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Preface
We have spent countless hours over the last decade discussing the finer nuances of the physician
revenue cycle management industry (herein referred to as the “RCM” industry) with investors,
business owners, and executives. In the past several years, we have noticed a distinct shift in the
general trajectory of the market. The emergence of new payment and business models, rapid
adoption of electronic health records (“EHR"), and a host of other trends are forcing RCM service and
technology companies to redefine their value propositions. This is within the context of a number of
historical challenges that continue to create market turbulence, including technology advancement,
reimbursement uncertainty, heightened competition, and increased cost of noncompliance.
We wanted to take an opportunity to synthesize the most important trends affecting the RCM
industry at the turn of 2013, and to comment on strategic alternatives for market participants to
consider as they craft strategy going forward. The overview begins with a brief executive summary
and then dives into an overview of the physician RCM market, where we define the industry, explain
its historical context, describe the difference between office‐ and hospital‐based physicians, and
review a number of key historical drivers. In the third section, we dive deep into a number of trends
affecting RCM service and technology companies, some of which we have discussed previously at prior
industry events and through a variety of publications; however, we will be taking a fresh look with
additional detail and observations through January 2013. In the final section, we offer a number of
strategies for RCM service and technology companies that can be used to cope with an increasingly
dynamic healthcare provider landscape.
For further information please contact:
Ted Stack, Managing Director
Falcon Capital Partners
tstack@falconllc.com
(610) 989‐8901
Registered Representative of BA Securities, LLC Member FINRA SIPC
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Section 1: Executive Summary
The physician RCM market continues to rapidly evolve in response to a number of economic,
regulatory, and technological trends. These trends will continue to have major implications for the
strategies of RCM service and technology companies, who must rapidly adapt to the changing business
needs of physicians in the United States. We believe that these new problem sets create significant
growth opportunity for RCM companies that are able and willing to overhaul their businesses,
including significant investments in technology, comprehensive process redesign, and development of
new services.
RCM Industry Snapshot
The $38 billion physician RCM industry includes a variety of companies that provide outsourced
business services and information technology systems to physicians. The industry is dichotomized into
companies catering to office‐based and hospital‐based physicians, due to different workflows,
technology requirements, and reimbursement dynamics associated with these distinct practitioners.
Figure 1.1 provides our estimate of the size of the market for both groups, which is $6.9 billion for
hospital‐based physicians and $30.9 billion for office‐based physicians. See Section 2 for a more
detailed review of these market size statistics.
Figure 1.1: Physician RCM Market Size ($ in billions)1,2
The physician RCM industry has seen strong growth in the last decade – we estimate an average
annual growth rate of 11% from 2002 through 2012. This growth has largely been catalyzed by an
increase in the number of physicians that outsource RCM functions, as well as widespread availability
of more sophisticated IT solutions serving the physician landscape. Increasing complexity of revenue
cycle processes, aging populations, and further proliferation of more advanced IT systems will
continue to drive growth and innovation in the market, albeit at a slower rate than previous years.
Selected headwinds include reimbursement pressure, more intense competition, and consolidation of
physician practices into hospitals. We address each of these dynamics in detail in Section 3.
$5.1 $0.7 $1.1 $6.9
$16.9
$7.7
$6.2 $30.9
$37.8
Medical
Billing
Practice
Mgmt.
Tech. Total Medical
Billing
Practice
Mgmt.
Tech. Total Total
Market
Hospital‐Based Office‐Based
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Several pure‐play physician RCM companies in the public markets have driven strong investor interest
in the space, including Greenway Medical and athenahealth. See Figure 1.2 for revenue growth
comparisons for these two companies. Both companies are growing at an average annual rate in
excess of 30%. It is interesting to note that while many believe that athenahealth’s spectacular
revenue growth has come from sales of its EHR products, between 75‐80% of its revenue still stems
from RCM services.3
One key catalyst to this growth has been athenahealth’s significant investment in
sales and marketing; the physician RCM market has historically “underinvested” in this area.
Figure 1.2: Annual Revenue Growth Comparison – ATHN and GWAY 4
Competition Drives the Need for Efficiency
Increasing revenue cycle complexity and a host of other market trends have made the business side of
medicine much more complicated for individual physician practices, making outsourcing an attractive
option. This has driven strong market growth; as stated above, we estimate that the RCM market has
grown at an average rate of 11% over the last 10 years. This growth, however, has predictably
attracted significant competition from large healthcare service and technology businesses, such as
McKesson and athenahealth. Private equity investment has also fueled the growth of sophisticated,
large‐scale competitors in the RCM industry, including Intermedix, Abeo, MedData, and AdvantEdge
Healthcare Solutions, among others. These larger companies have developed major economies of
scale and have invested heavily in their technology platforms.
Smaller RCM companies, of which there are over 1,500 in the United States, have historically
differentiated with high‐touch customer service and personal relationships. We expect that this will
always be a major success factor for these firms, as maintaining physician relationships requires
attention to detail and focused customer service. Physicians are very demanding clients. However,
the increased competition from larger businesses, including sophisticated technology offerings and
lower fee rates, is driving many smaller participants to rethink their competitive basis. RCM
companies must invest in new technologies, process efficiency redesign (potentially via consultants or
outside experts), and offshore labor, which we view as an increasingly vital component to stay
competitive in the market. This has to be done in the context of existing technology investments,
which must be standardized and streamlined where possible.
39.6%
38.3%
30.2%
32.0% 32.1% 32.9%
30.3%
32.6%
39.0% 38.1%
21.3% 20.5%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
2008 2009 2010 2011 2012 2013 2014
athenahealth
Greenway Medical
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Payor Mix and Reimbursement Trends
The Patient Protection and Affordable Care Act (“PPACA,” which is referred to more colloquially as
“Obamacare”) will have a significant effect on physician payor mixes. It is estimated that an additional
10 million Medicaid / Children's Health Insurance Program (“CHIP”) lives will enter the system by 2014
and an additional 25 million on the state healthcare insurance exchanges. We view this expansion in
coverage as a net positive to physician reimbursement, since many of these individuals currently
access the healthcare system as self pay patients through emergency departments. However,
pressure on traditional funding sources will largely offset the additional reimbursement from newly
insured individuals. Medicare continues to remain in political crossfire, with a number of proposals at
the table that could decrease physician reimbursement. Also, given that changes in commercial
reimbursement rates largely trend with Medicare, we expect a deceleration in commercial
reimbursement growth rates.
