Follow the money. Everywhere in health care today, controlling the flow of revenue is critical to success, from physician practices to hospitals, skilled nursing facilities and more. As critical as it is, revenue cycle management took a back seat to electronic medical records in recent years, as CMS enforced the early stages of Meaningful Use to get physician practices on board with EMRs.
Now that the switch to the ICD-10 coding system is firmly in place, investors’ attention has turned back to revenue cycle management (RCM). In just the first four months of 2016, nine RCM companies have been acquired, surpassing 2014’s total of eight RCM deals, and putting this year on track to beat 2015’s total of 15 RCM deals.
Buyers are from the financial as well as the strategic side. Of the 22 RCM deals announced in 2015 and 2016, 14 involved a digital health acquirer. Seven of the 22 RCM targets were acquired by private equity firms or by a PE-owned portfolio company. The most recent deal for an RCM firm was Warburg Pincus’s acquisition of DocuTAP, Inc., which provides both RCM and EMR services to more than 1,300 urgent and primary care clinics across the United States. Financial terms weren’t disclosed.
We expect interest in RCMs will continue through 2016 and into 2017, as consolidation among RCM and EMR firms continues. Warburg probably won’t hold on to DocuTAP for as long as Apax Partners nurtured TriZetto Corporation, which it acquired in 2011 for $1.4 billion. Apax finally exited in 2014, selling TriZetto to Cognizant Technology Solutions (NASDAQ: CTSH) in return for $2.7 billion.
Other PE firms are hungry for good investments in this space. As Ralph Davis, a partner at Cressey & Co. told attendees at a deal-making summit in Nashville in 2014, “If you can make a successful HIT company with two chipmunks and an abacus, we’ll invest in you.”