Revenue Cycle Management: The Right WAY

This article details one of our favorite business models at the moment. As we dive deeper into our Healthcare IT research, Waystar's solid business model stands out.

This past summer 2024, J.P. Morgan took Waystar public through IPO. As I sat at my desk everyday during the back-half of the summer, all I could hear was “Waystar this” and “Waystar that.” With nothing more than the cool-looking logo printed on a flag that sat on my analyst’s desk, my interest in learning more about the company had been piqued.

Disclaimer: All of the information on this blog post is public, pulled from sources such as Value Investors Club, websites, financial statements, and Waystar Investor Relations.

Waystar (“the company”) is an end-to-end revenue cycle management company (one of the only public pure-play RCM companies) and operates primarily in the ambulatory market (~9% market penetration), but also in the hospital market (4% penetration). The company trades in line with its Healthcare IT peers at a ~23.0x EBITDA multiple, which represents an $8bn enterprise value and a $7bn market cap. Forming from a combination of Zirmed and Navicure in 2017, the company had been primarily sponsor owned (Bain Capital and later EQT). So far, Waystar has had a strong showing, rising ~79% since IPO.

The company has a unique business model which allows it to obtain strong recurring revenue and scalability, represented in it’s gross revenue retention of 90%, and its net revenue retention (which includes cross-selling and up-selling) of 109%. This is due to its pricing structure where there is a 50/50 split between subscription based revenue and volume based transactions. On the subscription side, the company maintains profitability metrics similar to a traditional SaaS company: 80% gross margins and 50% EBITDA margins. The annual contract value is around $11,000 - $18,000 and has built in 3% price escalators every year, with contracts renewing every 2-3 years. This means that automatically, the company has 50% of its revenue locked up and inflation adjusted for 3 years. On the volume-based transactions, Waystar collects a commission on each service they provide ($0.11 per claim scrubbed, $0.04 per remit, and $0.14 per eligibility verification process - these were the numbers I was able to find). While that doesn’t seem like much, a company that has ~3bn transactions per year can generate a lot of top-line growth from these incremental services.

Waystar has 5 main modules: the Clearinghouse (their bread and butter module), Revenue Capture (which includes claims scrubbing), Denials Management, Recovery & Analytics, and Patient Financial Care. As the company operates in the front-end, middle-end, and back-end of the revenue cycle, they have plenty of potential to cross-sell and up-sell their products, a key operation as customer acquisition costs begin to rise.

Diving deeper into the company, Waystar operates under the Rule of 50: with industry-leading 42% EBITDA margins and ~12% sustainable revenue growth. Not only does it have a strong business model, but it also has industry tailwinds that help Waystar take advantage of their competitive position. Currently, roughly 70% of providers use in-house revenue cycle management solutions. However, with a new transition to ICD-11 coupled with surprise billing legislation (the “No Surprises Act”), and hospitals operating on razor-thin margins due to higher medical loss ratios (stemming from wage inflation and a tight labor market from lingering effects of The Great Resignation), there are many reasons to believe that the providers will begin a transition to outsourcing their revenue cycle management and other administrative services. Looking at the size of the market, the RCM market is expected to be valued around $130bn. Using quick market sizing tools, we can double check this value. The Center for Medicare and Medicaid Services (CMS) provides hospital and ambulatory total expenditures each year with estimates on how much spending will be in the future at around $1.5T for hospitals and $1T for ambulatory and other outpatient services. With revenue cycle management making ~4-6% of total expenditures, we come to a market size of ~$125bn.

Even when looking on the back-end of the company, Waystar is still in a strong position for growth, scalability, customer stickiness, and recurring revenue. The company spends ~45% of their total marketing expenses on channel partnerships, which is increasingly important as top-of-mind brand awareness heavily impacts the top-line of these vendors. When looking at the contingency fee dynamics in the claims scrubbing markets (one of Waystar’s primary modules), the first vendor of choice will get to scrub the most amount of claims. Residual claims are then trickled down into secondary and tertiary vendors, who then have the potential of scrubbing a smaller batch of claims (kind of like a waterfall effect). Having these partnerships is crucial for Waystar to maintain its loyal customer base.

Lastly, Waystar has a much more modern tech stack compared to its competitors. A lot of its competition includes legacy systems (think about hospital systems and other electronic health record systems) who have been in the game forever. Having a newer tech stack allows the company’s integration costs to be lower, as it’s able to seamlessly integrate with other technology systems while also keeping transition costs away from the company’s services high.

As always, every company comes with risks. 2 of Waystar’s largest risks include 1) a concentrated customer base. This tends to be more of an industry problem, where oftentimes RCM companies will have their top few clients make up a large percentage of their sales. In this case, Waystar’s top 10 clients make up ~11.3% of their total revenue. Now, 11.3% doesn’t seem like much, but considering Waystar’s ~30,000 customers, there seems to be heavier weightage assigned to the biggest customers. 2) A failure to develop new technologies, specifically regarding the middle-end of the revenue cycle (coding & billing) could leave the company behind. In such a fragmented industry, the middle-end of the cycle is increasingly becoming the most innovative section in the revenue cycle due to capabilities in A.I. Not staying at the forefront of innovation can allow smaller companies to scale up and beat out Waystar’s market share.

Hopefully this has been an interesting read and a helpful guide on how to dive deeper into a company’s business model. The way I like to approach understanding business models is asking myself 2 questions: “how does a dollar flow from a customer’s pockets into the business?” and “how does that same dollar flow from the top-line of a company’s financials to the bottom line?”