December 17, 2012
MTSO Cash Flow: Strategies for Maintaining Profitability
By Elizabeth S. Roop
For The Record
Vol. 24 No. 23 P. 18
Experts lend insight into how medical transcription organizations can stay in the black.
For medical transcription service organizations (MTSOs), cash is much more than king. And for many small- and midsize MTSOs, strong cash flow is all about survival.
“If there is no cash flow, there is no business,” says Michael Clark, a transcription business expert and former chief operating officer of several MTSOs, including M*Modal (formerly MedQuist) and eScribe. “When the [account receivables] pattern breaks or is delayed, you have to act quickly. That’s a challenge for MTSOs because they’re owner-operators, not bill collectors.”
Anything that negatively affects cash flow can be an MTSO’s death knell. That is why learning to recognize the threats and how to mitigate their impact goes beyond sound business practice; it’s survival training.
Know the Enemy
The enemies of strong cash flow are many and can often be traced back to the point of client engagement. Failure to ascertain a client’s real payment terms—and therefore harboring unrealistic expectations of just how quickly an invoice will be turned around—is a common problem.
“It’s the nature of healthcare. [Hospitals] have to carefully manage cash flow in order to make sure they can cover their obligations. Revenues are constantly being squeezed, so one way to manage that is to pay vendors slowly,” says Philip Cohen, founder of healthcare factoring firm PRN Funding, who notes that it’s not unusual to see net 90-day payment terms. “Any well-run business can manage a slow-pay situation as long as they understand it going into the relationship. Where MTSOs get themselves into trouble is when they expect to get paid in 30 days and instead get paid in 90.”
Cohen, who worked for one of the nation’s largest MTSOs before founding PRN Funding, recommends running credit reports on any prospective client before formalizing an engagement. It’s the only way to get a true picture of a client’s payment history.
“In effect, you’re lending them $10,000 a month. You’re giving them a service. Have you established that they’re capable of paying or that they pay their vendors in a timely manner? How long do they generally take to pay so you can get your pricing right? These are really good Business 102-type questions that the average small- and midsize MTSO doesn’t ask but should be,” he says.
Cohen also suggests reaching out to the client’s accounts payable (A/P) department to determine what normal payment terms are for the organization. More often than not, those terms will be much longer than what is agreed to in the contract.
It’s also important to know who is responsible for approving invoices and what accompanying documentation is required. This eliminates delays caused when an invoice languishes for days or weeks on the wrong individual’s desk or hangs in limbo while supporting documentation is requested and processed.
“Think of getting your bills paid as a two-step process. There is a process for getting it into the A/P department and a process for getting it out,” Cohen says. “Make sure that all the steps have occurred along the way so that you’ll have a reasonable chance of getting paid. Be sure it gets to where it needs to be in a timely manner, and you can manage it from there.”
Another cash flow killer is the failure to properly account for float time between ramping up for a new client and receipt of the first payment. Clark notes that MTSOs typically pay medical transcriptionists (MTs) and other employees on a two-week cycle but bill clients monthly. Add another 30 to 90 days before payment is received—which matches the typical time frame for a hospital to be reimbursed for patient services—and trouble begins brewing almost immediately.
“You start out behind the curve or with the challenge that your outlay on paying labor is more immediate and your ability to collect is extended because your audience is made up of notoriously slow payers,” says Clark, adding that MT labor costs are typically 35% to 45% of an MTSO’s direct costs, to which overhead expenses must be added. “Whether it’s an immediate problem or not, the point is that it can quickly become one if you have a large customer and they are a slow payer.”
To avoid this cash flow killer, MTSOs should attempt to secure a deposit or advance payment at the contract signing or bill more frequently. Another option is to work with A/P to have the MTSO placed on the client’s list of vendors that are paid immediately on receipt of invoice.
But while float time is a challenge, Clark says it’s not the biggest obstacle. The bigger problem is when a lost invoice, dissatisfaction with transcription quality or performance, or internal financial difficulties results in a large client paying slowly or not at all. Whatever the cause, when it comes to “any event that rattles the normal course of bill payment, it’s really how you react or what kind of cushion you can build in order to weather whatever the storm, large or small, becomes,” he says.
