Your practice’s denial rate is the percentage of claims rejected by payers upon first submission. Think of it as a vital sign for your financial operations. A rate below 5% is considered healthy and indicates efficient billing and documentation. A rate above 10% suggests underlying operational issues that are actively costing you money and reducing your practice’s value.
Why This Matters to Healthcare Providers
A high denial rate is more than an administrative headache; it is a direct leak in your revenue bucket. Buyers in an M&A transaction see a high denial rate as a significant red flag. It tells them your earnings are inconsistent and that your operational costs are inflated from chasing down payments you should have received correctly the first time. Fixing this is expensive, so they will lower their valuation offer to account for the work they will have to do. Conversely, a low denial rate demonstrates operational excellence and makes your practice a much more attractive and valuable asset.
Example in Healthcare M&A
Scenario: A private equity group is evaluating two dermatology practices for a potential acquisition. Practice A has a 12% denial rate, while Practice B has a clean 4% denial rate. Both clinics generate similar annual revenue.
Application: During financial due diligence, the buyer performs a Quality of Earnings (QoE) analysis. For Practice A, the analysis flags the high denial rate and discounts a portion of its accounts receivable as high-risk. This also increases the projected operating costs needed to manage appeals, which lowers the practice’s Adjusted EBITDA.
Outcome: Practice B, with its low denial rate and predictable cash flow, receives a valuation at a premium multiple of its EBITDA. Practice A’s valuation is significantly lower. The buyer knows they will not have to invest heavily in fixing Practice B’s billing processes, making it a more profitable and stable platform for growth.
Related Terms
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Frequently Asked Questions
What is a denial rate in healthcare billing?
A denial rate is the percentage of claims rejected by payers upon first submission. It acts as a vital sign for your financial operations.
Why is it important for healthcare providers to maintain a low denial rate?
Maintaining a low denial rate is important because a high denial rate represents a direct leak in revenue, inflates operational costs, and lowers the valuation buyers offer in M&A transactions.
What denial rate percentage is considered healthy and what does a high rate indicate?
A denial rate below 5% is considered healthy and indicates efficient billing and documentation. A rate above 10% suggests operational issues that cost money and reduce practice value.
How does a high denial rate affect a healthcare practice’s valuation during M&A?
A high denial rate causes quality of earnings analysis to flag accounts receivable as high-risk, increases projected operating costs for managing appeals, lowers adjusted EBITDA, and results in a lower valuation offer.
Can you give an example of how denial rates impact valuation in healthcare M&A?
In an example, two dermatology practices have similar revenues but different denial rates: Practice A at 12% and Practice B at 4%. Buyers value Practice B higher due to its low denial rate and predictable cash flow, while Practice A’s valuation is lower due to high denial rate risks and costs.