Understanding Per Member Per Month (PMPM) Billing
About the Author: Cameron Jacox is the founder of Rocket Digital Health, the foremost digital health scale consultancy. Go-to-market is hard in healthcare, and we believe that you don’t need to reinvent the wheel to bring your brilliant invention to market. Having helped scale over a dozen digital health startups, including for 4 years as Chief Growth Officer at Lark Health from Series A to Unicorn status, Cameron & his team work with select startups to bring growth strategy to bear to beat their growth goals and catch their stride.
PMPM billing, also known as Per Member Per Month billing, is a type of billing model used by healthcare providers and payers to bill for healthcare services. PMPM billing is based on a fixed amount that is charged per member per month, regardless of the number of services provided. PMPM billing is often used in managed care and value-based care models, and is intended to provide incentives for providers to deliver cost-effective and high-quality care.
Digital health startups often face unique challenges when it comes to securing contracts with health plans. One pricing model that is gaining popularity among health plans is per member per month (PMPM) contracting. PMPM contracting allows startups to be paid a fixed amount for each member of a health plan per month, regardless of how much care they actually receive. This model can offer several benefits to startups, covered below. Among them is the fact that PMPM billing can provide fixed recurring revenue, enhancing stability, and becoming a SaaS business. Although value-based and per-engaged member billing seems to make more sense for health plans, many resist the risk associated with variability in costs.
How Does PMPM Billing Work?
In PMPM billing, healthcare providers and payers agree to a fixed amount that is charged per member per month. This fixed amount is typically based on the expected cost of providing healthcare services to the member and may include the cost of preventive care, acute care, and chronic care services.
PMPM billing is often used in managed care and value-based care models, which are designed to incentivize providers to deliver cost-effective and high-quality care. In these models, providers may receive additional payments or bonuses if they meet certain quality or cost targets, or may be at risk for financial penalties if they do not meet these targets.
Advantages of PMPM Billing
PMPM billing has a number of advantages, including:
Predictability: PMPM billing provides predictability for both providers and payers, as the fixed amount charged per member per month is agreed upon in advance. This can help to reduce uncertainty and allow providers to plan for the expected cost of caring for their patients.
Incentives for cost-effective care: PMPM billing provides incentives for providers to deliver cost-effective care, as providers may receive additional payments or bonuses if they meet certain quality or cost targets. This can help to reduce healthcare costs and improve the value of care for patients.
Flexibility: PMPM billing can be flexible, as the fixed amount charged per member per month can be adjusted based on the needs of the patient and the services provided. This can allow providers to tailor the care they provide to the individual needs of their patients.
Disadvantages of PMPM Billing
PMPM billing has a number of disadvantages, including:
Limited visibility into cost: PMPM billing may provide limited visibility into the cost of individual healthcare services, as the fixed amount charged per member per month is based on the expected cost of providing care. This can make it difficult for payers and patients to understand the cost of individual services and compare costs across providers.
Incentives for low utilization: PMPM billing may provide incentives for providers to limit the utilization of healthcare services.
What are the Benefits of PMPM Contracting for Digital Health Startups?
Digital health startups are a vital part of the healthcare industry, and they are transforming how healthcare is delivered. However, digital health startups face many challenges, including funding, scaling, and commercialization. One way to address these challenges is through Per Member Per Month (PMPM) contracting. PMPM contracting is a pricing model where healthcare providers pay a fixed fee per patient per month for a specific set of services. Here are some benefits of PMPM contracting for digital health startups:
Stable Revenue Streams: PMPM contracting offers a predictable and stable revenue stream for digital health startups. With PMPM contracts, healthcare providers pay a fixed fee per patient per month, regardless of the volume of services delivered. This provides digital health startups with a predictable cash flow and financial stability, which is crucial for growth and scaling.
Better Financial Planning: PMPM contracting enables digital health startups to plan their finances better. With a fixed fee per patient per month, startups can forecast revenue and costs accurately, which helps with financial planning and investment decisions.
Improved Market Penetration: PMPM contracting can help digital health startups penetrate the market more effectively. With PMPM contracts, startups can offer their services to healthcare providers at a predictable and affordable price, which can attract more customers and increase market share.
Reduced Risk: PMPM contracting reduces the risk for digital health startups. With a fixed fee per patient per month, startups are not exposed to the risk of non-payment or delayed payments. This reduces financial risk and enables startups to focus on delivering quality services.
Long-Term Relationships: PMPM contracting can help digital health startups build long-term relationships with healthcare providers. With a fixed fee per patient per month, startups can offer services that are aligned with the needs of healthcare providers, which can lead to long-term partnerships and collaborations.
What are the Benefits of PMPM Contracting for Health Plans?
PMPM contracting is also beneficial for health plans. Here are some benefits of PMPM contracting for health plans:
Cost Control: PMPM contracting helps health plans control costs. With a fixed fee per patient per month, health plans can budget and plan their expenses better. This reduces the risk of unexpected expenses and enables health plans to offer affordable services to their customers.
Improved Provider Relationships: PMPM contracting can help health plans build better relationships with healthcare providers. With PMPM contracts, health plans can offer healthcare providers a predictable and stable revenue stream, which can improve their financial stability. This can lead to better collaboration and partnerships between health plans and healthcare providers.
Quality of Care: PMPM contracting can improve the quality of care. With a fixed fee per patient per month, healthcare providers can focus on delivering high-quality services, rather than worrying about payment and reimbursement. This can lead to better patient outcomes and satisfaction.
Alignment with Value-Based Care: PMPM contracting aligns with the shift towards value-based care. With PMPM contracts, healthcare providers are incentivized to deliver quality care at a reasonable cost. This can improve the overall quality of care and reduce healthcare costs.
What are Some Alternatives to Per Member Per Month Pricing?
While PMPM contracting can offer several benefits to digital health startups and health plans alike, it is not the only pricing model available. Other pricing models that may be appropriate for digital health startups include:
Fee-for-Service: With fee-for-service pricing, digital health startups are paid for each service they provide to health plan members. This model can be appropriate for startups that offer more specialized or episodic care.
Value-Based Care: Value-based care models focus on rewarding providers for delivering high-quality care and achieving positive health outcomes. This model can be appropriate for digital health startups that are focused on population health management or chronic disease management.
Shared Savings: Shared savings models allow digital health startups to share in the cost savings they generate for health plans. This model can be appropriate for startups that are focused on improving care coordination or reducing unnecessary hospital readmissions.
How Does Rocket Digital Health Help?
Rocket Digital Health is a healthcare consulting firm that specializes in helping digital health startups navigate the complex healthcare landscape. One area of expertise is in structuring the right PMPM or per engaged member per month (PEMPM) model for startups and securing health plan buy-in on the model. Rocket Digital Health can also help startups identify and pursue other pricing models that may be appropriate for their business model.