Proceed with Caution: Five Key Considerations in Quality of Revenue Analysis 

March 20, 2024

Written by Melissa Hoelting, CPA and Lukas Recio, CPA

In healthcare-related mergers and acquisitions (M&A), quality of revenue analysis represents both the most vital piece of due diligence and its most unique aspect given the nature of healthcare revenue. For many transactions, buyers rely on due diligence advisors to provide independent net revenue hindsight analyses to facilitate valuation efforts, such as growth potential, risk analysis, and financial stability. Quality of revenue analysis becomes even more crucial in healthcare transactions due to the added complexity of payor contracting and unique reimbursement mechanisms by vertical. Due to this complexity, investors and advisors need to know the key indicators that arise in quality of revenue analysis to address the issues and properly assess the merits of the transaction. In this article, our financial due diligence team previews five key considerations: 

1. Payor Concentration 

When revenues are concentrated with a select few payors, there is potential for future revenue loss from either unfavorable reimbursement rate changes or the loss of in-network status. Even minor changes in reimbursement rates may have a material impact on top-line revenue when applied to key groups. A key consideration when evaluating payor concentration comes from a large reliance on government payors, as the rates can change year to year without the company’s input or control. Payor concentration in and of itself will not impact the revenue hindsight analysis, as collections for previous dates of service will follow the current contracts, but investors and their advisors should make it a priority to understand the payor mix to properly identify and assess the inherent risks. Additionally, any upcoming contract negotiations should be discussed to evaluate the potential near-term impact of negative price adjustments to make necessary pro forma/forecasting assumptions. 

2. Increasing Days Sales Outstanding (DSO) 

Aging accounts receivable balances indicate difficulties in the billing and/or collection process, which directly impact the company’s cash flows and the reliability of reported revenues for companies on an accrual basis. Increasing DSO could be the result of certain non-recurring events, such as the loss of key personnel in the billing department or converting revenue cycle management systems, or may be indicative of deeper issues at play within the company. In the case of third-party payors, increased DSO could point to two potential issues: 

  1. Disputes with payors, or  
  1. Insufficient collections of copays, coinsurance, or deductibles. If it is discovered that increased DSO for certain third-party payors stems from remaining patient responsibility, the company could be under-collecting copays, coinsurance, and deductibles at the time of service. This misstep in the collection process can leave a company exposed to an accounts receivable balance overly weighted toward patient balances, which can be more difficult to collect.  

Regardless of the payor type exhibiting increased DSO, decrease in collection speed should always alert the investment team that more analysis and discussion is required to properly determine the collectability of accounts receivable, and thus, the revenue accruals themselves.

3. Reconciliation Irregularities 

Revenue analysis fundamentally begins with a reconciliation of the payment data to the bank statements to anchor the data to verifiable cash inflows. Variances between collections from the billing system and bank statement deposits could indicate that the company does not deposit all collections, certain revenue streams do not run through the billing system, or there are significant delays in posting cash receipts to the billing system. By comparing the reported revenue to the bank statements, teams can identify overstatements of revenue that are not supported by bank deposits. Regardless of the variance’s cause, any discrepancies should be investigated and discussed with management to ensure data completeness and integrity before using the billing system reports for any revenue analysis.  

4. Variability in Gross-to-Net Ratios 

An entity’s gross-to-net ratios (net collections as a percentage of total gross charges) often highlight changes in underlying processes or outcomes for a given period of service; therefore, they are a key consideration during the due diligence process. Effective gross-to-net ratio analysis starts at the lowest level, such as by CPT code by payor. Significant variations at this level from month to month or quarter to quarter may indicate rate changes, an altered chargemaster, or increased/decreased denial activity. At a less detailed level, changes in this ratio may also illustrate changes in payor mix or procedure mix. In any case, the underlying drivers must be identified and their impact to future cash flows assessed to determine the true quality of the underlying revenue streams.  

5. Billing and Coding Irregularities 

A foundational component in the revenue recognition process, the billing and coding process can be the area most susceptible to downside surprise. Investors and their advisors should focus on CPT code-level trending to determine key metrics, such as payment per code and code distribution. By comparing these metrics to contracted rates and industry or specialty norms, irregularities in coding practice can be identified and investigated. For example, if an organization has higher concentration in level one or level five evaluation and management codes, it could indicate consistent undercoding to avoid payor scrutiny or overcoding for work performed, respectively. On a similar note, if an organization receives similar reimbursement on office visit codes for a doctor and a mid-level provider, it could indicate that the billing team is not coding and charging the proper rates. Identified irregularities in the coding metrics should be discussed in detail, as inappropriate coding can result in downward adjustments to both historical collections and any outstanding collections, as well as takebacks owed to insurance companies for prior periods.


For any healthcare transaction, revenue analysis remains the most essential and most complicated part of the diligence process. Because of the payor contracts that underpin most healthcare revenues, investment teams must identify any variances in reimbursement, charges, and coding that could indicate errors or changes in the billing process. When considering adjustments or estimating future collections, teams must consider the changes and errors they have identified through these variances. These five considerations represent just a portion of the potential intricacies and issues that arise during quality of revenue analysis. Thus, an organization looking to enter into a transaction, whether on the buy-side or the sell-side, would benefit from the services of a financial due diligence and/or coding and compliance firm to bring an additional layer of confidence to the target’s revenues. 

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