Contracted rates are the specific reimbursement amounts you have negotiated and formally agreed upon with insurance payers. Think of it not as your official “list price” for a service, but as the actual, binding price a specific insurance company will pay you for that CPT code. These rates are the foundation of your practice’s true revenue potential.
Why This Matters to Healthcare Providers
Your payer contracts and the rates within them are one of the most important assets a buyer evaluates. Favorable, up-to-date contracted rates demonstrate strong revenue health and can significantly increase your practice’s valuation, while outdated or low rates can be a major red flag during due diligence.
Example in Healthcare M&A
Scenario: Two independent orthopedic groups in the same city are considering a sale. Group A has actively managed its payer contracts, renegotiating its rates with its top three commercial payers within the last two two years. Group B has allowed its contracts to auto-renew for the past five years without review.
Application: A private equity firm performs due diligence on both. They discover Group A’s contracted rate for a knee arthroscopy is 15% higher than Group B’s rate with the same insurer. This difference, multiplied across hundreds of procedures per year, translates into a substantial gap in historical and projected EBITDA.
Outcome: Group A receives a valuation multiple that is notably higher than Group B’s. The buyer sees Group A as a more profitable and well-managed platform, while viewing Group B as a practice that will require significant post-acquisition effort to fix its revenue foundation.
Related Terms
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Frequently Asked Questions
What are contracted rates in healthcare?
Contracted rates are the specific reimbursement amounts that a healthcare provider has negotiated and formally agreed upon with insurance payers. They represent the actual, binding prices an insurance company will pay for a service, rather than the provider’s list price.
Why are contracted rates important for healthcare providers?
Contracted rates are crucial because they form the foundation of a practice’s true revenue potential. Favorable and up-to-date contracted rates demonstrate strong revenue health and can significantly increase a practice’s valuation during a sale or acquisition.
How do contracted rates affect healthcare mergers and acquisitions (M&A)?
In healthcare M&A, practices with higher and well-managed contracted rates are viewed as more profitable and better managed, resulting in higher valuation multiples. Practices with outdated or low contracted rates may be seen as needing significant post-acquisition effort to improve revenue.
Can you give an example illustrating the impact of contracted rates on business valuation?
Yes. For example, in a scenario where two orthopedic groups are up for sale, the group that renegotiated and maintained higher contracted rates with insurers received a notably higher valuation from buyers compared to the group that allowed contracts to auto-renew without review. This difference translates into substantial differences in historical and projected EBITDA.
What are some related terms to understand alongside contracted rates?
Some related terms include Payer Mix Analysis, Payor Contract Optimization, and EBITDA, which are essential concepts when evaluating healthcare revenue and practice valuation.