Welcome to Revenue-Generating Insights, Focus Search Partners’ three-part series (view Part II and Part III) dedicated to PE firms invested in healthcare services. The series begins by discussing the increasingly critical role that managed care and revenue cycle management (RCM) strategies play in creating value and why that’s changing PE hiring needs.
“We are leaking millions in revenue.”
That is the refrain we hear on a regular basis from many lower middle market PE clients and their CEOs when discussing portfolio company hiring needs. The magnitude of this revenue leakage most often comes to light after the acquisition of physician-founded healthcare services businesses. But many PE firms run into this problem even when such businesses are acquired from other investors.
Consequently, leadership of two closely intertwined functions are increasingly becoming the top hiring priorities as PE firms scale their healthcare platforms: Managed care and revenue cycle management (RCM).
What’s the Typical State of Managed Care?
With only so many hours in the day and any number of patients to treat, the administration of managed care contracts often gets unintentionally short-changed in physician-led practices. Instead of negotiating a three to five percent rate increase at renewal, contracts often remain flat. And when that happens repeatedly at each subsequent renewal, the potential revenue loss grows exponentially.
We’re no longer surprised by post-acquisition stories from PE clients about providers who are getting paid on contracts written five, six, seven, and, even, 10 years ago. Not to mention, the firms who share tales of long-untouched boxes of managed care contracts collecting dust in storage despite their untapped revenue potential.
By contrast, once an experienced chief managed care officer (CMCO) is hired, the revenue lift is significant. Within six months, a CMCO we placed recovered $2 million, and another brought in $8 million in three years. They each organized and analyzed their platform’s contracts, built strong payor relationships, and are now regularly negotiating for better rates. That’s money going straight to the bottom line.
Why Is Revenue Cycle Management Important in Healthcare?
It’s bad enough when a provider is billing a service at the same rate as five years ago, especially when that’s exacerbated by persistently high inflation. What’s worse? Charging less than even an outdated contract allows because no one within the revenue cycle function knows or checks what is allowed. Those are just two causes of leakage in the bill-to-pay cycle. Others include things like the following:
- Incomplete or inaccurate patient documentation that isn’t addressed quickly or at all
- Coding errors that aren’t caught
- Unpaid patient balances that aren’t collected
- Denied and disputed insurance claims that aren’t pursued
For PE firms, such leakage is multiplied with every additional practice acquired, each with its own legacy revenue function. That is why RCM is often one of the first areas investors choose to professionalize through upgraded talent, processes, and systems. More often than not today, that transformation starts with the hire of a VP of RCM, if not a chief revenue officer (CRO).
Ideal candidates for these roles have the leadership skills, analytical chops, and technology knowledge to create a consistent and clean revenue cycle across the entire platform. Once hired, the millions-plus revenue lift quickly follows. Additionally, CROs are fast becoming integral members of acquisition due diligence teams for their ability to assess the difference between revenue claims and actual receipts.
Industry and Societal Shifts Elevating the Criticality of Managed Care and RCM
Just a few years ago, PE firms sought tactical candidates to supervise managed care and RCM in their healthcare services platforms. Today, leadership of these revenue-generating functions has been elevated to strategic roles, often at the C-level or just below it. Several industry and societal shifts are driving this elevation:
- In-office versus telehealth care: Even as we approach the endemic stage of COVID-19, virtual care remains a popular and convenient patient option. Investors realize that practices that aren’t adequately gathering virtual patients’ medical history or still haven’t mastered telehealth billing codes are unnecessarily hobbling their revenue cycle.
- Outsourced versus in-house back-end operations: Not long ago, many hospitals and practices joined the popular push to outsource their RCM to third-party providers. But PE firms have realized that the smaller-dollar collections such providers typically ignore add up to significant revenue. Not only does a re-established in-house RCM allow them to go after every dollar, but it puts them in control of their own data, one of their most valuable assets.
- Manual versus automated, AI-driven data: Speaking of data, it can now be sliced and diced in all sorts of ways through automated software, often powered by artificial intelligence. As a result, some PE firms have expanded the role of their CROs to include in-depth data analysis of referral patterns and revenue cycle mapping to identify where the most patients are coming from, what their diagnoses are, and who requires more frequent and extensive care.
- Fee-for-service versus value-based-care (VBC) contracts: This shift is already happening in renal care and oncology with cardiology following suit. It’s only a matter of time before VBC contracts become the norm across the board, which is why PE firms are so focused on cleaning up their managed care function and ensuring they have a leader who understands and can effectively manage the shift from fee-for-service to VBC.
Finding the Right Leaders at the Right Time
Along with now-common plans to install dedicated FP&A functions in portfolio companies, we’re seeing more and more PE firms implement managed care and RCM strategies that elevate the leadership of these functions. It’s all part of a concerted effort to create as much value as possible before planned exits and to demonstrate the sophistication of these areas to potential buyers.
The success of these strategies depends on your ability to attract qualified leadership candidates and get top talent across the finish line. The healthcare practice at Focus Search Partners understands the urgency of this moment. Moreover, we have the expertise and experience to help you fill these critical strategic leadership positions at a time when the candidate pool for them is stretched to its limit.
Stay tuned for part two of this series, Seven Essential Traits of Today’s Chief Managed Care Officer.
Until then, let’s discuss your leadership needs. Contact Focus Search Partners today.
By Lynn Durant and Alesha Herbert, Managing Directors at Focus Search Partners