falcon capital partners - physician rcm industry report

Industry Research Report

Physician Revenue Cycle Management

Falcon Capital Partners LLC Securities Offered Through BA Securities, LLC Member FINRA/SIPC www.falconllc.com January 2013

Copyright © 2013 Falcon Capital Partners LLC www.falconllc.com

Table of ContentsPreface .............................................................................................................................................. 3

Section 1: Executive Summary ........................................................................................................... 4

RCM Industry Snapshot ......................................................................................................................... 4

Competition Drives the Need for Efficiency .......................................................................................... 5

Payor Mix and Reimbursement Trends ................................................................................................. 6

Migration to Value‐Based Reimbursement and its Implications .......................................................... 6

Looking Forward: Redefining the RCM Industry ................................................................................... 8

Section 2: Overview of the Physician RCM Services and Technology Market ...................................... 9

Definition of the Market / Scope of our Discussion .............................................................................. 9

Market Evolution and Structure .......................................................................................................... 11

Hospital‐Based Physician Market ........................................................................................................ 12

Office‐Based Physician Market ........................................................................................................... 13

Historical Drivers of Outsourcing ........................................................................................................ 14

Section 3: Major Market Changes .................................................................................................... 16

Introduction ........................................................................................................................................ 16

Shifting Reimbursement Priorities ...................................................................................................... 18

Shifting Payor Mix ............................................................................................................................... 20

Rising Healthcare Administrative Costs and their Implications .......................................................... 21

Competitive Pressure .......................................................................................................................... 22

Hospitals Acquiring Physician Groups ................................................................................................. 23

Shift from Fee‐for‐Service to Pay for Quality ...................................................................................... 24

Overview of the Most Common Quality‐Based Reimbursement Models........................................... 25

Likely Evolution in Payment Models ................................................................................................... 27

Changing Payment Models Catalyze Changing Business Needs for Physicians .................................. 27

Technology Adoption .......................................................................................................................... 28

Engagement of the Healthcare “Consumer” ....................................................................................... 29

Health Insurance Exchanges and Expansion of Medicaid ................................................................... 30

Data Security / Compliance ................................................................................................................. 31

Section 4: Implications for RCM Companies ..................................................................................... 33

Reduce Cost Basis / Prepare for Downward Fee Pressure .................................................................. 33

Diversify Specialty Mix ........................................................................................................................ 33

Invest in Practice Management Capabilities ....................................................................................... 34

Invest in “Next‐Generation Technology” / Find Technology Partners ................................................ 35

Develop Relationships with Hospitals ................................................................................................. 36

Prepare to Help Physicians Tie Clinical Activities to Financial Outcomes ........................................... 37

Prepare to Engage Consumers ............................................................................................................ 37

Improve Compliance & Data Security ................................................................................................. 37

About Falcon Capital Partners ......................................................................................................... 39

Endnotes ......................................................................................................................................... 41


Preface We have spent countless hours over the last decade discussing the finer nuances of the physician revenue cycle management industry (herein referred to as the “RCM” industry) with investors, business owners, and executives. In the past several years, we have noticed a distinct shift in the general trajectory of the market. The emergence of new payment and business models, rapid adoption of electronic health records (“EHR"), and a host of other trends are forcing RCM service and technology companies to redefine their value propositions. This is within the context of a number of historical challenges that continue to create market turbulence, including technology advancement, reimbursement uncertainty, heightened competition, and increased cost of noncompliance.

We wanted to take an opportunity to synthesize the most important trends affecting the RCM industry at the turn of 2013, and to comment on strategic alternatives for market participants to consider as they craft strategy going forward. The overview begins with a brief executive summary and then dives into an overview of the physician RCM market, where we define the industry, explain its historical context, describe the difference between office‐ and hospital‐based physicians, and review a number of key historical drivers. In the third section, we dive deep into a number of trends affecting RCM service and technology companies, some of which we have discussed previously at prior industry events and through a variety of publications; however, we will be taking a fresh look with additional detail and observations through January 2013. In the final section, we offer a number of strategies for RCM service and technology companies that can be used to cope with an increasingly dynamic healthcare provider landscape.

For further information please contact:

Ted Stack, Managing Director Falcon Capital Partners [email protected] (610) 989‐8901 Registered Representative of BA Securities, LLC Member FINRA SIPC


Section 1: Executive Summary The physician RCM market continues to rapidly evolve in response to a number of economic, regulatory, and technological trends. These trends will continue to have major implications for the strategies of RCM service and technology companies, who must rapidly adapt to the changing business needs of physicians in the United States. We believe that these new problem sets create significant growth opportunity for RCM companies that are able and willing to overhaul their businesses, including significant investments in technology, comprehensive process redesign, and development of new services.

RCM Industry Snapshot The $38 billion physician RCM industry includes a variety of companies that provide outsourced business services and information technology systems to physicians. The industry is dichotomized into companies catering to office‐based and hospital‐based physicians, due to different workflows, technology requirements, and reimbursement dynamics associated with these distinct practitioners. Figure 1.1 provides our estimate of the size of the market for both groups, which is $6.9 billion for hospital‐based physicians and $30.9 billion for office‐based physicians. See Section 2 for a more detailed review of these market size statistics.

Figure 1.1: Physician RCM Market Size ($ in billions)1,2

The physician RCM industry has seen strong growth in the last decade – we estimate an average annual growth rate of 11% from 2002 through 2012. This growth has largely been catalyzed by an increase in the number of physicians that outsource RCM functions, as well as widespread availability of more sophisticated IT solutions serving the physician landscape. Increasing complexity of revenue cycle processes, aging populations, and further proliferation of more advanced IT systems will continue to drive growth and innovation in the market, albeit at a slower rate than previous years. Selected headwinds include reimbursement pressure, more intense competition, and consolidation of physician practices into hospitals. We address each of these dynamics in detail in Section 3.

$5.1 $0.7 $1.1 $6.9

$16.9

$7.7

$6.2 $30.9

$37.8

MedicalBilling

PracticeMgmt.

Tech. Total MedicalBilling

PracticeMgmt.

Tech. Total Total Market

Hospital‐Based Office‐Based


Several pure‐play physician RCM companies in the public markets have driven strong investor interest in the space, including Greenway Medical and athenahealth. See Figure 1.2 for revenue growth comparisons for these two companies. Both companies are growing at an average annual rate in excess of 30%. It is interesting to note that while many believe that athenahealth’s spectacular revenue growth has come from sales of its EHR products, between 75‐80% of its revenue still stems from RCM services.3 One key catalyst to this growth has been athenahealth’s significant investment in sales and marketing; the physician RCM market has historically “underinvested” in this area.

Figure 1.2: Annual Revenue Growth Comparison – ATHN and GWAY 4

Competition Drives the Need for Efficiency Increasing revenue cycle complexity and a host of other market trends have made the business side of medicine much more complicated for individual physician practices, making outsourcing an attractive option. This has driven strong market growth; as stated above, we estimate that the RCM market has grown at an average rate of 11% over the last 10 years. This growth, however, has predictably attracted significant competition from large healthcare service and technology businesses, such as McKesson and athenahealth. Private equity investment has also fueled the growth of sophisticated, large‐scale competitors in the RCM industry, including Intermedix, Abeo, MedData, and AdvantEdge Healthcare Solutions, among others. These larger companies have developed major economies of scale and have invested heavily in their technology platforms.

Smaller RCM companies, of which there are over 1,500 in the United States, have historically differentiated with high‐touch customer service and personal relationships. We expect that this will always be a major success factor for these firms, as maintaining physician relationships requires attention to detail and focused customer service. Physicians are very demanding clients. However, the increased competition from larger businesses, including sophisticated technology offerings and lower fee rates, is driving many smaller participants to rethink their competitive basis. RCM companies must invest in new technologies, process efficiency redesign (potentially via consultants or outside experts), and offshore labor, which we view as an increasingly vital component to stay competitive in the market. This has to be done in the context of existing technology investments, which must be standardized and streamlined where possible.

39.6%38.3%

30.2%

32.0% 32.1% 32.9%30.3%

32.6%

39.0% 38.1%

21.3% 20.5%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2008 2009 2010 2011 2012 2013 2014

athenahealth

Greenway Medical


Payor Mix and Reimbursement Trends The Patient Protection and Affordable Care Act (“PPACA,” which is referred to more colloquially as “Obamacare”) will have a significant effect on physician payor mixes. It is estimated that an additional 10 million Medicaid / Children's Health Insurance Program (“CHIP”) lives will enter the system by 2014 and an additional 25 million on the state healthcare insurance exchanges. We view this expansion in coverage as a net positive to physician reimbursement, since many of these individuals currently access the healthcare system as self pay patients through emergency departments. However, pressure on traditional funding sources will largely offset the additional reimbursement from newly insured individuals. Medicare continues to remain in political crossfire, with a number of proposals at the table that could decrease physician reimbursement. Also, given that changes in commercial reimbursement rates largely trend with Medicare, we expect a deceleration in commercial reimbursement growth rates.

It is important to note that individual medical specialties are more susceptible to large swings in reimbursement rates than the industry as a whole. We view total reimbursement as a balloon – it can be compressed in certain areas to compensate for increases in others, but the total amount of funding will keep relatively consistent. For example, while overall physician reimbursement remained relatively flat from 2005 through 2011, internal medicine experienced an increase of over 25% in collections per physician, compared to a 20% decline in oncology and a 10% decline in radiology.5

Migration to Value‐Based Reimbursement and its Implications The healthcare industry has reached an inevitable inflection point. Some researchers estimate that approximately half of all healthcare spending may be unnecessary.6 Hundreds of billions are unnecessarily spent on administrative costs. The widespread political pressure and public attention on the problem, including the passage of the PPACA, has catalyzed a major mind shift in the healthcare industry. Healthcare organizations are betting on value‐based care as public and private payors spend billions testing new reimbursement and business models. Though not explicitly required by law, many healthcare organizations are proactively reorganizing their delivery organizations to support pay‐for‐quality reimbursement models before such laws are enacted. Some pioneering hospital systems are assuming real risk through the Medicare ACO pilot program. While the timing of the migration to pay‐for‐quality reimbursement models is uncertain, most providers seem to have embraced their inevitability.

