Keep Your Valuation High By Keeping Your Risk Factors Low, Key #2: Referral Payer Risk
Paul explains how acquirers assess referral and payer risk, from new patient trends and payer concentration to contract assignability, and three steps PT business owners can take now to lower it.
Full transcript
Generated from the episode audio and lightly edited for readability.
Good morning and welcome to another episode of Paul Martin's guide to finishing well. Today we are going to focus once again on how we are able to drive your risks lower which will increase and improve your valuation. And today we're going to focus in on referral and payer risks and how acquirers view that and how you can make changes in order to drive your valuation higher. Let's jump in. So again as it pertains to valuation in this industry is driven by your IPA earnings before interest taxes depreciation and amateurization.
It's the cash flow of your business times a multiple equals the valuation. And so what drives that multiple up or down? What drives it up or down is clearly risk. And today again, we're going to hone in on that referral payer risk. So what are the risk factors that we have inherent in a rehabilitation business? Well, the first and most important comes down to your earnings risk and all the other five areas of risk impact your earnings. The second risk factor, and the one we're going to focus on today, is your referral and your payer risk.
We're going to talk a lot about that today. In addition, there's people risk, there is market risk, and there is compliance risk. And again, keep in mind, all of these risk factors impact that earnings, and that's what a company's buying. So again, how does risk impact valuation? It comes down to this. The higher the risk inherent in your company, the lower the multiple, the lower valuation, the less you're going to get for your company. The lower the risk, the higher the multiple. This is why when we get calls from folks out there in the industry and they say, "What are the multiples today?" Well, it really depends on your risk and your risk factor analysis.
All right. Now, why is it so important that we lower our earnings risk? Well, acquirers are using what we call OPM, which is other people's money. They are borrowing, they are utilizing capital from a private equity group who is borrowing from a bank. That's other people's money. They have to pay back these sources and they're going to pay that back with the earnings they acquire from your business. The cash flow, the Ebbitad that they acquire from your business. So again, earnings pays those other people who the acquirers are borrowing from.
That's what pays them back. All right, so let's jump in today and talk a little bit about referral risks and why this is really a huge risk factor as it relates to the rehabilitation industry and to your business. Well, what are the things that acquirers look at when they look at your referral risks? Well, they look at your yearover-year new patient trends. Just the numbers. Are your trends trending upward or are they trending downward as it relates to your referrals and your number of new patients?
Is your referral base a diverse meaning your referrals are coming from many physicians or is it narrow? Is it coming from just a few physicians? Real key. And do you have the statistics to prove out where your referrals are truly coming from? Do you have a formal marketing plan in place? How do you contact referral sources? What is your methodology of contacting your referral sources? And finally, how do you, which is you and your company, how do you actually connect with the community, which as we know, a large number of your re your referrals, especially with direct access, are coming from your community and community referral sources.
How do you connect with your community? Finally, what is your social media outreach program? This is so important in today's industry and something that acquirers are really focusing and honing in on. What's your social media outreach plan? How does it connect back to driving your referrals and new patients? And then finally, the results for all of these efforts that you would be making and all these areas of driving referrals. How do we show our results? All right. Now let's talk a little bit about payer. We kind of look at referral from physicians and payers in the same category simply because you are essentially getting patients from specific payer categories.
So first just like with your referral base is it a diverse or a narrow payer base? Do we have any one specific payer class where that has more than 25% of your overall referrals coming from that? Second is a do you have any referrals that are a high number of your referral base that is coming from governmentont controlled payers Medicare, Medicaid, typically from the military. Is it governmentont controlled? Because those can be changed with a snap. And finally, are the contracts that you have with your payers, are they assignable to a new acquirer?
That's something that we really have to know and understand going into a transaction in order to determine how we present a business into the market. So, we talked today about referral payer risk and how by reducing that risk, we improve our value. What are the three things that you should do today or make sure that you're able to do prior to taking your business into the market? First and foremost, you need to have that referral slpayer story. For example, we realized that Blue Cross was one of our higher payers.
And so we honed in on these 10 physicians and look at the record of what we have in terms of numbers of new patients from those 10 phys physicians over time. What is your story going back a number of years and moving forward? Do you have a written marketing plan? Because if you don't, that plan should be done annually and updated annually. We're not talking about a book. We're talking about a couple page marketing plan. What are the sources that you're using? How are you contacting those sources?
And what do you anticipate getting from making those contacts? And then finally, this is key to track starting today really and truly where you are getting your referrals from, where they're coming from. For example, if all you do is track physicians and the physician scripts, yet a patient comes in with a physician script, and this is from Dr. Jones, but it was one of your former patients that told me to come here. Dr. Jones just gave me this script. You would want to be able to track very succinctly where your referrals are coming from.
That referral didn't come from Dr. Jones. That came from one of your former patients or I went to one of your seminars or I saw something on social media. So to really be able to track really where your referrals are coming and not this can't be verbal. This needs to be tracked and in charts and has to be shown that has been a question that has been asked at the front desk that is something that you should start today if you are not doing it. All right.
So if today you are looking at your referral and your payer sources and you are seeking to have a better understanding of how that could impact and drive your value up or drive your value down and you're looking for some strategies as it relates to your referrals and payers and drive your value up. Click below. Let's talk. Thanks. Have a great day.
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