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What Is The PMPM Cost In Health Insurance?

This guide delves into the significance of PMPM costs, their role in analysis, budgeting, and program efficiency evaluation.

  • 05 Jan 2024
  • 3 min read
  • 131 views

PMPM stands for “per member per month”. PMPM in healthcare  is a type of cost that represents the amount paid or received monthly for each individual enrolled in a managed care plan, often called capitation. It is the average cost or revenue generated per individual enrolled in a health plan within a month. Let’s understand this term a bit better in the next section.

 

 

PMPM Cost In Health Insurance

PMPM represents the true cost for payers. PMPM Cost plays an important role in health insurance in the following ways :

 

  • Useful for Cost analysis by dividing the total cost or spending on healthcare services for a specific group by the number of members.

 

  • Helps in financial budgeting and planning. It helps estimate future costs based on historical data and can assist in financial planning for healthcare services.

 

It is a performance indicator that evaluates the efficiency of healthcare programs.

 

The formula for calculating PMPM is straightforward:

PMPM = Total Number of Members / Total Cost of Spending × Time Period

 

Organisations can use the PMPM formula to know the average healthcare costs incurred per member within a specific timeline. It helps in cost analysis, financial planning, and performance evaluation within the health insurance industry.

 

However, there are a few issues that can arise with the PMPM cost:

  • Risk select bias
  • Limited information
  • Variations in population demographics
  • Time frame sensitivity
  • Inclusion of non-medical costs

 

To help with these issues, healthcare organisations often use different methods. It includes additional metrics, risk adjustment methodologies, and more detailed analyses to manage PMPM pricing.

 

Conclusion

The PMPM healthcare method is often preferred by individuals with many members in their team. A good PMPM should be transparent, with claim-level accountability and a proper target for all claims.

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