Michael Lamm: Healthcare ARM and RCM Industries Converging

Michael Lamm

The following is taken from the Kaulkin Ginsberg Q1 2012 M&A Report: Outsourced Business Services Sector Review. Download your free copy here.

The convergence between Accounts Receivable Management (ARM) and Revenue Cycle Management (RCM) providers continued to be apparent in Q1, as both strategic buyers and larger private equity backed Healthcare OBS companies were aggressively seeking acquisition opportunities in both markets.

Historically, Healthcare Outsourced Business Services (OBS) companies fell into either a collection servicing (ARM provider) or a pre-collection servicing (RCM provider) category. Today, these distinctions have become blurred as healthcare clients, predominantly hospitals, have shown a preference for vendors who can provide a more comprehensive suite of services from patient registration, IT services, billing to back-end collection services.

In order to meet this need, many of the ARM and RCM companies have pursued strategic acquisitions and mergers with companies that have complimentary service offerings. This trend has obviously had a direct and positive effect on M&A activity in the Healthcare OBS market, and is clearly evident in the Q1 deal results.

Of the 21 OBS transactions completed in Q1, 9 of them involved healthcare OBS companies, half of which provide both ARM and RCM services. While 9 transactions may not seem like a lot, keep in mind that in 2011 there was only a total of 17 Healthcare OBS deals, representing 1/3 of the total M&A volume for that year. In Q1, the Healthcare OBS market accounted for more than half that number and over 40% of total OBS deals.

One prime example of this convergence involved the partial acquisition of American Healthcare Outsourcing Alternatives (AHOA), LLC by Expeditive toward the end of Q1. Expeditive is a leading provider of interim staffing of revenue cycle personnel, while AHOA provides remote billing and collection services. By joining forces, these two entities can provide their clients with a broader array of Healthcare OBS services and enable the companies to gain greater market share with their respective healthcare clients.

Additionally, we continue to witness healthcare focused IT management companies establishing deeper relationships with their clients and further distinguishing themselves from their peers by acquiring select healthcare OBS companies that offer distinct ARM and RCM services. In Q1 Francisco Partners’ portfolio company T-System announced the acquisitions of Clinical Coding Solutions and Practice Management Associates. T-System delivers clinical, business and IT solutions for emergency departments. With these two acquisitions, T-System has simultaneously supported its continued growth and investment in technology-enabled solutions for emergency care clients, and has obtained additional complimentary services (clinical documentation and coding/billing processes) for its existing clients.

Here are a few examples of what buyer’s are actively seeking in the Healthcare OBS market:

• ARM platform (north of $5M in EBITDA) companies providing both pre-collect and bad-debt collection services for hospitals; enables strategic buyers to provide “cradle to grave” services.  As the healthcare market tends to be very local/regional in nature, acquisitions tend to be the only way for a Healthcare OBS company to enter a new geographic market. The Midwest and North West sections of the United States have become particularly attractive as they offer cheaper labor and more profitable business opportunities than area such as the West and North East sections.
• Companies that offer billing, pre-collect and/or work-flow process technology solutions to hospitals, physician groups and/or emergency rooms that can be combined with an IT Management or complimentary service delivery model.
• RCM companies that are providing revenue cycle staffing into the central business office of hospitals.
• Medicaid eligibility companies that are focused in a particular geography.
• Coding and transcription companies that have both on-shore and off-shore/near-shore capabilities.

Political Climate

Despite the level of buyer interest in the Healthcare OBS industry, many continue to watch closely how the Supreme Court will ultimately vote regarding the constitutionality of the “Obama Care” requirement that an estimated 32 million uninsured Americans must purchase healthcare insurance beginning next year or face a penalty. The Supreme Court is expected to deliver its decision in June. If the Supreme Court decides against the individual mandate and/or repeals Obama’s Healthcare Reform Plan, health care providers, ARM and RCM firms will see more of the same regarding patients who are unable to pay. However, if the court decides to rule in favor of Congress and the President, millions of Americans will be required to have health insurance.  As a result, this will help increase the “propensity to pay”  of many that fall into the self-pay collections bucket over time, which will ultimately help the balance sheet woes of hospitals and make the accounts serviced by ARM and RCM providers easier to bill and collect on.

Predictions for the Remainder of 2012

We expect continued buyer interest in healthcare ARM and RCM companies for the remainder of the year.  We are aware of a number of transactions that are in the works, which could make this one of the biggest years for M&A within the ARM and RCM markets we have seen since before the recession.

Small ARM and RCM companies (< $10M in revenues) are also attractive to larger healthcare OBS companies if they have an attractive suite of services, clients and/or geographic concentration. In the Healthcare ARM industry, buyers seem to be more interested in First Party and pre-collect services than later stage collections, as they typically generate more predictable cash flow and are a better entrée into other central business office servicing opportunities such as patient registration, staffing and front-end billing.

It will be an interesting year as we continue to watch the Healthcare OBS market respond to strong buyer interest, growing anxiety over the Supreme Court’s ruling and who will ultimately become our next President – if President Obama is not reelected, this could have negative ramifications on his Healthcare Reform Bill. Either way, we don’t expect M&A activity to slow down in healthcare ARM and RCM as they continue to converge.

Michael D. Lamm advises owners on their growth and exit strategies for Kaulkin Ginsberg’s Strategic Advisory team. Michael can be reached directly from Kaulkin Ginsberg’s Philadelphia office at 240-499-3808 or by email. You can also read his blogs on insideARM.com.