amount of money per potential patient per unit of time paid to a healthcare organization in advance to perform needed services. Capitation is based upon the expected number of services provided to the population, including preventive, diagnostic, and treatment services. Capitation is advantageous as it makes the cash flow predictable, decreases the accounting costs, puts a sharper focus on preventative care, and reduces unnecessary interventions (Alguire, n.d.). PMPM is for calculating capitation premiums paid by insurance companies.
Task Overview
The primary task is to analyze PMPM rates considering reductions in utilization or pricing in Bay Pines Medical Center. The hospital serves a population of 50,000 patients, and base case utilization and total cost characteristics are summarized in Table 1 below. Bay Pines also allocates 10% of total premiums to administration and reserves.
Table 1.Bay Pines: Basic Estimations.
The present report aims to answer the following research questions:
- RQ1: What is the PMPM rate that Bay Pines must set to cover medical costs plus administrative expenses?
- RQ2: What would be the rate if a utilization management program were to reduce utilization within each patient service category by 10% or 20%?
- RQ3: What rate would be set if the average cost on each service were reduced by 10%?
- RQ4: What would the premium be assuming that both utilization and cost reductions were made?
RQ1: Calculating PMPM Rate
In order to calculate the PMPM rate, it crucial to measure member months. Member moths are calculated by multiplying the number of members by the number of months. Since the number of members is 50,000 (the capitated population) and the number of months is 12 (for one year), the number of member months for Bay Pines Medical Center is the following:
50,000*12=600,000 member months
Considering this information and the basic estimations demonstrated in Table 1, the PMPM rate is $53.80. The calculation for the PMPM rate are demonstrated in Table 2 below.
Table 2. PMPM Calculations.
Al l the calculations presented in Table 2 are made assuming that column two includes an annual average of inpatient days per 1,000 enrollees. The yearly cost for 1,000 enrollees demonstrated in the fourth column of Table 2 was calculated by multiplying inpatient days per 1,000 enrollees by the average cost per day. In the fifth column, the administration cost of 10% was added to the annual cost for 1,000 enrollees by dividing the annual cost for 1,000 enrollees by 90%. The sixth column represents the total cost for 50,000 enrollees, which was calculated by multiplying the values in the fifth column by 50. The PMPM rate presented in the seventh column of Figure 1 was calculated by dividing the values in the sixth column by 600,000 member months. The results revealed that with every additional member of the capitated population, Bay Pines would need to cover $53.26 of additional costs every year.
RQ2: Reducing Utilization
If the utilization is reduced by 10%, it is expected that the PMPM rate will also decrease by 10%. In order to confirm the hypothesis, calculations were made using Microsoft Excel. The results of the calculations are demonstrated in Table 3 below.
Table 3. PMPM Calculations with 10% Reduction in Service Utilization.
In order to calculate the PMPM rate after reduction in service utilization, we conducted similar calculations, as demonstrated in Table 2. The only changes were the values in the second column of the table, where all the values were reduced by 10%. The calculations show that after decreasing utilization within each patient service by 10%, the PMPM rate dropped to $48.42. Since the new PMPM rate is 90% of the initial PMPM rate calculated in Table 2, the hypothesis that a 10% reduction in utilization causes a 10% reduction in PMPM rate is confirmed.
If service utilization is decreased by 20%, the PMPM rate will also decrease by 20% to $43.04. The calculations for the new PMPM rate are demonstrated in Table 4 below. Considering the estimations made in the present section, it may be concluded that if the utilization of services decreases by a certain amount, the PMPM rate will decrease by the same amount.
Table 4. PMPM Calculations with 20% Reduction in Service Utilization.
RQ3: Reduction in the Average Cost
A 10% reduction in average cost is expected to cause a 10% drop in PMPM rate. The hypothesis was testing using similar calculations in Excel as was done. The results of the calculations are demonstrated in Table 5 below.
Table 5. PMPM Calculations with 10% Reduction in Average Cost.
In Table 5, the values in the third column were reduced by 10% in comparison with the values presented in Table 2. The results of the calculations revealed that after a 10% reduction in costs per day, the PMPM rate decreased to $48.42, which is 10% less than the initial PMPM rate calculated in Table 1.
RQ4: Reduction in Cost and Utilization
If the hospital authorities decided to reduce both utilization and cost by 10%, the PMPM rate is expected to drop by 20%. In order to confirm the hypothesis, we performed calculations in Microsoft Excel. The results of the calculations are presented in Table 6 below.
Table 6. PMPM Calculations with 10% Reduction in Average Cost and Utilization.
The second and the third columns of Table 6 include values reduced by 10% in comparison with the values presented in Table 2. As a result, the PMPM rate was lowered to $43.58, which is 81% of the initial PMPM rate calculated in Table 2. In other words, a 10% decrease in both utilization and cost leads only to a 19% reduction of PMPM rate. Therefore, it may be stated that the initial hypothesis was not confirmed as the premium would decrease by 19% instead of hypothesized 20%.
Conclusion
PMPM rate is a helpful metric that can be used for different purposes. It is calculated by dividing the total annual cost or revenue by the number of member months. PMPM is a descriptor often used in practice and research. At the current level of utilization and cost, the PMPM rate for Bay Pines Medical Center is $53.80. A 10% decrease in either utilization or cost per patient day will cause a 10% decrease in the PMPM rate. If hospital authorities manage to decrease either the utilization or the cost by 20%, the PMPM rate will be reduced by 20%, respectively. However, if the organization decides to decrease both the utilization and cost by 10%, the PMPM rate will be lowered by 19% and reach $43.58.
References
Alguire, P. (n.d.). Understanding capitation. American College of Physicians. Web.
Johnson, T. L., Van der Heijde, M., & Davenport, S. (2017). Population health in primary care: cost, quality, and experience impact. American Journal of Accountable Care, 5, 10-20.
Redmond, J. (2018). How to calculate PMPM. PocketSense. Web.