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Maximizing the value of healthcare portfolio companies

by contributors Brian B. Sanderson and Kevin J. Hovorka, Crowe Horwath | Published July 5, 2012 at 1:42 PM

Despite long-term challenges and a changing regulatory environment -- or possibly because of them -- merger and acquisition activity in the healthcare industry continues to grow. Healthcare providers today must deal with rising costs, downward pressure on reimbursement rates, complex insurance issues and growing regulatory scrutiny.

To maximize the value of healthcare portfolio companies in this environment, management teams must look beyond cost-cutting alone and take a comprehensive and methodical approach to some commonly encountered revenue issues as well. To succeed in this effort, the team must first have a clear picture of the broad dynamics of the industry and the ways in which these factors affect their revenue-generating capabilities.

When addressing the revenue cycle in a healthcare portfolio company, three general trends in the industry merit specific attention.

Industry consolidation and reconfiguration. One recent study by Irving Levin Associates Inc. reported that the value of mergers and acquisitions in the healthcare industry increased by 9% in 2011, with the M&A market generating 980 healthcare-related deals worth $227.4 billion. While a sizable portion of that activity involved providers of medical devices and technology, more than half of the deal volume -- 56% -- involved direct providers of healthcare services such as hospitals, laboratories and physician practices, according to a Healthcare Financial Management Association Healthcare Financial News article.

Today's M&A activity is both vertical and horizontal -- that is, it is occurring both within specific provider segments and across various types of providers. As hospitals and hospital chains have consolidated horizontally into broader networks with greater purchasing power and management efficiency, the advent of various accountable care organization models has spurred vertical consolidation involving multidisciplinary networks of providers. These vertically integrated organizations may include physician groups, testing and laboratory facilities, outpatient treatment and therapy providers, hospitals, ambulatory surgery centers, walk-in clinics, home health providers and long-term care providers.

Technological changes. Another broad trend affecting healthcare portfolio companies is the increased use of technology applications that touch all aspects of the organization, not just the delivery of care. Integrated software solutions that link the clinical, financial, operational and reporting functions add complexity but also help deliver better operational efficiency and financial rigor.

Concurrently, changing regulations related to electronic medical records -- and the coming transition to the new International Classification of Diseases (ICD-10) codes -- will require system and business changes throughout the healthcare industry.

Revenue and cost pressures. Despite many attempts over the years to devise reimbursement systems that control usage or encourage individuals to be more directly involved in monitoring the cost of care, the predominant payment systems in the healthcare industry are still based on volume. For the most part, providers continue to be reimbursed based on the number of patients seen, the number of procedures performed or the number of services provided.

As long as that is the case, any discussion of holding down healthcare costs invariably will revert to the notion of reducing reimbursement rates, which means healthcare portfolio companies must be continually adept at managing their revenue cycles.

A related aspect of the ongoing revenue pressures is the need to control costs in healthcare portfolio companies. The cost structures of the various industry segments vary considerably -- a home health organization faces cost challenges that are quite different from those of a hospital, lab or physician's office.

Regardless of the specific cost structure being examined, however, simply vowing to "do things more efficiently" is not enough. Cost reduction efforts must include specific initiatives -- such as technology projects, outsourcing or integration of services across several portfolio companies -- that result in savings that can be directly tracked and verified.

Reducing costs and achieving efficiencies of scale are obvious priorities in all healthcare organizations, especially when integrating merged or acquired portfolio companies. What is less commonly addressed, however, is the opportunity to achieve significant bottom-line benefits by focusing on the revenue side of the operation.

Industry experience indicates that generally it is possible to increase net revenue by 1% to 5% through a combination of initiatives designed to reduce bad debt, increase collections and maximize charge capture. Improvement opportunities typically can be found in four broad areas:

Collections, reimbursement and bad debt reduction. It is always surprising to discover how poorly the collections processes are performing in many healthcare organizations. In numerous instances, for example, providers have been able to reduce bad debt by 30% to 40% in a relatively short time simply by installing some basic collections infrastructure.

A critical component of this effort is creating an expectation of payment from the outset, and communicating it clearly yet professionally to patients. A closely related -- and surprisingly common -- shortcoming is insufficient attention to point-of-service payments such as the collection of co-payments and deductibles.

Many healthcare portfolio companies also lack basic collections tools such as credit scoring or payment testing on incoming patients to identify repeat nonpayers in advance. Using such tools does not necessarily mean turning away patients who cannot pay. Rather, it means exploring alternative delivery systems or charity care for such patients while devoting scarce collections resources to those accounts that actually have the means to pay.

This effort requires establishing a methodical process for billing and collecting patient payments. Often it makes sense to outsource collections activity to organizations that have the resources to handle it more effectively.

Charge capture. Two frequent causes of lost revenue are inadequate documentation and simply failing to bill for allowable charges. An example is billing for a phlebotomy procedure when blood is drawn but failing to bill for phlebotomy administration, which many payers recognize as a separate, allowable charge. When thousands of procedures are performed over the course of a year, such small shortcomings have a large impact. Such oversights are not confined to physician offices; they occur at all types of healthcare providers.

There are often related technology issues as well. For example, thousands of current procedural technology codes are used by providers and insurers to communicate the services provided and the reimbursement amounts due. As the practice of healthcare changes, new codes are developed for new services, current codes are revised, and old codes are discarded. Dealing with outdated current procedural technology codes is a constant challenge.

Denials. Coding errors are only one reason why an insurer or other payer might deny payment. Failure to obtain required preauthorization for certain services, lack of a required referral from a primary-care provider, insufficient or inaccurate billing information, and simple clerical errors can also cause payment to be denied.

Addressing these varied shortcomings requires an organized methodology, beginning with the establishment of a denial database so that management can identify patterns and develop methods for preventing recurring problems.

Revenue cycle management. On a broader scale, healthcare portfolio companies should also implement general revenue cycle management programs. These include basic accounts receivable management, collections performance management and revenue analysis by payer, type of service, place of service and other variables.

In one recent instance, a chain of outpatient therapy providers that was incurring a disproportionate amount of bad debt eventually traced the problem to one specific clinic where therapists were unaware of some insurers' limits on the number of covered visits. The problem had gone undetected for some time -- until the payer began analyzing bad debt by place of service.

Another important management tool, revenue cycle analytics, can also help to automate financial reporting and bring integrity to financial reports. For healthcare portfolio companies that may eventually be divested, such demonstrable financial reporting integrity can be a critical advantage.

In an industry in which margins are chronically thin -- and always under pressure -- achieving a 1% to 5% increase in net revenues by addressing common shortcomings is a significant victory. Moreover, for private equity groups or other investors that plan to eventually sell their portfolio companies at a multiple of annual revenue, an increase in revenue provides additional leverage that cost-cutting alone cannot achieve.

A comprehensive, objective and methodical management approach to revenue enhancement is essential to success in today's challenging -- yet potentially rewarding -- healthcare industry.

Brian B. Sanderson is the managing partner of healthcare services at Crowe Horwath LLP in Oak Brook, Ill. Kevin J. Hovorka is the managing partner of private equity services at Crowe Horwath in New York.

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Tags: Healthcare Financial Management Association Healthcare Financial News | healthcare providers | International Classification of Diseases (ICD-10) codes | Irving Levin Associates Inc.

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