It is important to note that individual medical specialties are more susceptible to large swings in
reimbursement rates than the industry as a whole. We view total reimbursement as a balloon – it can
be compressed in certain areas to compensate for increases in others, but the total amount of funding
will keep relatively consistent. For example, while overall physician reimbursement remained
relatively flat from 2005 through 2011, internal medicine experienced an increase of over 25% in
collections per physician, compared to a 20% decline in oncology and a 10% decline in radiology.5
Migration to Value‐Based Reimbursement and its Implications
The healthcare industry has reached an inevitable inflection point. Some researchers estimate that
approximately half of all healthcare spending may be unnecessary.6
Hundreds of billions are
unnecessarily spent on administrative costs. The widespread political pressure and public attention
on the problem, including the passage of the PPACA, has catalyzed a major mind shift in the
healthcare industry. Healthcare organizations are betting on value‐based care as public and private
payors spend billions testing new reimbursement and business models. Though not explicitly required
by law, many healthcare organizations are proactively reorganizing their delivery organizations to
support pay‐for‐quality reimbursement models before such laws are enacted. Some pioneering
hospital systems are assuming real risk through the Medicare ACO pilot program. While the timing of
the migration to pay‐for‐quality reimbursement models is uncertain, most providers seem to have
embraced their inevitability.
Physicians will need new tools to practice medicine in an environment that rewards quality over
volume. Electronic Health Records (“EHR”) provide the ground‐level infrastructure for these tools. In
2009, the Health Information Technology for Economic and Clinical Health (“HITECH”) Act allocated
over $30 billion in spending to providers to lay this infrastructure; in fact, we have seen more progress
in the last two years relative to HCIT adoption than the entirety of the last twenty years. EHR
adoption is expected to more than triple from 2009 through 2016, when it is expected to reach 80%.7
These software systems are blurring the line between financial and clinical data. The widespread
digitization of healthcare information will enable much more comprehensive measurement of care
processes and outcomes; in turn, this will enable changes to the methodologies and processes by
which physicians are reimbursed. The government has bet billions of dollars that this will improve
healthcare delivery in the United States. In the short run (1‐5 years), we believe that the adoption of
these systems will do little to improve the cost of delivering care. On a longer‐term basis, however, as
care becomes more coordinated and clinical decision making becomes more fluid, we believe that
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technology will in fact contribute to an increase in efficiency and a decrease in cost of care. This
transition could take up to five years or more.
Changing payment models will also require software products that enable physicians to meaningfully
collaborate within a diverse ecosystem of providers, both internal and external to their organizations,
for the first time. The wide adoption of EHR systems has catalyzed rapid innovation in this sector.
Physicians must also actively engage patients in their own care delivery. Patients are most often
bewildered and confused by the stunning complexity of the healthcare system, including medicine
itself, convoluted billing and insurance programs, and disconnected and uncoordinated care delivery.
It is also difficult for physicians to coax patients into major behavioral changes that are required to
improve health outcomes. Engagement is the answer and patients will begin to use these tools as
they become more ubiquitous.
The good news for physician RCM companies is that all of this change presents significant opportunity.
These businesses have the systems, processes, relationships, and knowledge to help physicians with
these issues. Revenue cycle activities are interwoven throughout all clinical activities and provide
necessary financial insight into what activities will drive provider profitability in the future. Intensely
proactive companies such as athenahealth are building and acquiring next‐generation technologies
and clinical services to serve as touch‐points to new potential clients, enabling them to bundle
lucrative RCM services contracts over time on a cost‐effective basis. Exhibit 1.1 outlines the migration
of physician RCM companies to more sophisticated capability sets. We outline these concepts in
greater depth in Section 4.
Exhibit 1.1: Evolving Scope of RCM Industry
< 2009 2009 ‐ 2012
Patient engagement and relationship
management, including patient portal
technologies, telephonic consultations,
online scheduling, personal health
records, and other patient touch points.
Patient
Engagement
Medical
Billing and A/R
Management
2013 +
New HCIT
Capabilities
Supporting technologies and services to
help physicians understand and adapt to
quality‐based reimbursement models.
Manage Pay‐
For‐Quality
Migration
Integrated EHR /
Practice
Management
Historically the core focus of the RCM
industry – preparing and submitting
medical claims, managing denials, and
managing A/R.
Integrated practice management and
Meaningful Use certified EHR systems.
Interoperability solutions, business
intelligence, clinical data management
applications, and automated coding,
among many others.
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Section 2: Overview of the Physician RCM
Services and Technology Market
The $38 billion physician RCM industry includes a variety of companies that provide outsourced
business services and information technology systems to physicians. Properly requesting and
receiving payment for healthcare services is incredibly difficult and time consuming, and is largely a
function of the inherent complexity of medical services; as such, many physicians opt to outsource the
function entirely. We estimate that approximately 45% of physicians currently outsource RCM
functions, leaving significant room for additional growth.
Increasingly complex healthcare reimbursement methodologies and the rapid proliferation of
healthcare information technologies have driven rapid growth in the market in the last decade.
Additionally, the next ten years in healthcare are expected to bring significant change as the system
reorients to value‐based reimbursement methodologies, requiring physicians to revaluate business
models and the way they practice medicine entirely. To profit under these new models, physicians
will need to better understand the relationships between their clinical and financial activities; improve
care coordination throughout the healthcare ecosystem; engage patients more meaningfully in their
own care; invest in information technology infrastructure; and improve day‐to‐day care delivery to
maintain profitability. RCM companies are their physician clients’ most trusted business partner, and
are equipped with the technology, processes, tools, expertise, and relationships to help physicians
manage this transformation. We outline this more thoroughly in Sections 3 and 4. In this section, we
will define and size the physician RCM market, discuss its historical evolution, and outline a number of
historical growth drivers.
Definition of the Market / Scope of our Discussion
Physicians spend approximately 4‐10% of revenue collecting proper reimbursement for their services
(note that reimbursement is synonymous with “revenue” and “collections”). This includes generating
and submitting medical claims to insurance companies, managing denials of such claims, and
managing accounts receivable associated with all healthcare billings. We define this process,
collectively, as “medical billing.” See Figure 2.1 below for a summary of the medical billing process.
Figure 2.1: Medical Billing Process
A/R
Management
Patient
Scheduling
Encounter
Coding and
Data Entry
Prepare &
Submit
Claims
Reporting
Schedule patients and collect
basic demographic and
insurance information
Follow up with patients and
payers to collect outstanding
receivables
Physician meets / interacts
with the patient and
documents encounter in EMR
or on paper
Prepare medical claims using
healthcare insurer‐specific
rules
Report on metrics
Management Tools
Translate physician notes into
specific medical codes (e.g.
ICD‐9, ICD‐10, CPT)
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Physicians spend an additional 5‐10% of their revenue on various administrative and management
functions, including finance and accounting, human resource management, and compliance, among
others; we refer to these activities collectively as “practice management.” Management of
technology – including selection of software vendors and ongoing strategic support – has recently
become a significant aspect of practice management as physicians have rapidly adopted EHR products.
See Figure 2.2 for a summary of the functions we include in this definition. Medical billing service
companies have become more actively involved in providing these activities as the complexity of
running physician practices has increased – practice management is an opportunity to expand new
revenue streams and to deepen client relationships. These services have become a major
differentiator for a number of larger medical billing companies that have historically provided practice
management. We have also seen medical billing companies enter the market via acquisition, such as
Intermedix’s acquisition of Practice Support Resources, an emergency medicine‐focused practice
management company. We view larger practices (10+ physicians) as much more willing to outsource
part or all of their practice management activities, given their greater complexity and ability to
leverage economies of scale. We have found that practice management fees typically range between
1% and 7% of revenue, depending on how much work the physician practice decides to outsource.
