Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Medical Billing Firms
Transcript
- Lucas: So there's this corner of healthcare that almost nobody thinks about, but it processes hundreds of billions of dollars a year. I'm talking about medical billing — the companies that sit between a hospital and an insurer and decide whether a claim gets paid or sent back for the third time. Luna: The back office of medicine. Most patients never see it, but it's where the money actually moves. Lucas: Exactly. And private equity has been quietly buying up these firms for the better part of a decade. We're not talking about mom and pop practices doing their own billing — those still exist — but the big independent billing companies, the ones that handle revenue-cycle management for entire hospital systems, they've become a favourite roll-up target. Luna: And why is that? What makes billing more attractive than, say, the dental or vet roll-ups we've covered? Lucas: Well, the business model is almost perfect from a private equity standpoint. You've got recurring revenue — every claim processed is a fee, and there's no seasonality. You've got high switching costs, because once a hospital outsources its billing, ripping that out and bringing it back in-house is a nightmare. And you've got a regulatory environment that keeps getting more complicated, which pushes more providers to outsource in the first place. Luna: So it's sticky, it's scalable, and it's growing. I can see the appeal. Lucas: And that's why we're doing this episode. We've covered a lot of roll-ups on this show — car washes, pharmacies, pest control — but medical billing is one of the most consequential, because it touches every dollar that flows through the healthcare system. And it's happening largely out of sight. Luna: Before we dive in, I want to take a quick beat. We keep this show free and ad-free because we think these conversations matter. If you've gotten value from our episodes, and you want to make sure we can keep doing this without interrupting the flow with ads, you can support us at buy me a coffee dot com slash fexingo. No pressure, just a way to keep the lights on. Lucas: Yeah, and we genuinely appreciate that. We'd rather spend these minutes on the topic than on a sponsor read. So, back to billing. Lucas: Let's anchor this with a number. The medical billing market is estimated to be worth somewhere around eighteen billion dollars globally, and it's growing at a compound annual growth rate of roughly ten percent. That's faster than the overall economy, and it's being driven by a few things: an aging population, more complex claims, and the shift to value-based care, which requires even more tracking. Luna: Ten percent growth — that's a pretty solid tailwind. And private equity has noticed. Lucas: Oh, they've noticed. One of the biggest players is R1 RCM, which was taken private by TowerBrook Capital Partners and Clayton, Dubilier & Rice in 2023 in a deal valued at nearly nine billion dollars. That's a huge bet on a company that most people have never heard of. Luna: R1 RCM — they handle revenue cycle management for hospitals, right? Lucas: Correct. They process claims, manage denials, handle patient billing — the whole cycle. And they're not alone. There's also Waystar, which went public in 2024, and you've got companies like Experian Health and Cerner, though Cerner is now part of Oracle. But the interesting thing isn't just the size of these companies — it's the pattern of how they're being built. Luna: The roll-up pattern. So you're saying these big firms are themselves the product of dozens of smaller acquisitions? Lucas: Exactly. Take a firm like Change Healthcare — which was acquired by UnitedHealth Group in 2022 for around thirteen billion dollars. Before that, Change was the result of a merger between McKesson's technology division and a company called Emdeon, which itself had been assembled through a series of acquisitions. So you have this layering of deals that creates a giant. Luna: And each layer adds more market power. But what does that mean for the hospitals and doctors who use these services? Lucas: That's the key question. On the one hand, consolidation can bring efficiency — economies of scale, better technology, more negotiating power with insurers. A small billing shop might not have the software to fight a denial from a big insurance company, but a large RCM firm does. On the other hand, when you have fewer, bigger players, there's a risk of higher prices and less transparency. Luna: And also a single point of failure, like we saw with the Change Healthcare cyberattack in early 2024. That knocked out claims processing for weeks across the country. Lucas: Right, that was a wake-up call. A single company processing billions of claims, and one breach — it froze cash flow for thousands of providers. So the concentration risk is real. Luna: So how does a private equity firm actually execute one of these roll-ups? Walk me through the playbook. Lucas: Sure. The typical approach is to start with a platform — a mid-sized billing company with a solid client base and decent technology. Then they use that platform to acquire smaller competitors or adjacent services, like coding, denial management, or patient financing. Each acquisition adds scale, which lets them negotiate better rates with clearinghouses and insurers, and also lets them invest in AI and automation. Luna: And automation is a big angle. I've seen estimates that AI can cut the cost of claims processing by twenty to thirty percent. Lucas: That's the pitch. And it's not just about cutting costs — it's about improving accuracy. Medical billing is notoriously error-prone; studies have shown that up to one in five claims is denied initially. So a company that can use AI to reduce denials is directly improving a hospital's cash flow. That's a value proposition that resonates. Luna: But is that value actually passed on to the patient? Or is it just captured by the PE firm and the hospital's bottom line? Lucas: Honest answer: it's mixed. Some savings do flow to providers, which can help keep prices down. But there's also evidence that consolidation has led to higher fees for hospitals — sometimes they pay more for billing than they would if they kept it in-house. It's a trade-off. Luna: That's a good point. And it's not just hospitals — physician groups are also being targeted. I've seen reports of PE firms rolling up dermatology and cardiology billing specifically. Lucas: Yes, specialty billing is another hot area. Take a field like anesthesia — there are a few large companies that handle billing for thousands of anesthesiologists across the country. They have to deal with different payer contracts, different codes — it's a niche that benefits from scale. Luna: And what about the smaller billing firms? Are they getting squeezed out? Lucas: Some are — they're either acquired or they lose clients to bigger players. But there's also a counter-trend: some hospitals are actually bringing billing back in-house, especially after the Change Healthcare breach showed how vulnerable they were to a third-party dependency. So it's not a one-way street. Luna: Interesting. So what should we watch for in the next few years? Lucas: I'd keep an eye on three things. First, the regulatory landscape — if the FTC starts scrutinizing healthcare roll-ups more aggressively, that could slow down deals. Second, the adoption of AI — not just for claims processing, but for prior authorization and even coding. And third, the exit environment — a lot of these pe backed companies were bought with the expectation of an IPO down the road. If the public markets stay receptive, we could see more Waystar-style listings. Luna: And if they don't, we might see more secondary buyouts — PE selling to PE. Lucas: Exactly. That's been happening a lot in this space. R1 RCM itself was a secondary buyout — it was previously owned by a different PE group before TowerBrook and CD&R stepped in. Luna: So the cycle continues. It's a bit like musical chairs, but the music hasn't stopped yet. Lucas: And for now, the players are happy to keep buying. The underlying drivers — an aging population, complex billing codes, regulatory demands — aren't going away. That's what makes this such a durable play. Luna: Durable, but not without risks. The concentration risk, the security risk, and the regulatory risk are all real. Lucas: Right. And I think that's the takeaway. Private equity is buying up medical billing because it's a great business — but the bigger question is whether we're comfortable with a few private companies controlling the financial plumbing of our healthcare system. Luna: That's a question worth asking. And maybe a topic for another episode. Lucas: Agreed. For now, that's a wrap on this one. Thanks for listening.