Revenue cycle management is in the midst of a unique shift that is driving considerable value for companies that operate in the self-pay management sector. The revenue cycle encompasses the non-clinical processes that affects how cash flows through an organization, starting from the front-end scheduling and data collection activities, to the middle coding and documentation services, and finally to the back-end billing and collections. In each of these, process breakdowns can lead to huge delays or decreases in cash collections.
Companies like McKesson that offer services or software to manage, facilitate, or improve the revenue cycle have always played a significant role in outsourcing these specialized services for hospitals and physician groups. While large national revenue cycle companies have often looked for acquisition opportunities, a sector which used to have one of the lowest valuations in this space, they are now driving strong interest from a wide variety of strategic and financial investors and pushing the upper bounds of valuation.
How has health reform made an impact?
It’s not uncommon for large national platforms to seek acquisitions to consolidate software and services capabilities. This has afforded entrepreneurial businesses an opportunity to find liquidity, although at relatively low multiples. Potentially the lowest multiples in the sector were paid for outsourcing firms that provided back-end accounts receivable management services. The companies that specialized in small dollar or bad debt collections were historically at the lowest valuation in the revenue cycle sector and health reforms anticipated to be driven by the Accountable Care Act were forecasted to be particularly damaging for this segment of the industry. Specifically, the mandate to obtain health insurance coverage was expected to significantly reduce the payment obligations of the previously uninsured.
However, health reform has actually been a boon for revenue cycle management companies that focus on self-pay management, driving a considerable increase in volume and valuation. In particular, outsourcing companies that offer solutions dedicated to managing the self-pay portion of the revenue cycle have seen their volumes increase. It turns out that the newly insured patient population is utilizing more elective services due to its perceived insurance coverage, only to discover, after the fact, that they have a significant out-of-pocket obligation in the form of deductibles, co-insurance, and co-pays. At the same time, the broader insurance industry continues to shift a larger portion of the overall healthcare claim onto the patient, further exacerbating the need to more stringently manage these self-pay amounts. As a result, business is very good for self-pay management companies.
Valuations are rising
Whereas valuations for firms that specialized in collecting these small dollar balances used to be low single-digit multiples of EBITDA, transactions currently in the market are drawing a higher volume of bidders, and EBITDA multiples are approaching the double-digit range. Clearly, the self-pay management sector has benefited greatly from health reform and is now one of the hottest sectors of the revenue cycle.