While the market penetration in this market is relatively low, we believe that medical billing
companies should be making a more concerted effort to offer these services.
We define medical billing, practice management, and related technologies collectively as “revenue
cycle management,” or “RCM” in this report (notwithstanding our definition of CPM in Section 1).
Though many practice management activities are beyond the scope of the revenue cycle and
represent a relatively minor fraction of RCM industry revenue, revenue cycle companies are
increasingly becoming involved in these new functions.
Figure 2.2: Practice Management Functions
Strategy
Operations
Management/IT
Compliance
Finance and
Accounting
Education and thought
leadership on
government regulations,
third‐party payer
activities, competition,
economic changes, and
other outside influences
Mergers, acquisitions,
and joint ventures
Strategic advice on new,
emerging business
models such as ACO’s
and new reimbursement
methodologies
Management and
supervisory staffing
Develop IT strategy and
support all IT activities
and vendor relationships
Support of all quality‐
related reimbursement
activities (PQRS, etc.)
Coordinate outside legal
and accounting services
Develop and implement
patient engagement
strategies and targeted
outreach
Various other
administrative activities
Develop and maintain
compliance programs
Review of contracts,
business opportunities,
and agreements
Advise on risk analysis
and insurance planning
Physician credentialing
and licensing
Budgeting and cash
flow planning
Finance and tax
planning
Assist in design ad
funding of retirement
compensation, and
benefit programs for
employees and
physicians
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In addition, the scope of the RCM services and technology industry has expanded in recent years to
encompass a greater number of clinical activities. Widespread adoption of EHR and other information
technologies have changed the business needs of physicians, and will continue to do so in the future.
Changing models of payment are also changing the way physicians must practice medicine to survive,
with a greater focus on consumer engagement and collaboration across provider boundaries. RCM
companies are best positioned to help with these challenges and have been forging new markets, as
they are often the most trusted business partner to their physician clients. We will discuss these
recent trends in more detail in Sections 3 and their implications in Section 4.
Market Evolution and Structure
The genesis of the physician medical billing industry was the Tax Equity and Fiscal Responsibility Act of
1982 (“TEFRA”), which mandated changes to a number of healthcare reimbursement methodologies.
Among other mandates, including creation of the Prospective Payment System in Medicare, the act
forced hospitals and physicians to bill separately for services. Prior to TEFRA, hospitals charged
patients for both hospital services (“rent” for their bed, hospital supplies, and meal costs, among
many others) and physician services (consultations and procedures) in one bill. When physicians
became responsible for their own billing, many scrambled to organize internal offices to perform the
work. Some decided to outsource the function entirely.
The physician RCM market can be dichotomized between hospital‐based and office‐based physicians.
These two types of physicians have different workflows, technology requirements, and revenue cycle
processes. The hospital‐based market opportunity is roughly $6.9 billion, which includes $5.1 billion
for medical billing services, $0.7 billion for practice management services, and $1.1 billion for
technology. The office‐based market is currently $30.9 billion, which includes $16.9 billion for medical
billing services, $7.7 billion for practice management, and $6.2 billion for technology. Figure 2.3
outlines the market size. We will discuss the differences between hospital‐based and office‐based
physician markets below.
Figure 2.3: Physician RCM Market Size ($ billions) 8,9
$5.1 $0.7 $1.1 $6.9
$16.9
$7.7
$6.2 $30.9
$37.8
Medical
Billing
Practice
Mgmt.
Tech. Total Medical
Billing
Practice
Mgmt.
Tech. Total Total
Market
Hospital‐Based Office‐Based
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Hospital‐Based Physician Market
The first physicians to outsource RCM processes were hospital‐based doctors, which include
radiologists, pathologists, anesthesiologists, hospitalists, and emergency medicine physicians. The
term hospital‐based is not intended to categorize ownership or office location, but rather, the types of
workflows, reimbursement mechanisms, and IT systems that physicians need in a hospital‐based
setting. Hospital‐based physicians have dramatically different needs than office‐based physicians, as
they (1) do not have office waiting rooms or “front office” operations to absorb RCM functions, (2)
have no need to manage patient relationships and interactions, and (3) have a reduced role in
coordinating patient care management. Hospital‐based physicians also have different information
technology requirements than physicians in a traditional “office” setting, as hospitals generally
provide them with their enterprise EMR system and administrative support software. RCM company
technology has largely focused on the medical billing process and more recently on patient and
practice engagement tools, rather than the EMR and administrative software components.
Hospital‐based practices also tend to be larger groups and require RCM vendors that can bring scale,
efficiency, and more sophisticated ability to negotiate contracts with payors and hospitals. These
practices are also not being consolidated into hospitals as rapidly, as they are largely diagnostic or
support specialties and do not generate patient referrals – there is less perceived value to hospitals in
owning these practices. However, as ACO’s continue to take hold hospitals may find it more
advantageous to keep a larger share of the overall care dollars through the ownership of these
professionals.
Figure 2.4 outlines the total size of the hospital‐based physician market, which is $6.9 billion, including
medical billing and practice management services. We have also included the technology market
opportunity in this figure, including integrated niche practice management software, patient portal
technology, automated coding, and a variety of other bolt‐on technologies that are outlined further in
Section 4. Note that the hospital‐based technology market excludes an EHR, since such software is
provided by the hospital. The hospital‐based market is more penetrated than the office‐based
market, with between 50‐55% of physicians outsourcing their RCM activities. We estimate that the
hospital‐based practice management market is penetrated at less than 10%.
Figure 2.4: Market Size Analysis: Hospital‐Based Physicians 10
Number of Total Medical Billing Practice Mgmt.** Technology*** Total
Physicians Collections Fee Market Fee Market Monthly Market Market
Medical Specialty (000's)* ($mm) Rates ($mm) Rates ($mm) Fee / Doc ($mm) ($mm)
Anesthesiology**** 85 25,676$ 5.0% 1,284$ 1.0% 257$ 500$ 513$ 2,053$
Radiology 29 17,025 7.0% 1,192 1.0% 170 500 173 1,535
Emergency Medicine 28 11,620 9.5% 1,104 1.0% 116 500 168 1,388
Hospitalists 30 12,000 7.0% 840 1.0% 120 500 180 1,140
Pathology 12 8,672 7.5% 650 1.0% 87 500 71 808
Total Hospital‐Based Physicians 184 74,992$ 6.8% 5,070$ 1.0% 750$ 500$ 1,105$ 6,925$
* Note: physician count includes active physicians whose self‐designated major professional activity is "patient care,"
and excludes teaching, research, administrative, and other physicians.
** Fee rate is lower for hospital‐based physicians than office‐based physicians because of their light administrative needs.
