In-network revenue is the income your practice generates from services provided to patients covered by insurance plans with which you have a pre-negotiated contract. Conversely, out-of-network revenue comes from patients whose insurance you do not have a contract with.
Think of it as the difference between wholesale and retail. With in-network contracts, you sell your services “wholesale” to the insurer; you accept a lower, predictable rate in exchange for a steady volume of patients and more reliable payment. Out-of-network is a “retail” approach; you can set higher list prices, but patient volume is less certain, and collecting payment is often more challenging and expensive.
Why This Matters to Healthcare Providers
When a potential buyer evaluates your practice, they are not just looking at your total revenue; they are scrutinizing its quality and predictability. A high percentage of stable, in-network revenue signals a healthy, sustainable business that can be scaled. A heavy reliance on out-of-network revenue is a red flag for buyers. They see it as volatile and at risk, especially with regulations like the No Surprises Act severely limiting out-of-network billing for services at in-network facilities. Your revenue mix directly influences the valuation multiple a buyer is willing to offer.
Example in Healthcare M&A
Scenario: A private equity firm is evaluating two orthopedic practices for acquisition. Practice A earns 95% of its revenue from in-network contracts with all major regional payers. Practice B earns only 50% from in-network contracts, relying on its “star surgeon’s” reputation to attract out-of-network patients who are willing to pay a premium.
Application: The buyer views Practice A’s revenue as highly durable and predictable. It can be easily integrated into their platform, and its cash flow is reliable. They see Practice B’s revenue as high-risk. It depends on a single surgeon’s brand, faces collection challenges, and is exposed to changing patient price sensitivity and regulations.
Outcome: The PE firm offers a premium valuation multiple for Practice A due to its stable financial foundation. For Practice B, they offer a significantly lower multiple and may even require a large portion of the payment be tied to a future performance earnout to mitigate their risk. The physicians at Practice A receive a higher cash payment at closing.
Related Terms
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Frequently Asked Questions
What is the difference between in-network and out-of-network revenue for healthcare providers?
In-network revenue comes from services provided to patients covered by insurance plans your practice has a pre-negotiated contract with, typically at lower, predictable rates. Out-of-network revenue comes from patients whose insurance you don’t have contracts with, allowing higher prices but with less predictable patient volume and more challenging payment collection.
Why is the mix of in-network vs. out-of-network revenue important for healthcare practice valuation?
Buyers evaluate not just total revenue but its stability and predictability. A high percentage of in-network revenue signals a stable, scalable business with reliable cash flow, thus attracting higher valuation multiples. Heavy reliance on out-of-network revenue is seen as risky and volatile, reducing the valuation multiple and increasing deal conditions like earnouts.
How do in-network contracts affect a healthcare practice’s payment and patient volume?
In-network contracts offer lower, pre-negotiated rates (wholesale pricing) in exchange for a steady volume of patients and more reliable payment. This helps ensure consistent cash flow and financial stability for the practice.
What impact did the No Surprises Act have on out-of-network billing?
The No Surprises Act severely limits out-of-network billing for services provided at in-network facilities, increasing the risk and volatility of relying heavily on out-of-network revenue for healthcare practices.
Can you provide an example illustrating the valuation difference between two practices with different in-network revenue percentages?
Yes. For example, a private equity firm valued Practice A, earning 95% in-network revenue, higher because its revenue was predictable and scalable. Practice B, with only 50% in-network revenue relying heavily on a star surgeon and out-of-network payments, was seen as high-risk and offered a lower valuation multiple with potential earnouts to reduce risk.