Physicians will need new tools to practice medicine in an environment that rewards quality over volume. Electronic Health Records (“EHR”) provide the ground‐level infrastructure for these tools. In 2009, the Health Information Technology for Economic and Clinical Health (“HITECH”) Act allocated over $30 billion in spending to providers to lay this infrastructure; in fact, we have seen more progress in the last two years relative to HCIT adoption than the entirety of the last twenty years. EHR adoption is expected to more than triple from 2009 through 2016, when it is expected to reach 80%.7 These software systems are blurring the line between financial and clinical data. The widespread digitization of healthcare information will enable much more comprehensive measurement of care processes and outcomes; in turn, this will enable changes to the methodologies and processes by which physicians are reimbursed. The government has bet billions of dollars that this will improve healthcare delivery in the United States. In the short run (1‐5 years), we believe that the adoption of these systems will do little to improve the cost of delivering care. On a longer‐term basis, however, as care becomes more coordinated and clinical decision making becomes more fluid, we believe that


technology will in fact contribute to an increase in efficiency and a decrease in cost of care. This transition could take up to five years or more.

Changing payment models will also require software products that enable physicians to meaningfully collaborate within a diverse ecosystem of providers, both internal and external to their organizations, for the first time. The wide adoption of EHR systems has catalyzed rapid innovation in this sector. Physicians must also actively engage patients in their own care delivery. Patients are most often bewildered and confused by the stunning complexity of the healthcare system, including medicine itself, convoluted billing and insurance programs, and disconnected and uncoordinated care delivery. It is also difficult for physicians to coax patients into major behavioral changes that are required to improve health outcomes. Engagement is the answer and patients will begin to use these tools as they become more ubiquitous.

The good news for physician RCM companies is that all of this change presents significant opportunity. These businesses have the systems, processes, relationships, and knowledge to help physicians with these issues. Revenue cycle activities are interwoven throughout all clinical activities and provide necessary financial insight into what activities will drive provider profitability in the future. Intensely proactive companies such as athenahealth are building and acquiring next‐generation technologies and clinical services to serve as touch‐points to new potential clients, enabling them to bundle lucrative RCM services contracts over time on a cost‐effective basis. Exhibit 1.1 outlines the migration of physician RCM companies to more sophisticated capability sets. We outline these concepts in greater depth in Section 4.

Exhibit 1.1: Evolving Scope of RCM Industry

< 2009 2009 ‐ 2012

Patient engagement and relationship management, including patient portal technologies, telephonic consultations, online scheduling, personal health records, and other patient touch points.

Patient Engagement

MedicalBilling and A/R Management

2013 +

New HCIT Capabilities

Supporting technologies and services to help physicians understand and adapt to quality‐based reimbursement models.

Manage Pay‐For‐Quality Migration

Integrated EHR / Practice

Management

Historically the core focus of the RCM industry – preparing and submitting medical claims, managing denials, and managing A/R.

Integrated practice management and Meaningful Use certified EHR systems.

Interoperability solutions, business intelligence, clinical data management applications, and automated coding, among many others.


Looking Forward: Redefining the RCM Industry As depicted in Exhibit 1.1, the historical scope of the RCM industry – medical billing and A/R management – must expand to serve the evolving business needs of physician practices. We suggest taking a broader view of the industry, whereby revenue cycle processes are seamlessly bundled with clinical documentation and decision making. We believe this convergence, spurred by the availability of new technologies and focus on pay for quality reimbursement systems, is transforming the industry from Revenue Cycle Management to Comprehensive Practice Management (“CPM”). CPM refers to the suite of technologies and services that enable physicians to coordinate care with other physicians and share data throughout multiple care ecosystems; engage patients more deeply in their care; and identify and analyze profitable activities under value‐based care models, both retrospectively (more comprehensive) and at the point‐of‐care (more timely). The RCM industry has historically helped physicians maximize profitability by measuring service volume and translating that information into top line revenue, giving clients a view of their most lucrative activities. However, this clear‐cut path to profitability will erode under‐value based care models. It is the RCM industry’s prerogative to be the tour guide, and to provide physicians the IT tools and services that will be required to succeed in the future.

We believe that successful RCM companies will transform into CPM businesses. We view this as a logical evolution of the RCM sector within the context of rapid adoption of clinical technologies and widespread roll‐out of value‐based care reimbursement models. We will outline the trends that are forcing this evolution in Section 3, and will present a number of specific strategies in Section 4 that can help RCM companies become more CPM‐centric.


Section 2: Overview of the Physician RCM Services and Technology Market The $38 billion physician RCM industry includes a variety of companies that provide outsourced business services and information technology systems to physicians. Properly requesting and receiving payment for healthcare services is incredibly difficult and time consuming, and is largely a function of the inherent complexity of medical services; as such, many physicians opt to outsource the function entirely. We estimate that approximately 45% of physicians currently outsource RCM functions, leaving significant room for additional growth.

Increasingly complex healthcare reimbursement methodologies and the rapid proliferation of healthcare information technologies have driven rapid growth in the market in the last decade. Additionally, the next ten years in healthcare are expected to bring significant change as the system reorients to value‐based reimbursement methodologies, requiring physicians to revaluate business models and the way they practice medicine entirely. To profit under these new models, physicians will need to better understand the relationships between their clinical and financial activities; improve care coordination throughout the healthcare ecosystem; engage patients more meaningfully in their own care; invest in information technology infrastructure; and improve day‐to‐day care delivery to maintain profitability. RCM companies are their physician clients’ most trusted business partner, and are equipped with the technology, processes, tools, expertise, and relationships to help physicians manage this transformation. We outline this more thoroughly in Sections 3 and 4. In this section, we will define and size the physician RCM market, discuss its historical evolution, and outline a number of historical growth drivers.

Definition of the Market / Scope of our Discussion Physicians spend approximately 4‐10% of revenue collecting proper reimbursement for their services (note that reimbursement is synonymous with “revenue” and “collections”). This includes generating and submitting medical claims to insurance companies, managing denials of such claims, and managing accounts receivable associated with all healthcare billings. We define this process, collectively, as “medical billing.” See Figure 2.1 below for a summary of the medical billing process.

Figure 2.1: Medical Billing Process

A/R Management

Patient Scheduling

EncounterCoding and Data Entry

Prepare & SubmitClaims

Reporting

Schedule patients and collect basic demographic and insurance information

Follow up with patients and payers to collect outstanding receivables

Physician meets / interacts with the patient and documents encounter in EMR or on paper

Prepare medical claims using healthcare insurer‐specific rules

Report on metrics Management Tools

Translate physician notes into specific medical codes (e.g. ICD‐9, ICD‐10, CPT)


Physicians spend an additional 5‐10% of their revenue on various administrative and management functions, including finance and accounting, human resource management, and compliance, among others; we refer to these activities collectively as “practice management.” Management of technology – including selection of software vendors and ongoing strategic support – has recently become a significant aspect of practice management as physicians have rapidly adopted EHR products. See Figure 2.2 for a summary of the functions we include in this definition. Medical billing service companies have become more actively involved in providing these activities as the complexity of running physician practices has increased – practice management is an opportunity to expand new revenue streams and to deepen client relationships. These services have become a major differentiator for a number of larger medical billing companies that have historically provided practice management. We have also seen medical billing companies enter the market via acquisition, such as Intermedix’s acquisition of Practice Support Resources, an emergency medicine‐focused practice management company. We view larger practices (10+ physicians) as much more willing to outsource part or all of their practice management activities, given their greater complexity and ability to leverage economies of scale. We have found that practice management fees typically range between 1% and 7% of revenue, depending on how much work the physician practice decides to outsource. While the market penetration in this market is relatively low, we believe that medical billing companies should be making a more concerted effort to offer these services.

We define medical billing, practice management, and related technologies collectively as “revenue cycle management,” or “RCM” in this report (notwithstanding our definition of CPM in Section 1). Though many practice management activities are beyond the scope of the revenue cycle and represent a relatively minor fraction of RCM industry revenue, revenue cycle companies are increasingly becoming involved in these new functions.

Figure 2.2: Practice Management Functions

StrategyOperations

Management/ITCompliance

Finance and Accounting

Education and thought leadership on government regulations, third‐party payer activities, competition, economic changes, and other outside influences

Mergers, acquisitions, and joint ventures

Strategic advice on new, emerging business models such as ACO’s and new reimbursement methodologies

Management and supervisory staffing

Develop IT strategy and support all IT activities and vendor relationships

Support of all quality‐related reimbursement activities (PQRS, etc.)

Coordinate outside legal and accounting services

Develop and implement patient engagement strategies and targeted outreach

Various other administrative activities

Develop and maintain compliance programs

Review of contracts, business opportunities, and agreements

Advise on risk analysis and insurance planning

Physician credentialing and licensing

Budgeting and cash flow planning

Finance and tax planning

Assist in design ad funding of retirement compensation, and benefit programs for employees and physicians


In addition, the scope of the RCM services and technology industry has expanded in recent years to encompass a greater number of clinical activities. Widespread adoption of EHR and other information technologies have changed the business needs of physicians, and will continue to do so in the future. Changing models of payment are also changing the way physicians must practice medicine to survive, with a greater focus on consumer engagement and collaboration across provider boundaries. RCM companies are best positioned to help with these challenges and have been forging new markets, as they are often the most trusted business partner to their physician clients. We will discuss these recent trends in more detail in Sections 3 and their implications in Section 4.

Market Evolution and Structure The genesis of the physician medical billing industry was the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”), which mandated changes to a number of healthcare reimbursement methodologies. Among other mandates, including creation of the Prospective Payment System in Medicare, the act forced hospitals and physicians to bill separately for services. Prior to TEFRA, hospitals charged patients for both hospital services (“rent” for their bed, hospital supplies, and meal costs, among many others) and physician services (consultations and procedures) in one bill. When physicians became responsible for their own billing, many scrambled to organize internal offices to perform the work. Some decided to outsource the function entirely.

The physician RCM market can be dichotomized between hospital‐based and office‐based physicians. These two types of physicians have different workflows, technology requirements, and revenue cycle processes. The hospital‐based market opportunity is roughly $6.9 billion, which includes $5.1 billion for medical billing services, $0.7 billion for practice management services, and $1.1 billion for technology. The office‐based market is currently $30.9 billion, which includes $16.9 billion for medical billing services, $7.7 billion for practice management, and $6.2 billion for technology. Figure 2.3 outlines the market size. We will discuss the differences between hospital‐based and office‐based physician markets below.

Figure 2.3: Physician RCM Market Size ($ billions) 8,9

$5.1 $0.7 $1.1 $6.9

$16.9

$7.7

$6.2 $30.9

$37.8

MedicalBilling

PracticeMgmt.

Tech. Total MedicalBilling

PracticeMgmt.

