Healthcare M&A update: Q2 2019

Sector spotlight: Revenue cycle management outsourcing

Revenue Cycle Management (RCM) involves the control of payments as they flow through the healthcare ecosystem, amongst patients, providers, facilities and suppliers. Activities falling under the RCM umbrella include billing, collections, coding, data analytics and compliance. Providers and healthcare organizations often manage their revenue cycle in-house, with the application of software developed by healthcare IT firms, or they may choose to outsource a portion or all of their RCM activities. With more stringent reimbursement policies, growing emphasis on detailed reporting and an industry-wide shift towards value-based care, providers are turning towards RCM outsourcing to optimize revenue, to recognize cost efficiencies and to focus on providing care.

The RCM outsourcing industry is in a period of strong growth, with the industry projected to grow from $11.7 billion in 2017 to a valuation of $23 billion by 2023. According to a 2018 Black Book survey, 18% of hospitals implemented a full RCM outsourcing project in 2018, up from 11% in 2015. Increasing demand is being driven by a twofold benefit to providers from RCM outsourcing:

• In today’s environment of falling reimbursements, the importance of revenue capture is growing- in a 2018 Crowe study conducted on approximately 950 hospitals, RCM outsourcing was found to generate a 3% increase in POS cash collections and a 2% increase in self-pay after insurance collection. Outsourcing some or all of RCM activities can decrease bad debt, cash collections and decrease AR balance.
• Hospitals’ expenses have been growing faster than revenues, with margins dropping to a record low of 1.6% in 2017. Finding cost savings will be crucial to providers moving forward, and outsourcing RCM activities is one way to save on administrative costs of staffing and costly technology implementations that may not be optimally suited for an organization.

Crowe’s study did indicate that RCM outsourcing had its pitfalls for the 950 surveyed hospitals- it resulted in a lengthier collection cycle and resulted in 1% higher denial and write-off rates. However, healthcare industry variables such as reimbursement models, coding standards, reporting requirements and compliance are most likely to challenge providers’ top and bottom-lines. In this environment, greater revenue capture, lower cost structures, analytics-based insight and the ability to scale operations without significant integration hurdles are all benefits which are driving demand for RCM outsourcing. Industry trends that could continue the growth of RCM outsourcing firms, as well as the attractiveness of investing in or acquiring them, include: