In the Wake of the Merger: Addressing Billing MSO Issues

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 - Bill Ziemke, JD
Bill Ziemke, JD, LLM, MBA, CPA

The radiology environment is changing rapidly, with mergers, acquisitions and new entities and business models entering the market. All of this activity begs the question: What is to be done with existing back offices or management services organizations (MSOs)? Many decisions will have to be made to help ensure that the combined new MSO meshes together in a manner that maximizes productivity, efficiency and profitability over the short and long-term, while preserving or creating the desired workplace culture.

One of the first issues that will need to be determined is the value of the respective entity or entities.  If you value your MSO as an independent existing entity, should it be valued at a multiple of earnings before interest, taxes, and amortization (EBITDA)? It may be better to take a market valuation or an asset valuation approach. Some mergers will provide value to one premerged entity over another depending upon the facts and circumstances. Some scenarios to consider include:

  • one entity contributes more billed procedures than the other entity,
  • one group has an excellent in house IT department and the other entity outsources IT,
  • one group has higher-skilled employees, and
  • current service offerings of each MSO.

Further, value is sometimes fixed for existing additional revenues streams, such as one of the premerged MSOs delivering services to outside independent businesses.  Some groups put no value on the back office, and move all in without attaching a value to the premerged MSOs.

Organizational structure. Key decisions must be made in order to determine the best way to structure the new entity to accomplish its goals. Do you close the MSO and layoff your staff?  Do you merge the MSOs? With healthcare getting more complex each day and margins continuing to shrink, it is more important than ever to address what you want to do with an MSO. 

Having skilled administrators running the back office and being able to lead the organization is worth more than you think.  Depending on the leader and size of the MSO, you may have differences of your bottom line greater than $10 million dollars, and this is with sales revenue less than $200 million.

Be cognizant that merging back offices that operate in multiple states is different than merging within the same state.  In particular, be aware of issues involving—but not limited to—managed care, legal (including employment laws), taxes and regulatory issues. Finally, depending on the size and geographic area of the combined MSO, you will need to determine what functions are best done at a regional versus home office or local levels. 

Governance. Many questions also must be addressed regarding governance and ownership of the MSO. Will any of the executive team members get ownership in the MSO? Who will sit on the board of directors, how will it be governed and how often will the board meet? 

Committee structure also must be determined, such as whether or not the primary governance mechanism will be the executive committee or other committees will participate, such as ethics, compliance, finance, operations, human resources (insurance and retirement) and Information technology committees. If you need any other committees, you must decide who and how will you run them.

Culture. A critical issue—one that groups will need to tackle together—will be to identify and agree upon which corporate culture characteristics should be cultivated and how the transition to that culture should be communicated, nurtured and supported. Making shifts in organizational behavior and norms is one of the most difficult changes to implement in any merger and requires careful thought and planning. 

One MSO culture may be based on lifestyle or reflect the atmosphere of a “mom-and-pop” shop, while the other culture is more corporatized and based on accountability.  Initially, it will be important to assess the talent, training and education level of the MSO administrative team.

Compatibility of the MSO leadership also should be addressed. The administrators work together in a merged entity.  Do they have the same work ethic?  Will there be internal equity whereby each person will pull their own weight?  Will the proverbial sacred cows be provided positions in the new MSO? 

The owners must determine which style of management they want—directive, authoritative, affiliative, participative, pacesetting or coaching?  The chosen management style must be conducive to the level of experience and knowledge of the employees and executive team and enable it to produce the desired results of the owner.

All of these issues and questions must be considered prior to merging the MSOs of two or more merged practices. If valuation, culture, governance or structural issues can’t be agreed upon, then it would be advisable to rethink your decision to merge MSOs. 

Troublesome billing issues

Many potentially troublesome issues may be encountered that are related to the billing services offered by the merging practices’ MSOs. With the proper attention, they all can be overcome.

When you are doing the due diligence it is important to look at the true billing costs and collection rates to attain best in class. If one or more of the merged entities provide in-house billing services, how good are they? Do the entities want to outsource billing?

Many times no due diligence is done on the billing side of a merger.  Some mergers don’t even protect each party for past billing problems that could arise in the future, thereby exposing the new merged entity to old liabilities such as recoupment from RAC audits. 