Tech. Total Total Market

Hospital‐Based Office‐Based


Hospital‐Based Physician Market The first physicians to outsource RCM processes were hospital‐based doctors, which include radiologists, pathologists, anesthesiologists, hospitalists, and emergency medicine physicians. The term hospital‐based is not intended to categorize ownership or office location, but rather, the types of workflows, reimbursement mechanisms, and IT systems that physicians need in a hospital‐based setting. Hospital‐based physicians have dramatically different needs than office‐based physicians, as they (1) do not have office waiting rooms or “front office” operations to absorb RCM functions, (2) have no need to manage patient relationships and interactions, and (3) have a reduced role in coordinating patient care management. Hospital‐based physicians also have different information technology requirements than physicians in a traditional “office” setting, as hospitals generally provide them with their enterprise EMR system and administrative support software. RCM company technology has largely focused on the medical billing process and more recently on patient and practice engagement tools, rather than the EMR and administrative software components.

Hospital‐based practices also tend to be larger groups and require RCM vendors that can bring scale, efficiency, and more sophisticated ability to negotiate contracts with payors and hospitals. These practices are also not being consolidated into hospitals as rapidly, as they are largely diagnostic or support specialties and do not generate patient referrals – there is less perceived value to hospitals in owning these practices. However, as ACO’s continue to take hold hospitals may find it more advantageous to keep a larger share of the overall care dollars through the ownership of these professionals.

Figure 2.4 outlines the total size of the hospital‐based physician market, which is $6.9 billion, including medical billing and practice management services. We have also included the technology market opportunity in this figure, including integrated niche practice management software, patient portal technology, automated coding, and a variety of other bolt‐on technologies that are outlined further in Section 4. Note that the hospital‐based technology market excludes an EHR, since such software is provided by the hospital. The hospital‐based market is more penetrated than the office‐based market, with between 50‐55% of physicians outsourcing their RCM activities. We estimate that the hospital‐based practice management market is penetrated at less than 10%.

Figure 2.4: Market Size Analysis: Hospital‐Based Physicians 10

Number of Total Medical Billing Practice Mgmt.** Technology*** Total

Physicians Collections Fee Market Fee Market Monthly Market Market

Medical Specialty (000's)* ($mm) Rates ($mm) Rates ($mm) Fee / Doc ($mm) ($mm)

Anesthesiology**** 85 25,676$ 5.0% 1,284$ 1.0% 257$ 500$ 513$ 2,053$

Radiology 29 17,025 7.0% 1,192 1.0% 170 500 173 1,535

Emergency Medicine 28 11,620 9.5% 1,104 1.0% 116 500 168 1,388

Hospitalists 30 12,000 7.0% 840 1.0% 120 500 180 1,140

Pathology 12 8,672 7.5% 650 1.0% 87 500 71 808

Total Hospital‐Based Physicians 184 74,992$ 6.8% 5,070$ 1.0% 750$ 500$ 1,105$ 6,925$

* Note: phys ician count includes active phys icians whose sel f‐des ignated major profess iona l activi ty i s "patient care,"

and excludes teaching, research, adminis trative, and other phys icians . ** Fee rate i s lower for hospi ta l ‐based phys icians than offi ce‐based phys icians because of their l ight adminis trative needs . *** For s impl ici ty, technology costs are estimated on a SaaS model pricing. Hospita l ‐based phys icians general ly receive EMR sys tems from hospita l s , so the costs represented above only include "add on" technologies , including patient portal , automated

speech recognition, interoperabi l i ty, patient porta ls , and bus iness intel l i gence functiona l i ty, among others . **** Includes nurse anesthetis ts .


Office‐Based Physician Market A full list of what we define as office‐based physicians is included below in Figure 2.5. Approximately 74% of physicians fall into the office‐based market, including primary care and a variety of surgical and non‐surgical specialties. Figure 2.5 includes a breakdown of what we define as the office‐based market, which we size at $31 billion, including both software and services. Note that the moniker “office‐based” includes physicians that are owned by or work inside the walls of a hospital, in addition to independent private practices. As stated above, the term office‐based refers to the types of workflows, reimbursement mechanisms, and IT systems that physicians need in an office based setting; physicians could be located within or outside of a hospital, and ownership could fall under a variety of structures. Procedures could be performed in office or at a hospital.

In office‐based settings, the practice interacts directly with the patient – think waiting rooms with check‐in window. These physicians often hire office staff to manage these offices, so the outsourcing rate has historically been lower; we estimate that current outsourcing rates are 40%. We estimate that the practice management market is penetrated at less than 10%.

Figure 2.5: Market Size Analysis: Office‐Based Physicians 11

Number of Total Medical Billing Practice Mgmt.** Technology*** Total

Physicians Collections Fee Market Fee Market Monthly Market Market

Medical Specialty (000's)* ($mm) Rates ($mm) Rates ($mm) Fee / Doc ($mm) ($mm)

Family Medicine/General Practice 96 37,552$ 7.5% 2,816$ 3.0% 1,127$ 1,000$ 1,148$ 5,090$

Internal Medicine 91 33,530 7.0% 2,347 3.0% 1,006 1,000 1,097 4,450

Pediatrics 48 21,588 7.5% 1,619 3.0% 648 1,000 577 2,844

Internal Medicine/Pediatrics 3 1,106 7.0% 77 3.0% 33 1,000 33 143

Total General Office Based 238 93,776$ 7.3% 6,860$ 3.0% 2,813$ 1,000$ 2,855$ 12,528$

Obstetrics & Gynecology 37 22,780$ 6.0% 1,367$ 3.0% 683$ 1,000$ 442$ 2,492$

Cardiovascular Disease 19 12,641 7.0% 885 3.0% 379 1,000 234 1,498

Ophthalmology 17 11,794 7.0% 826 3.0% 354 1,000 199 1,379

Orthopedic Surgery 19 15,446 4.0% 618 3.0% 463 1,000 227 1,308

General Surgery 23 12,354 4.5% 556 3.0% 371 1,000 274 1,201

Dermatology 10 8,834 7.0% 618 3.0% 265 1,000 118 1,001

Psychiatry 34 7,160 7.5% 537 3.0% 215 1,000 407 1,159

Gastroenterology 11 8,325 7.0% 583 3.0% 250 1,000 132 965

Urology 9 6,353 7.0% 445 3.0% 191 1,000 112 747

Pulmonary Disease & Critical Care 10 4,587 7.0% 321 3.0% 138 1,000 118 577

Hematology & Oncology 10 4,275 7.0% 299 3.0% 128 1,000 115 543

Neurology 11 4,336 4.5% 195 3.0% 130 1,000 127 452

Other 73 43,673 6.5% 2,839 3.0% 1,310 1,000 872 5,021

Total Office‐Based Specialists 281 162,557$ 6.2% 10,088$ 3.0% 4,877$ 1,000$ 3,377$ 18,342$

Total Office‐Based Physicians 519 256,333$ 6.6% 16,948$ 3.0% 7,690$ 1,000$ 6,232$ 30,870$

* Note: phys ician count includes active phys icians whose sel f‐des ignated major profess iona l activi ty i s "patient care," and excludes teaching, research, adminis trative, and other phys icians .

** Fee rates are genera l ly 3% to 7%; however, we have weighted i t to 3% to account for smal ler practices that do not tend to outsource their practice management activi ties .

*** For s impl ici ty, technology costs are estimated on a SaaS model pricing. Includes integrated EMR / practice management platform,

and a variety of "add on" technologies , including patient porta l , automated speech recogni tion, interoperabi l i ty, patient porta l s , and bus iness intel l i gence functiona l i ty, among others .


A more comprehensive technology suite is required in an office setting, including EHR and administrative systems. Widespread adoption of EMR technology has driven growth in this market and will continue to do so over the next couple years. We believe that vendors that serve office‐based physicians must have an EMR strategy and must continue to innovate around the unique technological needs of physicians in this market. EHR and other technologies can also serve as a hook‐point for more lucrative RCM service contracts.

Historical Drivers of Outsourcing Healthcare reimbursement processes are notoriously complex and time consuming. These reimbursement methodologies have also become increasingly complicated over the last 40 years. Government funding sources (Medicare and Medicaid) currently represent roughly half of all healthcare expenditures in the United States; as such, the government has significant interest in managing the level of overall health spending, and has passed a great deal of legislation in the past decades establishing new reimbursement methodologies aimed to reduce healthcare spending. It has also created thousands of individual regulations to increase healthcare data security, prevent fraud, and capture data for analysis and trending purposes. The government continues to fund new pilot programs that test the ability of new reimbursement methodologies and business models to reduce levels of healthcare spending. The PPACA allocated $10 billion to establish the Center for Medicare & Medicaid Innovation, which is expected to lead significant additional change.

Private healthcare insurers have also contributed to this complexity. Physician practices frequently contract with over 30 individual insurance companies to maximize the pool of patients that they can serve, increasing total revenue. Each insurance company brings its own unique claim forms, reimbursement methodologies and processes, and technology systems, which significantly complicates reimbursement processes. Commercial insurers have created new insurance products that shift the financial burden to the patient (high deductible plans) and have invested in systems that monitor appropriateness of care which have created further complexities and delays in adjudicating physician claims. See below for a selected list of industry growth drivers:

1) Complexity of health plan contracting. A multitude of individual insurers create hundreds of distinct plans and customized packages, including HMO, PPO, EPO, and HSA plans, among others. While several large payors generally represent the majority of physician revenue, the smallest 20% can include over 30 different payors, each of which have their own reimbursement methodologies and claim filing processes. There is little standardization across different insurance companies in terms of contracting processes. There is also significant fragmentation in health plans state‐to‐state.

2) Changing, dynamic nature of health plans. Health plans frequently redesign reimbursement methodologies year‐to‐year to account for new medical advancements and certain cost effectiveness data as they become available. This limits the amount of workflow standardization that can be done at the physician practice level, as optimal workflows constantly change and adapt to payor requirements.

3) Healthcare payors are sophisticated, demanding, and armed with data (“David vs. Goliath”). Payors are incentivized to complicate contracts and the contracting process, and have historically acted to confuse physician practices (e.g. introduction of various payment hierarchies, bundling policies, and misleading methodologies as well as arbitrary denials and audit take‐backs). Physician practices often lack the in‐house expertise and data systems to properly negotiate and interact with sophisticated payors, who are armed with actuarial data and significant patient data aggregated over time.


4) Government regulation. The government heavily regulates the healthcare sector, from patient security standards to mandatory quality measures to certification of physicians. Migration to new medical coding standards (ICD‐10) will cost the industry billions in compliance fees and will create a more complex reimbursement environment into perpetuity. New reimbursement models in Medicare and Medicaid programs will add new layers of complexity.

5) Fragmented technology and processes. There is little standardization across operating practices, payor and patient payment methodologies, data management processes, and billing systems. Physician practices often rely on heavily manual processes to bridge the gap between different systems, or simply accept incorrect payments/denials.

6) Increasing portion of “self pay” collections. Physicians have the burden of collecting payment for services from two separate constituents: healthcare insurance companies and patients. Patients have represented an increasing portion of reimbursement in the last decade, and given their low pay rates, practice revenues have declined accordingly.

