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November 18, 2021
This decade will see perhaps the most significant shift in the Revenue Cycle Management (RCM) industry since its origin, and investors are intent on catching the upside where technology advancements can produce tremendous revenue growth opportunities.
Traditional RCM is being disrupted as Artificial Intelligence (AI) and digital automation supplement and begin to replace inefficient human processes. Automation offers a path to the industry’s Holy Grail—higher collections at lower cost—but brings many challenges: steep startup costs, significant adoption hurdles (in an industry not known for agility), and real implementation risks.
The Cascadia Healthcare team has a core focus on Digital Health, and we’ve kept a close eye on the evolution of RCM through our direct work in the space. Since the current wave of industry change began in 2018, we’ve talked with hundreds of industry participants, from traditional RCM providers pushing into the digital age to would-be disrupters looking to break into the system from the outside.
By virtue of our experiences serving as the sellside advisor for a number of healthcare payments and RCM companies and advising Tegria on the buyside, our team has developed a clear vision on where the market is heading. The industry is changing rapidly, and we’re at the forefront of the activity with this new wave of consolidation and rush into “intelligent” AI-driven RCM, billings, and payments.
RCM Automation Represents Significant Revenue Upside
From its paper-based roots in snail mail and landline phone calls, RCM has evolved through off-shoring, digitization, and a slow convergence with the digital payments industry. In 2021, when U.S. national health expenditure reached 18.2% (1) of GDP (more than double the 1980 percentage), RCM generated an estimated $40 billion in revenue. (2)
For healthcare providers, RCM offers an obvious value proposition. Hospitals typically collect 60% to 70% of what they bill; an RCM program typically yields a 2-5% increase in that figure. Managed with efficiency in a system that bills $3.5 trillion (3) annually, that could mean billions of dollars of additional revenue.
The Three Stages of RCM Automation
Two Models Gain Traction
We see two approaches to automation that seem to be yielding the most significant results. On one side are hospital systems that have kept RCM in house but have been aggressive about investing in automation. Ensemble is an automated RCM solutions provider built inside the multi-state Bon Secours Mercy Health system before it spun out in 2019 with the sale of a majority stake to private equity investor Golden Gate Capital.
Renton, Wash.-based Providence formed its own tech-enabled RCM unit, Tegria, by acquiring four different companies in the RCM space since 2019, all transactions for which Cascadia served as exclusive buyside adviser.
We additionally see traction via the buy-and-build approach often pursued by private equity investors. They start by buying an old-line RCM player and build by adding specific automations and tech solutions that increase the efficiency and automation of the market-facing RCM solution.
R1 RCM is an example of this approach. The business, founded in 2003 as Accretive Health, experienced serious financial and operational setbacks in the first half of the 2010s. It remade itself via a 2016 RCM partnership with the private hospital giant Ascension and a $200 million growth capital infusion from TowerBrook Capital Partners. Since then, R1 (which is now NASDAQ-traded) has bolted on:
The VisitPay acquisition, announced in May 2021, was evidence of a broader, patient-focused trend in RCM, an industry that long focused on insurer collections. Now, the goal is to optimize collections from the moment a patient schedules an appointment or enters the hospital door through to payment processing and billing follow-up. R1 and its competitors in the space—companies like Conifer, Ensemble (the Bon Secours spinout referenced earlier), and Optum360—are all taking comparable end-to-end approaches.
A similar dynamic is at play in the appetite of traditional fintech payment processors to acquire medical billings and healthcare payments software providers and other RCM services. These are providers—like Global Payments and JP Morgan Chase—who are already optimizing the consumer payment experience and now want a piece of the massive addressable market for patient payments in the healthcare space.
Anyone who has spent time around the U.S. healthcare system knows that change can be maddeningly slow; just think of how long we’ve been talking about electronic health records! In the RCM space, though, the digital revolution is finally upon us, and the appetite for change on the part of providers and patients has never been stronger.
If you own a business in or adjacent to the RCM or electronic payments space, our team is always eager to connect and share specifics about how what we are seeing in the market might help inform the path forward.
Cascadia Capital’s Healthcare Team:
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