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Get your house in order: Prepare for private equity acquisition
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With ever-increasing amounts of private equity flowing into health care, orthopedic surgeons are being approached by firms offering capital infusion or partnership arrangements. If your group is considering going this route, ensuring your “house” is in good order will better position you for success. “Success” in this context means a premium offer. If your practice is not in optimal order, you risk a less than top tier offer or worse yet, you may cost yourself the deal in total. If the transaction does not happen, the internal evaluation process will improve the bottom line and practice efficiency, but that is not the goal. The goal is to close the deal and ensure the practice gets a maximum return. Do not let this window of opportunity close because you did not want to tackle subjects that might be unpleasant. Be clear eyed and ready to show the true value of your practice.
The following are five key areas to review as you prepare for an equity opportunity:
1. Billing and coding
A thorough review of all billing and coding processes is paramount to preparing for potential partnership with private equity (PE) or venture capital entities. Take an honest, introspective look at each step in the revenue cycle, from the consistency of eligibility verification and in-office collections to the accuracy of coding and the management of denials. As each component of the process is evaluated, consider how the efficiency of the workflows might look to an outside evaluator. As practices mature, staff and systems can become lax or complacent. An attitude of “that’s good enough” grows, but it is not enough when it comes to steely eyed acquirers. Performing the following exercise will likely identify areas that need improvement and result in the practice being dollars ahead even if the PE transaction does not go through.
Review key performance indicators (KPIs), know where your practice stands in relation to industry benchmarks and make data easily available for potential suitors who evaluate the practice. Days in accounts receivable, aging reports (both patient balance and insurance), payer mix percentages, and net and gross collection percentages are some of the most common datasets. Knowing these industry-standard measures is helpful in the PE transaction. However, even without PE involvement, these KPIs should be measured monthly for your group’s management team and leaders.
Analyze volume-based reports for a variety of indicators. These data speak to the health of the practice and also provide insights into your market share. Indicators include daily office visit totals by provider, new patient vs. established patient ratios and a measure of surgical case volume. If the practice involves ancillaries, such as radiology, durable medical equipment or labs, evaluate and report the volume and profitability of these segments to potential buyers, as well.
It is important to understand these numbers for your practice, as well as how they stack up against industry benchmarks. Do not shy away from difficult news. If your practice is not meeting these numbers, dig in and find out why. A potential buyer will perform this analysis by the book.
2. Financial reports
The following reports are the most commonly requested during due diligence. Don’t wait until financial data are requested by PE firms to fix problem areas. That is too late. Evaluate and act now, so that when you do hand over your data, you can do so without worry.
- Income and expense report: Conduct a line-by-line review to identify expenses that may be personal physician expenses as opposed to practice expenses. Ensure the books follow generally accepted accounting principles. If they do not, the value of your pending transaction just decreased or the possibility of the transaction has ended.
- Depreciation schedule: To have potential investors believe you’re on top of your game, present a thorough, up-to-date and well-formatted depreciation schedule. Although this report doesn’t get much attention in monthly financial meetings, it should. Put it on the agenda for monthly meetings and have all partners review it to be sure it accurately identifies all of the practice’s assets. Occasionally, information about capital purchases does not flow through to an outside practice accountant. So, not only should you look for accurate data on the depreciation schedule, you should focus on what is not listed. As this report directly correlates to asset values, do not wait until potential acquirers show an interest in your practice put the depreciation schedule in order. The time to do it is now.
3. Current leases and vendor contracts
Being able to easily identify all existing leases and contractual relationships will help present a complete analysis of your practice to PE firms. These agreements include equipment leases, real estate leases and contract labor agreements, as well as software licensing agreements, and others. Just as with the Depreciation Schedule, the science of keeping this information up-to-date marries nicely with the art of presenting as a high-performing group.
If you have verbal agreements, such as with timesharing tenants, get them on paper and officially on the books. Additionally, you should be able to provide a list of all vendors with whom you have Business Associate Agreements. This includes anyone that may have access to your patients’ protected health information, such as shredding companies and waste management vendors.
4. Personnel
Are there fellow physicians or providers in the practice who are chronically behind on documentation and dropping charges? Do not put off the uncomfortable conversations to address this problem because the effects of this behavior will negatively influence how your practice is valued. Put policies in place to correct the conduct and enforce them. Compliance may have been put on the back burner because it’s not a glamorous topic, but suitors will devalue practices that have compliance issues. Address those issues now.
Be prepared to provide a detailed listing of all your staff members along with their roles, tenure with the group and compensation structure. If you have not done so previously, quantify the full-time equivalent-to-physician ratio. This provides a good measure of whether your practice is operating in an appropriately lean fashion.
As the practice’s partners and executive leaders head down the pathway of potential PE involvement, remember to maintain open, quality communications with the staff. Certainly, not all information is meant to be shared. However, keeping things as transparent as possible will help waylay unnecessary fears, which can keep the team productive and functioning throughout the diligence process. It is important that patient care, scheduling, billing and other activity continues to be carried out at a high level, and this requires that the entire staff maintain focus.
5. Patient experience
Can you tout your patient experience scores as being top quartile or top decile? Invest in knowing the numbers and the operational items that can affect each area. Patient experience scores can be a metric that is slow to improve. While your practice works to get better, so does everyone else and the accounts for the slowness with which percentile rankings rise. Do not delay just because this is not a quick project. Solid patient experience scores will pay dividends.
When you have a PE suitor interested and evaluating your practice, it is imperative that the patient experience continues to be high quality. It can be easy to get distracted with the buzz of potential PE involvement and all the possible results related to that. By continuing to treat patients in an environment with a solid operational foundation and by paying extreme attention to all things related to quality patient care, your potential PE transaction will be strengthened and at the same time your patients will remain happy and healthy.
Don’t get caught with your head in the sand when it comes to any of these key areas. Own these crucial elements now to strengthen your group’s performance and make it a high-value target for PE investors. If a PE opportunity presents itself, you will be ready. If you chose to remain independent, your practice will continue to be high functioning with happy staff, patients and physicians.
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Wathen Strong, MBA, CMPE, CCS-P, CPC, is a consultant with KarenZupko & Associates Inc. (KZA). She has more than 20 years of experience and leadership responsibility in health care operations, physician relations and revenue cycle management. KZA develops and delivers national coding workshops for the American Academy of Orthopaedic Surgeons.
Disclosure: Strong reports she is a consultant and speaker with KZA, which develops and delivers CPT coding and practice management workshops presented by the AAOS in conjunction with KZA.