Figure 2.6: Selected data points / drivers 12

2%3%

4%5%

6%

8%

10%

'80 '85 '90 '95 '00 '05 '08 ICD‐9 ICD‐10

Payor PaymentAccuracy Rates*

ICD‐9 ICD‐10Conversion

141,000

Number of Codes

17,000

Bad Debt as % of Hospital Expense**

Providers have struggled to collect full payment from an increasing number of non‐insured individuals incapable of paying their bills.

The number of codes under ICD‐10 is 8x more than under ICD‐9, the current industry standard; ICD‐10 will require greater clinical sophistication.

Healthcare insurers have notoriously poor accuracy rates when paying claims; some have error rates in excess of 10%. This is expensive and time consuming for providers to manage.

* Source: American Medical Association** Source: AHA Annual Survey Data. Note that while this data reflects hospital bad debt rates, we

believe that it is representative of the increase that physicians have also experienced.

86.1% 88.1% 89.3% 91.3% 91.7%

14.0% 11.9% 10.8% 8.7% 8.3%

Regence Humana Anthem HCSC Cigna

Accurate Erroneous


Section 3: Major Market Changes Introduction The United States’ healthcare cost crisis has been widely discussed in the last decade. It is commonly understood that our system is overpriced and largely inefficient, in terms of both clinical and administrative processes. Researchers have estimated that up to half of all healthcare spending is wasteful.13 The unsustainable growth rate of healthcare spending will be a major focus on the national agenda for years to come and has already catalyzed a major shift in the healthcare industry. Though a full analysis of this dialogue is beyond the scope of this report, we will present a brief summary to set the context for a discussion of its implications to the RCM industry.

United States health spending has increased from 5.1% of GDP in 1960 to 17.9% of GDP in 2010, and is expected to reach almost 20% by 2020 (see Figure 3.1 below). To put this in perspective, the incremental percentage increase represents $1.9 trillion in additional economic output based on 2011 GDP.14 This increase in spending has put significant pressure on federal budgets, and has restricted employee wage growth and business investment. This has catalyzed major political pressure to reduce healthcare spending, as we have seen in the popular press.

Figure 3.1: National Health Expenditures as a Percentage of GDP15

The interest in reducing healthcare costs reached a new high during the passage of the PPACA. The act has major implications that have been broadly discussed. Many believe that the law did not go far enough to reform the delivery system. However, we believe that the national attention on our broken healthcare system has led to several widely held beliefs about how to solve the problem, and has galvanized support for the following initiatives:

1) Reform healthcare payment models to reward value over volume 2) Invest in healthcare IT to digitize health information, which can be shared and analyzed 3) Improve care coordination, particularly for chronically ill patients, using information technology 4) Form new business models and relationships that enable integrated care delivery 5) Engage the healthcare consumer / patient 6) Provide more transparency on cost and quality associated with individual provider entities

5.1%

9.2%

13.8%

17.9%19.7%

1960 1980 2000 2010 2020


This is not the United States’ first attempt at reforming healthcare. We have seen wide‐scale experiments with capitation and managed care in the 1980’s and 1990’s and their subsequent, well‐publicized failures. However, despite the lack of historical success, we do believe that we will see a more permanent shift to an improved healthcare system that embraces the six dynamics listed above. Per‐capita healthcare costs have increased significantly over the last 10‐15 years (see Figure 3.2 below); declining middle‐class incomes and increasing national debt / budget deficits make this particularly acute. Additionally, we are beginning to see the information technologies that enable care coordination and data analysis, critical tools for a pay‐for‐quality paradigm (more on this later).

Figure 3.2: Average Annual Health Insurance Premiums and Worker Contributions for Family Coverage, 2002‐2012 16

The healthcare industry has seen the government take dramatic action to (1) improve healthcare access for American’s and (2) apply top‐down pressure to reimbursement. There is national consensus that the system, as currently designed, does not work. Healthcare providers and payors are now making the assumption that they must change now, or face the threat of more dire government regulation, such as nationalization of the healthcare system. This would render payors’ historical business obsolete and threaten providers’ sustained profitability.

In the sections below, we address a number of issues that are affecting RCM companies. We grouped these trends into two separate buckets: (1) trends related to the historical RCM business and (2) trends related to new business needs in a Pay‐for‐Quality paradigm. RCM companies must be prepared to dynamically adapt to these major changes in their client base, particularly trends from the second category. We will discuss the implications of these trends in the final section.

$2,137 $4,316

$5,866

$11,429 $8,003

$15,745

2002 2012

Worker Contribution Employer Contribution


Update on Historical RCM Trends

Shifting Reimbursement Priorities Healthcare’s funding sources, including employers, federal and state governments, and consumers, are stretched thin after many years of increasing healthcare costs. This has put top‐down pressure on healthcare reimbursement. Individual physician reimbursement has been targeted by multiple pieces of legislation, including the Balanced Budget Act of 1997, which calls for a cumulative cut to physician reimbursements from Medicare of over 25% via the Sustainable Growth Rate (“SGR”) model. Though this is likely to be averted in the long‐term, it is representative of the pressure that physician reimbursements will face in the future.

However, despite an abundance of negative press on physician reimbursement, we suggest a less draconian view. While several specific medical specialties have faced significant reimbursement pressure over the last 5‐10 years, including radiology, we view extended cuts as unlikely. We view total healthcare reimbursement as a balloon – it can be compressed in certain areas to compensate for increases in others, but the total amount of funding will keep consistent. The year‐to‐year shape shifting of this balloon cannot be reliably predicted. The government continues to study cost and quality associated with certain medical specialties and specific procedures, which can have significant year‐to‐year effect on reimbursement rates. The results of these studies are largely unpredictable. See Figure 3.3 for a breakdown of the change in reimbursement by specialty from 2005‐2011.

Advancements in diagnosis and treatment technologies can also have significant effect on reimbursement within specific specialties; these are also largely unpredictable. An example would be recent advances in diagnostic technologies, which enable care teams to deliver effective care at lower cost, reducing the expense and frustration of guesswork. This could serve to increase reimbursement to pathology and radiology, which have faced pressure in the last five years. The takeaway is that there will always be wider variations on a specialty‐specific level than in the aggregate. This suggests that a diversified client base, across many medical specialties, is a potential risk‐mitigation tool for RCM companies.


Figure 3.3: Change in Cash Collections per Physician, 2005‐201117

We do note that there does seem to be a longer‐term push to reimburse primary care physicians at higher levels than specialists. See Figure 3.4 for a comparison of the reimbursement by primary care versus specialists. We do expect this trend to continue particularly as patient‐centered medical home reimbursement models gain more traction.

Figure 3.4: Median Collections for Professional Charges per Physician ($ in 000’s)18

‐20.7%

‐12.7%

‐10.0%

‐7.5%

‐5.8%

‐4.3%

‐3.0%

‐2.2%

‐1.2%

‐0.3%

0.5%

1.6%

6.8%

11.5%

14.2%

16.3%

18.7%

19.7%

22.2%

25.5%

‐30.0% ‐20.0% ‐10.0% 0.0% 10.0% 20.0% 30.0%

Hema / Oncology

Cardio: Invasive

Radiology: Diagnostic

Cardio: Noninvasive

Psychiatry

Neurology

Surgery

Emergency

ENT

Pulmonary

GI

Ortho Surgery

OB/GYN

Urology

Anesthesiology

Ophthalmology

Pediatric Med

Family Med

Dermatology

Internal Med

$349

$526

$381

$527

Primary Care Specialists

2005 2011


Shifting Payor Mix A number of changes to healthcare funding and financing will change the payor mix for physicians in the next 5‐10 years. See Figure 3.5 below, which outlines our view of expected changes to physician payor mix by category.

Figure 3.5: Revenue by Payor

The PPACA will extend insurance coverage to roughly 35 million Americans via: (1) an expansion in Medicaid and (2) the creation of state‐run healthcare insurance exchanges.19 The insurance exchanges will serve as a platform to evaluate a variety of commercial plans, and will also direct qualifying individuals to Medicaid or CHIP. Though Medicaid and insurance exchange reimbursement is expected to be on the low range of reimbursement rates, these 35 million Americans should represent a net boost to physician reimbursement, since we are assuming that a majority of them are currently self‐pay (which has notoriously low collection rates). If in fact the shift comes from the self‐pay category into the health insurance exchanges, this will have a large positive effect on total physician reimbursement. Many of these patients currently access the healthcare system through very expensive emergency department visits, and often do not pay for such services.

Medicare Hybrid (Fee‐for‐Service + Quality Measures)

Medicaid Hybrid (Fee‐for‐Service + Quality Measures)

Blue Cross Blue Shield Fee‐for‐Service

Commercial Fee‐for‐Service

Traditional Managed Care Hybrid (Fee‐for‐Service + Quality Measures)

Self Pay* Fee‐for‐Service

Health Insurance Exchanges Medicaid‐Like Reimbursement

Accountable Care Organizations Negotiated

PQRI** Quality Measures

E‐Prescribing Bonus Payments/Penalties

Meaningful Use Bonus Payments/Penalties

Payor % of Revenue Payment Methodology

*Self‐pay is expected to decline as individuals obtain coverage through insurance exchanges and Medicaid; however, we do expect increasing consumer contributions (high‐deductible health plans and HSA’s) to somewhat offset this effect.

**Physician Quality Reporting Initiative

Trad

itional

Recen

t / New


In addition, the PPACA catalyzed a wave of new payment models and structures, and funded a number of experiments to test various delivery and payment models. Several existing Medicare programs and other pieces of legislation are also changing the balance of healthcare payments, including the Comprehensive Primary Care Initiative (“CPC”), Physician Quality Reporting System (“PQRS”), and Medicare Pay‐for‐Performance (“P4P”), among many others. Commercial payors are also aggressively experimenting with new payment models and investing in IT to facilitate the transition. These programs are continuously being updated and revised and are very specific to local conditions. This is discussed in more detail below.

Rising Healthcare Administrative Costs and their Implications While a majority of the growth in healthcare costs has come from clinical spend, administrative spend has contributed materially to the increase. Some estimates put administrative expense at $361 billion per year – spend that many view as a side effect of an unnecessarily complex system.20 See Figure 3.6 for a breakout of administrative spend as a percentage of healthcare costs. The $361 billion includes all administrative costs across the entire healthcare system – hospitals, physicians, and insurance companies. Additionally, administrative cost as a percentage of health expenditures doubled from 1970 to 2010.21 This system‐wide growth is indeed representative of physician practices, which currently spend 13% of revenue on administrative costs.22

Figure 3.6: National Health Expenditures, 1980‐2010, with Breakout of Clinical and Administrative Spend in 2010 ($ in billions) 23

We view most of this administrative spend as largely unavoidable. As discussed in Section 2, revenue cycle complexity results from the structure of the healthcare system, which has hundreds of individual payors with ever‐changing rules and technology standards, changing government regulation, and fragmentation in IT systems and processes, among other factors. However, the rising cost has not escaped national attention. Physicians are putting pressure on RCM companies to reduce this administrative cost via lower fees. Physicians could historically rely on increasing reimbursement to offset rising administrative expenses; however, expectations of slower reimbursement growth in the future are forcing doctors to reduce their cost basis. The easiest, most direct route to do so is to go after billing rates.

