Public Company Reliance on Government Revenue Streams Must be Considered in Valuation

Published by Becker’s Hospital Review

As the chart illustrates, the percentage of business generated through government payers ranged from a low of 16.2 percent (Quest Diagnostics) to a high of 78.0 percent (Kindred Healthcare), with a median of 36.0 percent and a mean of 36.5 percent. Post-acute providers, such as Kindred Health, take care of patients of more advanced age. Lab companies, such as LabCorp and Quest Diagnostics, focus on commercial payers while deferring government lab studies to hospitals.

There are many reasons to analyze the percentage of revenue generated by government payers, such as Medicare, when performing valuations in the healthcare industry. By understanding the percentage of revenue generated by government payers, one can benchmark that information to a subject company. Comparing the subject company to the industry averages can provide a better understanding of the subject company’s strategy and patient demographics. In addition, government reimbursement for Medicare is directly affected by government policy. Changes to Medicare reimbursement rates have an immediate impact on reimbursement. Commercial payers often base payments on Medicare reimbursement rates. As a result, a change in governmental reimbursement rates will have not only an immediate effect on the revenues of a subject healthcare entity, but also a potential future change as the entity renegotiates contracts with commercial payers.

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