*** For simplicity, technology costs are estimated on a SaaS model pricing. Hospital‐based physicians generally receive EMR
systems from hospitals, so the costs represented above only include "add on" technologies, including patient portal, automated
speech recognition, interoperability, patient portals, and business intelligence functionality, among others.
**** Includes nurse anesthetists.
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Office‐Based Physician Market
A full list of what we define as office‐based physicians is included below in Figure 2.5. Approximately
74% of physicians fall into the office‐based market, including primary care and a variety of surgical and
non‐surgical specialties. Figure 2.5 includes a breakdown of what we define as the office‐based
market, which we size at $31 billion, including both software and services. Note that the moniker
“office‐based” includes physicians that are owned by or work inside the walls of a hospital, in addition
to independent private practices. As stated above, the term office‐based refers to the types of
workflows, reimbursement mechanisms, and IT systems that physicians need in an office based
setting; physicians could be located within or outside of a hospital, and ownership could fall under a
variety of structures. Procedures could be performed in office or at a hospital.
In office‐based settings, the practice interacts directly with the patient – think waiting rooms with
check‐in window. These physicians often hire office staff to manage these offices, so the outsourcing
rate has historically been lower; we estimate that current outsourcing rates are 40%. We estimate
that the practice management market is penetrated at less than 10%.
Figure 2.5: Market Size Analysis: Office‐Based Physicians 11
Number of Total Medical Billing Practice Mgmt.** Technology*** Total
Physicians Collections Fee Market Fee Market Monthly Market Market
Medical Specialty (000's)* ($mm) Rates ($mm) Rates ($mm) Fee / Doc ($mm) ($mm)
Family Medicine/General Practice 96 37,552$ 7.5% 2,816$ 3.0% 1,127$ 1,000$ 1,148$ 5,090$
Internal Medicine 91 33,530 7.0% 2,347 3.0% 1,006 1,000 1,097 4,450
Pediatrics 48 21,588 7.5% 1,619 3.0% 648 1,000 577 2,844
Internal Medicine/Pediatrics 3 1,106 7.0% 77 3.0% 33 1,000 33 143
Total General Office Based 238 93,776$ 7.3% 6,860$ 3.0% 2,813$ 1,000$ 2,855$ 12,528$
Obstetrics & Gynecology 37 22,780$ 6.0% 1,367$ 3.0% 683$ 1,000$ 442$ 2,492$
Cardiovascular Disease 19 12,641 7.0% 885 3.0% 379 1,000 234 1,498
Ophthalmology 17 11,794 7.0% 826 3.0% 354 1,000 199 1,379
Orthopedic Surgery 19 15,446 4.0% 618 3.0% 463 1,000 227 1,308
General Surgery 23 12,354 4.5% 556 3.0% 371 1,000 274 1,201
Dermatology 10 8,834 7.0% 618 3.0% 265 1,000 118 1,001
Psychiatry 34 7,160 7.5% 537 3.0% 215 1,000 407 1,159
Gastroenterology 11 8,325 7.0% 583 3.0% 250 1,000 132 965
Urology 9 6,353 7.0% 445 3.0% 191 1,000 112 747
Pulmonary Disease & Critical Care 10 4,587 7.0% 321 3.0% 138 1,000 118 577
Hematology & Oncology 10 4,275 7.0% 299 3.0% 128 1,000 115 543
Neurology 11 4,336 4.5% 195 3.0% 130 1,000 127 452
Other 73 43,673 6.5% 2,839 3.0% 1,310 1,000 872 5,021
Total Office‐Based Specialists 281 162,557$ 6.2% 10,088$ 3.0% 4,877$ 1,000$ 3,377$ 18,342$
Total Office‐Based Physicians 519 256,333$ 6.6% 16,948$ 3.0% 7,690$ 1,000$ 6,232$ 30,870$
* Note: physician count includes active physicians whose self‐designated major professional activity is "patient care,"
and excludes teaching, research, administrative, and other physicians.
** Fee rates are generally 3% to 7%; however, we have weighted it to 3% to account for smaller practices that do not tend to outsource
their practice management activities.
*** For simplicity, technology costs are estimated on a SaaS model pricing. Includes integrated EMR / practice management platform,
and a variety of "add on" technologies, including patient portal, automated speech recognition, interoperability, patient portals,
and business intelligence functionality, among others.
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A more comprehensive technology suite is required in an office setting, including EHR and
administrative systems. Widespread adoption of EMR technology has driven growth in this market and
will continue to do so over the next couple years. We believe that vendors that serve office‐based
physicians must have an EMR strategy and must continue to innovate around the unique technological
needs of physicians in this market. EHR and other technologies can also serve as a hook‐point for
more lucrative RCM service contracts.
Historical Drivers of Outsourcing
Healthcare reimbursement processes are notoriously complex and time consuming. These
reimbursement methodologies have also become increasingly complicated over the last 40 years.
Government funding sources (Medicare and Medicaid) currently represent roughly half of all
healthcare expenditures in the United States; as such, the government has significant interest in
managing the level of overall health spending, and has passed a great deal of legislation in the past
decades establishing new reimbursement methodologies aimed to reduce healthcare spending. It has
also created thousands of individual regulations to increase healthcare data security, prevent fraud,
and capture data for analysis and trending purposes. The government continues to fund new pilot
programs that test the ability of new reimbursement methodologies and business models to reduce
levels of healthcare spending. The PPACA allocated $10 billion to establish the Center for Medicare &
Medicaid Innovation, which is expected to lead significant additional change.
Private healthcare insurers have also contributed to this complexity. Physician practices frequently
contract with over 30 individual insurance companies to maximize the pool of patients that they can
serve, increasing total revenue. Each insurance company brings its own unique claim forms,
reimbursement methodologies and processes, and technology systems, which significantly
complicates reimbursement processes. Commercial insurers have created new insurance products
that shift the financial burden to the patient (high deductible plans) and have invested in systems that
monitor appropriateness of care which have created further complexities and delays in adjudicating
physician claims. See below for a selected list of industry growth drivers:
1) Complexity of health plan contracting. A multitude of individual insurers create hundreds of
distinct plans and customized packages, including HMO, PPO, EPO, and HSA plans, among
others. While several large payors generally represent the majority of physician revenue, the
smallest 20% can include over 30 different payors, each of which have their own
reimbursement methodologies and claim filing processes. There is little standardization
across different insurance companies in terms of contracting processes. There is also
significant fragmentation in health plans state‐to‐state.
2) Changing, dynamic nature of health plans. Health plans frequently redesign reimbursement
methodologies year‐to‐year to account for new medical advancements and certain cost
effectiveness data as they become available. This limits the amount of workflow
standardization that can be done at the physician practice level, as optimal workflows
constantly change and adapt to payor requirements.
3) Healthcare payors are sophisticated, demanding, and armed with data (“David vs. Goliath”).
