Maximize Practice Value with Enhanced Contracting Strategies

Many providers are trying to improve the financial viability of their practices. Others are considering taking equity out of their practices by selling to other providers or private equity firms. Practices that have not optimized their commercial payment levels will sell below their potential value. Therefore, practices trying to improve their viability or considering or pursuing an equity transaction should look at ‘low-hanging fruit’ opportunities for commercial payment increases.

The payout that ownership receives from buyouts is directly related to their practice’s EBITDA[1] (i.e., multiple of EBITDA). EBITDA, in turn, goes up or down dollar for dollar with the practice’s commercial payment levels. EBITDA multiples range from 5-14x depending on market conditions. So, as illustrated in the table at the end of this article, an increase in commercial health plan revenue of $1 million can translate into a transaction payout increase of $5-14 million.

Opportunity in the Commercial Market

Often, provider practices are paid less by some commercial health plans than similar or even smaller practices in the same county. The underpaid practices oftentimes do not know how their payment levels compare to other practices and may not have attempted to improve their reimbursement with some health plans in years. As a result, their payment agreements with some health plans may be on a so-called ‘standard’ fee schedule, unilaterally determined by the health plan. Sometimes, standard fee schedules don’t change materially for many years, but other practices approaching the health plan may have been able to negotiate to a higher fee schedule.

Practices that have not optimized their commercial payment levels will sell below their potential value.

In addition, some health plans have value-based bonus programs available to practices in addition to their standard fee schedule that a practice may be able to access. The provider group might already be achieving some of the quality metrics and unknowingly be missing out on additional revenue. Therefore, to ensure they are maximizing their EBITDA and asset value, practices should periodically assess and act on their commercial payment improvement opportunities. Such an assessment can be summarized in four primary steps.

1. Review payer contracts and negotiation history

The practice should review its contracts with its 3-5 largest health plans, determine how fees are determined and the last time payment levels were updated or negotiated. Fee schedules that have not been negotiated in 5 years present an opportunity for negotiation with health plans. As part of this step, it is useful to review and benchmark the practice’s approach to health plan negotiations compared to industry best practices. Each fee schedule and payer relationship is unique, so the practice should expect to conduct market research and engage differently depending on the circumstances.

2. Compare payment levels to Medicare and competitor rates.

The practice should benchmark its payment levels relative to both the Medicare fee schedule and other practices within the same market. For Medicare, this can be accomplished with fee schedule information from the CMS website. Typically, payment levels are expressed as a percentage of Medicare for the most prevalent billing codes and in composite for any given payer.

Additionally, the health plan price transparency data enables practices to compare their negotiated commercial rates against practices in the same region. The practice should identify practices with similar specialty makeup and size in its county and compare reimbursement levels for its 3-5 largest commercial payers. An actuarial firm such as Axene Health Partners can access machine-readable data that health plans are required to publish and prepare an analysis of payment levels by billing code by practice by health plan.

3. Identify opportunities to increase payment levels.

Reviewing the comparative payment level analysis and contract/negotiation history, the practice should identify the combinations of billing codes, area practices, and health plans that indicate opportunity. For example,

• If health plan A pays the same amount for each billing code to every local practice, it is probably adhering to a strict standard fee schedule approach but may have value based payment incentive programs.
• If health plan B is paying higher amounts to some local practices that are similar to or smaller than the partners’ practice, there is a clear opportunity to explore this inequity with the health plan.

Depending on the market and type of practice, a comprehensive analysis could yield a distribution of reimbursement levels and percentile ranking of the practice’s fee schedule relative to all other groups in the region. For larger or diversified practices, it’s important to recognize that some revenue lines or specialties might be reimbursed above market average while others reimbursed below average. Opportunities might present themselves more subtly and be apparent only after a thorough analysis.

It’s also worth consider that being the highest paid provider is not always the optimal outcome. Without an obvious leverage, being the highest reimbursed practice could turn into a risk of being excluded from networks.

4. Engage health plans on best opportunities.

With the relative payment level, contract and negotiation history evaluation complete, the practice should approach the health plans. It may find that some health plans are not open to discussing changes in payment levels. However, it may also find that a health plan is willing to negotiate higher payment with a practice that approaches them or allows the practice to participate in a value-based incentive plan.

An illustrative example is included at the end of this article to demonstrate the financial impact of even a 5% increase in commercial payment levels. For a practice with approximately $20M of revenue, where $9M is from commercial health plans, the valuation can increase between $2.25M and $6.30M from negotiating a 5% increase from commercial payers. In the context of sale or recapitalization, there is a strong financial case to invest in contracting improvements.

The provider group might already be achieving some of the quality metrics and unknowingly be missing out on additional revenue.

This high-ROI, four-step process can incrementally improve the practice’s bottom line and its attractiveness and value to potential capital partners. Ideally, a practice would start this process 1-2 years prior to a sale or recapitalization. Practices that do not proactively take this approach towards contracting may present an attractive opportunity for potential buyers. This process could be incorporated during due diligence on a prospect to uncover “latent” value within the practice, which can be easily realized once acquired. The return on investment in this process is very high, considering the direct impact on EBITDA and ultimate valuation.

Illustrative Physician Practice (5% rate increase for commercial payers)

Income Statement Comparison For the Year Ended December 31, 2023

Revenue:

Expenses:

Other Expenses:

EBITDA Calculation:

Practice Valuation:

Endnotes

[1] Earnings Before Interest, Taxes, Depreciation and Amortization