Even if due diligence is performed, many groups overlook questions that would identify every activity that contributes to the total cost of billing when deciding whether to outsource or choose one in-house billing team over the other.  For instance, if one of the prospective merged entities owns and bills for imaging centers and one doesn’t have imaging centers, is preauthorization included in the billing costs?  Are you including personnel that are responsible for your hospital or image center data feeds?  What about costs associated with updating/loading insurance rates into the billing system?  Are you including costs for revenue cycle audits?

Likewise, the right questions can tease out the total cost of medical coding as it may contribute to billing costs. Are you using an in house product or sending it out to a separate vendor?  Is this cost included when comparing billing costs (for instance, internal audit process versus outside consulting process)? How many coders do you have? Are the coders certified? Whether your coding is done manually or with the use of coding engine software will also make a difference in costs. 

Another factor that contributes to the cost of a billing service (and should be considered when comparing services) is the frequency with which coders meet with the physicians. The forum used to communicate coding issues to your radiologists is another factor that may be overlooked.

Additional activities that contribute to the cost of a billing service include:

  • invoice follow-up
  • customer service
  • refund activities for overpayments
  • bad-debt account collection costs

Billing is an information-technology intensive activity with related software costs that are either allocated to billing or IT. These costs include online payment tools, coding software, Windows software, computer stations and telephone and internet service.

Once the groups have performed their due diligence and determined a strategy, decisions must be made about which billing system, coding system and clearinghouse the new company will use going forward. Finally, you are going to have to decide how to compare and contrast best practices for charge entry, electronic claim submission, clearinghouse services, lockbox, payment posting, accounts receivable follow-up, patient statements, point-of-service collections and deposits, call center operations and more.

Managed care and contracting

In the event that two or  more practices come together and need to evaluate their MSOs, managed care is another area that demands agreement on how to run, manage and compare existing workflows and expectations. Initially, the practices must agree on the value they place on this activity and the expectations of the individual or individuals who perform the contract negotiations

Decisions will need to be made around whether an actual department will oversee these contracts, who will analyze payments from the insurance companies and how in-depth the financial analysis will be. During contract review, will the review focus on the top 20 codes—or will all codes be reviewed? 

Other areas of variation in managed care contracting include whether or not:

  • rates are locked to a fixed Medicare schedule
  • prices for specific modalities are locked 
  • how new codes are handled
  • the frequency with which you meet with insurance companies
  • the contractual clauses that are important
  • the managed care team will be included in payment reform discussions with insurance companies.

If MSOs in different states are being merged, remember that there are different state laws, regulatory bodies and related legal review and coordination involved. Geographic price differences and rate strategy will also come into play.  The MSO may have to be ready to deal with different Tax Identification Numbers (TINS).

If the new MSO resulting from a merger decides to invest in a practice management system that provides the ability to compare contracts with actual payments in a real-time live environment, a coordination or resolution of a myriad of day-to-day issues will be necessary. These include pre-certification, facility certfication, clinician credentialing and re-credentialing, resolution of denials issues (lack of pre-cert, credentials, late filing, non credentialed facility).

In order to have accountability, a decision must be made about where the authority will lie when it comes to determination of participating versus non-participating status with respect to managed care contracts. Who will have the authority for termination approvals?

Accounting, finance and taxes

There is wide variation in how different groups handle accounting and finance, so the expectations of the owners about how it is managed and handled may be very different. It is important to have a common set of expectations, as well as specific direction about how the accounting and finance tasks will be performed to ensure integrity in the financial statements. 

To begin with, a common accounting system and chart of accounts, budgets with consistent and tested methods and investment in systems beyond spreadsheet technology for greater accuracy and efficiency are critically important. The new entity needs adequate internal controls to help ensure integrity in the financial statements. 

After an initial assessment of the training and skills of existing accounting personnel, you must determine if trusted and known talent will move to a central location.  If they don’t want to move and are not retained through the merger, how will you manage the integration of the MSO and ensure the transfer of historical knowledge?

If you expect to change the practice’s banking relationships, will the new bank require personal guarantee versus an outright loan against the company?  It’s also important to find out if the banks will require difficult loan covenants, what banking fees they charge and what type of electronic banking will be available.