Payors are incentivized to complicate contracts and the contracting process, and have
historically acted to confuse physician practices (e.g. introduction of various payment
hierarchies, bundling policies, and misleading methodologies as well as arbitrary denials and
audit take‐backs). Physician practices often lack the in‐house expertise and data systems to
properly negotiate and interact with sophisticated payors, who are armed with actuarial data
and significant patient data aggregated over time.
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4) Government regulation. The government heavily regulates the healthcare sector, from
patient security standards to mandatory quality measures to certification of physicians.
Migration to new medical coding standards (ICD‐10) will cost the industry billions in
compliance fees and will create a more complex reimbursement environment into perpetuity.
New reimbursement models in Medicare and Medicaid programs will add new layers of
complexity.
5) Fragmented technology and processes. There is little standardization across operating
practices, payor and patient payment methodologies, data management processes, and billing
systems. Physician practices often rely on heavily manual processes to bridge the gap
between different systems, or simply accept incorrect payments/denials.
6) Increasing portion of “self pay” collections. Physicians have the burden of collecting payment
for services from two separate constituents: healthcare insurance companies and patients.
Patients have represented an increasing portion of reimbursement in the last decade, and
given their low pay rates, practice revenues have declined accordingly.
Figure 2.6: Selected data points / drivers 12
2%
3%
4%
5%
6%
8%
10%
'80 '85 '90 '95 '00 '05 '08 ICD‐9 ICD‐10
Payor Payment
Accuracy Rates*
ICD‐9 ICD‐10
Conversion
141,000
Number of Codes
17,000
Bad Debt as % of
Hospital Expense**
Providers have struggled to
collect full payment from
an increasing number of
non‐insured individuals
incapable of paying their
bills.
The number of codes under
ICD‐10 is 8x more than
under ICD‐9, the current
industry standard; ICD‐10
will require greater clinical
sophistication.
Healthcare insurers have notoriously poor
accuracy rates when paying claims; some
have error rates in excess of 10%. This is
expensive and time consuming for
providers to manage.
* Source: American Medical Association
** Source: AHA Annual Survey Data. Note that while this data reflects hospital bad debt rates, we
believe that it is representative of the increase that physicians have also experienced.
86.1% 88.1% 89.3% 91.3% 91.7%
14.0% 11.9% 10.8% 8.7% 8.3%
Regence Humana Anthem HCSC Cigna
Accurate Erroneous
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Section 3: Major Market Changes
Introduction
The United States’ healthcare cost crisis has been widely discussed in the last decade. It is commonly
understood that our system is overpriced and largely inefficient, in terms of both clinical and
administrative processes. Researchers have estimated that up to half of all healthcare spending is
wasteful.13
The unsustainable growth rate of healthcare spending will be a major focus on the
national agenda for years to come and has already catalyzed a major shift in the healthcare industry.
Though a full analysis of this dialogue is beyond the scope of this report, we will present a brief
summary to set the context for a discussion of its implications to the RCM industry.
United States health spending has increased from 5.1% of GDP in 1960 to 17.9% of GDP in 2010, and is
expected to reach almost 20% by 2020 (see Figure 3.1 below). To put this in perspective, the
incremental percentage increase represents $1.9 trillion in additional economic output based on 2011
GDP.14
This increase in spending has put significant pressure on federal budgets, and has restricted
employee wage growth and business investment. This has catalyzed major political pressure to
reduce healthcare spending, as we have seen in the popular press.
Figure 3.1: National Health Expenditures as a Percentage of GDP15
The interest in reducing healthcare costs reached a new high during the passage of the PPACA. The
act has major implications that have been broadly discussed. Many believe that the law did not go far
enough to reform the delivery system. However, we believe that the national attention on our broken
healthcare system has led to several widely held beliefs about how to solve the problem, and has
galvanized support for the following initiatives:
1) Reform healthcare payment models to reward value over volume
2) Invest in healthcare IT to digitize health information, which can be shared and analyzed
3) Improve care coordination, particularly for chronically ill patients, using information technology
4) Form new business models and relationships that enable integrated care delivery
5) Engage the healthcare consumer / patient
6) Provide more transparency on cost and quality associated with individual provider entities
5.1%
9.2%
13.8%
17.9%
19.7%
1960 1980 2000 2010 2020
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This is not the United States’ first attempt at reforming healthcare. We have seen wide‐scale
experiments with capitation and managed care in the 1980’s and 1990’s and their subsequent, well‐
publicized failures. However, despite the lack of historical success, we do believe that we will see a
more permanent shift to an improved healthcare system that embraces the six dynamics listed above.
Per‐capita healthcare costs have increased significantly over the last 10‐15 years (see Figure 3.2
below); declining middle‐class incomes and increasing national debt / budget deficits make this
particularly acute. Additionally, we are beginning to see the information technologies that enable
care coordination and data analysis, critical tools for a pay‐for‐quality paradigm (more on this later).
Figure 3.2: Average Annual Health Insurance Premiums and Worker
Contributions for Family Coverage, 2002‐2012 16
The healthcare industry has seen the government take dramatic action to (1) improve healthcare
access for American’s and (2) apply top‐down pressure to reimbursement. There is national
consensus that the system, as currently designed, does not work. Healthcare providers and payors are
now making the assumption that they must change now, or face the threat of more dire government
regulation, such as nationalization of the healthcare system. This would render payors’ historical
business obsolete and threaten providers’ sustained profitability.
In the sections below, we address a number of issues that are affecting RCM companies. We grouped
these trends into two separate buckets: (1) trends related to the historical RCM business and (2)
trends related to new business needs in a Pay‐for‐Quality paradigm. RCM companies must be
prepared to dynamically adapt to these major changes in their client base, particularly trends from the
second category. We will discuss the implications of these trends in the final section.
$2,137
$4,316
$5,866
$11,429 $8,003
$15,745
2002 2012
Worker Contribution Employer Contribution
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Update on Historical RCM Trends
Shifting Reimbursement Priorities
Healthcare’s funding sources, including employers, federal and state governments, and consumers,
are stretched thin after many years of increasing healthcare costs. This has put top‐down pressure on
healthcare reimbursement. Individual physician reimbursement has been targeted by multiple pieces
of legislation, including the Balanced Budget Act of 1997, which calls for a cumulative cut to physician
reimbursements from Medicare of over 25% via the Sustainable Growth Rate (“SGR”) model. Though
this is likely to be averted in the long‐term, it is representative of the pressure that physician
reimbursements will face in the future.
However, despite an abundance of negative press on physician reimbursement, we suggest a less
draconian view. While several specific medical specialties have faced significant reimbursement
pressure over the last 5‐10 years, including radiology, we view extended cuts as unlikely. We view
total healthcare reimbursement as a balloon – it can be compressed in certain areas to compensate
for increases in others, but the total amount of funding will keep consistent. The year‐to‐year shape
shifting of this balloon cannot be reliably predicted. The government continues to study cost and
quality associated with certain medical specialties and specific procedures, which can have significant
year‐to‐year effect on reimbursement rates. The results of these studies are largely unpredictable.
