By: Kyle Whitecotton
Merger and acquisition activity in 2017 was at a high level, thanks to low borrowing costs, a strong equities market, high levels of capital and low rates of organic growth in many industry sectors.
Healthcare — including acute care, chronic care, and medical technology — was a particularly active area. M&A activity was higher than average, even though transaction multiples tended to be higher than in many other industry sectors.
Increased regulation has been a major driver of M&A in healthcare and life sciences. The highly fragmented marketplace is consolidating to create economies of scale as larger networks look to save on cost of compliance. Long-term care was one of the most active areas for M&A within healthcare and is likely to remain so as interest rates remain low. Healthcare technology is another active area, as investors look to capitalize on bridging the gap between higher value care at a lower cost.
Healthcare deals offer rich opportunities, but the rapidly evolving environment carries significant risks.
Increased Use of E-Records
As of 2016, over 95 percent of hospital systems eligible for the Medicare and Medicaid Electronic Health Records Incentive Program were successfully using electronic records. While meaningful use requirements began in 2011, many middle-market healthcare providers and those outside of the hospital setting weren’t required to migrate to electronic records.
Buyers of smaller practices that have not completely automated their revenue cycle and health records should use extra due diligence. Paper processes often lack visibility into a provider’s practice, potentially creating a negative impact on the transaction price. A buyer may also perceive paper-based or multiple systems to be costly to integrate.
Evaluating Software Systems
Healthcare companies use a variety of revenue cycle systems to schedule, perform services, invoice and receive payments. These systems may provide vital information for a potential acquirer. Understanding the target’s revenue cycle is critical. Buyers should undertake a thorough review of the target’s processes and related documentation. A buyer’s request for information may include case data, types of services, dates, locations, amounts, primary payers, providers, times and other relevant data.
While system data provides a potential buyer with essential information, it may be difficult to assess its validity. Thus, it is crucial for the buyer and the seller to arrive at a mutual understanding of the data used to evaluate revenues and reimbursement.
Reimbursement Rates and Timing
Reimbursement rates carry a high level of uncertainty, requiring significant due diligence to understand reimbursement trends from commercial and government payers, as well as others. Buyers need to have a firm grasp on the typical cash collection cycle, how the patient mix has evolved and the level of government versus private reimbursement risk.
Reimbursement rate uncertainty and the timing of reimbursements are usually noted in a quality of earnings report produced during due diligence. An estimation of monthly or annual revenue adjustments often becomes a focal point of negotiations. The resulting adjustments could be significant, affecting terms of a contemplated transaction. For example, it’s not uncommon for a complete settlement of a patient’s claims to be made a year after service. It’s also critical to examine the collections of percentage of claims over time, the rates of denied claims, and the rates of paid claims by procedure or case mix by payer over time.
Different payer contracts can also lead to varying reimbursement rates. As the transition to value-based reimbursement models gains momentum, providers will need to document metrics for different payer and contract requirements. For example, one payer contract may provide for a higher reimbursement based on structural measures, such as physician to patient ratio or the use of medical records. Another payer contract may provide higher reimbursement based on outcomes.
Kevin Olvera is a healthcare assurance partner, and Shaun Buckley is a partner in the transaction advisory services group with BDO USA, LLP — a global accounting and advisory firm with offices in Fort Worth and Dallas. They’re writing this column on behalf of the Fort Worth CPAs, a regular contributor to FW Inc. They can be reached at [email protected] and [email protected].
By: Kyle Whitecotton