Reimbursement rate comparisons: Assess quality of earnings through healthcare M&A due diligence


The potential for managed care upside is a key consideration of the valuation model in many healthcare mergers and acquisitions. Comparisons of contracted reimbursement rates, therefore, are an important aspect of determining pre- and post-deal earnings potential. For this reason, a critical factor in the quality of earnings and financial due diligence process on healthcare deals is understanding potential payer reimbursement rate changes.

However, prior to an acquisition, organizations are often unable to share this information due to contractual clauses and/or confidentiality agreements with healthcare payers. As part of the financial due diligence process in healthcare M&A, a reimbursement rate comparison (sometimes referred to as a black box analysis when information cannot be shared amongst two parties) can provide clarity in this area. For buyers, it’s an important part of understanding the prospective value of most healthcare M&A deal, whether you’re acquiring a single practice or a larger organization, or if you are embarking on a larger roll-up of multiple practices.

Payer reimbursement rate comparisons: an overview

A payer reimbursement rate comparison for a healthcare M&A transaction is essentially an analysis of the most frequently-used Current Procedural Terminology (CPT) codes by commercial payer for both the acquirer and acquisition target. Often times, this analysis requires a third party to perform the calculation in order to maintain confidentiality of payer fee schedules.

Requirements for a healthcare reimbursement rate comparison are fairly straightforward:

  • A listing of the acquisition target’s frequencies by CPT code for a recent and normal 12-month period
  • Payer contractual allowables schedule for the acquisition target
  • Payer contractual allowables schedule for the acquirer

Through a model that uses historical CPT frequency utilization data, the reimbursement rate comparison evaluates how managed care revenue might change by moving the acquisition target from one company’s payer contract to the other company’s payer contract. This analysis is typically performed at the gross revenue (allowables) level, to eliminate any noise created by each respective company’s collection practices and potential bad debt.

Reimbursement rate comparisons are customized based on specific buyer and seller circumstances

A reimbursement rate analysis can be tailored to the needs of an organization based on its size and how it operates.

For instance, a large practice with multiple payer relationships may require a highly detailed level of analysis in order to gain a more useful picture of potential impacts. In this case, the model may need to consider multiple products and, therefore, reimbursement rates for any one given payer. Furthermore, there are times where future negotiated reimbursement rate escalators for both buyers and sellers may also need to be assessed during the managed care calculation in order to understand the full picture.

Other organizations may need a less intricate process. If the reimbursement rate comparison is being performed for a smaller business that does not have many specialties or payer relationships, it may be more useful to only examine a select number of CPT codes or payer relationships that represent the bulk of its revenue. This analysis would provide a higher-level look at the potential financial impact of a prospective deal.

Timing considerations for healthcare reimbursement rate comparisons

While payer reimbursement rate comparison is an important part of quality of earnings exploration, other factors outside of rate changes should also be considered. The timing of the payer contract assignment and of the transaction can each have a number of impacts on the financial side.

Timing considerations include when the prospective contract goes into effect and when it can be terminated. When an acquirer is considering moving the acquisition target’s providers onto its own payer agreements, delays in the credentialing process or full onboarding of the new providers may extend the timeline for the initially estimated increases in revenue.

Additionally, based on certain terms of the merger or acquisition, the parties may be required to notify the payer of a change of ownership control after the close of the transaction; this could further delay the anticipated reimbursement changes.

One part of healthcare M&A financial due diligence

Ultimately, a healthcare payer rate reimbursement comparison can have a crucial impact for all parties involved. By helping bridge informational gaps related to the other party’s contracted reimbursement rates with payers, it can lead to significant benefits in the M&A transaction process, both in the short term and the long term. These benefits often include increased revenue and earnings and, thus, lower deal multiples.

A reimbursement rate comparison is just one part of the overall financial due diligence that should precede any healthcare M&A transaction. If your healthcare organization or private equity firm is considering a merger or acquisition, contact Kaufman Rossin to learn more about payer reimbursement rate comparisons (or black box analysis), and learn how a comparison could assist with the financial due diligence and quality-of-earnings of your acquisition or roll-up strategy.

Ian Goldberger, CPA, is a Business Consulting Services Principal, Transaction Advisory Services at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.

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