Contract reimbursement is a critical component of revenue for healthcare service businesses. In the context of a transaction, it is important to understand the impact an acquirer’s contract reimbursement will have on a target’s revenue going forward. How will you assess the potential impact to revenue, and what factors should be considered to understand the timing of any impact, post-acquisition? Do you know how you will project the realized revenue impact for proforma purposes and internal projections for the target business?
Performing a “black box” reimbursement analysis and managed care contract review prior to completing an acquisition can help resolve these questions. The results of a black box analysis and contract review can provide insight to assess next steps in a transaction early in the deal process, or as part of final diligence.
Black Box Reimbursement Analysis – Estimating Revenue Impact:
Given the myriad of complexities in payor contract reimbursement, as well as the facts and circumstances specific to the parties of a transaction, there is not a “one size fits all” black box analysis. That said, it is important to understand the level of detail required for the analysis to produce meaningful results.
Should the analysis be detailed or more high-level?
- Detailed: For a selected set of payors, full contract logic for each party is modeled on target’s historical claims for all services to evaluate contract performance based on each party’s allowable reimbursement.
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- Well-suited for businesses with multiple service lines and more complex reimbursement logic, such as acute care hospitals.
- High-Level: This analysis aims to provide a general estimate of reimbursement differentials for selected payors based on a limited set of billing codes or service type. The scope and data required can vary depending on several factors, including the nature of the business/services provided and complexity of contracts/reimbursement logic.
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- Well-suited for businesses with less complex reimbursement logic, such as a physician practice.
Managed Care Contract Review – Considerations for Timing of Revenue Impact
Another important consideration is the timing of any revenue impact and when an acquirer’s contracts will apply to the target. Will the acquirer’s contracts apply day one? Is there any verbiage in the acquirer’s or target’s contracts that outline this? An initial review of each party’s contracts for assignability and other language is a critical first step to assess which contracts apply, and when, in the event of an acquisition. Some examples of verbiage that may be included in an acquirer’s or target’s contracts include:
- Specific time frame or holding period before a target can bill under the acquirer’s contracts
- Target may need to complete the term in its current contract before transitioning to an acquirer’s contracts
- Possible re-assessment or renegotiation of rates with payor, post-transaction
How can these items affect timing of a revenue impact? In some cases, the entire rate lift may not be realized for several months, post-acquisition (up to 18-24 months). What can you do to get in front of these issues? Be aware of the fine print in payor contracts and involve managed care teams on both sides to provide critical input at the beginning of the transaction. Also, adding contract review for assignability and projected revenue impact as part of a black box analysis can be very beneficial to help get clarity here.
Read Part 2 of Revenue Matters – Reimbursement Considerations for a Transaction.