Keeping a level ledger in which no single client makes up more than 20% of revenues and making sure overhead expenses stay under 50% of revenues are two ways to stave off client-related cash flow crises. Securing a line of credit or building a suitable cash safety net (typically 60 days or three to four pay periods) also can help offset unexpected payment slowdowns.
For some MTSOs, factoring is an option, especially when access to immediate cash is the only thing standing in the way of a significant new contract, and banks are reluctant to extend a loan or line of credit.
“I always tell prospects to go to the bank first. If the bank can meet your needs in the terms you need as quickly as you need, do it. We will never be able to come close to a bank’s terms,” Cohen says. “So if the contract is attractive but you can’t figure out how to take it, [factoring] is a good tool. The other time [factoring is an option] is if cash flow is keeping you up at night. If it’s distracting you from doing day-in and day-out stuff that you’re good at, then it’s good to get cash for your invoices right away.
“But you never factor if you don’t need it,” he adds. “You don’t factor for a little comfort; you factor because it will allow you to do things. We’re more expensive than a bank, and at times we’re more intrusive than a bank.”
Stopping service also is an option for slow or no-pay situations. However, it’s one that should be reserved for only extreme cases and as a last resort due to the long-term repercussions it can have on the client relationship and the MTSO’s reputation.
Clinical documentation “is critical to patient care, so when you cut off the service you will create a problem,” Clark says. “You have the ultimate bargaining chip. But … when you do pull that weapon out, you better have communicated in advance to the chief financial officer [CFO] that you are limited in what else you can do [because] at the end of the day, that CFO is the one who is going to work on your behalf to get the issue resolved. Having that relationship with your customer so you can have that conversation is the best thing you can do to manage your cash flow.”
Clash of the Technologies
While some cash flow deterrents can be tied to business practices, others are the direct result of the industry’s increasing reliance on HIT. Two of the most impactful—positive and negative—on MTSOs are EHRs and speech recognition.
On the negative side, a hospital’s volume of dictation and transcription moves inversely to its level of EHR adoption. The change is even more pronounced at facilities that have adopted speech recognition technologies, enabling transcription to be bypassed entirely in favor of editing clinical documentation prior to coding.
“The hospital industry has transformed significantly in the past 15 years and more dramatically in the past five. … Improvements in technology—the use of voice recognition in particular—has driven down costs,” says John Suender, president of Suender M&A Advisors, a boutique merger and acquisition advisory firm focused almost exclusively in the transcription and coding space.
Suender notes that the loss of a client that has transitioned to an EHR is one of the greatest risks an MTSO faces in today’s healthcare environment. However, it is not an event that comes without warning. MTSOs should not only be aware of their client’s technology plans but also how those plans will roll out across individual departments so the impact on business volume can be accurately gauged.
The key is to “pay attention to your client and understand what their future plans are so you can service them properly,” he says. “Keeping your finger on that pulse is important.”
Should an MTSO find itself in a circumstance where it can no longer keep a client at a price that is profitable, it needs to figure out how to reduce costs, preferably by improving workforce productivity. For many, the solution lies in adoption of speech recognition—the very technology that often impacts the level of transcription clients need in the first place.
“Right now the low-hanging fruit is to use back-end voice recognition with editors, then offshore if permitted by the client, and then a combination. Terminating MTs is not the answer. You have to improve their productivity because without an MT, you have no revenue,” says Suender, adding that in some cases even increased productivity isn’t enough to maintain account profitability.
“What can happen is someone can price business so poorly that the gross margin is actually negative. If that’s the case, you need to terminate that account. The most sane approach is to improve productivity,” he says.
Brian Toelle, an intermediary with Kruse Acquisitions, an acquisition firm with extensive MTSO experience, concurs that losing accounts or seeing volumes drop as clients adopt EHRs is one of the top threats facing MTSOs today. It also highlights the critical importance of adequate internal platforms to ensure MTSOs can keep pace with their clients’ technology needs.
For example, one of the biggest technology challenges confronting MTSOs is a lack of Health Level 7 International interfaces that will enable them to deliver transcribed reports directly into the client’s EHR system. “You have to have the technology, whether it’s in-house or working with an ASP [application service provider]-type service or licensing technology, so you can solve some of these issues or challenges,” Toelle says. “If you don’t have the right platform or partner, you’ll lose clients not due to performance issues on how to deliver transcription but on performance issues on how to deliver technology.”
