By Ken Comée, CareCloud
A wave of “feverish deal-making has swept through the global life sciences and healthcare industry,” reports Deloitte.
The $900 billion independent-medical-practice segment is part of this trend, in a new period of its own M&A activity, being fueled in part by private equity investors.
One recent report counted more than 200 PE deals involving physician practices between late 2014 and 2016. The number of these deals more than doubled between 2016 and 2017, with dermatology as one of the most active specialties.
Healthcare is as complicated as it is hot for PE investors. There are appealing investment approaches to be explored, including the common buy-and-build strategy to select well-run midsized practices as the platforms for bolt-ons.
Often the thesis here is to choose a combination of specialty plus market – such as dermatology in South Florida – with the goal to consolidate providers and dramatically increase share of patients served within that focus area.
As a result of working with PE-backed medical practices and researching market trends, we have unique insight into which practice-performance metrics matter when it comes to achieving high exit multiples. And the drivers of future returns may extend beyond the usual metrics you’d expect.
Here are five areas that we have seen consistently correlate to superior returns:’
- Loyal, thoughtfully managed patient population. A practice’s repeat-patient-visit rates can reveal whether patients are loyal, which is a strong sign the practice takes the patient experience seriously and is building a robust foundation from which to grow. The difference between 86 percent and 89 percent patient retention is an additional $150,000 a year in revenue to an average practice – at very wide margins. Above 90 percent retention is excellent and indicates a practice is doing the right things to achieve patient satisfaction while understanding how to retain patients in an increasingly digital healthcare world.
- Management against a broad set of KPIs. The devil is in the details and the management team of a strong platform practice needs to be very comfortable with a broader set of KPIs than you may expect. While most practices track Days in A/R, investors should push practice administrators to watch a number of billing and collection metrics just as closely. A net collection rate of 95 percent or higher is a sign that they’re managing the full revenue cycle closely, as is a denial rate below 5 percent and patient no-show rates below 1 percent.
- Deep visibility into every part of practice operations. That detail-oriented approach is crucial here again. It’s typical to find practice managers who have limited visibility into their practices – through no fault of their own but because they are hampered by outdated technology and reliance on vendors to generate reports. Success requires a management team and a technology platform that can collect and evaluate data points across the entire medical group in depth. While the traditional PE play has been to leave systems as they are and not necessarily make big IT changes, we’ve seen more and more PE-backed medical groups at the forefront of this consolidation trend dedicate material time and resources to getting the right tools in place that will support growth, not hold it back.
- Multiple, robust, proven revenue streams. In the shifting sands of the current medical climate, large medical groups should not be relying on any one type of payer or procedure for a majority of their revenue. Ideally, all practice revenue streams will be profitable in their own right, with no loss-leaders. A thriving retail or cash-pay elective-procedure business inside the practice is an especially good sign and explains in part why dermatology has been a popular specialty for PE recently. Thriving practices with multiple revenue streams typically see more than 30 percent of their revenue come from patients, and 50 percent or more in some sub-specialties. These start to look a lot more like B2C retail businesses, requiring a shift in approach and a management team that can adapt quickly.
- Cost synergies beyond the obvious. PE investors can bring economies of scale for their medical-practice investments. But beyond consolidating suppliers and vendors, investors can drive value through improved payer negotiations. We’ve seen successful consolidators approach payers proactively and positively, a big shift from the traditional adversarial model in this market. A wide range of business models and payer relationship frameworks are available for PE owners, including a variety of at-risk contracts, that are looking to embrace value-based care and further drive cost synergies.
Although healthcare is complex, and success under shifting market dynamics far from assured, PE and corporate investors continue to find the medical-practice segment very attractive.
Only recently, however, did healthcare-IT platforms become mature enough to enable running a loosely knit federation of practices as a single, cohesive organization with full data visibility across the entire span of control.
This is fueling a sharp increase in consolidators looking to capture big market shares in valuable segments, quickly and with the full array of business-process-improvement tools common in other B2B industries.
Ken Comée is CEO of CareCloud, the Miami cloud-based software and services platform focused on supporting high-growth medical groups. He can be reached at +1 305-265-4200 and [email protected].