RCM companies have responded by becoming more efficient and investing in technology. We have seen companies that invest in technology and processes cut cost per “claim” by a factor of 2‐3x in the last 5‐10 years.24 This is not to be understated. There is also significant national effort to standardize

$2,233

$361

$256

$1,377

1980 2000 2010

Clinical Administrative

14%


terminology, billing processes, and technology standards, which will somewhat simplify claim filling processes. However, we do not see billing rates declining significantly in the future, because the dynamic nature of healthcare reimbursement policy throughout the healthcare system will require concentrated manual intervention. As a function of this, we do see the service mix shifting from nuts‐and‐bolts billing services to management of new business functions that will be required of physicians in the next decade. This will largely counteract any decline in billing fee rates.

Competitive Pressure The RCM market has become increasingly competitive over the last decade. Providers are seeking vendors with competitive pricing and “next generation” technologies to efficiently manage business operations. This has given natural competitive advantages to companies of scale, and has driven increased competition in the industry. Significant investment by private equity firms in the industry has also fueled growth and consolidation.

A number of large market players have emerged, bringing economies of scale and major investment in both RCM and clinical technology. One such company is athenahealth, which has achieved significant scale and has managed to dramatically drive down costs per claim. This has given the company the flexibility to invest heavily in sales and marketing (22% of 2012 revenue) and software development and R&D (7% of 2012 revenue). If athenahealth’s selling and marketing and R&D costs are added to the company’s operating cash flows25 (also referred to as Earnings Before Interest, Taxes, Depreciation, and Amortization [“EBITDA”]), the company’s EBITDA margin is almost 50%; we will refer to this metric as “normalized EBITDA.” We contrast this to an average normalized EBITDA of 10‐25% among smaller RCM companies, generally with less than $20 million in revenue. See Figure 3.7 below for a visual representation of this information. While athenahealth has achieved more scale than arguably any other RCM company, there are roughly 10‐15 players with sufficient scale to drive these margins.

Figure 3.7: athenahealth “Normalized EBITDA” Margins Versus RCM Service Company Averages26

31.5%34.5%

38.9%43.1%

47.1% 49.0%

10.0%

17.5%

25.0%

2007 2008 2009 2010 2011 2012 Lo Mid High


Hospitals Acquiring Physician Groups Hospitals have been aggressively acquiring physician groups for a number of years. Acquisitions of physician practices enable hospitals to integrate care teams more tightly; physician practices also provide a source of steady referrals to hospitals. The benefits to physicians are financial security and avoidance of the administrative complexity involved in running a practice. See Figure 3.8 for a breakdown of the percentage of medical practices owned by hospitals from 2002 through 2012, according to the MGMA. While we feel that the 64% figure may be high – we believe that the number is likely closer to 50% based on our independent analysis – the important takeaway is the significant increase in ownership by hospitals.

Figure 3.8: Percentage of Medical Practices Owned by Hospitals, United States27

There is much uncertainty in terms of RCM vendor relationships when a hospital acquires a physician practice. Hospitals can gain efficiencies of scale and data continuity by consolidating RCM functions into a central function or by using a single RCM vendor. However, there is significant execution risk when migrating both the billing and clinical functions. RCM vendors that have systems that easily integrate with other hospital IT systems and other physician systems have higher success rates. Additionally, if acquired physicians have strong relationships with their RCM vendors, they can often influence the hospital to keep the relationship in place. We estimate that hospitals tend to consolidate billing functions in 75% of acquisitions and leave the relationship untouched the other 25%. Highly specialized billing (anesthesia) and very high volume (radiology) billing are often not consolidated. In an ACO environment, we view hospitals as even more likely to take control of the billing processes or go with a single vendor that can standardize processes across multiple care groups.

22%

39%

64%

2002 2007 2012


Review of “Next Generation” Trends

Shift from Fee‐for‐Service to Pay for Quality It is now widely accepted that payment methodologies are changing and will continue moving to a pay‐for‐quality paradigm. The concept of paying physicians for value rather than volume has an intuitive, common‐sense appeal, and reflects basic underlying economics that drive competition and innovation in most industries. Specifically, value‐based reimbursement incentivizes providers to:

1) Invest in critical “care management” infrastructure, including electronic health records, communication tools, and health data analytics

2) Coordinate care among different providers 3) Avoid unnecessary procedures and duplicative tests 4) Engage and incentivize patients to participate in their own care activities

Value‐based reimbursement is not a new concept. Both commercial and public payors have been experimenting with value‐based reimbursements for a number of years. For example, UnitedHealthcare began rolling out performance‐based contracts in selected markets in 2010, and expects that by 2014 most contracts will tie performance criteria to payment rates.28 The PPACA launched the CMS Innovation Center with $10 billion in funding, with the goal to test a variety of payment and service models that could potentially be rolled out on a much greater scale. The Innovation Center has released 16 programs involving over 50,000 healthcare providers to date, including a number of Accountable Care Organizations. Additionally, we have seen a gradual increase in the number of National Quality Forum (“NQF”) endorsed quality measures since 2005 (see Figure 3.9 below), which are used to guide quality‐based reimbursements.

Figure 3.9: NQF‐Endorsed Quality Measures by Type, 2005‐2010 29

Figure 3.10 shows one estimate for the timing of the transition to a fee‐for‐value healthcare system. Oliver Wyman, a global consulting firm, estimates that over 80% of hospital‐employed physicians will be working under a pay‐for‐value model by 2020; dollar value estimates are not available, so we use this statistic as a crude proxy for such figures. This estimate likely overestimates the adoption of fee‐for‐value programs because standalone physicians are more likely to operate under more basic fee‐for‐service contracts. UnitedHealth estimates that total value‐based reimbursement will be 60% in 2020.30 The range of potential outcomes is wide, based on significant uncertainty around the specifics of the PPACA and other tests and pilots that are currently in motion. What we do know for certain is that the transition will be long, complex, and difficult.

158

668

2005 2010


Figure 3.10: Percent of Hospital‐Employed Physicians by Payment Model31

Despite all of its promise, quality based reimbursement has historically been difficult to implement. A key challenge is in defining and measuring exactly what “quality” means and in negotiating appropriate benchmarks between funding sources and risk‐bearers. Quality based reimbursement also requires massive investments in structures and processes that support pay‐for‐volume methods. This goes beyond IT systems and workflow processes to entire shifts in the culture of medical delivery. Many physicians simply do not embrace the pay for quality concept. In fact, only 17% of physicians believe that fee‐for‐service payment models do not encourage coordination of care. Additionally, of 623,000 physicians that qualified for PQRS bonuses in 2010, only 182,000 applied for and received payment, demonstrated limited awareness and enthusiasm for these models among many physicians.32

Overview of the Most Common Quality‐Based Reimbursement Models There are four value‐based reimbursement models in existence today. The first is Pay‐for‐Performance (“P4P”), which we define as an augmented type of fee‐for‐service model, whereby physicians are paid bonuses and / or penalized based on their performance relative to certain quality targets (also referred to as quality “measures”). These measures are established during contract negotiations between payors and physicians, and can include procedural targets, such as performing wellness checkups on an annual basis; meeting certain performance targets, such as limiting the number of hospital readmissions for a particular surgery; patient satisfaction targets; and/or cost targets. The P4P umbrella also includes Patient Centered Medical Homes (“PCMH”), a concept that is rapidly rising in popularity. PCMH receive additional care management fees to organize extended networks of caregivers that manage patient care along the continuum of the healthcare spectrum; it is widely recognized that such coordination improves outcomes. A challenge to P4P models is their administrative complexity, which can sometimes lead to management costs that exceed actual bonus payments. Additionally, different payors often establish different quality measures and performance targets, which can increase the burden of data collection and confuse physicians.

The second option is shared savings and shared risk models. This includes the concept of an Accountable Care Organization (“ACO”). In these models, healthcare organizations take pre‐defined levels of risk for managing entire sets of patient populations. Most existing models in the market

17%

51%

83%

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49%

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0%

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Fee‐for‐Value Fee‐for‐Service


today are asymmetric in that they only share in potential savings. However, there is a smaller subset of providers that also take financial responsibility for moderate levels of risk. Shares savings models require more clinical coordination than P4P programs, and correspondingly require large investments in infrastructure and technology. They also require large amount of control over ancillary providers. One of the challenges associated with these models is the complexity in negotiating the specific “savings targets” that are reasonable over time, and how to divide the savings among providers in the organization. Shared savings / risk models are seen as a critical stepping stone and have gained greater than expected market traction.33 In fact, 30 million Americans are treated by ACO’s today. Approximately 330 ACO’s are in operation, up from 164 in 2011, and as many as 31 million patients are being served.34 It is estimated that 150 million Americans are in geographies where some form of an ACO exists, suggesting the potential for much greater penetration of the patient population.35

The third model, which is furthest along the continuum of value‐based reimbursement, is full capitation, whereby provider groups take full responsibility for the cost of all patient care for a specific pre‐defined payment. There is significant risk to providers in this model, and most provider groups are not equipped to manage this amount of risk. Capitation requires significant investment in infrastructure, technology, and ownership / control over a wide variety of ancillary providers. We believe that the healthcare system will be slow to move to mass adoption of this model. Incremental approaches above will serve to prepare healthcare organizations for full capitation.

The fourth model is bundled or “episodic” payments, which is a single lump sum that is paid to a specific set of providers for providing a specific procedure or episode, such as a knee replacement surgery. Additionally, there are commercial pilots underway that are testing longer‐term and more complex cases, such as cancer care / chemotherapy.36 This is intended to make the providers as efficient as possible in delivering the service, since it will encourage the group to do so at lowest cost. Since bundled payments can incentivize providers to skimp on service, these payments are often coupled with potential penalties for missing quality and performance targets. The value of bundled payment models is limited to more definable cases, such as surgeries, rather than longer term of chronic care management – with longer term or more complex cases, it can become very difficult to identify which processes, treatments, drugs, provider services, among others, belong in the bundle.