From a tax perspective, combining multistate back offices increases the complexity of filing in multiple states. How the group practices are legally structured will determine whether more or less tax returns will need to be filed and how far in advance planning needs to begin.  Further review of state sales tax, payroll taxes, real estate taxes, state and local taxes will also be needed.  Certain entities may file on an accrual basis versus cash basis.

How data driven the company is will determine the size and complexity of the analytics department and what mechanism will be used to gather and analyze data—Excel® spreadsheets or a robust analytical system? Will you have separate analysts and report writers?  Will the analysts be financial, operational or both? Will they report to accounting, IT or somewhere else?  

Depending on the size of the new MSO, an internal audit department may be warranted that not only checks internal controls and accounting but also performs operational improvement audits.

Human resources will have to understand, in detail, the various systems and costs associated with each MSO’s payroll system and performance management system.  Costs involved in creating employee handbooks and job descriptions, for instance, also will need to be examined. Employee benefits such as health and disability insurance, retirement plan issues and normalizing the differences in employee compensation also will demand decisions.

IT, operations implications

In the event of a merger, many systems will need to be retired and the hosted data migrated to the surviving (best-of-class) system. This is an expensive and time-consuming task, but one may achieve better controls and lower operating costs after the migration. Change management and project management skills are critical when merging or retiring systems.

Likewise, many processes will need to be re-developed as they are intrinsically linked to the information systems. Finally, we must deal with software and hardware considerations related to system hosting and/or co-location, licensing and network bandwidth requirements (see Table 1).

Office workflows are closely defined by the underlying information systems and their custom configurations within the sites. Therefore, changes in the systems above will cause a change in workflows, procedural and practice changes (see Table 2).

As you can see, information technology is a big consideration when merging business operations, especially because it has such a large impact on the physicians and how they operate.  One will need to be cognizant of changes to the HIS/RIS and PACS and possibly other systems, such as physician scheduling.

Marketing, internal and external

The marketing and communication functions are often not discussed up front, but are critical to the success of the new enterprise and will impact how the newly merged MSO interfaces with the outside clinical, operational and financial environments. Are the original members of the pre-merged entities hospital-based or do they own and operate imaging centers? Will the MSO provide marketing and sales services and support to these members and what will be the scope of their services? Will the marketing activities be performed on a local, regional or national level?

If marketing services are offered by the MSO, thorough market, customer-needs, competitive assessments by market area will have to be performed as well as an evaluation of the new MSO’s existing strengths and weaknesses. By performing a SWOT analysis, the new organization will be able to position itself and its resources to best meet profitability and timing objectives. The creation of marketing and communication plans will be needed to support this positioning and coordinated and executed at the appropriate local, regional and/or national levels.

The combined entity, in any form, will need to be rebranded in a professional manner under the MSO’s new name. Changes in brand and corporate identity must be communicated to all stakeholders. Messaging, tone and content will have to be created, agreed upon and included in all new collateral, brochures, websites, sales materials, forms, signage, logo, stationary, and other pertinent materials. 

In advance of the actual merge day, internal and external communications pieces would need to be created and distributed through various communications channels to all MSO staff, clients, hospitals, patients, referrers, managed care organizations, government agencies, vendors and others to keep them informed. In addition, ongoing internal messaging and scripts would need to be developed and disseminated for use by the MSO staff in dealing with their constituents (e.g. patients, referrers, managed care organizations). Clinical operations will require branded support to ease the office and clinical workflow and assist in transitioning to the new clinical and business reality to be experienced by referrers and patients.

Will the MSO be promoting its services to other potential clients outside the initial entity and member groups? If so, a separate marketing and communications effort will be necessary to accomplish that goal.

Legal, compliance activities

Last but not least, the legal and compliance area also will need to be addressed. It is imperative to answer the following questions:

  • How in-depth is the compliance plan and how much training is performed by the employees?
  • How often are compliance issues addressed and with whom? 
  • Who will the new MSO choose to use as their legal counsel? 
  • Will they have internal counsel? Registration of names and registering the business to do business in the various states within which it is performing services will require thought and the correct advisors. 
  • Will there be much difference in the HIPPA procedures within the new MSO?

When considering a merger of MSOs, analysis of the areas above should provide a good starting point. The decisions made in these areas will help ensure that the combined new MSO meshes together in a manner that maximizes productivity, efficiency and profitability over the short and long-term, while preserving or creating both the desired value and workplace culture.