Investment Banking

Healthcare BPO: US Healthcare + Offshoring = Attractive High Margin Scalable Business

June 2020

Read Time: 3 minutes

Healthcare BPO has become a globally accepted model driven by several initiatives introduced by providers and payers to control costs, improve quality, enhance collaboration, and promote mutual accountability. 

Attractive market opportunity, critical and counter-cyclic nature, tech-enabled transformation, high margins (65-70% Gross Margins and 35-40% EBITDA margins) and barriers to entry due to domain expertise have led to premium valuation for healthcare BPO vendors.

This sector offers opportunities to invest in an established but high growth sector with very few large independent players. Our report provides insights into the critical elements that define the healthcare ecosystem and the attractive offshore business model.

Attractive Market Opportunity

The USD3.5 trillion US healthcare industry is projected to grow at a CAGR of ~6% from 2018-27, leading to high growth in healthcare BPO segments. Increasing costs and the shift to value-based care, are driving providers and payers to outsource healthcare functions. 

Health Information Management (HIM) and Revenue Cycle Management (RCM) are accepted offshoring models witnessing high growth (10% and 12% respectively) while Population Health Management (PHM) and Patient Engagement (PE) are fast-growing segments (20% and 16% respectively). Telehealth is growing in importance amid COVID-19 driven by the provider need to improve patient satisfaction & accessibility, and quality of care.

Industry Transformation 

Criticality and counter-cyclical nature of this industry lowers the impact of economic downturns such as COVID-19. Healthcare BPO is expected to take a slight hit in the short term but will bounce back in the long term with strong growth, driven by changes in patient behavior.

Tech-enabled solutions such as computer assisted coding (CAC), analytics, artificial intelligence/machine learning and robotic process automation are improving productivity and efficiency in healthcare BPO. Currently, 75% of the revenue cycle management functions have 20%+ level of automation, and coding productivity increases by 20% with CAC. Tech-enabled solutions create long term differentiation and act as a source of competitive advantage.

Globally Accepted Model with High Margins

The Healthcare BPO model has evolved significantly in the past 10+ years driven by US government regulations, with India and Philippines emerging as the preferred offshoring locations. It has evolved into a scalable delivery model addressing critical pain points for both payers and providers with established players across revenue spectrum having delivery centers based out of unique locations.

Low cost per employee, outcome-based pricing model, and tech-enabled solutions improving efficiency have led to higher margins. High margins are supported by best-in-class growth (27%), returns (28% ROCE) and cash flows (80% conversion). Direct client base, onshore presence, coding & technology capabilities are the key differentiators among vendors.

Healthcare BPO Vendors Command a Premium Valuation

M&A deal activity has remained strong in this sector with 15+ deals in the last 5 years amid significant interest from financial and strategic investors. Valuation has been consistently increasing in the past 3 years with offshore being accepted as a preferred destination. Healthcare BPO vendors have commanded an average valuation of ~11x EV/EBITDA in the last 5 years.

To know more about the healthcare BPO ecosystem and attractiveness of the offshoring model in terms of drivers for growth, impact of COVID-19, tech-enabled transformation, market landscape and deal activity, download our latest report.

Author: Shobhit Jain, Director, Enterprise Technology & Services Investment Banking

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