Each payment model has benefits and drawbacks. In some cases, the challenges of specific payment methodologies can be remedied by combinations of several. For example, certain quality measures developed in P4P models are useful under both capitation and bundled payment models to ensure that providers to not skimp on service to reduce their costs. Additionally, bundled payment models incentivize the formation of “centers of excellence” that develop specialized expertise with certain procedures; shared savings organizations could outsource certain procedures to these groups if vertical integration proves less efficient. These centers of excellence also lend themselves to be more independent, since they can provide specific, defined services in isolation from a more diverse care team; physicians also prefer to be independent, all else being equal. The takeaway is that we expect to see wide proliferation of these various payment models, often packaged together in complex ways, over time.

We also expect significant variation in payment methodologies at the contract level among individual physicians. Payor organizations will view their ability to develop and execute optimal reimbursement structures as a core competency; while this push for innovation will benefit the industry over time, it will increase administrative complexity for individual providers. Confusion will likely emerge among providers as result of potential conflicting incentives arising from different payors’ preferred contracting styles.


Likely Evolution in Payment Models We expect healthcare payment models to evolve as depicted in the diagram below. Each model introduces incrementally more financial risk to provider groups and requires / incentivizes greater collaboration and care integration. While this is clearly an oversimplification, particularly in light of the discussion above, this framework is helpful as a baseline to understand the incremental nature of healthcare payment reform.

Figure 3.11: Expected Migration Model in Physician Payments

Each incremental step toward quality serves to prepare providers for the next step. P4P methodologies encourage more coordination than fee‐for‐service, and so on. However, healthcare organizations vary widely in their preparation for these models. Most physician groups are not equipped with the scale and sophistication for full capitation. The effectiveness of these separate methodologies, when blended together, will only be understood after much testing. It is also important to understand the cost of administration of each model relative to the expected clinical benefits.

Changing Payment Models Catalyze Changing Business Needs for Physicians The enormity of the shift from volume‐based reimbursement to value‐based reimbursement is not to be underestimated. The $2.5 trillion healthcare industry has evolved over the last 100 years to support fee‐for‐service or cost‐based payments. Business models, organizational structures, incentives, information technology systems, and the job functions of individual provides have evolved to profit from fee‐for‐service methodologies. The transition will take time and it will be difficult.

Value‐based models will require physicians to totally redesign the way they practice medicine. They must integrate with community‐based services, promote wellness, manage populations and adopt new workflows. Most importantly, they must understand the financial impact of these new activities, making the availability of both cost and quality information critical. Physicians will need decision support in the form of information that is useful in guiding behaviors and making decisions at the point of care to understand which specific clinical activities lead to improved outcomes and higher reimbursement. Additionally, as new payment models evolve and change over time, requirements for receiving performance payments will change and become more demanding. Physicians should expect to continuously retool their workflows during the slow march to value‐based reimbursement over the next decade. RCM companies that proactively develop tools to help physicians maximize reimbursement will have significant value to their clients. We believe that it is a significant opportunity for RCM companies.

Fee‐for‐ServicePay‐for‐

PerformanceShared Savings /

RiskCapitation

Bundled Payments

Responsibility / Accountability for Outcomes


Another challenge for doctors will be negotiating value‐based reimbursement contracts with payors, who are armed with significant information resources and medical information across broad populations. Payors are more prepared to negotiate new, unfamiliar reimbursement methodologies based on aggregated cost and quality information. Physicians will need competent, data‐savvy advisors to support these negotiations.

Technology Adoption The Health Information Technology for Economic and Clinical Health Act (“HITECH”) released over $30 billion in stimulus payments for the adoption of EHR systems. This has catalyzed rapid adoption of electronic health records and has unleashed a wave of innovation in the healthcare information technology industry. In fact, the progress in adoption of EHR's in the past two years has exceeded the progress in the 20 years prior to that.37 Significant advancements are being made in data exchange and interoperability, as well as software tools that enable providers to more effectively interact with patients. A variety of other technologies are emerging that will enable providers to manage patient data longitudinally across various care settings.

Figure 3.12: EMR Adoption Rates 38

It is important to note that despite this rapid progress, the healthcare industry is still far behind other service industries in its adoption of IT, and many experts believe health IT is largely in its infancy. While physician services represent 3.4% of GDP, physician practice IT spend represents only 0.6% of total United States IT spend, as of 2011 (see Figure 3.13); this points to the significant historical underinvestment in technology by physician practices. While close to half of office‐based physicians have a basic EHR system, almost 50% of these systems do not have capabilities to manage care coordination or preventative care, such as viewing real‐time lab results, clinical notes, and management of eprescribing, among other functions (data from a 2011 study).39 One of the reasons that progress has been so slow is that IT investments and data sharing tools represent cost centers under a fee‐for‐service paradigm, where little value accrues to the purchasers of these systems. On the other hand, pay‐for‐quality models turn these systems into true infrastructure investments that have capacity to increase provider profitability long‐term, since they improve care and increase efficiency. As such, we expect continued rapid innovation in health IT.

17.3%20.8%

23.9%29.2%

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42.0%

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10.5% 11.8%16.9%

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33.9%

39.6%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Any EMR / EHR System

BasicSystem


Figure 3.13: Physician IT Spend Benchmarking 40

Providers will need a variety of software tools and capabilities to succeed under future pay‐for‐quality models, which create new business needs. They need to be connected to their patients’ full ecosystems and be able to “play nice” in the sandbox. RCM companies are positioned to provide them with these tools. Additionally, technology will increasingly serve as a differentiator to physician practices under pay‐for‐quality reimbursement models. Sophisticated technology often gives comfort to patients and increases subtle perceptions of quality, in addition to decreasing the many hassles and confusion associated with visiting a physician. Patient portals make it easier for patients to access their health information, and facilitate patient engagement in care delivery, thus improving outcomes.

We view the following technologies as critical supplements to existing RCM technologies. Note that we expand on this list in Section 4.

1) “Next generation” practice management and EMR system 2) Robust interoperability solutions 3) Patient portals 4) Business intelligence functionality 5) Mobile device support 6) Social media and web 2.0

Engagement of the Healthcare “Consumer” One of the implications of pay‐for‐quality models is that providers will need to more actively engage patients in their own healthcare activities. There is an abundant set of literature that indicates that more engaged patients are able to reduce their own cost. This can be accomplished through direct support through lower‐cost ancillary providers that can physically engage patients throughout their day, such as home health aides. Electronic patient education will also play a large role in patient engagement as these tools become more user‐friendly and accessible. The government has recognized the importance of engaged healthcare consumers and has mandated, via Meaningful Use Stage 2 requirements, that providers must provide patients access to their healthcare data information. This is only a starting point – we encourage RCM companies to proactively develop creative ways to engage patients in the future, and keep a pulse on developments in the space.

ACO’s and capitated providers will have more natural incentives to manage patient populations. P4P providers will be more focused on “superficially” meeting patient engagement measures, whereas full

0.6%

3.4%

Physician Practice IT Spend as % of Total US IT Spend

Physician Services as % of GDP


risk providers will be driven to innovate and develop new ways to engage patients. We expect more leading‐edge providers to demand more from their service and technology partners in this regard.

There are also significant efforts to give consumers cost and quality information on individual providers. Many believe that informed patients will be able to drive competition and innovation in healthcare by putting pressure on lower‐performing providers, just as in other industries. The implication of this is that providers must view patient service and satisfaction as a major differentiator in the future.

Health Insurance Exchanges and Expansion of Medicaid It is well publicized that the PPACA authorized the formation of state‐level health insurance exchanges, which are to be fully operational by 2014. Enrollees will begin purchasing plans in October 2013. What is less well understood are details on the tactical roll out of these exchanges, including funding sources, financing mechanisms and payment processes, expected risk pools, and technology requirements, among other issues. There will likely be little time to evaluate the impact of the exchanges on billing processes.

Figure 3.14: Coverage Expansion (patient counts in millions) 41

That said, the 20+ million people expected to receive coverage through the exchanges are in good health, on a self‐reported basis, with a median age of 33. They are more likely to speak multiple languages and are less likely to hold a college degree. When combined the millions of new Medicaid patients from the PPACA, this new customer base will require physicians to adapt customer engagement processes; they will need to provide heavier “hand holding” and will need to devise new ways to educate consumers on health insurance options and care instructions / prognoses.

As we more closely study the intent of healthcare exchanges we see the potential for troubling unintended consequences. Many experts are predicting that healthy individuals will likely avoid purchasing insurance through the exchanges due to the high cost of insurance relative to the penalties for not purchasing coverage. Penalties are likely to be several hundred dollars; this is compared to

34 42 42

9 25

155 156 155

26 24 26

2012 2014 2017‐

7 10 ‐

9

25

2012 2014 2017

New Medicaid andExchange Patients

Number of Insuredby Category *

16

35

215231 248

Medicaid and CHIP Exchanges

Employer Nongroup and Other

* Figures exclude individuals 65 years of age and older, per CBO estimates


several thousand for full coverage. This is expected to create unfavorable risk pooling characteristics for the insurance exchanges, which will increase premiums for the individuals that do purchase insurance. This could lead to a total re‐think of the purpose and funding of the healthcare exchanges.

Data Security / Compliance An ever‐increasing amount of patient data has been put into digital format in connection with the proliferation of electronic health records. This increase in digital patient data is represented below in Figure 3.15. Roughly 80% of hospitals have on average more than 25% of patient data online; over 40% have more than 75%. Note that while these figures refer to patient data in the hospital setting, we believe it is also representative of the physician marketplace.

Figure 3.15: Percentage of Patient Data Captured in Hospitals’ Electronic Records42

Information system networks in healthcare are very complex due to the fragmented universe of healthcare providers, complex nature of the information contained in these records, and wide variety of software vendors and competing technology formats. This complexity creates many opportunities for mismanagement of patient information. Many of these risks are as dynamic and ever‐changing as the new technologies that enable them, but a few common dangers to healthcare patient data security have been laid out below.

5.6%

4.8%

8.4%

14.4%

24.0%

29.2%

12.8%

0.8%

None

Less than 10 Percent

10 to 25 Percent

26 to 50 Percent

51 to 75 Percent

76 to 99 Percent

100 Percent

Don't Know


Figure 3.16: Sample of Risk Analysis for Security of Patient Data 43

Many healthcare organizations have underinvested in data security despite the high risk of security breaches. Over 18 million patient records breached between 2009 and 2011; the annual cost of security breaches to the healthcare industry is over $6.5 billion.44 Individual fines can be quite large as well. In the first half of 2012 alone, the following firms were fined by the HHS Office for Civil Rights for “major breaches of protected health information…which left more than 1 million consumers at risk.” The figure below spells out the financial impact of these fines for the firms involved.

