Quality of Revenue (QoR) is a critical part of the financial due diligence (FDD) process in healthcare transactions, given the unique characteristics and nuances of healthcare revenue, such as varying collection timelines among payers; changes in reimbursement; ever-changing governmental regulations; and the importance of timely, accurate, and well-documented claim submission. Revenue cycle management (RCM) is a critical financial process adopted by healthcare institutions to oversee the administrative and clinical aspects of claims processing, payment collection, and revenue generation. This comprehensive process covers the identification, management, and collection of patient service revenue, and it is essential to ensuring the continuous operation of medical practices while prioritizing patient care. The RCM process begins and ends with the healthcare company’s management team ensuring they have a strong understanding of their RCM lifecycle and a dependable and knowledgeable internal or third-party billing team to support the needs of the business’ revenue streams.
VMG Health’s Net Revenue Analysis
The foundation of any healthcare Quality of Earnings analysis (QoE) is the QoR and related analyses, given the importance of revenue to the overall cash flows and earnings. With healthcare’s unique financial characteristics and the significant impact revenue has on true cash flows and purchase price, QoR analyses must be thorough and multifaceted to ensure the seller receives proper consideration for their true earnings. Further, this gives security to the buyer that they will not overpay for the business or find themselves in a situation post-transaction where earnings are materially different from what was assumed in the purchase price.
VMG Health performs cash waterfall analyses, which are the gold standard in estimating outstanding remaining collections (accounts receivable) and determining accurate accrual basis revenue earned by the business in the respective historical period. In this process, payments are sourced back to their original date of service and observed historical collection patterns are applied across the dataset to accurately calculate outstanding accounts receivable and accrual basis revenues. This is achieved primarily through two methods:
- Collection Distribution (Velocity)
- Gross Charges
Collection Distribution (Velocity) Method
This method analyzes the historical speed of collections to estimate remaining collections. For example, in VMG Health’s extensive deal experience, Medicare typically pays 100% of the total payment expected to be received within 12 months of the original service date. There are some exceptions which can cause delays—such as denials, which usually result from incorrect medical coding or other issues. Other sources such as attorney lien/letter of protection revenues on personal injury claims tend to have longer payment collection tails due to the nature of how payment is determined (i.e., legal proceedings and settlements). On these claims it can take up to 20+ months or even years after the original service date for the healthcare provider to receive complete payment. Analyzing revenues on a payer-by-payer basis in the QoR is imperative in understanding the distinct payment timing trends across payer types to accurately estimate the company’s net revenue.
The Collection Distribution method is not without certain limitations and must be excluded in certain circumstances, including instances where there was a period of delays in claims processing. For example, delays can be caused by billing employees being out-of-office for an extended period or issues with the claims processor itself, such as the recent Change Healthcare outage. This method relies on accurate and timely reporting throughout the full period to effectively generate a meaningful result, so any impact on timing during that period must be discussed with the management team and understood by all parties to determine the validity of this type of analysis.
Gross Charges Method
This method analyzes the historical gross-to-net percentage (percentage of gross charge ultimately collected) across a period and estimates future collections in the more recent periods based on those observed historical collection rates. This analysis still considers payment collection tails in a way that illustrates the cutoff for estimated remaining collections (i.e., the point in time where it is believed that any claims prior to that period would likely be fully adjudicated and therefore have no additional accounts receivable outstanding). As in the previous example, Medicare and other governmental payers tend to pay quickly as long as there are not broader issues, such as denials. These claims would likely only have outstanding accounts receivable for a maximum of 12 months after the date of service.
In this example, if the analysis period is December 2024 and VMG Health obtains payments through December, the QoR will only estimate outstanding collections (accounts receivable) for dates of service from January 2024 through December 2024. Similarly, if the payer has longer payment collection timeframes, as with the attorney lien example, the analysis could estimate outstanding collections back 24 months or further if supported by historical data.
Certain limitations may preclude this method or require special consideration, including changes in fee schedule or chargemaster during the period under analysis. As the gross-to-net ratio is the foundation for this type of estimate, gross charges by CPT® must be consistent throughout the full period under analysis. For example, if the period we use to develop our estimate is fiscal year 2024, but there was a chargemaster change in January 2025 that increased all charges by 50%, we would multiply the higher charges by the same gross-to-net percentage calculated based on the lower charges, overstating our revenue estimate. It is important to recognize these trends in the data and discuss the potential for any changes to gross charges throughout the period under analysis to understand whether certain adjustments to procedures—such as normalizing charges throughout the full period—are necessary, or whether excluding the estimation method in its entirety is the best approach depending on scope of impact.
How the Quality of Revenue Analysis Helps Our Clients
A fundamental FDD procedure in many healthcare deals is validating the accuracy of management presented and diligence-adjusted revenue in the financial statements. Strong RCM processes simplify due diligence and post-transaction transition by making revenue data more accessible and reliable for accurate analysis. VMG Health’s net revenue hindsight analysis provides meaningful and actionable insights for our clients. For example:
- VMG Health restated revenue from a cash-basis to an accrual-basis of accounting on a QoE/QoR engagement, highlighting a resulting decrease in accrual-basis revenue and ensuring our client did not base purchase price on the overstated revenue figures. The reduction in revenue was mainly due to large cash payments being recognized as revenue in more recent periods (when cash was received rather than when cash was earned). These large cash payments recognized in the wrong periods were tied to aged attorney lien claims with dates of service prior to the historical period being analyzed by VMG Health, and that revenue was pushed outside of the historical period in the adjusted financial statements.
- VMG Health has enabled buyers and sellers to evaluate significant financial and reimbursement trends by payer. For example, one of our clients received a significant rate increase from their top payer, which initiated a pro forma adjustment to reflect this rate increase throughout the entire historical period, increasing the value of the client’s business based on the trends identified through the QoR analysis.
- A client wanted to understand when they could expect to collect the outstanding accounts receivable from the previously used RCM system. VMG Health’s net revenue analysis used the historical collection speeds to estimate how much of the remaining collections should be collected in future periods. The company provided 18 additional months of collection data for dates of service before the previously used system was discontinued. Based on the results, this illustrated that the RCM team had not been working open claims from the old system, leaving revenue uncollected.
Conclusion
Whether contemplating the sale of a healthcare company or wanting to gain a deeper understanding into your own practices RCM processes, VMG Health’s QoR analysis can offer substantial insight regarding reimbursement trends, revenue estimation, and knowledge that directly influences your organization’s financial stability, growth, and, ultimately, its ability to provide high-quality patient care.
Our industry experts uncover actionable insights that strengthen your revenue cycle strategy. Contact us today to learn how a QoR analysis can help you optimize collections, reduce risk, and drive sustainable growth for your organization.
