RCM Acquisition Metrics

Mergers and acquisitions activity in the revenue cycle management (RCM) space remains robust, with private equity firms and strategic buyers constantly evaluating potential targets. As someone who regularly works with PE groups and RCM companies pursuing growth through acquisition, I’m frequently asked about the most important RCM acquisition metrics to consider during due diligence.

Traditional RCM Acquisition Metrics Fall Short

Recently, I had a conversation with a large strategic buyer—a nine-figure revenue company backed by multiple rounds of private equity—about their approach to evaluating potential acquisitions. When I asked which RCM acquisition metrics they prioritize, they listed several traditional indicators:

• Accounts receivable days
• AR aging distribution (percentage over 60/90/120 days)
• First pass claim rate
• Net collection rate

This approach is typical across the industry, but it presents several significant challenges that limit its effectiveness for acquisition evaluation.

The Data Challenge in RCM Acquisitions

The first major issue with traditional RCM acquisition metrics is data access and reliability. Most acquisition targets:

1. Lack analytics capabilities: Smaller RCM companies (even those with $5M-$15M in revenue) rarely have the technical infrastructure or staff to extract and analyze data effectively.
2. Have misaligned incentives: Targets may be selective about what information they provide, particularly when they know certain metrics could impact valuation.
3. Use inconsistent calculation methods: Even seemingly standardized metrics like AR days can be calculated differently (by service date vs. submission date, most recent vs. initial submission).

According to Healthcare M&A Today, these data limitations lead to significant valuation challenges, with up to 30% of RCM acquisitions experiencing post-close disputes related to performance metrics.

Why Traditional Metrics Are Problematic

Beyond the data challenges, the traditional RCM acquisition metrics have inherent limitations:

1. Accounts Receivable Aging

While widely used, AR metrics are easily manipulated. The simplest way to improve AR aging is aggressive write-offs—creating an illusion of efficiency while potentially masking collection problems.

2. Net Collection Rate

This metric suffers from calculation inconsistencies. Most PM/EHR systems cannot accurately calculate this rate because they lack comprehensive payer rules and contracted rates. Without these elements, NCR calculations become what one Healthcare Financial Management Association contributor calls “fictional math.”

3. First Pass Rate

With no industry standard definition, first pass rates vary widely based on whether they measure clearinghouse rejections or payer denials. More importantly, this metric lacks actionability during acquisition evaluation.

These limitations create significant blindspots for acquirers trying to assess operational quality through conventional RCM acquisition metrics.

The #1 RCM Acquisition Metric

After years of experience evaluating RCM companies—including building analytics platforms, developing benchmarking systems, and participating in numerous due diligence processes—I’ve identified one metric that stands above all others for acquisition evaluation:

Customer retention rate.

Specifically, gross customer retention rate (not net retention, which can mask underlying issues) provides the most reliable proxy for operational quality in an RCM company.

Why Customer Retention Trumps All Other Metrics

Customer retention functions as a comprehensive indicator of operational excellence for several reasons:

1. It’s difficult to manipulate: Unlike AR metrics or collection rates that can be temporarily improved through accounting adjustments, retention reflects real client satisfaction over time.
2. It aggregates all operational factors: Retention naturally incorporates the quality of people, processes, technology, and client service—elements that are difficult to assess individually during limited due diligence.
3. It predicts future performance: Strong retention directly correlates with stable future revenue, making it the most forward-looking of all RCM acquisition metrics.

For insights on maintaining strong client relationships post-acquisition, see our article on medical billing dashboards that support client retention.

Implementing a Retention-Focused Due Diligence Approach

When evaluating RCM acquisition targets using customer retention as your primary metric, consider these approaches:

1. Request multi-year retention data: Analyze at least three years of client retention history to identify patterns and ensure sustainability.
2. Segment by client size: Examine retention rates across different client revenue tiers to ensure stability isn’t dependent on just a few large clients.
3. Investigate churn reasons: For clients who left, identify the causes to determine if issues were systematic or isolated.
4. Verify expansion revenue: While focusing on gross retention, also examine expansion revenue within existing clients as a secondary indicator of service quality.

For effective post-acquisition integration, our guidance on RCM analytics provides valuable insights on maintaining strong performance metrics.

Conclusion

While traditional RCM acquisition metrics like AR days and collection rates may seem like objective measures of operational quality, they often create more confusion than clarity due to data limitations and calculation inconsistencies.

Customer retention rate offers a simpler, more reliable indicator of an RCM company’s true operational quality and future potential. By focusing on this metric during due diligence, acquirers can make more informed decisions that lead to successful transactions and post-acquisition outcomes.

For RCM companies seeking acquisition, this insight presents a clear strategic priority: rather than temporarily improving AR metrics before going to market, focus on building sustainable client relationships that demonstrate true operational excellence.