The COVID-19 pandemic has reshaped the entire health care delivery system unlike any previous health care crisis. The world faced a shortage of medical supplies and hospital beds, a rise in virtual patient visits, a shrinking workforce, and unprecedented physical and mental burnout.
The health care sector saw a sharp drop in revenues and employment at the onset of the pandemic and the public health emergency (PHE), left no health care provider or facility unscathed. Legislators and regulators tried to support providers during the crisis but created other challenges in many cases. Health care delivery organizations of all sizes and types adapted to cope with these unique challenges. The resilience of health service delivery was tested and even the highest performing systems met their match. With the pandemic in our rearview mirror, the next test is how we recover and prepare to support patients as we absorb the fallout.
Federally qualified health centers (FQHCs) in particular are still facing unprecedented operational and financial challenges. Findings from the Kaiser Family Foundation/Geiger Gibson 2019 CHC survey revealed the top three challenges facing community health centers (CHCs), that have become even more acute in the years since include:
- Workforce recruitment
- Increasing costs to operate the health center
- Inadequate physical space
To mitigate these challenges, health care providers, including FQHCs and CHCs, have welcomed partnership, merger, and acquisition possibilities to:
- Scale operations
- Expand into different markets
- Leverage technology and innovation
- Realize new capabilities and efficiencies
- Spread costs over a larger organization
- Navigate the challenges of health care ambiguity
Transaction Trends
2021 was a busy year for transactions in terms of dollars and deal counts. The volume of transaction activity in 2022 declined compared to 2021, pressured by rising interest rates, inflation, and differences in valuation expectations between buyers and sellers.
Private equity, private equity platforms, and corporate entities have remained active in the middle market. Competition and changes in health care reimbursement and regulations led to disruption and the need for new alliances with other entities that will help them deliver high-quality patient care in an economically sustainable manner. Although FQHCs must be operated as either a public entity or a private nonprofit organization, transactions made by these for-profit entities impact the marketplaces in which the FQHCs operate.
Why Transactions Fail to Meet Objectives
Transactions are generally sought in pursuit of the following effects:
- Counter decreasing margins
- Reduce operating waste
- Gain larger market share
- Increase capacity and service offerings
- Better ability to manage financial risk
- Improve patient care
Yet, consolidation transactions can fail to deliver on those benefits after the deal is concluded. There are several reasons a transaction could fail to meet the objectives that were set.
Overestimating Synergies
The parties to deals can overestimate the level of synergy to expect. Fact finding, through objective review of staffing information, data mining, and interviews of key staff can assist in identifying redundancies between organizations. Acquirers don’t always fully appreciate the costs, resources and time required to realize the benefits of identified synergies.
Incomplete Due Diligence
Due diligence is critical for buyers to clearly understand, assess, and mitigate the potential risks of a seller. It should include functional areas such as financial, tax, operational, legal, regulatory, technology, and human resources. The financial due diligence should also include a comprehensive quality of earnings (QoE) analysis to provide the acquiring party with a solid foundation and understanding of recurring revenues, costs and working capital. The overall due diligence process is intensive and can span multiple months. If key risks are overlooked or not fully vetted, challenges could arise after the transaction closes.
Misunderstanding the Company to Be Acquired
Unrealistic expectations from faulty data can derail integration efforts, threaten existing revenues, and reduce a deal’s value. A successful transaction requires receiving, understanding, and fact-checking business data.
Merging entities must be able to clearly articulate their business on day one. Revenue streams, revenue recognition standards, and consistency of accounting methods with industry standards are some of the many areas to review and consider.
Buyers need to understand the reimbursement assumptions, such as payer contract assignment which can be unrealistic due to regulatory or other challenges.
Misaligned Culture
The union of two organizations with different cultures often results in conflict, unplanned attrition, and subpar financial performance. Diligence teams often spend a lot of time running financial models, and leaders focus on defining the organization’s new vision and values. Too often, this leaves culture issues unaddressed. Cultural cohesion and organizational alignment are critical to the success of any integration and can be the primary reason integration efforts fail.
Staff Workload
Nearly all providers are currently faced with challenges recruiting and retaining staff across the organization. When employees are asked to manage integration on top of their full-time roles, that can create extreme levels of stress and has the potential to delay or kill a transaction. Within revenue cycle, providers can reduce this risk by outsourcing some of the legacy patient accounts receivables (AR) to allow the internal team to focus on AR in the new system. While that alone requires additional effort, the longer-term impact can be beneficial.
Effects of One-Time Costs
Some buyers may publicly commit to a large investment for improving newly acquired facilities, recruiting physicians, and expanding clinical services while also committing to reducing annual expenses to generate financial returns.
Capital spend commitments must be articulated with defined, realistic timelines. Each party should focus on risks such as:
- Delays in obtaining financing or approval
- Large operating model redesign or change
- Turnover in key leaders and staff
- Financial and cash flow challenges
- Governmental or regulatory challenges
- Consolidation or replacement of IT systems
- Any Certificate of Need (CoE) requirements in a given state
- Not meeting efficiency targets
To give yourself the best chance at achieving the objectives of a transaction, you need to:
- Consider which transaction type to pursue
- Closely manage the revenue impacts
- Realistically plan cost savings
- Develop a comprehensive risk mitigation strategy
Types of Affiliations
We consider three types of affiliation that are typical in health care.
