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Diligence Considerations for Healthcare Provider Investments

Private equity interest and deal activity for healthcare providers has certainly accelerated over the past decade. Platform acquisitions are particularly targeted as opportunities for back-office efficiency and revenue growth – and to address pricing power imbalances with the ever-focused payers.

Physician practices historically have been slow to adopt truly lean operational efficiency measures. With the advent of the Affordable Care Act, practices have been forced to adopt certain information technologies to maintain patient information, as well as to provide compliance reporting to CMS for incentive rewards, and longer term, as deficiency penalty payments for operations that fall below promulgated standards. Thus, providers can serve as attractive investments/acquisitions due to opportunities for business efficiency improvements and margin expansion – if they have the right scale and ability to further scale.

The move towards a value-based healthcare system and away from a traditional fee-for-service system provides new opportunities for platforms that can take on risk and manage efficiencies. The nuances of varied Healthcare practices necessitate a thoughtful approach when performing Commercial Diligence on a provider of interest.

In an upcoming GRAPH Paper I will share thoughts on designing the commercial diligence agenda to address threshold issues in an order logical to both mitigating diligence spend, and aggressively sharpen a differentiated and pressure tested thesis. In the meanwhile, here is a list of key commercial diligence considerations for a provider-based investments:

  1. Regulatory environment

Certain states require certificates of need to open and operate medical facilities or provide new services, thus regional expansion may require local or state approval. Familiarity with all local, state, or federal regulations for establishing/expanding healthcare services is a front end “must-understand” if regional growth is part of the thesis.

  1. Local/Regional competitive environment

Is there adequate competitive differentiation through unique or niche service offerings on the platform?

  1. Physician/PA/NP, etc. tenure

Is there a balance of composition and tenure of physicians/key personnel to maintain practice integrity and avoid key personnel risks to the practice?

  1. Practice payor mix

Payment for services varies amongst public/private and self-pay. The mix of payors is important to understand when modeling potential future revenues and opportunities for growth.

  1. Labor pool environment for ancillary staff

Labor, especially nurses and nurse practitioners, can be expensive. Recruitment and retention can be a financial and employment risk as nationwide nursing shortages have resulted in escalating salary and benefit expansion. Additionally, the standard nurse full-time work week is 32 hours (unlike other budget-based personnel).

  1. Capacity for revenue mix enhancement

Understanding the mix, and the potential mix of cash and insurance/government pay revenue, can lead to enhanced margins; likewise, certain revenue line items may be subject to lesser or more reimbursement pressure depending on certain market characteristics.

  1. Significance of network effects

Integrated delivery networks can offer opportunities for a distributive care model whereby certain complementary services are offered at various sites to enhance customer/patient retention.

  1. Multi-site expansion

If the physician practices are owned by a hospital, Medicare rules allow outpatient clinics that meet certain federal requirements to bill separately for the facility as well as for physician services (a significant revenue add-on). Physician offices owned by physicians and freestanding clinics are not permitted to charge for the facility.

  1. Procedure/visit ratio

Typically, procedures performed by physicians reimburse more than patient visits. The ratio of procedures performed to patient visits can impact the value of the practice. Add-on services and expansion of procedures performed can enhance revenue generation.

  1. Management/Service Contracts

The terms of current and pending service contracts may include restrictive clauses and termination specifics.


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