3.17: Penalties Paid to HHS Office of Civil Rights for Breaches of Protected Medical Information ($ in millions) 45

Medicare will begin enacting penalties of up to 5% reimbursement in 2015 for companies that fail to take measures to prevent theft of patient data.46 It is also possible for healthcare firms to be subjected directly to federal fines when all necessary compliance costs are not met. The current maximum civil HIPAA penalty for data breaches is $1.5 million, and is expected to increase significantly in the years to come.47 The bottom line is that it is simply becoming too costly not to invest in further security measures for patient data than those laid out under the compliance of federal law.

Missing patches on an internal web server housing

patient history

Patient health records stored on unencrypted

laptop drives

Webmail being used over unsecured wireless networks at remote doctors’ offices

Sales presentations stored on USB thumb drives

Anti‐virus signatures out of date on file servers

Marketing web server tape backups not stored in a

fireproof safe

External hard drives that aren’t actively backed up

A weak password on an internal server that houses

business associate contracts

Lack of system auditing logging a monitoring on

EMR server

Likelihood of Occurrence

Potential Impact

Medium

High

Low

High Medium Low

$0.1

$0.9

$1.0

$1.0

$1.5

$2.2

$4.3

Providence Health

UCLA Health System

Massachussets General

Rite Aid

BCBS of Tennessee

CVS Pharmacy

Cignet Health


Section 4: Implications for RCM Companies The healthcare revenue cycle management market is at the intersection of a number of trends that are reshaping the healthcare industry. Historical payment models are slowly being turned upside down as a slew of regulations and private industry initiatives aim to shift risk to providers. This is creating significant new business needs for physicians to become more efficient and effective in care delivery. Physicians will need to adopt new technologies and establish cutting‐edge vendor relationships that help them meet these new business needs. We believe that RCM companies are the best positioned entities to help lead physicians through this storm. They must do so to stay relevant and continue to grow. In this section, we outline a number of strategies that RCM companies can use to cope with this change.

While some of these strategies represent opportunities for new growth into new markets, several of our recommendations will require immediate attention. We will begin with what we believe to be the most important strategic concern for the RCM industry – developing a competitive cost basis that enables competition with companies that have developed major economies of scale.

Reduce Cost Basis / Prepare for Downward Fee Pressure RCM companies must reduce their cost basis in order to grow and thrive. Well‐capitalized players are investing in technology and are designing new processes to drive down cost‐per‐encounter.48 RCM companies will need to continue to be more efficient. Several specific initiatives are laid below:

1) Evaluate the efficiency of their core billing / practice management system. A number of “next generation” platforms have emerged in the last three years that are significantly more efficient than legacy systems, and more flexible in their ability to manage changing regulations.

2) Take an assembly line approach to process efficiency. This might include retaining outside six‐sigma consultants or similar experts to take a fresh view of your detailed operations processes. Standardize processes to the greatest extent possible.

3) Invest in other supporting technologies, such as automated coding software, on‐line engagement tools and call center technologies.

4) Seek offshore or “right shore” labor partners that can reduce compensation costs. A number of players in the market are aggressively using offshore labor to reduce their cost basis. While certain client sensitivity and service quality issues have historically been a barrier to adoption, we view offshore labor as a critical competitive element on a go‐forward basis.

Diversify Specialty Mix Year‐to‐year changes in specialty‐specific reimbursement represent enormous risks to RCM companies focused on a limited universe of medical specialties. As discussed in Section 3, there is significant variation in specific reimbursement trends by medical specialty.

To combat this risk, we recommend a diversified customer base across primary care physicians and both hospital‐ and office‐based specialists. The strategies for accomplishing this will be different for companies that are focused on office‐based rather than hospital‐based specialties, and vice versa. Note that cross‐expansion into office‐ or hospital‐based specialties is not an easy feat, and requires


large investments in the forms of capital and management team effort. We highlight several practical strategies below for RCM companies seeking to “cross the chasm” from office‐ to hospital‐based markets and vice versa.

1) RCM companies serving hospital‐based physicians – the first step would be to find an integrated PM / EHR system to serve this client base. It would be wise to select a system that has strong market ratings and broad user base. The jump to office‐based markets also requires investments in sales, marketing, and customer support, as the clients tend to be much smaller – practices of 1‐5 physicians are very common in this market. We view acquisitions as a logical entry point to this market; however, attractive targets will be expensive.

2) RCM companies serving office‐based physicians – to expand into hospital‐based specialties, back‐end medical billing systems will likely be required. Many RCM companies in the hospital‐based space have built proprietary technologies specific to their individual company workflows; however, some of these businesses to sell their platform to third party outsourcing companies. This strategy brings interesting competitive risks, given the conflict of interest with the software vendor.

Invest in Practice Management Capabilities As discussed in Section 2, the services and technologies that RCM companies provide fall into two buckets: medical billing and practice management. We do see the medical billing component becoming more competitive as it is a relatively mature industry. However, as medical billing markets have faced pressure, we have seen significant growth and opportunity in the practice management and technology components. RCM companies have been embedding new services and technologies on top of their core medical billing platforms, including EHR software and support, business intelligence and analytics, and more sophisticated data connectivity solutions. Additionally, we have seen some medical billing companies step outside of their comfort zone to proactively provide sophisticated analyses and strategy counseling to clients. One particular strategy that we have seen is shifting spend from production employees, via technology investment and offshore labor, to more educated workers that can oversee larger offshore labor teams. These workers generally have graduate or master‐level degrees and are technology savvy. We do believe that practice administration will require more intellectual horsepower over the next decade than has been historically required, and that these types of business models will succeed.

New reimbursement models will also require more active human intervention. Payors are currently testing hundreds of new health plan designs and payment methodologies, many of which involve concurrently running two reimbursement methodologies at once – fee‐for‐service along with retrospective quality‐based payments. This comes with an obvious increase in administrative expense, but also clouds the ability of physicians to understand which activities will lead to profits. Physicians will also have to manage multiple such contracts at any given point. This will require both financial and clinical oversight. RCM companies must develop additional clinical expertise to help clients through these transitions, and must invest in human capital and software tools to accomplish these objectives. Some may consider adding small task forces of educated workers to manage more complex scenarios, using a combination of in‐house expertise, consultants, and new hires.


Invest in “Next‐Generation Technology” / Find Technology Partners The healthcare information technology market has grown rapidly in recent years, arming RCM companies with hundreds of potential options for EMR products, niche RCM solutions, clinical applications, and business intelligence and analytics, among many others. The number of vendors and different products can be overwhelming, particularly given often exaggerated and misleading claims made by many market participants. Below, we have distilled a list of “must have” technologies for RCM vendors. It is important to note that the majority of technology vendors have started or are in the process of building / acquiring medical billing divisions to compete with traditional RCM service companies. This trend makes it particularly important for medical billing companies to develop a sound technology strategy to position for this new competitive angle, and to beware of potential competitive threats from vendor relationships.

1) “Next Generation” Practice Management and EMR system – we see significant innovation occurring in the physician RCM market in terms of “core” software platforms. Systems that are built on modern architecture, with integrated financial and clinical content, are not only more efficient but better equipped to help physicians navigate a rapidly evolving healthcare system. These systems are able to process medical billing transactions more efficiently by automatically placing patient data where it belongs along the revenue cycle continuum. Clinical information drives financial information. More importantly, the nature of integrated systems – flexible data structures and logical architecture – allows them to more easily integrate their systems with other providers in their ecosystem. Of the hundreds of EMR providers across the country, only a selected handful will have the staying power to continue innovating on top of their core EMR platforms. The CDC reported in December 2012 that of physicians intending to participate in the EHR incentive program, roughly 25% had systems with capabilities to support 15 of the Stage 1 Core Set objectives for Meaningful Use, which is required for compliance.49 This is a worrisome statistic. RCM companies must be wary of EMR system vendors with poor track records in attaining Meaningful Use.

2) Robust interoperability solutions – Stage 2 Meaningful Use will require some basic interoperability from EMR systems in 2014; in fact, the rule requires that only 10% of transitions of care must be transmitted electronically. However, many physicians are being forced to share data in new care delivery models across different settings, and are striving to achieve much greater thresholds. Many clients of RCM companies could face consolidation or business model change in 2013; as such, RCM vendors should be prepared to exceed the interoperability mandates established by Meaningful Use Stage 2 to best serve clients with advanced data sharing and reporting requirements.

3) Patient portals – patient portals serve to both differentiate physician practices and reduce administrative costs. Functionality should allow patients to schedule appointments, pay bills, send and receive messages from physicians, and access detailed clinical information such as lab results, medication lists, and clinical notes, among others. Patient portals should be integrated into practices’ EMR systems so that data can move seamlessly between the patient portal and EMR. Next generation portals will link to significant volumes of clinical education content. Collectively, these features significantly reduce patient hand holding and long telephonic interactions that could be accomplished more effectively over the internet. Patient portals also catalyze patient engagement in their own care delivery, discussed in more detail below.


4) Business intelligence functionality – business intelligence tools give providers insight into billing patterns and work processes. Leading systems enable physicians and RCM companies to cut data in a variety of ways to identify important business trends / issues, including profitable activities, delinquent payors, and cash cycle issues, among many others. Business intelligence platforms also facilitate analysis of individual provider efficiency and volume, important considerations when considering compensation policies and resource allocation.

5) Mobile device support – be an expert on mobile devices. They are becoming so ubiquitous in the general population that we expect to see further innovation and adoption on “mid‐size” screen mobile devices. Over 60% of physicians are currently using tablet computers in a clinical context in 2012, double the amount in 2011. This is a fascinating statistic relative to the speed of adoption, considering tablet computers were only introduced in 2010. Mobile applications enable physicians to quickly and easily check for information, such as drugs and disease symptoms, among many others. Physicians can also easily share data with patients and show anatomical drawings to explain certain medical concepts – a picture is worth a thousand words.

6) Social media and web 2.0 – while RCM companies do not have to be experts in social media, they should be able to help their clients manage patient interactions that occur through any social media channel.

Develop Relationships with Hospitals As discussed in Section 3, hospitals have been aggressively acquiring physician groups since 2005. The threat of hospital consolidation makes it absolutely critical that RCM vendors develop relationships with hospitals in their geographic coverage universe, and to understand and articulate their value proposition in a hospital environment. RCM companies will have to demonstrate value above and beyond the benefits that would accrue to hospitals if functions are consolidated (efficiency, data continuity, etc). We recommend several action items:

1) RCM companies need to ensure that they present the right level of “sophistication” to hospital clients in terms of processes, technology, and staff. It is important to have business intelligence tools and other “add on” capabilities to core billing platforms. We have also seen smaller companies succeed by bringing higher levels of service and expertise.

2) Actively seek out relationships with hospitals in your geographic coverage universe to open potential business opportunities and to stay on their radar.

