HDG #008: PMPM is the most important metric in healthcare
Read time: 5 minutes
Greetings, Gurus!
Today we are deep-diving into healthcare’s most important metric (says me)—the PMPM.
There is surprisingly a lot to learn about this “simple” calculation, but I’ll try to distill what I’ve learned over the last 15 years in just 5 minutes. If you don’t master your understanding of the PMPM, you’ll be dead in the water for any kind of healthcare initiative, whether you’re a plan, provider, or vendor.
What is PMPM?
PMPM stands for per member per month.
Multiple definitions are floating around beyond that:
The amount of money paid (or received) on a monthly basis for each individual enrolled in a managed care plan, often referred to as capitation — North Carolina Healthcare Association
A type of billing model used by healthcare providers and payers to bill for healthcare services — Rocket Digital Health
The average cost of healthcare for members — Investopedia
Etc etc etc
It is all of these things and more. To me, it means:
For a given group of people (a population of members or patients)
How much money is being [exchanged a.k.a. spent or billed]
Per each person in that group
On a monthly basis
For certain services
This gets confusing because depending who/where you are in the healthcare value chain, this can mean something different. Here is an overly-simplified diagram that shows one example:
We commonly see PMPM used by health plans/managed care as a way to measure healthcare costs over time. If they see that their members are starting to “cost” more each month (rising PMPM), they start looking into why. They can break it down by type of service, like inpatient or outpatient PMPM, to identify if it is related to any one area.
Why is it the most important metric in healthcare?
Some may disagree with me that this is the most important metric in healthcare, citing patient satisfaction, quality (like mortality), and others. I think those are all extremely important, too.
But the reason I think PMPM is the most important metric in healthcare is that soooo much is tied to it: whether or not new initiatives get funded and where the focus for new initiatives are placed. It is a metric that payers and now providers alike are starting to have to manage towards and understand, a method of reimbursement for new benefits or payment models… and one of the most telling metrics as it pertains to skyrocketing healthcare costs.
I also strongly prefer analyzing PMPM changes over time to analyzing the change in raw totals over time (i.e. total spend $) because it is normalized for enrollment changes that could be influencing the change in spend (i.e more members enrolled = increase in total spend… but is it really an increase in trends we should be concerned about? Like more utilization than normal or higher rates?)
How do you calculate PMPM?
On its face, it sounds simple:
[total cost/spend]
÷
[number of months that members were active/covered in the time period a.k.a member months]
While it seems like a simple cost metric, spend is driven by a combination of different factors touching multiple areas that impact everyone on the value chain in some way. Peeling the onion back deeper, spend can be broken down into a function of cost per unit (reimbursement), enrollment (member months), and utilization all rolled into one quantifiable ad easy-to-understand dollar figure.
For instance, say you have 5,000 members (~15,000 member months over a quarter) and you’re looking at the PMPM changes between 2 quarters. Say it went from $645 to $650.
If PMPM went up by $5.00, the total change in spend between the 2 quarters would be ~ $5.00*15,000, or a $75,000 increase in total spend.
But PMPM can tell us so much more.
Consider that $75,000 increase in spend. $30,000 of it could be due to increased utilization of a certain kind of surgery, while the remaining $45,000 could be due to increased average cost per inpatient admission due to a contract change. But you’d approach that very differently than if only $5,000 was attributed to a utilization change and $70,000 was due to average cost per unit changes.
There are calculations to determine what proportion/contribution margin to the total change in spend observed period over period are attributed to:
changes in membership/enrollment,
changes in utilization, and
changes in average cost
And knowing that information can help you pinpoint specific areas of opportunity, early signals of changes in behavior, and minute trends hidden within aggregate values. For instance, you can break your overall PMPM of $650 down into subcategories and calculate changes in each subcategory that total up to the overall PMPM. Inpatient might have gone from $230 to $255 (up by +$25), Outpatient from $160 to $139 (down by -$21), and Professional from $110 to $111 (up by +$1). Adding those all up (+$25 – $21 + $1) = your +$5.00 PMPM change, but it’s clear that Inpatient is the main driver, so you should focus there. You could even further break that out into types of admits like DRG, types of surgery, subpopulations, etc., to see what was driving the Inpatient changes (e.g. increase in utilization for elective knee surgeries).
This is just one reason why, among many, PMPM is so richly nuanced, valuable to understand, and supremely informative.
This is really just scratching the surface. PMPM can also be used to help gauge “ROI” of new initiatives, can serve as a directional pointer to the areas/subgroups of people/regions that we most need to focus, can provide vendors some solid improvement targets for new technology, and so much more.
Am I saying that PMPM is the end-all-be-all or the only metric that matters? No!
But it is an important tool to have in your toolbox when designing and evaluating new programs, analyses, and strategies.
Now just wait until we get into Utilization per 1000!
. . .
Actionable Idea of the Week:
The next time you’re doing a root cause analysis on changing trends over time, I encourage you to consider “normalizing” the data into a PMPM, and try to break that down into further subcategories. I guarantee this will help you find hidden pockets of “why” values are changing over time.
If you’re someone trying to sell services or tools to a payer or provider, I challenge you to think about how you might quantify the impact of your services or tools into a PMPM change. Is it utilization? Average cost per case? To what extent? What does it translate into total savings?
. . .
See you next week!
-Stefany
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