Bon Secours Mercy Health plans to sell a majority stake of its revenue-cycle management subsidiary Ensemble Health Partners to private equity firm Golden Gate Capital, the organizations announced Thursday.
The Cincinnati-based Catholic health system aims to sell 51% of the equity in Ensemble netting $1.2 billion in cash proceeds, which will be reinvested in Bon Secours Mercy when the deal is completed following the standard regulatory approvals.
“Our bread and butter is not to be a revenue cycle management company, so we thought maybe it was time to spin it out as a private company,” said John Starcher, Bon Secours Mercy Health president and CEO, adding that Golden Gate has the capital and expertise to continue to build out Ensemble.
At that time, Mercy was coming off a failed revenue cycle outsourcing venture and an attempt to bring it in-house as its cost to collect, point of service collections and other metrics were trending negatively, resulting in a $135 million shortfall in expected cash collections, Starcher said.
Ensemble has helped Mercy Bon Secours accrue about $400 million to its bottom line over a three-year period, he said.
“Our terrible numbers had righted in less than one year,” Starcher said.
More providers are outsourcing their scheduling, billing and collections services as patients shoulder more of their healthcare costs and bad debt levels grow. Hospitals and health systems are turning to specialists that claim to deliver on patient satisfaction goals, which are poised to have a greater impact on reimbursement rates. Outsourcing also allows providers to free up capital and mitigate compliance risks.
“There is a tremendous amount of pricing and rate pressure on health systems,” said Judson Ivy, founder and CEO of Ensemble, adding that consumerism is another driving force behind outsourcing revenue cycle management as consumers seek a better experience. “There is also a talent drain on the industry.”
Meanwhile, alternative revenue sources are becoming a bigger part of hospital and health systems’ strategies. Ninety percent of hospital and health system executives in a recent survey indicated that new revenue streams were an urgent priority and expected to yield a return in the next three years, a study from Boston-based Partners HealthCare and healthcare private equity firm Fitzroy Health found.
Pressure on reimbursement rates from government and commercial payers have driven investment in revenue cycle subsidiaries, commercial real estate ventures, consulting spin offs, supply chain companies and other endeavors.
Bon Secours Mercy Health also has an IT subsidiary that specializes in Epic installations and a call center venture that manages the patient journey, among others, Starcher said.
“We also have expertise as we look across the continuum in marketing, supply chain and HR, and we think this is a burgeoning opportunity,” he said.
But you can’t monetize a mediocre service, Starcher said, offering a word of caution. A subsidiary can’t be so tethered to a health system that it can’t be priced competitively with other standalone companies, he said.
“While many health systems talk about this a lot, it doesn’t mean that it has been done successfully,” Starcher said.
Mercy Health and Bon Secours Health System completed their merger in September 2018, expanding its combined network to 43 hospitals, more than $8 billion in net operating revenue and 57,000 employees.
Over a four-month period following the merger, the health system reported $58.9 million in recurring operating income, which excludes restructuring and integration expenses, on operating revenue of $2.7 billion. With the $95.5 million of one-time costs, its operating income fell to negative $36.6 million. Those losses included an impairment charge on the now-defunct HealthSpan Partners’ investment in Summa and merger-related costs.
That compared to $72.9 million in recurring operating income on revenue of $2.69 billion over the same period the year prior. Operating income fell slightly to $68.2 million with $4.7 million of one-time expenses.