To survive in today’s market, it is essential that you actively build out your healthcare accounts receivable management (ARM) footprint either organically or inorganically via acquisition(s), to diversify your client base and service offerings.
Becoming a complacent ARM service provider exposes you to undue risk of lost business to full service end-to-end, well-capitalized revenue cycle management (RCM) companies.
What is driving M&A interest in healthcare today?
When it comes to M&A activity, healthcare has been an active segment in the market, especially for ARM and RCM service providers. Deal activity has been driven by hospital consolidations, technology disruption and growing financial constraints caused by increased levels of bad debt and costly IT infrastructure.
The rise of high deductible healthcare insurance plans has increased self-pay account volume, creating issues for hospitals and ultimately for their vendors. As a result, more technology and service providers are including self-pay financing to develop more robust end-to-end RCM solutions. Focusing on revenue capture as the ultimate goal, successful service providers look at the holistic and complete view of the revenue cycle.
The magnitude of transactions happening within Healthcare ARM doubles and even triples when you add in other revenue cycle lines such as eligibility, dispute resolution, underpayments, denials management, and workers’ compensation claims. The Healthcare RCM M&A market is extremely active with 15 transactions closed during Q1 2019.
The other main reason supporting additional deal activity in healthcare ARM/RCM is changing technology. The patient population wants hospitals to make it easier and more efficient to deal with bill payment that is more transparent as to the amount owed by the patient.
What is driving and detracting from valuations?
Much smaller and mid-size health care ARM service providers concentrate solely on “self-pay” bad debt collections. When you have a company with one hospital system making up a majority of the revenue that is performance (contingency) based, it leads to challenges in deal structuring and owner/management transition. Buyers correspondingly are pricing in the additional client risk and potential attrition post-transaction into their financial models. Significant client concentration usually leads to a lower multiple, less cash and more deal structure in terms of an earn-out, retained equity or a seller’s note.
Compliance is also a factor impacting value. Keeping patient data safe and sound is the main priority for hospitals and their vendors who are seeking to avoid legal and reputational exposure. We tend to see more data security related issues with smaller vendors who do not have adequate capital to put the appropriate safeguards in place.
Since client concentration could be a potential problem from a deal structure perspective, should ARM service providers expand the number of clients they are working with as a strategy to make themselves more attractive to a buyer?
Just as vendors are merging, hospitals across the country are consolidating and merging. This is creating client concentration issues when acquiring vendors.
Here’s why: If a hospital is acquiring other hospitals, a long-term valued vendor is likely to get the chance to receive more business as the hospital acquires others regionally and nationally. This is a double-edged sword – on one hand, it is a good problem to have because as a valued strategic vendor you are growing with your clients. As an example, a hospital system client can go from 15 – 20% of a vendor’s overall revenue to 60% within a year. However, this is where concentration issues emerge.
To help offset client concentration issues, work to bring on additional revenue or service lines by maintaining a robust sales pipeline. Create a “runway” for your company to help mitigate client concentration.
In addition to expanding the sales funnel, ARM service providers should look at adjacent, complementary service lines they can provide to existing or prospective clients. Healthcare providers are typically outsourcing beyond 3rd party self-pay collections and seeking assistance with 1st party/customer care and other adjacent service lines such as workers’ comp, denials management or even self-pay financing. There may be additional service lines to help diversify the business.
Final thoughts
We anticipate increased healthcare M&A activity during the next 12 – 18 months. This works out well for long-term industry growth.
Focus on the patient experience and ways to remain competitive in a changing market. Look for opportunities where technology can be used to make the patient experience more seamless during the RCM process; everything from patient financing to the development of easy to use patient portals. Technology changes during the next 5 – 10 years, with how communications are evolving, will alter how this market provides patient services and how providers deal with the back-end component of cleaning up billing/collections issues.
About CAS
CAS oversees and executes on M&A engagements, investment opportunities, compliance/regulatory assessments, valuation and expert witness litigation matters for constituents of the Outsourced Business Services (OBS) sector.
