Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Medical Billing Companies
Transcript
- Lucas: Luna, I want to talk about something that touches almost every American who's been to a doctor but that most people never think about — medical billing. Luna: You mean the dreaded Explanation of Benefits, the codes, the surprise bills? That world? Lucas: Exactly that world. But specifically, the companies that process those claims for hospitals and health systems. The revenue cycle management industry, to use the formal term. And private equity has been quietly buying up those companies for years, but the deals are getting bigger and more strategic. Luna: I remember when Athenahealth went private in 2022 — that was a big one. But I think there's an even bigger fish in this pond. Lucas: You're thinking of R1 RCM. In 2023, New Mountain Capital and TowerBrook Capital took R1 private in a deal valued at roughly $8.2 billion. That's not a small bet on a back-office function. Luna: Eight point two billion. For a company that helps hospitals bill insurance. How does that math work? Lucas: Let me walk through the business model. Medical billing companies typically charge hospitals a percentage of the reimbursement they secure — often around 2 to 5 percent of net collections. For a large hospital system bringing in a billion dollars in revenue, that's twenty to fifty million in fees. And if you can improve the collection rate by even a few percentage points, the value is enormous. Luna: So PE sees a steady, recurring revenue stream that scales with healthcare inflation. Lucas: Right. And the industry is fragmented — there are hundreds of regional billing companies. The largest players have maybe 10 percent market share. That's the classic roll-up thesis: consolidate, standardize, add technology, and negotiate better contracts with insurers. It's a textbook private equity play. Luna: But the technology part is interesting. Billing is notoriously manual. A lot of claims still get submitted via paper or fax. Lucas: That's exactly where PE sees an opportunity. By rolling up smaller firms and investing in automation — ai driven coding, automated denial management — you can cut labor costs significantly. One analysis I saw suggested that technology can reduce the cost to collect by 30 to 40 percent. That's huge margin expansion. Luna: And the hospitals are happy to outsource it because they don't want to deal with the complexity. They want to focus on patient care. Lucas: Exactly. So you have this virtuous cycle from the PE perspective: buy a platform, bolt on tuck-in acquisitions, deploy tech, improve margins, and then sell to a larger financial buyer or take it public again. R1 itself had been public before, but the founders felt they could execute better away from quarterly earnings pressure. Luna: But here's the question I have: when PE owns the billing infrastructure, who gets squeezed? Is it the hospital, the insurer, or the patient? Lucas: That's the right question. In theory, the billing company is aligned with the hospital — they both want to maximize reimbursement. But if the billing company uses aggressive tactics to get paid, that can drive up costs for insurers, which then get passed to patients as higher premiums. There's also the risk that the billing company might prioritize high-reimbursement procedures over others, subtly influencing what gets coded. Luna: And there's the transparency angle. If a pe owned billing company is more aggressive in pursuing out-of-network payments, that could lead to more surprise bills. Lucas: It's a real concern. And regulators are starting to pay attention. The No Surprises Act of 2022 already changed some of the dynamics, but PE firms are adapting. They're investing in 'compliance automation' — essentially software that ensures billing practices stay within regulatory lines. But the underlying incentive to maximize revenue hasn't changed. Luna: Let me ask about the macro trend. How much of U.S. healthcare spending goes through these revenue cycle management companies? Lucas: Rough estimates suggest that about 15 to 20 percent of the $4.5 trillion in annual U.S. healthcare spending touches some form of outsourced RCM. That's a massive addressable market. And PE has been increasing its share rapidly. Over the past five years, we've seen over a hundred deals in the space, with total enterprise value north of $30 billion. Luna: So it's not just R1 and Athenahealth. There's a whole ecosystem of smaller players being rolled up. Lucas: Absolutely. Names like Waystar, which was taken private by EQT and Canada Pension Plan Investment Board in 2019 for about $2.7 billion, and then re-emerged as a public company in 2024. Or ZirMed, which was acquired by Bain Capital in 2018. The playbook is consistent: buy a platform, scale it, and exit. Luna: One thing I find fascinating is that these companies are essentially toll collectors on the healthcare system. Every claim that gets processed, they take a small fee. And with healthcare spending growing faster than GDP, that toll just gets bigger every year. Lucas: That's the beauty of the model from an investment standpoint. It's not dependent on volume of procedures — it's tied to the total dollar value of claims. Even