Investing in sophisticated technology platforms also helps MTSOs lessen the impact of their clients’ move toward more advanced HIT by providing opportunities to create new revenue streams that leverage existing client relationships. In some cases, it may be cross-training their transcriptionists as coders. In other cases, it is launching billing, appointment, and reminder services.
It is the MTSO that sees the evolving healthcare landscape as presenting new opportunities to go outside the transcription box to generate new sources of cash flow that will thrive—even as transcription revenues decline.
“The ones that are always hunting for new business, they do find it. It’s more difficult than it was years ago, but having a consistent marketing plan is important,” says Toelle. “With every challenge, there is opportunity. A lot of MTSOs don’t realize how truly valuable their relationships are or the amount of trust they’ve built up over the years.”
— Elizabeth S. Roop is a Tampa, Florida-based freelance writer specializing in healthcare and HIT.
Time to Sell?
For some medical transcription service organization (MTSO) owners, a slowdown in cash flow can trigger a decision to sell—but it shouldn’t.
“Obviously I can sell their company if they’re looking to sell, and the prices they’re going to get are pretty good multiples [of revenues],” says Brian Toelle, an intermediary with Kruse Acquisitions. “But it comes down to passion. Do you love [the business] or not? Some hang on too long. They start losing their drive for it and are just keeping the company so they have something to do or to support themselves. Those companies will decline.”
If the passion is gone, then by all means look into selling. However, if the passion is still there, Toelle says its best to “either bring on more clients or find more revenue sources. … Sell because it’s time more than any other factor.”
M*Modal, which has acquired several MTSOs in the last year, sees several benefits to market consolidation. “Bringing new MTSOs into our organization offers tremendous advantages for both the MTs [medical transcriptionists] and the customers they’ve been serving from a cost, business continuity, and technology capability perspective,” explains Matt Jenkins, senior vice president of corporate business development. “As a large-scale transcription provider, we’re able to offer a career path and financial incentives to the MTs while also providing our mutual clients with cutting-edge technologies.”
John Suender, president of Suender M&A Advisors, says the decision to sell should be based on more than just current cash flow issues but adds that every MTSO owner should be prepared to sell at some point. “The business theoretically can live forever, but human beings don’t,” he says. “You’re better off selling when the business is doing well. But if it’s shrinking and cash flow is declining, that can often trigger someone to say, ‘I just can’t fix this one more time.’”
In other words, cash flow problems shouldn’t trigger a sale decision, but they often do. That is why Toelle and Suender recommend establishing relationships with an acquisition partner early to develop a transition plan long before it is time to begin courting buyers.
“If you’re forward thinking—and if you’re not, you should be—you should develop these relationships even if it’s talking to more than one firm to get a sense for which you trust the most,” Suender says. “You don’t want to be in a situation where you’re forced to sell or you’re not in a strong position. The person who is ready to walk away is the best negotiator.”
Working with an acquisition firm levels the playing field for smaller MTSOs by ensuring they have the expertise on their side to identify buyers and navigate the acquisition process to achieve the best possible outcomes.
“Making introductions to buyers is important, but it’s probably the lowest value we bring. … What we bring is a variety of skill sets, [including] financial, legal, structuring and negotiating, and operational, that is very broad from our professional training and all the transactions we’ve done, mostly as buyers,” Suender says. “The buyers have an expert in each of those fields and do this routinely. Most sellers do it once in their lives.”
Acquisition firms also serve as trusted advisors, informing clients of all their options. In many cases, sellers aren’t ready to retire, and often the acquiring firm would prefer the owners stay with the company long-term. The acquisition partner’s role is to understand and address the goals on both sides of the transaction to work out the best possible solution.
“We find answers for people who are looking to liquidate or sell and help the business owner sell or acquire to reach goals through acquisition. We will also help prior to sale to get the business ready because there are things you can do to maximize your profitability,” Tolle says. “It’s similar to selling a house. For most people, their house never looked better than the day they put it on the market. That’s what we do.”