Skilled nursing facility acquisitions are complex transactions where the visible financial statements tell only part of the story. Below the surface in the billing records, accounts receivable aging reports, payer contracts, compliance history, and MDS documentation lies the real financial risk and opportunity that will determine whether the acquisition delivers its projected returns or surprises you with problems that were entirely discoverable before closing.
For ownership groups, private equity sponsors, and healthcare operators evaluating SNF acquisitions, revenue cycle due diligence is not optional, it is essential. Yet in many transactions, billing and revenue cycle analysis is treated as a secondary concern behind real estate, licensure, staffing, and clinical quality, and the financial exposure that results from inadequate billing due diligence can be substantial.
In working with skilled nursing facilities and ownership groups on billing and accounting operations, we have seen facilities that appeared financially healthy on the surface mask significant revenue cycle problems from undisclosed overpayment demands to accounts receivable that was dramatically overstated, to Medicaid contracts with unfavorable terms that would suppress revenue for years post-acquisition.
This post gives you a 12-question revenue cycle due diligence checklist that every SNF buyer should work through before closing.
Why Revenue Cycle Due Diligence Is Different from Financial Statement Review
Audited financial statements and tax returns give you historical revenue and expense data but they do not tell you about the quality of the accounts receivable, the compliance posture of the billing operations, or the revenue cycle risks that could affect future performance under new ownership.
Revenue cycle due diligence asks a different set of questions: Is the AR actually collectible at the stated value? Are there billing compliance issues that could generate post-closing liability? Are the payer contracts favorable, and what are the renewal terms? Is there hidden revenue potential that the current operator has not captured? The answers to these questions can meaningfully change your valuation and your integration plan.
The 12 Revenue Cycle Due Diligence Questions
Question 1: What Does the Accounts Receivable Aging Report Look Like?
Request a detailed AR aging report by payer, broken down by 0–30, 31–60, 61–90, 91–120, and 120+ days. The 90+ day and 120+ day buckets are where collection risk concentrates. Understand what is driving those balances denied claims, Medicaid pending, Medicare appeals in process, or genuinely uncollectible balances that have not been written off.
A facility carrying large AR balances in the 120+ day bucket without adequate bad debt reserves is presenting overstated AR on its balance sheet. Adjust your valuation accordingly.
Question 2: What Is the Facility’s Historical Clean Claim Rate?
Ask for the facility’s clean claim rate, the percentage of claims accepted on first submission by payer over the prior 24 months. A clean claim rate below 90% for Medicare is a significant red flag that indicates systemic billing accuracy problems. Low clean claim rates mean higher administrative cost per dollar collected and slower cash flow.
Question 3: What Are the Denial Rates and Root Causes?
Request denial data broken down by payer and denial reason code. High denial rates for specific reasons medical necessity, authorization failures, and untimely filing indicate specific billing process failures that will require remediation under new ownership. Understand whether denied claims are being appealed and at what recovery rate.
Question 4: Are There Outstanding Medicare or Medicaid Overpayment Demands?
Medicare and Medicaid overpayment demands including those arising from RAC audits, ZPIC/UPIC reviews, or state Medicaid program integrity audits can represent significant post-closing liabilities if not properly disclosed and addressed in the purchase agreement. Request copies of any outstanding audit correspondence, overpayment demand letters, and repayment agreements.
Question 5: What Is the Payer Mix, and How Has It Trended?
Request payer mix data by patient day percentage for the prior 24–36 months. A payer mix that is shifting toward higher Medicaid and lower Medicare without a corresponding change in clinical programming or referral strategy signals census pressure or referral source erosion that will affect future revenue under new ownership.
Question 6: What Are the Medicare Advantage and Managed Care Contract Terms?
Request copies of all managed care contracts, including Medicare Advantage, managed Medicaid, and commercial insurance agreements. Review per diem rates, contract termination and renewal terms, prior authorization requirements, and dispute resolution provisions. Unfavorable managed care contracts with long remaining terms can suppress revenue for years post-acquisition.
Question 7: What Is the PDPM Case Mix Index and Trend?
The facility’s Medicare case mix index (CMI) under PDPM indicates the acuity of its Medicare population and the reimbursement level it is generating per Medicare patient day. A CMI significantly below regional benchmarks may indicate MDS undercoding an opportunity for revenue improvement or may reflect a genuinely lower-acuity patient population. Understand which it is.
Question 8: What Is the Status of Medicaid Cost Reports and Any Open Audits?
Request copies of filed Medicaid cost reports for the prior three years, along with any desk review or field audit correspondence. Open cost report settlement periods represent contingent liabilities the state could owe you money, or you could owe the state that need to be addressed in the purchase agreement and reflected in your valuation.
Question 9: What Is the MDS Accuracy History?
Request MDS accuracy audit data if available, along with any corrected claims or MDS amendments in the prior 24 months. High rates of MDS corrections may indicate systematic coding errors that create both recovery opportunities and compliance exposure. An MDS audit as part of due diligence can identify revenue recovery potential.
Question 10: What Are the Days in Accounts Receivable (DSO)?
Calculate the facility’s days sales outstanding total AR divided by average daily revenue. DSO above 55–60 days for a typical SNF payer mix indicates meaningful billing efficiency issues that will require remediation. DSO should be trended over 24 months to determine whether it is improving or deteriorating.
Question 11: Is There Pending or Historical Billing Compliance Litigation?
Request disclosure of any pending OIG investigations, False Claims Act exposure, CMS program exclusion risks, or billing compliance litigation. These are potentially catastrophic post-closing liabilities that must be disclosed and appropriately represented in the purchase agreement, with appropriate indemnification provisions.
Question 12: What Is the Billing Infrastructure and Staff Situation?
Understand who is currently performing the billing function in-house staff, an outsourced billing company, or a combination and what the transition plan is under new ownership. Billing staff departures post-closing are a common and underappreciated disruption risk. If the billing function is in-house and the team is likely to leave, plan for billing continuity from day one.
Translating Due Diligence Findings Into Valuation and Deal Terms
Revenue cycle due diligence findings should feed directly into your acquisition analysis in three ways:
- Valuation adjustments: Overstate AR, undisclosed overpayment liabilities, and poor clean claim rates should be reflected in a lower offered price or purchase price adjustment mechanism
- Indemnification provisions: Billing compliance issues, open audit periods, and undisclosed overpayment demands require explicit indemnification language in the purchase agreement
- Integration planning: Revenue cycle gaps and opportunities identified in due diligence should drive your 100-day integration plan, including billing partner selection, staff retention or replacement, and MDS optimization initiatives
Conclusion
SNF acquisitions are high-stakes decisions where revenue cycle intelligence can materially affect both the price you pay and the returns you achieve. The 12 questions in this checklist are not the full scope of financial due diligence but they are the revenue cycle starting point that every buyer needs to work through before committing to a transaction.
Key Takeaways
- Revenue cycle due diligence is distinct from and complementary to financial statement review in SNF acquisitions
- AR quality, denial rates, clean claim rates, and DSO reveal billing infrastructure health that historical financials may obscure
- Open cost report audits, overpayment demands, and OIG exposure are material post-closing liabilities requiring deal protection
- Payer mix trends, PDPM CMI, and managed care contract terms directly affect forward revenue projections
- Billing continuity risk at closing is frequently underestimated plan for it explicitly
