Revenue Cycle Management In Hospitals: Endless Opportunities

By Kristina Zucchi, CFA | December 15, 2010 AAA

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.

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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%.

Conclusion
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.)

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