Understanding Healthcare Revenue

February 15th, 2008 | Income Approach & Methods

One of the things that continues to surprise if not astound me is the number of individuals who believe you can value a healthcare enterprise without looking at the underlying coding that generates the revenue.  I rarely hear anyone suggest that you can value a generic business without understanding what it is the company sells, who the customers are, etc.  Given the common use of revenue multiples in valuation – notwithstanding my distrust of them – it is even more astounding.

The healthcare world is replete with examples of where coding is significant, but here is a recent example.  Medicare – followed by many other insurers – limited the payment for the technical component of same day contiguous CT and MR.  If you did not analyze the imaging center’s coding to see what was CT or MR and how much was the technical component and the impact of the new rule for same day contiguous body parts, how could you forecast revenue? Last time I checked, revenue was based on units and rate per unit.  Absent a coding analysis, there would be no way to get the rate.

Similarly, Ambulatory Surgery Centers are under a whole new billing regime in 2008.  There were dramatic increases and decreases in per unit revenue based upon the type of procedure.  The only way to determine what future revenue would be is – you guessed it – look at the code!

Physician practices are no different and a coding analysis is critical not only to understanding the revenue stream, but also to understanding the practice!  Many times, valuation analysts look at the number of encounters a practice does and compare it to norms from the MGMA.  If the MGMA median is, say, 4500 for a given specialty, and the practice does 4000, the conclusion is that its under-producing.  Then, if it is under-producing, it must have excess capacity, which leads to a forecast of more encounters!  WRONG!  What if there is a disproportionate number of Level 4 encounters which take more time than a Level 3 for example? The encounter volume cannot be evaluated for reasonableness without the coding analysis.

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