What’s Behind Private Equity’s Interest in RCM Vendors

A major offer from a private equity firm is making waves in the revenue cycle management (RCM) vendor space, showcasing private equity’s interest in RCM vendors and software.

New Mountain Capital, a private equity and capital firm headquartered in New York, recently offered to buy all of R1 RCM’s outstanding shares not currently owned by investors. The firm, which already has a significant stake in R1 RCM, proposed to buy the shares at $13.75 each in cash, equating to about $5.8 billion.

The offer raised concerns about the RCM vendor’s valuation and prompted some shareholders to consider going private or rejecting the offer.

Whether R1 RCM accepts New Mountain Capital’s proposal or not, the deal is opening the door to greater private equity investment in the RCM vendor, according to Kate Festle, a partner in healthcare mergers and acquisitions at West Munroe.

“If they don’t go forward, it might invite other bidders who might now be sparked by the idea of a lot of upside potential in something like R1,” Festle recently told RevCycleIntelligence.

The private equity offer for R1 RCM isn’t the first or last deal in the RCM vendor space. In fact, private equity has had a strong interest in RCM vendors and software despite recent economic headwinds.

“The market has been down the past 18 months as interest rates have been high,” Festle explained. “It takes more confidence for investors to feel comfortable investing at those rates, so the types of assets that have weathered the storm best have tended to be things like software where you have a recurring revenue model that’s more predictable.”

This has made health IT and software companies more attractive to private equity investors and, within that realm, RCM vendors.

“RCM has been a constant,” Festle emphasized. “It was popular before, but its necessity in this ecosystem is really resonating with investors even beyond software. There’s also been a lot of transaction momentum around RCM BPOs.”

Healthcare consulting firm Kaufman Hall called 2022 the worst financial year for US hospitals and health systems since the start of the COVID-19 pandemic in 2020. Half of hospitals and health systems finished that year with a negative margin. In 2023, hospital financial performance approached pre-pandemic levels, with the median operating margin index hitting a high of just 2.3 percent by December.

Provider organizations have to find ways to do more with less as labor expenses remain high and patient volumes finally stabilize. Many are turning to BPOs, or business process outsourcing (BPO), to optimize administrative processes. Providers are also outsourcing revenue cycle functions in the face of persistent labor shortages and the complexity of payer requirements for claims reimbursement.

“This type of business has really crossed the bridge of being able to prove themselves as a sticky component of the large hospital system ecosystem,” Festle stated. “About five years ago, there were still questions around the viability of these BPO companies, but now we see so many major domestic health systems continuing to rely on and get more comfortable with outsourcing RCM services.”

“Overall, there’s a lot of headwinds, but the interest in RCM automation and outsourcing services has been proven and continues to be attractive to investors.”

Revenue cycle outsourcing services have gained much traction over the last few years as RCM automation has evolved. Not only are provider organizations leveraging robotic process automation, artificial intelligence, and other forms of technology to optimize operations, but so are BPOs in healthcare.

“RCM BPOs have become the primary buyers of automation,” Festle observed. “Instead of competing with automation vendors, they are acquiring them, operationalizing their technology into internal systems to achieve margin improvement, and then using that automation to better serve their customers.”

A prime example of this merging of RCM automation and BPO services is R1 RCM’s acquisition of CloudMed. R1 RCM bought the cloud-based RCM intelligence company in 2022 to leverage cloud-based capabilities and scale end-to-end RCM services.

These types of deals benefit the customer — providers can leverage the latest innovations in RCM automation while relying on experts in the field to manage key administrative functions —  and the RCM vendor. Vendors who acquire RCM automation companies are able to “internalize what used to be a market threat and make competitive advantages,” according to Festle.

“From a front-row investor perspective, like New Mountain Capital’s, that’s a positive sign of a future in more automated, margin-effective operations,” Festle added.

Private equity firms will continue to look at RCM vendors for investment. Many vendors in this space are proving their value to healthcare providers by tapping into technological innovations and providing much-needed services in the current economic environment.

If they haven't already, providers are likely to see their vendor partners pair up with private equity firms, perhaps bringing more automation and innovation to the RCM space.