3) Have a plan for when physician groups are acquired by a local hospital. Understand your value proposition in the context of a hospital and be able to articulate it to decision makers. Prepare a presentation that is “off the shelf” that can address key discussion topics and set the stage for more advanced discussions.

4) Develop flexibility in your ability to perform RCM services on different platforms. If a hospital forces an acquired physician group to adopt EPIC, GE, Cerner, or some other platform software, there is still an opportunity to provide the billing services on the hospitals’ platform.


Prepare to Help Physicians Tie Clinical Activities to Financial Outcomes The activities that drive physician compensation now are different from the activities that will drive physician compensation in the future. RCM companies are positioned to give physicians the tools they need to both redesign workflows and spontaneously adjust decision making processes during the point of care; however, in order to do so, the RCM industry needs to enhance its understanding of clinical activities that drive reimbursement. The goal shouldn’t be to become medical experts per se, but to equip physicians with the tools that enable them to more effectively practice medicine. Specific strategies include:

1) Equip physicians with real‐time clinical decision support that enables them to meet detailed process‐related quality measures. Meaningful Use mandates that physicians implement clinical decision support rules into their workflows – one in Stage 1, five in Stage 2, and a yet‐to‐be determined number in Stage 3.

2) Collect patient data over time and across different care settings. RCM companies must build more a complete view of patient clinical data and the corresponding cost data over time.

Prepare to Engage Consumers Physicians will increasingly rely on patient satisfaction measures to drive performance and differentiate themselves. In an environment where consumers have better cost and quality information, the following actions will become much more important to physician practices:

3) Review and potentially revise customer service protocols to be more rigorous. Prepare to counsel patients on cost information and provide more transparency in terms of billing processes and pricing. It will become increasingly valuable to collect patient co‐pays at the point of care – seek a technology vendor that can help with this functionality.

4) Develop custom payment plans for patients that have poor credit or demonstrated inability to pay for services.

5) Provide clients with patient portals (also discussed in technology review above).

6) Mine patient healthcare data to identify patients with gaps in care, and use multi‐touch communications (phone, email, and text) to engage these patients.

7) Develop creative ways of using client data to develop marketing materials. RCM companies are positioned to provide cost and quality information relative to their specific client base.

Improve Compliance & Data Security It is important for healthcare organizations to perform their own analyses, similar to that in Figure 3.16 in Section 3, with company‐specific risks ranging from both likely to unlikely and high‐ to low‐impact. An emphasis on security rather than basic compliance must be in place. The current state of fines associated with breaches in patient data confidentiality have shown that firms can be fined for such breaches even if they are complying with federal law in terms of information technology investments. A recent study performed by Ipswitch, a leading markets software products and services developer, found that while a growing number of healthcare organizations have come into compliance with HIPAA compliance standards, “47 percent still said they have experienced a patient‐records data


breach in the past two years.” It is becoming clear that analyses of risks beyond the level of legislative demands is becoming necessary for healthcare companies hoping to avoid lofty fines for mishandling of patient data.

In addition to company‐specific initiatives, which need to be established on a firm‐to‐firm basis, there are a few general actions that firms in the healthcare industry can take:

1) Firms need to establish and check the efficiency of their EHR platforms before implementing them.

2) If not in place already, the development of an “internal healthcare compliance department”50 is strongly encouraged with new legislation surrounding patient data privacy coming into effect.

3) Healthcare organizations need to closely monitor the use of handheld mobile devices being used to collect personal health information, as 49% of providers have yet to implement security platforms for these mobile devices.51


About Falcon Capital Partners Falcon Capital Partners is the leading M&A advisor to the physician revenue cycle management industry. Over the last ten years, we have completed more transactions in the physician, hospital and payer revenue cycle industries than any other investment bank. Specific areas of expertise include:

Billing, collections and claims processing

Coding, audits, and compliance

Data integration / interoperability

Practice management software

Clinical systems and electronic health records

Data analytics

Patient communication and engagement technologies

Falcon Capital Partners Team

Falcon Capital Partners Securities Products offered through BA Securities, LLC Member FINRA SIPC 52 201 King of Prussia Road | Suite 370 Radnor, PA 19087

Ted Stack Managing Director (610) 989‐8901 [email protected]

Jonathan BrallierSenior Associate (610) 989‐8905 [email protected]

Keith DeVantierManaging Director (610) 989‐8902 [email protected]

Carl Witonsky Managing Director (610) 989‐8903 [email protected]

Mark Gaeto Managing Director (610) 989‐8904 [email protected]

Robert Jennings Senior Associate (610) 989‐8906 [email protected]


Selected Revenue Cycle Transaction and Strategic Experience

has been acquired by

Falcon Capital Partners served as exclusive financial advisor

to Hart Associates

Merger / Acquisition Merger / Acquisition


Falcon Capital Partners served

as exclusive financial advisor to Francisco Partners

Merger / Acquisition



to AMSPlus

Falcon Capital Partners served as exclusive financial advisor to CPU Management Systems

has been partnered with

Merger / Acquisition Merger / Acquisition


Falcon Capital Partners served as exclusive financial advisor to Intermedix Corporation



as exclusive financial advisor to Medical Account Services




as exclusive financial advisor to Physician’s Service Center




as exclusive financial advisor to Intermedix


Strategic Advisory

has received strategic and transactional advisory from

Strategic Advisory

has received strategic and transactional advisory from




as exclusive financial advisor to Parthenon Capital



to SPI




as exclusive financial advisor to Pathology Service Associates




to BilAmerica



Falcon Capital Partners advised MedSuite, PMG,

and Summit HMR



Endnotes 1 Source: Falcon Capital Partners; MGMA Physician Compensation and Production Survey 2 Note: “Current” refers to the total spend by physicians currently outsourcing services. “Runway” refers to the total potential spend from physicians that are not currently outsourcing. “Total” represents the combination of the two. Definitions for hospital‐based and office‐based physicians are described further below. 3 Source: Publicly available information 4 Source: Publicly available information; estimates provided by Thompson Reuters 5 Source: MGMA Physician Compensation and Production Survey 6 Source: National Academies Press, “The Healthcare Imperative: Lowering Costs and Improving Outcomes: Workshop Series Summary” (2010) 7 Source: IDC Health Insights 8 Source: Falcon Capital Partners; MGMA Physician Compensation and Production Survey 9 Note: “Current” refers to the total spend by physicians currently outsourcing services. “Runway” refers to the total potential spend from physicians that are not currently outsourcing. “Total” represents the combination of the two. Definitions for hospital‐based and office‐based physicians are described in the text. 10 Source: AMA Physician Masterfile (January 2008); 2010 MGMA Physician Compensation and Production Survey; public company data; market pricing statistics; Falcon Capital Partners estimates 11 Source: AMA Physician Masterfile (January 2008); 2010 MGMA Physician Compensation and Production Survey; public company data; market pricing statistics; Falcon Capital Partners estimates 12 Source: 2012 AMA National Health Insurer Report Card 13 Source: National Academies Press, “The Healthcare Imperative: Lowering Costs and Improving Outcomes: Workshop Series Summary” (2010) 14 Note: Calculated as ([17.9% ‐ 5.1%] x 2011 GDP of $15.1 trillion 15 Source: Bureau of Economic Analysis; CMS 16 Source: Kaiser 2012 Employer Health Benefits Survey 17 Source: MGMA Physician Compensation and Production Survey, 2012. The data represents the median collections for professional charges, as defined by the MGMA. 18 Source: 2012 MGMA Physician Compensation and Production Survey 19 Note: The mandatory expansion in Medicaid was later made voluntary by the Supreme Court. While a number of states are electing to decline the expansion, Medicaid is still expected to increase significantly in the future. 20 Source: Center for American Progress 21 Source: Falcon Capital Partners Estimates; Centers for Medicare and Medicaid Services 22 Source: Center for American Progress 23 Source: Center for American Progress 24 “Claim” in this context is synonymous an “encounter” or “visit” 25 For purposes of this discussion, we are using the terms operating cash flow and EBITDA interchangeably 26 Source: Falcon Capital Partners analysis; publicly available information 27 Source: MGMA Physician Compensation and Production Survey 28 Source: UnitedHealth Center for Health Reform & Modernization working paper, “Farewell to see‐for‐service?” (2012) 29 Source: Agency for Healthcare Research and Quality (“AHRQ”) 30 Source: UnitedHealth Center for Health Reform & Modernization working paper, “Farewell to see‐for‐service?” (2012) 31 Source: Oliver Wyman study 32 Source: UnitedHealth Center for Health Reform & Modernization working paper, “Farewell to see‐for‐service?” (2012) 33 Source: Oliver Wyman study 34 Source: Oliver Wyman study 35 Source: Oliver Wyman study


36 Source: UnitedHealth Center for Health Reform & Modernization working paper, “Farewell to see‐for‐service?” (2012) 37 Source: Dr. Farzad Mostashari of the Department of Health and Human Services 38 Note: Basic system is defined as one that has all of the following functionalities: patient history and demographics, patient problem lists, physician clinical notes, comprehensive list of patients’ medications and allergies, computerized orders for prescriptions, and ability to view laboratory and imaging results electronically. 39 Source: Health Affairs, “Physicians in Nonprimary Care and Small Practices and Those Age 55 and Older Lag in Adopting Electronic Health Record Systems,” (2012) 40 Source: Gartner; US Department of Health and Human Services 41 CBO Estimates 42 2012 HIMSS Analytics Report: Security of Patient Data. Commissioned by Kroll Advisory Services, April 2012 43 Source: “Healthcare Security + Compliance Guide” Commissioned by HIMSS and SOPHOS, 2010 44 Source: “Healthcare security breaches: Secure patient information and avoid financial penalties” Commissioned by Dell SecureWorks, 2012 45 Source: “OCR Fines BCBS Tennessee $1.5 Million for Breach” HealthData Management, Joseph Goedert, Mar. 13, 2012 46 Source: “Healthcare security breaches: Secure patient information and avoid financial penalties” Commissioned by Dell SecureWorks, 2012 47 Source: “Healthcare security breaches: Secure patient information and avoid financial penalties” Commissioned by Dell SecureWorks, 2012 48 “Encounter” in this context is synonymous a “claim” or “visit” 49 Source: CDC (cdc.gov/nchs/data/databriefs/db111.pdf) 50 Source: “Top 10 Healthcare Compliance Issues of 2011” BHM Healtcar Solutions. Danyell Jones July 20, 2011 51 Source: “Healthcare security breaches: Secure patient information and avoid financial penalties” Commissioned by Dell SecureWorks, 2012 52 Falcon Capital Partners and BA Securities, LLC are independent entities.

falcon capital partners - physician rcm industry report

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tableofcontents preface