if utilization drops, reimbursement rates tend to rise. It's a very defensive cash flow stream. Luna: Speaking of cash flow, I've noticed that many of these billing companies have high EBITDA margins — 30 percent plus — and they generate significant free cash flow. That's perfect for PE's leveraged buyout model. Lucas: Exactly. You can use the company's own cash flow to service the debt used to acquire it. And because the revenue is sticky — hospitals rarely switch billing vendors — the risk of default is low. It's a textbook LBO candidate. Luna: But there's a potential disruptor on the horizon: AI. If AI can automate coding and claims processing more cheaply, does that threaten the margins of these companies? Lucas: It's a double-edged sword. On one hand, AI can reduce the need for human coders, which is a cost savings that PE owners can capture. On the other hand, if a startup develops a pure software solution that hospitals can use without outsourcing, it could disintermediate the billing companies. But so far, the complexity of healthcare billing — with thousands of different payer contracts, each with unique rules — has made it hard for pure software to replace the full-service model. Luna: So PE is betting that the combination of technology and scale will be a moat, not a vulnerability. Lucas: That's the thesis. And it's not crazy. The biggest players have massive data sets on claims patterns, denial rates, and reimbursement benchmarks. That data is incredibly valuable for training AI models. A small startup can't replicate that overnight. Luna: Let's zoom in on the R1 RCM deal as a case study. What were the specific financial terms? Lucas: In July 2023, New Mountain and TowerBrook offered $14.50 per share in cash, which represented a 29 percent premium to the prior closing price. The deal was structured as a take-private, meaning R1 would delist from NASDAQ. The total enterprise value was about $8.2 billion, including debt. That valued R1 at roughly 16 times forward EBITDA, which is a bit high for a billing company, but the acquirers argued that the margin improvement story justified it. Luna: And how has the company performed since? Lucas: Public information is limited since it's private, but according to some debt rating reports, R1's revenue has grown in the mid-single digits, and EBITDA margins have expanded from about 25 percent at acquisition to over 30 percent. The cost savings from technology integration are starting to show up. Luna: That's exactly the kind of improvement that could set up a future IPO or a sale to a larger financial buyer. Lucas: That's the exit plan. And there's already talk that R1 could come back to public markets in 2028 or 2029, possibly at a higher multiple if the margin story holds. Luna: You know, this conversation reminds me how much of the economy is invisible — the plumbing that makes other industries work. Most people don't know that private equity owns the pipes that process their medical bills. Lucas: And that's exactly why we cover this show. The more you understand the ownership structure behind the services you use, the better you can anticipate the incentives at play. Luna: And on that note, I want to take a brief moment to say that if you find these deep dives useful — if they've helped you think about your own business or investments — a few listeners have started chipping in monthly at buy me a coffee dot com slash fexingo, and that literally helps us keep the show ad-free and independent. Lucas: Yeah, it's a small thing that makes a big difference. We don't run ads, we don't have sponsors. It's just listener support. And honestly, it's humbling that people find this valuable enough to contribute. Luna: So if you've ever thought about it, that's where to go. And if not, no pressure — the show stays free regardless. Now, back to the world of medical billing: Lucas, do you think the current wave of consolidation will eventually lead to antitrust scrutiny? Lucas: That's a great question. The Federal Trade Commission has been more active in healthcare lately, but they've focused more on hospital mergers and pharmacy benefit managers. Billing companies have flown under the radar. However, if the top five players control more than 50 percent of the market, which could happen in another five years, I think regulators will take notice. Luna: And there's a public policy angle: if billing companies are owned by PE firms with a short-term horizon, does that lead to more aggressive billing practices that harm patients? Lucas: It's a legitimate concern. Studies have shown that for-profit billing companies are more likely to use litigation or credit reporting to collect unpaid bills than nonprofit hospitals. If PE firms push for higher revenue, that could exacerbate the problem. But the data is still emerging. Luna: So it's a space to watch — both as an investment thesis and as a policy issue. Lucas: Absolutely. And I think the next few years will determine whether medical billing becomes the next big PE battleground or a cautionary tale. But for now, the deals keep coming. Luna: Lucas, thanks for unpacking this. I'll never look at an Explanation of Benefits the same way again. Lucas: Happy to make the invisible visible. That's what we do here.