The state of the healthcare industry in the U.S. has been much publicized, and everyone from politicians to mainstreet has an opinion about what's wrong and how to fix it. However, most people do not understand the connection between the different components of the system and how intertwined they are.

IN PICTURES: 4 More Can't-Miss Health Deductions

Negotiating Healthcare
The proposed acquisition of Tenet Healthcare Corp. (NYSE:THC) announced by Community Health Systems (NYSE:CYH) made sense, according to CYH to leverage contract negotiations and improve growth and savings opportunities in today's environment. The hospitals, like Community Health Systems and other service providers, are at the center of patient care and are often at the mercy of the government, insurance companies and the patients. They have the mission to deliver the proper and highest quality of care, but must accept whatever payment "guidelines" are set for them.

Service providers must decide how to collect the most revenue for the care delivered. The turn of the century brought this debate to the forefront, as many hospitals started to see bad debt and expenses rise while revenues in the form of reimbursements were frequently cut. This caused many hospitals to fail, and even the largest of the public hospital companies, HCA, was not immune and eventually went back to being privately held. However, there now are several companies that address these issues in the hopes of helping hospitals improve their financial prospects.

Capturing Lost Dollars
Hospitals historically have been run by medical professionals who typically focus on patient care. But the business of delivering health had not been adequately addressed. As such, the issues mentioned came into play. Accretive Health Inc. (NYSE:AH) provides healthcare revenue cycle management services. Basically this means that many hospitals and other providers do not capture the total revenue owed due to billing mistakes, improper verification of benefits and even simple improper or non-billing to the patients after insurance payments are received.

This company has such strong prospects that institutional ownership increased 45% in the last month alone. The company estimates it has only penetrated 1% of potential opportunity worth $50 billion, and states that typical hospitals see 400-600 basis points of improvement in operating margins by the end of the contract term, a huge margin expansion by any standards, especially for hospitals.

Healthcare Assets
Similar to AH, MedAssets Inc (Nasdaq:MDAS) also helps hospitals and other providers with the revenue cycle management. In addition, MDAS helps these same providers with spend management - helping control non-labor expenses. Both AH and MDAS are small companies with revenues under $1 billion, but they have dissimilar gross margins; MDAS's are in the high-70% range, with estimated growth for the next year in the low-30% range, while AH has about 20% gross margins, but with expected growth for next year at 95%.

Hospitals exist in a very uncertain time. Reimbursement risk runs high, and receiving payments from patients is not guaranteed. The ability to capture lost revenue and improve the ability to forecast actual revenue received to the budget is necessary for hospitals' and other service providers' survival and vitality.

Revenue cycle management companies can play an integral part in this goal and with such a large, underpenetrated market, they should be able to grow revenue base and subsequent margins at a rapid and steady pace. (To learn more, see Investing In The Healthcare Sector.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  4. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  5. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  6. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  7. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  8. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  9. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  10. Stock Analysis

    GoPro's Stock: Can it Fall Much Further? (GPRO)

    As a company that primarily sells discretionary products, GoPro and its potential falls right in line with consumer trends. Is that good or bad?
  1. What is revenue cycle management?

    Revenue cycle management is a big-picture sales, collection and payment processing technique, popular among healthcare providers. ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

Trading Center