The Inadequacy of Revenue Cycle Diligence

As private equity firms continue to acquire and expand healthcare organizations, they are quickly learning the importance of revenue-cycle due diligence. After acquisition and integration, we often hear from clients that their perceived financially strong purchase is characterized by a struggling cash flow, aged receivables, and mounting denials. Whether the target is a small physician-group or multi-regional healthcare organization, the issue is frequently that financial analysis will not always reflect potential performance risks when capturing and billing for services. Financial diligence reviews may often also overlook planned future growth, aging technology, staff attrition, and other integration considerations.

Over the past few decades, mergers and acquisitions have become an increasingly popular tool for healthcare organizations to adapt and create value. In 2022 the industry’s trend toward fewer but larger acquisitions continued, with the second quarter of 2022 setting a record high $19.2 billion dollars in acquisition revenue across just 13 transactions.1 Though activity within the segment fluctuates, the potential for additional consolidations and private-equity-backed roll-ups remains as organizations navigate increasingly challenging market economics. Comprehensive transactional due diligence is integral to ensuring successful integration of these high-value deals.

Due diligence provides a better chance of closing and integration success by providing relevant data to appropriate stakeholders for improved decision-making. Diligence reviews often include financial data, legal documentation, tax and regulatory information, and human resources. However, revenue cycle diligence often goes overlooked because of several reasons, such as:

Lack of knowledge regarding the complexities of healthcare billing;
Financials masking operational issues and risks; and/or
Belief that integration or outsourcing can be easily implemented to fix any future issues.

In the commercial market, it is important to know that the risk/reward of a successfully or unsuccessfully integrated revenue cycle can have rapid and significant financial impact. Overlooking RCM diligence can have numerous negative impacts, including but not limited to:

Integration delays
Revenue leakage
Productivity degradation
IT system gaps or failures
Reporting barriers
Frustrated staff and providers.

RCM diligence should address all components of the revenue cycle, both in-house and outsourced, that impact cash flow and net revenue leakage. Detailed review of payer-mix, charges, payments, adjustments and reimbursement rates creates a more comprehensive picture of the financial health of the business. A comprehensive RCM diligence review will highlight potential risk areas, such as IT system functionality and scalability, resource gaps, vendor inventory and alignment analysis and performance benchmarking. Such a review will also provide a better understanding of existing operational performance across functional areas measured against leading practice indicators.

RCM diligence can be completed in either pre- or post-close diligence activity. While there are advantages to pre-close diligence, ensuring its completion is of primary importance. Delaying diligence will only compound any underlying problems. Having established that completing RCM diligence is the most important idea, let’s explore the different advantages between pre- and post-close diligence.

RCM Due Diligence Advantages	Pre-Close	Post-Close
Comprehensive understanding of AR and identification of hidden payer-issues	X	X
Full review of key performance indicators (“KPI”s) and use of KPIs to identify process improvement opportunities	X	X
Identification of resource gaps	X	X
Staff alignment and ability scale/adapt to changes such as increased volume	X	X
Technology maturity	X	X
Vendor management strategy	X	X
Performance improvement roadmap	X	X
Integration (“IMO”) priorities, roadmap and timeline	X
Synergy alignments	X

Key Considerations:

There are four key categories to explore, during RCM diligence, to identify potential risks or opportunities in a target’s operations:

Operating Model & Integration:

Successfully evaluating a target’s potential fit into the acquiring organization requires an RCM Operating Model that provides the blueprint for strategy execution. Careful evaluation of target operations is critical to identifying and mitigating potential integration pain points.

Staff and Organization

It is important to consider the target’s existing RCM organization, level of centralization and sophistication of job descriptions and functions. A thoughtful staffing integration plan should define roles and responsibilities, identify and address potential gaps and synergies and outline clear, measurable productivity metrics to ensure success.

Technology and Reporting:

Evaluating a target’s technology and reporting footprint is another vital step to ensure successful integration. Thorough understanding of a target’s existing work drivers, level of automation and reporting capabilities is necessary to identify and address potential risks and opportunities during integration. Another output of the RCM diligence process should include a Technology Roadmap providing the integration strategy and associated timeline to mitigate technology risks.

Policies and Processes:

Identifying and addressing variability in RCM-related processes and associated policies in target operations is another pivotal step. A gap analysis to identify deviations from current processes in the established RCM best-practice operating model is yet another valuable output of RCM diligence.

Bottom line:

Comprehensive RCM diligence should not be overlooked during the financial due diligence process. It is critical to framing the logistics of whether a potential target is a good strategic fit, enhances accurate target valuation and increases the chances of integration success. Our RCM experts have worked numerous healthcare due diligence deals and successfully assisted clients in identifying risks and opportunities while creating a playbook to facilitate integration success.

© Copyright 2023. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.