As buyers and sellers are considering a transaction in the ambulatory surgery center (ASC) marketplace, all involved parties must consider and quantify potential revenue impacts as they relate to that ASC’s contracted managed care reimbursement.
Payor contract reimbursement is a critical component of revenue, as is an understanding of the impact that an acquirer’s managed care contracts have on a target’s revenue. A “black box” reimbursement analysis can help assess the overall impact on revenue by comparing the target’s and acquirer’s managed care reimbursement (as applied to the target’s utilization data) while maintaining the confidentiality of each party’s payor contracts and allowable rates. In addition, black box analyses can offer insight into why an acquirer’s managed care contracts perform favorably or unfavorably when applied to a target’s utilization.
Contract Pitfalls: Why One Party’s Contracts Perform Better Than Another’s
There are several reasons why an acquirer’s contracts may perform more or less advantageously when applied to the target’s utilization data. Often, we hear expectations like, “we know our rates are better,” but there is far more to it than that. The primary reasons are: case mix, payor mix, and contract structure (payment logic).
Case Mix & Payor Mix Differences
An acquirer may believe their contracts perform well based on their current book of business; however, this may not necessarily apply to a target ASC’s case mix. When reviewing and negotiating payor contracts, various items are taken into consideration, including case mix (by specialty), payor mix, and patient population/demographics. This can yield mixed results when testing an acquirer’s contracts against a target ASC’s utilization. In addition, utilization differences can play a role even if the acquirer provides similar services and has a similar payor mix. In this situation, an acquirer’s contracts may underperform due to utilization differences, such as lack of implant reimbursement or procedural carve-outs for services not typically provided by the acquirer.
An acquirer’s contracts may underperform on a target’s utilization due to a range of reimbursement differences in each party’s contracts. Understanding the reimbursement logic details for each party’s contract is critical to identifying differences in overall contract performance. Some of the most common examples of reimbursement logic differing between two parties’ contracts include:
- Grouper rate differentials
- Procedural carve-outs vs. grouper rates
- Specialized carve-outs can be negotiated and tailored to an ASC’s respective procedure mix, which can result in more favorable reimbursement vs. standard grouper rates.
- Multiple procedure discounting logic
- Multiple procedure discounting logic can vary even between contracts for the same payor, e.g., 100% allowable payment for primary procedures only vs. 100% allowable payment reimbursement for the primary procedure and 50% payment reduction for all tertiary procedures within the same case.
- Implant reimbursement
- Implants are typically reimbursed based on cost or cost plus a nominal markup; however, there may be different thresholds that trigger payment requirements or implants may not be reimbursed at all, depending on how the contract is written. This can be an important factor when considering specialties like orthopedics, which utilize high-cost implants.
In summary, there are several reasons why an acquirer’s contracts may not perform on a target’s utilization beyond grouper rates. Differences in terms of case mix, payor mix, and contract structure all matter since these can contribute to a negative impact on revenue.
Understanding payor contract pitfalls and their potential impacts on revenue is crucial when structuring a transaction. Acquirers should consider a black box analysis when determining whether to purchase a controlling interest in an ASC, as most commercial payors require a party to have controlling rights for their rates to apply. For an acquirer, black box analyses can also assist in the post-transaction, pro-forma development of the ASC, thus ensuring that required rates of return are achieved for the proposed purchase price. For a target, a black box analysis can present reimbursement differences between multiple acquirers and help inform the selection of potential suitors.
Another transaction implication to consider relates to the assignability and timing of each party’s contracts and acquisition-specific language that is critical to said acquisition. In some cases, the entire revenue impact may not be realized for as long as 18 to 24 months post-acquisition.
Black box reimbursement analyses have become a critical due diligence component in the ASC transaction space. Development teams and operators both rely on these reports to help guide alignment decisions and return on investment thresholds. Careful examination of payor contract logic and utilization data is critical to successfully assessing managed care contracts. VMG Health has an experienced team with the knowledge required to provide clients with detailed insight into reimbursement differentials in the ASC marketplace and assist parties in making strategic decisions based on data-driven analysis.