See Figure 3.3 for a breakdown of the change in reimbursement by specialty from 2005‐2011.
Advancements in diagnosis and treatment technologies can also have significant effect on
reimbursement within specific specialties; these are also largely unpredictable. An example would be
recent advances in diagnostic technologies, which enable care teams to deliver effective care at lower
cost, reducing the expense and frustration of guesswork. This could serve to increase reimbursement
to pathology and radiology, which have faced pressure in the last five years. The takeaway is that
there will always be wider variations on a specialty‐specific level than in the aggregate. This suggests
that a diversified client base, across many medical specialties, is a potential risk‐mitigation tool for
RCM companies.
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In addition, the PPACA catalyzed a wave of new payment models and structures, and funded a
number of experiments to test various delivery and payment models. Several existing Medicare
programs and other pieces of legislation are also changing the balance of healthcare payments,
including the Comprehensive Primary Care Initiative (“CPC”), Physician Quality Reporting System
(“PQRS”), and Medicare Pay‐for‐Performance (“P4P”), among many others. Commercial payors are
also aggressively experimenting with new payment models and investing in IT to facilitate the
transition. These programs are continuously being updated and revised and are very specific to local
conditions. This is discussed in more detail below.
Rising Healthcare Administrative Costs and their Implications
While a majority of the growth in healthcare costs has come from clinical spend, administrative spend
has contributed materially to the increase. Some estimates put administrative expense at $361 billion
per year – spend that many view as a side effect of an unnecessarily complex system.20
See Figure 3.6
for a breakout of administrative spend as a percentage of healthcare costs. The $361 billion includes
all administrative costs across the entire healthcare system – hospitals, physicians, and insurance
companies. Additionally, administrative cost as a percentage of health expenditures doubled from
1970 to 2010.21
This system‐wide growth is indeed representative of physician practices, which
currently spend 13% of revenue on administrative costs.22
Figure 3.6: National Health Expenditures, 1980‐2010, with Breakout
of Clinical and Administrative Spend in 2010 ($ in billions) 23
We view most of this administrative spend as largely unavoidable. As discussed in Section 2, revenue
cycle complexity results from the structure of the healthcare system, which has hundreds of individual
payors with ever‐changing rules and technology standards, changing government regulation, and
fragmentation in IT systems and processes, among other factors. However, the rising cost has not
escaped national attention. Physicians are putting pressure on RCM companies to reduce this
administrative cost via lower fees. Physicians could historically rely on increasing reimbursement to
offset rising administrative expenses; however, expectations of slower reimbursement growth in the
future are forcing doctors to reduce their cost basis. The easiest, most direct route to do so is to go
after billing rates.
RCM companies have responded by becoming more efficient and investing in technology. We have
seen companies that invest in technology and processes cut cost per “claim” by a factor of 2‐3x in the
last 5‐10 years.24
This is not to be understated. There is also significant national effort to standardize
$2,233
$361
$256
$1,377
1980 2000 2010
Clinical Administrative
14%
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terminology, billing processes, and technology standards, which will somewhat simplify claim filling
processes. However, we do not see billing rates declining significantly in the future, because the
dynamic nature of healthcare reimbursement policy throughout the healthcare system will require
concentrated manual intervention. As a function of this, we do see the service mix shifting from nuts‐
and‐bolts billing services to management of new business functions that will be required of physicians
in the next decade. This will largely counteract any decline in billing fee rates.
Competitive Pressure
The RCM market has become increasingly competitive over the last decade. Providers are seeking
vendors with competitive pricing and “next generation” technologies to efficiently manage business
operations. This has given natural competitive advantages to companies of scale, and has driven
increased competition in the industry. Significant investment by private equity firms in the industry
has also fueled growth and consolidation.
A number of large market players have emerged, bringing economies of scale and major investment
in both RCM and clinical technology. One such company is athenahealth, which has achieved
significant scale and has managed to dramatically drive down costs per claim. This has given the
company the flexibility to invest heavily in sales and marketing (22% of 2012 revenue) and software
development and R&D (7% of 2012 revenue). If athenahealth’s selling and marketing and R&D costs
are added to the company’s operating cash flows25
(also referred to as Earnings Before Interest, Taxes,
Depreciation, and Amortization [“EBITDA”]), the company’s EBITDA margin is almost 50%; we will
refer to this metric as “normalized EBITDA.” We contrast this to an average normalized EBITDA of 10‐
25% among smaller RCM companies, generally with less than $20 million in revenue. See Figure 3.7
below for a visual representation of this information. While athenahealth has achieved more scale
than arguably any other RCM company, there are roughly 10‐15 players with sufficient scale to drive
these margins.
Figure 3.7: athenahealth “Normalized EBITDA” Margins Versus RCM
Service Company Averages26
31.5%
34.5%
38.9%
43.1%
47.1% 49.0%
10.0%
17.5%
25.0%
2007 2008 2009 2010 2011 2012 Lo Mid High
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Review of “Next Generation” Trends
Shift from Fee‐for‐Service to Pay for Quality
It is now widely accepted that payment methodologies are changing and will continue moving to a
pay‐for‐quality paradigm. The concept of paying physicians for value rather than volume has an
intuitive, common‐sense appeal, and reflects basic underlying economics that drive competition and
innovation in most industries. Specifically, value‐based reimbursement incentivizes providers to:
1) Invest in critical “care management” infrastructure, including electronic health records,
communication tools, and health data analytics
2) Coordinate care among different providers
3) Avoid unnecessary procedures and duplicative tests
4) Engage and incentivize patients to participate in their own care activities
Value‐based reimbursement is not a new concept. Both commercial and public payors have been
experimenting with value‐based reimbursements for a number of years. For example,
UnitedHealthcare began rolling out performance‐based contracts in selected markets in 2010, and
expects that by 2014 most contracts will tie performance criteria to payment rates.28
The PPACA
launched the CMS Innovation Center with $10 billion in funding, with the goal to test a variety of
payment and service models that could potentially be rolled out on a much greater scale. The
Innovation Center has released 16 programs involving over 50,000 healthcare providers to date,
including a number of Accountable Care Organizations. Additionally, we have seen a gradual increase
in the number of National Quality Forum (“NQF”) endorsed quality measures since 2005 (see Figure
3.9 below), which are used to guide quality‐based reimbursements.
Figure 3.9: NQF‐Endorsed Quality Measures by Type, 2005‐2010 29
Figure 3.10 shows one estimate for the timing of the transition to a fee‐for‐value healthcare system.
Oliver Wyman, a global consulting firm, estimates that over 80% of hospital‐employed physicians will
be working under a pay‐for‐value model by 2020; dollar value estimates are not available, so we use
this statistic as a crude proxy for such figures. This estimate likely overestimates the adoption of fee‐
for‐value programs because standalone physicians are more likely to operate under more basic fee‐
for‐service contracts. UnitedHealth estimates that total value‐based reimbursement will be 60% in
2020.30
The range of potential outcomes is wide, based on significant uncertainty around the specifics
of the PPACA and other tests and pilots that are currently in motion. What we do know for certain is
that the transition will be long, complex, and difficult.
