Reimbursement Trends in PPM Businesses – 5 Key Points

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[co-author: Jeff Fisher]

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference focuses on trends in physician practice management (PPM). It is authored by Sarah Ahmed and Erin Dine of McGuireWoods LLP and Jeff Fisher of RSM US LLP.

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A practice’s reimbursement mix, the ratio of out-of-network reimbursement, and response to value-based care are all important considerations contemplated by PPM companies prior to an acquisition or partnership with a practice, according to experts who spoke on a panel at the 16th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 20 and 21.

Experts included Lisa Alexander, Vice President of Farragut Group; Vito Dacchille, Chief Executive Officer of Redwood Dental; Matthew Evans, Managing Director – Healthcare of Monroe Capital LLC; Stewart Gandolf, Chief Executive Officer & Creative Director of Healthcare Success; and Katherine Gibson, Senior Vice President of Marwood Group. The moderator was Erin Dine, Attorney at McGuireWoods LLP.

Here are five key points from the panel discussion:

1. Though the importance of scale cannot be overstated, PPM investors are also looking for practices that have certain qualities that enable the practice to withstand unforeseen reimbursement trends, such as a diversified reimbursement mix. The panelists noted that certain specialty practices (e.g., dermatology, allergy, and GI) could look to developing opportunities around cash-pay patients so as to achieve reimbursement diversification. Further, given unreliable reimbursement rates across various payors, diversifying a practice’s reimbursement portfolio in terms of networks, commercial payors, federal and state payors, and cash pay is important.

2. Diversification of a practice’s reimbursement mix is not something that should occur right before a practice considers selling. Panelists noted that investors equate movement with uncertainty when analyzing a potential partner and investors are looking for consistency over anything when analyzing the target. Therefore, practices looking for an investor should start developing opportunities to diversify its reimbursement mix after a sale.

3. Diversification can also be accomplished by adding ancillary services. For example, practices could expand by adding an ambulatory surgical center or pathology and laboratory services to its existing practice. However, investors may not be willing to value a new ancillary investment as highly as a more established cash stream. Therefore, practices should consider the timing of adding any ancillary services lines with a sale in mind, and ensure the ancillary strategy is executed in a manner that will maximize value.

4. When analyzing PPM targets, investors place significant value on practices that have strong relationships and payor agreements with commercial payors, compared to practices that have a significant percentage of out-of-network reimbursement. Practices that are in-network with payors are typically providing the same services for 20-30 percent less reimbursement compared to practices that are out-of-network with the same payor. Further, payors are aware of the significant amount of M&A activity transpiring within the PPM space and there is a strong drive toward narrow payor networks.

5. The healthcare industry feels the current push toward value-based care reimbursement; however, panelists noted that this push is more intense in connection with hospitals and larger health care systems, rather than at the practice or PPM level. That being said, panelists noted that investors continue to place value on practices that have the internal infrastructure, leadership, and knowledge to handle future value-based reimbursement trends, even though it is difficult to underwrite this value from a capital perspective.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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