Clinical Affiliation
A clinical affiliation is an agreement between independent health care providers to collaborate on an initiative or to provide a specific service together in a desire to create shared advantage and value. This agreement may involve local, regional, or national partners.
Joint Venture
A joint venture is a short-term or long-term arrangement between independent entities to form and operate a common enterprise that pursues a new or existing activity or purpose, while allowing for some level of involvement by all parties in the management or control of the activity. Joint venture has the benefit of shared risk and rewards.
Merger or Acquisition
At the other end of the affiliation scale is a merger, which is the formal purchase of one organization’s assets by another, or the combination of two organizations’ assets into a single legal entity.
Managing Transaction-Related Impacts on Revenue
Health care transactions almost always result in major challenges related to operational alignment, and one primary area of risk is in revenue cycle, or Revenue Cycle Management (RCM).
It involves multiple functions, systems, and stakeholders all needing to be aligned and integrated during and after a deal. Determining how to seamlessly integrate the revenue cycle functions of both entities must begin as quickly as possible to achieve a smooth and effective RCM transition and integration.
Scheduling, charge capture, claims generation, follow-up on denials, and securing payment for resolution of legacy and new claims is challenging when two entities are merging. Unlike multi-hospital health systems where a full integration and alignment of operations and service offerings could take years, smaller entities such as FQHCs should integrate faster.
Considerations in Revenue Cycle
Some key considerations for RCM include:
- Billing systems alignment
- Legacy accounts receivable
- Staffing and productivity
- Payer transition
- Provider contracting and credentialing
- Cross-market mergers
- Tax ID or name change
Billing System Alignment
When it comes to migrating or merging an RCM with another organization, the first step is to assess the existing processes in both organizations. FQHCs often have different billing systems and even if they are the same, they can be configured differently.
FQHCs typically choose in-house billing through a practice management system supported by an electronic medical record system, outsourcing to a medical billing company, or a hybrid of both.
The strengths and weaknesses of the billing systems should be thoroughly explored and understood. The cost and impact analysis will determine the most effective billing solution suited for the post-merger organization.
The evaluation team should also keep in mind the vendor contract terms and costs for contracting, re-contracting, or termination of billing services.
Legacy Accounts Receivable
Before implementing any conversion in the patient accounting systems, how to manage legacy AR is a major decision. Organizations may find it most advantageous to manage legacy receivables in the old system, merge them into the new system, or outsource them to allow the team to focus on learning the new system.
There is usually a reduction in cash flow when managing legacy and new AR that typically normalizes in three to six months. If depressed cash flow lasts longer than six months, it is likely a symptom of more significant RCM issues and should be investigated.
Staffing and Productivity
Successful workforce integration is a hallmark of smooth integration. Engagement and productivity may plummet while employees work with new team members and learn new systems, policies, and procedures, and cope with uncertainty regarding job security.
Productivity typically declines more for the RCM team adopting a conversion in the patient accounting system or Electronic Health Record (EHR) system.
Payer Transition
When a transaction results in a new care site, the new site must be enrolled in Medicare as a new FQHC provider, typically through the Provider Enrollment, Chain and Ownership System (PECOS), before it can serve Medicare patients. Additionally, there are state Medicaid enrollment processes and, in some states, additional steps such as registration with the Board of Pharmacy.
Each facility must have a separate agreement with Medicare for service reimbursement. There’s a guide for FQHCs on accurately documenting the scope of a project and when to submit a change in scope request to the Health Resources and Services Administration (HRSA).
HRSA also requires FQHCs to provide notice of changes in the scope of project to the state Medicaid agency within 90 days following HRSA approval. Third-party contract review and assessment also requires close attention.
Leadership must decide which contractual relationships will survive after a transaction, which to terminate, if any contract elements need to be renegotiated, and if changes to the Sliding Fee Discount Program (SFDP) need to be made. A health center’s SFDP consists of the schedule of discounts applied to the fee schedule and adjusts fees based on the patient’s ability to pay. A health center’s sliding mechanism also includes the related policies and procedures for determining eligibility and applying sliding fee discounts.
Provider Contracting and Credentialing
Credentialing is the process in which payers verify that a provider or a clinic is qualified to participate in their network and provide treatment to their insured members. A transaction greatly impacts the medical staff office due to the need to merge and reconcile privileging and credentialing databases and processes.
Organizations should follow the existing credentialing processes until structural changes such as change of tax ID or change of group National Provider Identifier (NPI) take effect. It’s critical to verify network status with payors for each clinic as billing issues can arise if one clinic is in network and the other is out of network.
Practitioners from the merged organization must go through the application process before practicing at the facility. Institutions can use a shared privileging and credentialing database but function under separate provider numbers, medical staff bylaws, and policies and procedures.
Review bylaws, policies and procedures, department structure, credentialing, and privileging standards for medical staff as well as the systems used to manage privileging and credentialing processes.