158
668
2005 2010
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Figure 3.10: Percent of Hospital‐Employed Physicians by Payment
Model31
Despite all of its promise, quality based reimbursement has historically been difficult to implement. A
key challenge is in defining and measuring exactly what “quality” means and in negotiating
appropriate benchmarks between funding sources and risk‐bearers. Quality based reimbursement
also requires massive investments in structures and processes that support pay‐for‐volume methods.
This goes beyond IT systems and workflow processes to entire shifts in the culture of medical delivery.
Many physicians simply do not embrace the pay for quality concept. In fact, only 17% of physicians
believe that fee‐for‐service payment models do not encourage coordination of care. Additionally, of
623,000 physicians that qualified for PQRS bonuses in 2010, only 182,000 applied for and received
payment, demonstrated limited awareness and enthusiasm for these models among many
physicians.32
Overview of the Most Common Quality‐Based Reimbursement
Models
There are four value‐based reimbursement models in existence today. The first is Pay‐for‐
Performance (“P4P”), which we define as an augmented type of fee‐for‐service model, whereby
physicians are paid bonuses and / or penalized based on their performance relative to certain quality
targets (also referred to as quality “measures”). These measures are established during contract
negotiations between payors and physicians, and can include procedural targets, such as performing
wellness checkups on an annual basis; meeting certain performance targets, such as limiting the
number of hospital readmissions for a particular surgery; patient satisfaction targets; and/or cost
targets. The P4P umbrella also includes Patient Centered Medical Homes (“PCMH”), a concept that is
rapidly rising in popularity. PCMH receive additional care management fees to organize extended
networks of caregivers that manage patient care along the continuum of the healthcare spectrum; it is
widely recognized that such coordination improves outcomes. A challenge to P4P models is their
administrative complexity, which can sometimes lead to management costs that exceed actual bonus
payments. Additionally, different payors often establish different quality measures and performance
targets, which can increase the burden of data collection and confuse physicians.
The second option is shared savings and shared risk models. This includes the concept of an
Accountable Care Organization (“ACO”). In these models, healthcare organizations take pre‐defined
levels of risk for managing entire sets of patient populations. Most existing models in the market
17%
51%
83%
83%
49%
17%
0%
20%
40%
60%
80%
100%
2010 2015 2020
Fee‐for‐Value Fee‐for‐Service
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today are asymmetric in that they only share in potential savings. However, there is a smaller subset
of providers that also take financial responsibility for moderate levels of risk. Shares savings models
require more clinical coordination than P4P programs, and correspondingly require large investments
in infrastructure and technology. They also require large amount of control over ancillary providers.
One of the challenges associated with these models is the complexity in negotiating the specific
“savings targets” that are reasonable over time, and how to divide the savings among providers in the
organization. Shared savings / risk models are seen as a critical stepping stone and have gained
greater than expected market traction.33
In fact, 30 million Americans are treated by ACO’s today.
Approximately 330 ACO’s are in operation, up from 164 in 2011, and as many as 31 million patients
are being served.34
It is estimated that 150 million Americans are in geographies where some form of
an ACO exists, suggesting the potential for much greater penetration of the patient population.35
The third model, which is furthest along the continuum of value‐based reimbursement, is full
capitation, whereby provider groups take full responsibility for the cost of all patient care for a specific
pre‐defined payment. There is significant risk to providers in this model, and most provider groups
are not equipped to manage this amount of risk. Capitation requires significant investment in
infrastructure, technology, and ownership / control over a wide variety of ancillary providers. We
believe that the healthcare system will be slow to move to mass adoption of this model. Incremental
approaches above will serve to prepare healthcare organizations for full capitation.
The fourth model is bundled or “episodic” payments, which is a single lump sum that is paid to a
specific set of providers for providing a specific procedure or episode, such as a knee replacement
surgery. Additionally, there are commercial pilots underway that are testing longer‐term and more
complex cases, such as cancer care / chemotherapy.36
This is intended to make the providers as
efficient as possible in delivering the service, since it will encourage the group to do so at lowest cost.
Since bundled payments can incentivize providers to skimp on service, these payments are often
coupled with potential penalties for missing quality and performance targets. The value of bundled
payment models is limited to more definable cases, such as surgeries, rather than longer term of
chronic care management – with longer term or more complex cases, it can become very difficult to
identify which processes, treatments, drugs, provider services, among others, belong in the bundle.
Each payment model has benefits and drawbacks. In some cases, the challenges of specific payment
methodologies can be remedied by combinations of several. For example, certain quality measures
developed in P4P models are useful under both capitation and bundled payment models to ensure
that providers to not skimp on service to reduce their costs. Additionally, bundled payment models
incentivize the formation of “centers of excellence” that develop specialized expertise with certain
procedures; shared savings organizations could outsource certain procedures to these groups if
vertical integration proves less efficient. These centers of excellence also lend themselves to be more
independent, since they can provide specific, defined services in isolation from a more diverse care
team; physicians also prefer to be independent, all else being equal. The takeaway is that we expect
to see wide proliferation of these various payment models, often packaged together in complex ways,
over time.
We also expect significant variation in payment methodologies at the contract level among individual
physicians. Payor organizations will view their ability to develop and execute optimal reimbursement
structures as a core competency; while this push for innovation will benefit the industry over time, it
will increase administrative complexity for individual providers. Confusion will likely emerge among
providers as result of potential conflicting incentives arising from different payors’ preferred
contracting styles.
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Likely Evolution in Payment Models
We expect healthcare payment models to evolve as depicted in the diagram below. Each model
introduces incrementally more financial risk to provider groups and requires / incentivizes greater
collaboration and care integration. While this is clearly an oversimplification, particularly in light of
the discussion above, this framework is helpful as a baseline to understand the incremental nature of
healthcare payment reform.
Figure 3.11: Expected Migration Model in Physician Payments
Each incremental step toward quality serves to prepare providers for the next step. P4P
methodologies encourage more coordination than fee‐for‐service, and so on. However, healthcare
organizations vary widely in their preparation for these models. Most physician groups are not
equipped with the scale and sophistication for full capitation. The effectiveness of these separate
methodologies, when blended together, will only be understood after much testing. It is also
important to understand the cost of administration of each model relative to the expected clinical
benefits.
Changing Payment Models Catalyze Changing Business Needs for
Physicians
The enormity of the shift from volume‐based reimbursement to value‐based reimbursement is not to
be underestimated. The $2.5 trillion healthcare industry has evolved over the last 100 years to
support fee‐for‐service or cost‐based payments. Business models, organizational structures,
incentives, information technology systems, and the job functions of individual provides have evolved
to profit from fee‐for‐service methodologies. The transition will take time and it will be difficult.
