By Sarah Bailey and Sweta Adhikari, Accordion
With tons of dry powder to invest, private equity has a (relatively) newfound interest in healthcare. In 2007 PE investment in the sector totaled $58 billion. In the decade-plus since, that number has more than doubled to $120 billion annually. What’s driving the increase? Investments in physician practices (or Physician Practice Management Companies: PPMCs).
Sponsors who invest in PPMCs are varied. There are those with deep-rooted sector expertise and there are those who experiment with healthcare practices in order to diversify their portfolio and capitalize on the changing economics of the industry. What they all have in common is the post-investment recognition that PPMCs are…complicated. Playbooks and value creation plans that apply to other deals often don’t translate well, and the “fixes” that address under-performance across the portfolio are not the cure for what ails PPMC returns.
As a result, the question that continues to plague sponsors seeking to stabilize or enhance value creation is: How do we accurately diagnose a problem with PPMC performance? The answer can be found in an old medical school adage: When you hear hoof beats, think horses, not zebras. More often than not, Revenue Cycle Management (RCM) is the horse and the overlooked source of PPMC revenue leakage.
Identifying, collecting and managing payor revenue is complex. But, if your PPMC portfolio company is experiencing one of these five symptoms, chances are the diagnosis is an inadequate RCM function:
Unexpected decreases in cashflow: Such is the case when revenue is not keeping pace with increases in patient volume.
Increases in accounts receivable: High performing PPMC accounts receivable runs at approximately 10% over 90 days. When the RCM function can’t achieve that benchmark, revenue is left on the table and the risk of collectability increases.
High days sales outstanding: DSO measures the numbers of days on average between care delivery and payment received. Healthy DSO for a physician’s office is under 45 days, and for a hospital is under 70, depending on the payor mix. The higher the number, the longer it takes to get cash in the door.
Large volume of claim denials: The most common reasons for insurance claims denials include coding and modifier issues, duplicate billing, untimely filing, inadequate documentation, insufficient patient information, and incorrect filing of claims forms. Most tie back to an issue with RCM-related processes and the technologies that enable them.
Limited visibility into practice performance: This can take many forms: delayed or inaccurate closings, a lack of information related to business drivers, the inadequacy of granular data, an inability to connect productivity metrics to practice performance, etc. They all, however, signal an underlying RCM concern.
When the symptoms point to an RCM diagnosis, the question then becomes, “How can we fix it?” Here, there are three steps:
Conduct an RCM function assessment to gauge performance and benchmark against peers. This assessment will often uncover the foundational issue: whether it’s process inefficiencies, inadequate resource allocation, antiquated technology-enablement, merger-integration issues that have decentralized the function or a combination of all of the above. Critically, this assessment will enable the company to analyze data and slice and dice historical collection patterns into relevant buckets, be it payor groups, geographic regions, PPMC locations, etc.
Create the appropriate RCM infrastructure to address assessment findings. Often that means creating a centralized RCM function within the PPMC. However, other alternatives include outsourcing the RCM function, or creating a hybrid model across existing locations, depending on the size and nature of the PPMC and/or the availability of practice management resources. A more effective RCM function will enable the PPMC to gain efficiencies within the cost-center by harmonizing policies, developing streamlined processes, and integrating workflow solutions.
Leverage technology to ensure a centralized function has the proper tools to accelerate revenue capture over the long-term. These tech-enabled RCM tools will support the entire payment cycle, provide performance visibility and integrate with other existing financial systems. Investment in AI-enabled automation technology to reduce the manual and redundant operational tasks related to patient access, billing, collections and denial management is particularly critical for building a cost-efficient RCM function that can scale with PPMC growth.
PE’s interest in PPMCs shows no sign of abating. In fact, the COVID economy has only served to increase PE’s interest in healthcare deals and has shone a light on those practices that already exist within the portfolio. PPMCs are, however, complicated investments that don’t align to the traditional PE value creation and stabilization playbook. While they can promise significant return on investment, underperformance is not uncommon and can confound even the most seasoned of PPMC sponsors.
RCM is often the unidentified and overlooked root cause of that pain and confusion. Understanding the hidden symptoms that signal an RCM issue, and appropriately treating the root cause, is the key to ensuring the long-term health (and wealth) of a physician practice investment.
Sarah Bailey is senior director and Sweta Adhikari is vice president, both with Accordion, the private equity-focused financial consulting and technology firm