Without credentials, the provider becomes a non-participating, out-of-network provider. If the intent is to stay out of network, the provider must consider the implications, such as from the No Surprises Act (NSA). Out-of-network providers must set up the right processes to avoid surprise billing of patients or develop a process to manage the Independent Dispute Resolution (IDR) process.
Cross-Market Merger Considerations
Cross-market or border mergers occur when facilities operating in different geographic markets merge across state lines, or the transaction is in a geographic market where the new or acquired facility doesn’t operate.
Consider the effects of differences in state regulations on RCM operations. One consideration is how wrap-around payment reconciliation differs from state to state. Wrap-around payments are supplemental payments that bring claim payment up to the FQHCs full prospective payment system (PPS) rate. In a managed care environment, the state Medicaid agency bears the responsibility of paying FQHCs the full PPS fee schedule rate.
The managed care organization (MCO) must pay the centers no less than they would any other provider for the same services on the fee schedule then the state pays the wrap-around.
The final wrap payments are reconciled via a year-end settlement process. Some states require manual calculation and request of these additional payments while other states have eliminated the year-end reconciliation process to remove the ad hoc collection of managed care entities (MCE) claims data.
There are also differences in state regulations in areas such as charity care. Some states go beyond the federal regulations in requiring upfront disclosures. Also, some states require providers to notify patients that they meet requirements for charity care, which can be particularly impactful when providers run presumptive charity care screening.
There are both state and federal regulations concerning language access in health care settings. Generally, facilities must translate vital documents, including Financial Assistance Policies (FAP), into languages of people likely to be served by the provider. Additionally, FQHCs should prominently display a summary of their FAP within public areas, provide it in writing, and have translators available to discuss it with the person in any language spoken by people in the service area likely to be served.
Different states may require different bill types and forms when submitting claims, and this may necessitate process changes and maintaining separate workstreams due to state-specific requirements. For instance, the 837I is the standard form required by CMS Medicare for FQHC electronic claims submission. Medi-Cal, California's Medicaid health care program, also requires 837I form; however, Arizona's Medicaid agency, Arizona Health Care Cost Containment System, requires FQHCs to submit claims on the 837P (1500 format).
On the outset, this may appear to be a minor difference, but the distinction can have a significant impact on timely claims processing and reimbursement.
Tax ID or Name Change
The new legal structure, associated tax identification numbers (TIN), and any doing business as (DBA) names should be evaluated in consultation with legal counsel when ownership or structure changes. These decisions can have significant downstream impacts so all relevant groups should be involved in the decision making. Additionally, the state and federal filing requirements, and sequence of approvals associated with the change can be daunting for FQHCs to handle on their own.
FQHC Transactions: Successor in Interest
FQHCs fall under the regulatory purview of HRSA. HRSA’s oversight of FQHCs is stringent and includes oversight of areas such as rules around board composition and the ability to appoint a new CEO. Change to an FQHC’s organizational structure due to transaction activity can impact their eligibility for HRSA Health Center Program awards. In that situation, the FQHC must submit a prior approval request to HRSA for recognition of a new entity which is also referred to as the successor in interest (SII).
Fifty-one percent of an FQHC’s governing board must be health center patients who are demographically representative of the community served and who can define and preserve the mission of the organization while serving as the voice of the community. They provide oversight and strategic direction for the organization. Although governance requirements aim to ensure FQHCs are in tune with the needs of their communities, they can add complexity to the FQHC’s involvement in transactions that seem strategically beneficial to the centers and their communities.
Choosing the right CEO is important to the surviving FQHC organization as the leadership needs to be committed to a larger patient population and likely broader community needs than its original scope.
It’s customary for the CEO of a health care provider to be selected by, and report directly to the board of directors, but in the case of FQHCs, governmental agency approval of a new CEO is also required. This HRSA approval requirement can make it challenging for an FQHC to promptly transition to new leadership and raises the stakes with CEO leadership decisions.
How to Mitigate Risks Associated with Transactions
There are some approaches that can mitigate risks associated with transactions and increase return on investment opportunities.
- Utilize advanced analytics to validate business data , engaging a team that understands FQHC business trends and changes in business.
- Dedicate personnel and time to capture and communicate the value of the transaction to its expanded set of stakeholders.
- Start the due diligence process early—well before the transaction closes—and act before cultural and operational integration becomes more challenging.
- Engage experts with FQHC revenue cycle experience to evaluate opportunities and roadblocks, and provide direction for migration, consolidation, or upgrading RCM systems, to decrease the impact of cash flow.
- Set clear expectations about information requested to support the transaction and dedicate time with transactional advisors to make sure the information is delivered timely.
Developing a post-transaction integration plan, fully vetted by experts with FQHC experience can help chart a course for minimizing disruption of processes and cash flow and achieving revenue cycle synergies. The plan should thoughtfully consider organizational readiness, articulate the steps to either migrate, consolidate, or otherwise upgrade RCM systems, enhance policies and procedures and integrate them with the clinical and operational systems.
We’re Here to Help
For more information on how to perform M&A diligence and integration or preparing the RCM process for your FQHC M&A, contact your Moss Adams professional.
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