Value‐based models will require physicians to totally redesign the way they practice medicine. They
must integrate with community‐based services, promote wellness, manage populations and adopt
new workflows. Most importantly, they must understand the financial impact of these new activities,
making the availability of both cost and quality information critical. Physicians will need decision
support in the form of information that is useful in guiding behaviors and making decisions at the
point of care to understand which specific clinical activities lead to improved outcomes and higher
reimbursement. Additionally, as new payment models evolve and change over time, requirements for
receiving performance payments will change and become more demanding. Physicians should expect
to continuously retool their workflows during the slow march to value‐based reimbursement over the
next decade. RCM companies that proactively develop tools to help physicians maximize
reimbursement will have significant value to their clients. We believe that it is a significant
opportunity for RCM companies.
Fee‐for‐Service
Pay‐for‐
Performance
Shared Savings /
Risk
Capitation
Bundled Payments
Responsibility / Accountability for Outcomes
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Another challenge for doctors will be negotiating value‐based reimbursement contracts with payors,
who are armed with significant information resources and medical information across broad
populations. Payors are more prepared to negotiate new, unfamiliar reimbursement methodologies
based on aggregated cost and quality information. Physicians will need competent, data‐savvy
advisors to support these negotiations.
Technology Adoption
The Health Information Technology for Economic and Clinical Health Act (“HITECH”) released over $30
billion in stimulus payments for the adoption of EHR systems. This has catalyzed rapid adoption of
electronic health records and has unleashed a wave of innovation in the healthcare information
technology industry. In fact, the progress in adoption of EHR's in the past two years has exceeded the
progress in the 20 years prior to that.37
Significant advancements are being made in data exchange
and interoperability, as well as software tools that enable providers to more effectively interact with
patients. A variety of other technologies are emerging that will enable providers to manage patient
data longitudinally across various care settings.
Figure 3.12: EMR Adoption Rates 38
It is important to note that despite this rapid progress, the healthcare industry is still far behind other
service industries in its adoption of IT, and many experts believe health IT is largely in its infancy.
While physician services represent 3.4% of GDP, physician practice IT spend represents only 0.6% of
total United States IT spend, as of 2011 (see Figure 3.13); this points to the significant historical
underinvestment in technology by physician practices. While close to half of office‐based physicians
have a basic EHR system, almost 50% of these systems do not have capabilities to manage care
coordination or preventative care, such as viewing real‐time lab results, clinical notes, and
management of eprescribing, among other functions (data from a 2011 study).39
One of the reasons
that progress has been so slow is that IT investments and data sharing tools represent cost centers
under a fee‐for‐service paradigm, where little value accrues to the purchasers of these systems. On
the other hand, pay‐for‐quality models turn these systems into true infrastructure investments that
have capacity to increase provider profitability long‐term, since they improve care and increase
efficiency. As such, we expect continued rapid innovation in health IT.
17.3%
20.8%
23.9%
29.2%
34.8%
42.0%
48.3%
51.0%
57.0%
71.8%
10.5% 11.8%
16.9%
21.8%
27.9%
33.9%
39.6%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Any EMR / EHR System
BasicSystem
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Figure 3.13: Physician IT Spend Benchmarking 40
Providers will need a variety of software tools and capabilities to succeed under future pay‐for‐quality
models, which create new business needs. They need to be connected to their patients’ full
ecosystems and be able to “play nice” in the sandbox. RCM companies are positioned to provide
them with these tools. Additionally, technology will increasingly serve as a differentiator to physician
practices under pay‐for‐quality reimbursement models. Sophisticated technology often gives comfort
to patients and increases subtle perceptions of quality, in addition to decreasing the many hassles and
confusion associated with visiting a physician. Patient portals make it easier for patients to access
their health information, and facilitate patient engagement in care delivery, thus improving outcomes.
We view the following technologies as critical supplements to existing RCM technologies. Note that
we expand on this list in Section 4.
1) “Next generation” practice management and EMR system
2) Robust interoperability solutions
3) Patient portals
4) Business intelligence functionality
5) Mobile device support
6) Social media and web 2.0
Engagement of the Healthcare “Consumer”
One of the implications of pay‐for‐quality models is that providers will need to more actively engage
patients in their own healthcare activities. There is an abundant set of literature that indicates that
more engaged patients are able to reduce their own cost. This can be accomplished through direct
support through lower‐cost ancillary providers that can physically engage patients throughout their
day, such as home health aides. Electronic patient education will also play a large role in patient
engagement as these tools become more user‐friendly and accessible. The government has
recognized the importance of engaged healthcare consumers and has mandated, via Meaningful Use
Stage 2 requirements, that providers must provide patients access to their healthcare data
information. This is only a starting point – we encourage RCM companies to proactively develop
creative ways to engage patients in the future, and keep a pulse on developments in the space.
ACO’s and capitated providers will have more natural incentives to manage patient populations. P4P
providers will be more focused on “superficially” meeting patient engagement measures, whereas full
0.6%
3.4%
Physician Practice
IT Spend as % of
Total US IT Spend
Physician Services
as % of GDP
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risk providers will be driven to innovate and develop new ways to engage patients. We expect more
leading‐edge providers to demand more from their service and technology partners in this regard.
There are also significant efforts to give consumers cost and quality information on individual
providers. Many believe that informed patients will be able to drive competition and innovation in
healthcare by putting pressure on lower‐performing providers, just as in other industries. The
implication of this is that providers must view patient service and satisfaction as a major differentiator
in the future.
Health Insurance Exchanges and Expansion of Medicaid
It is well publicized that the PPACA authorized the formation of state‐level health insurance
exchanges, which are to be fully operational by 2014. Enrollees will begin purchasing plans in October
2013. What is less well understood are details on the tactical roll out of these exchanges, including
funding sources, financing mechanisms and payment processes, expected risk pools, and technology
requirements, among other issues. There will likely be little time to evaluate the impact of the
exchanges on billing processes.
Figure 3.14: Coverage Expansion (patient counts in millions) 41
That said, the 20+ million people expected to receive coverage through the exchanges are in good
health, on a self‐reported basis, with a median age of 33. They are more likely to speak multiple
languages and are less likely to hold a college degree. When combined the millions of new Medicaid
patients from the PPACA, this new customer base will require physicians to adapt customer
engagement processes; they will need to provide heavier “hand holding” and will need to devise new
ways to educate consumers on health insurance options and care instructions / prognoses.
As we more closely study the intent of healthcare exchanges we see the potential for troubling
unintended consequences. Many experts are predicting that healthy individuals will likely avoid
purchasing insurance through the exchanges due to the high cost of insurance relative to the penalties
for not purchasing coverage. Penalties are likely to be several hundred dollars; this is compared to
34 42 42
9 25
155
156 155
26
24 26
2012 2014 2017
‐
7 10
‐
9
25
2012 2014 2017
New Medicaid and
Exchange Patients
Number of Insured
by Category *
16
35
215
231 248
Medicaid and CHIP Exchanges
Employer Nongroup and Other
* Figures exclude individuals 65 years of age and older, per CBO estimates
