# Medical Billing (RCM) Model

See how client growth, payer mix, collections, and denial rates affect a medical billing business.

- Canonical: https://finamodel.com/templates/medical-billing
- Excel download: https://finamodel.com/templates/medical-billing.xlsx
- Category: Healthcare
- Model type: Operating model
- Difficulty: Intermediate
- Audiences: Investors & analysts, Founders & operators, Medical billing and RCM operators, Healthcare services investors, Search-fund and PE buyers, Lenders and analysts
- Tags: medical-billing, revenue-cycle-management, healthcare-services, payer-mix, dcf

## Overview

This model helps an outsourced medical billing business plan its clients, claims, collections, and fee income. It shows how payer mix and denial rates affect what the business collects and the revenue it earns from healthcare providers.

Use it to test new-client growth, retention, collection performance, and staffing. The summary makes the effect on profit, cash flow, and value easy to see.

## What's included

- Client roster & claims inputs: opening clients, new clients signed, churn rate, claims per client, claims growth
- Billing & payer mix: average charge per claim, charge growth, commercial payer share and its annual decline
- Allowed amounts & denials: commercial/government allowed-amount ratios, commercial/government denial rates, appeal rate, appeal success rate
- Contingency fee schedule: commercial and government fee rates on cash collected
- Cost structure: claims per biller FTE, biller wage, clients per client-success FTE, client-success wage, corporate FTE and comp, benefits and wage growth, clearinghouse/EDI fee per claim, software & compliance cost per client, client-acquisition cost per new client, G&A and office overhead
- Tax: corporate tax rate on EBIT
- Capex & depreciation: technology capex per net-new FTE, platform development capex as % of revenue, useful life, base PP&E
- Working capital: commercial/government remittance lag, base fee receivable
- Valuation: WACC, terminal growth, net debt, shares outstanding
- Operations sheet: client roster roll-forward, claims volume and billing, the payer-mix schedule, the allowed-amount and denial funnel through written-off dollars, cash collected by payer type, staffing (FTE), capex and PP&E, and the fee-receivable working-capital build
- Revenue sheet: commercial and government fee revenue, total revenue, revenue per claim processed, blended fee % of collections
- P&L sheet: revenue to net income with clearinghouse-fee COGS, the opex stack, margins, revenue per claim, blended fee %, identity check
- FCF sheet: NOPAT, depreciation add-back, technology and platform capex, the fee-receivable balance and its change, unlevered FCF, discount factor, PV
- Valuation sheet: sum of PV, terminal value, enterprise value, equity value, value per share, implied EV/EBITDA (Y7)
- Dashboard with clients, claims processed, gross charges billed, blended fee %, revenue, EBITDA margin, revenue per claim, EV, value per share, payer-mix trend and an earnings waterfall

## Medical Billing Financial Model: How Payer Mix Drives Revenue and Cash Flow

This medical billing financial model projects seven years of operations for an outsourced revenue-cycle-management business. It shows how client growth, claims volume, payer mix, allowed amounts, denials, and contingency fees interact to shape cash collections and company revenue.

The model also covers staffing, per-claim costs, capital spending, working capital, and an unlevered DCF valuation. Rates and financial results described here reflect illustrative model settings, not industry benchmarks.

### Client Roster, Claims Volume, and the Payer-Mix Schedule

The operations build begins with a client roll-forward: opening clients plus new signings minus churn equals closing clients. Claims processed then equal closing clients multiplied by claims per client, which grow at 2% annually.

- The defining feature is an explicit payer-mix schedule where the commercial share drifts downward each year—from 68.0% in Year 1 to 54.2% by Year 7—as the book diversifies toward government payers. This single visible row feeds the blended allowed-amount ratio, denial rate, remittance lag, and the split of collected cash between payer types.

- Because everything downstream traces back to one auditable schedule, the model's yield compression is transparent rather than buried in multiple independent assumptions.

### Claims Funnel from Gross Charges to Collectible Cash

Gross charges billed are calculated as claims processed times average charge, with the charge per claim inflating 3% annually. That gross charge pool is multiplied by a mix-weighted allowed-amount ratio—64% commercial versus 26% government—to arrive at net collectible charges.

- A blended denial rate, mix-weighted at 5% commercial and 20% government, splits out denied dollars. Of those denied dollars, 70% are appealed, 45% of appeals succeed and recover at the same allowed ratio, and the remainder is written off and excluded from revenue.

- Clean claims plus recovered appeals sum to the total collectible pool, which is then split back into commercial and government cash using the same payer-mix schedule before applying contingency fees.

### Revenue Build and Per-Claim Compression

Total revenue combines commercial cash collected at a 7.5% contingency fee and government cash collected at a 4.0% fee.

- Because the government share of the pool grows and carries a lower fee rate, the blended take rate on collections eases from 6.38% in Year 1 to 5.90% by Year 7—shown as its own KPI row.

- When the falling allowed ratio and rising denial rate are combined with this fee compression, revenue per claim processed declines from $20.05 to $19.59 even though average charge per claim inflates.

- Three separate compression levers just barely outrun one inflation driver, producing a realistic, narrow margin of decline rather than a smoothed result.

### Cost Structure, Working Capital, and Valuation Outputs

Cost of goods sold is a per-claim clearinghouse fee of $0.28, a true unit cost rather than a margin assumption. Biller and client-success headcount scale with claims and clients respectively, while corporate headcount is fixed at five FTEs; all wages are loaded for benefits and escalated annually.

- Software, client-acquisition, G&A, and office overhead round out operating costs. Working capital is the fee receivable, tied to a payer-mix-weighted remittance lag that lengthens as government payers grow, making Year 1 free cash flow negative despite positive net income.

- The unlevered DCF discounts free cash flow at the stated WACC with Gordon-growth terminal value to produce enterprise value, equity value, and value per share, alongside dashboard KPIs such as EBITDA margin, revenue per claim, and blended fee percentage.

## Revenue is the output of a claims funnel, not a growth rate

The billing company earns a contingency fee on cash it actually collects for clients, never on gross billed charges, so revenue has to be built up from the claim itself: gross charges billed run through a payer-specific allowed-amount ratio to net collectible charges, then split into clean claims, denied-and-appealed claims that partially recover, and denied-and-written-off dollars that are explicitly excluded from revenue. Only the resulting collectible pool, split back into commercial and government cash by the payer mix, is priced at each payer type's own contingency fee rate.

## One payer-mix schedule drives three compounding compression levers

Commercial payer share is a single visible row drifting from 68.0% in Year 1 to 54.2% by Year 7 as the roster diversifies, and nothing downstream re-derives the mix independently. That one drift pulls the blended allowed-amount ratio down (government payers allow far less of billed charges than commercial contracts), the blended denial rate up (government payers carry stricter documentation requirements), and the blended contingency fee rate down (government fee schedules are capped lower) all at once - so revenue per claim processed falls from $20.05 to $19.59 even as the average charge per claim inflates 3% a year.

## Designed for one-edit responsiveness

Every input - the client roster and claims growth, the average charge and its inflation, the payer-mix schedule and its annual drift, both payers' allowed ratios, denial rates, fee rates and remittance lags, the full cost stack, capex, and the WACC - is a named-range cell. Edit one and the operations build, revenue, P&L, free-cash-flow bridge, valuation, and dashboard all recompute. No formula rewrites are needed to test a faster payer-mix shift, a fee-schedule cut, or a client-acquisition push.

## Workbook structure

### Cover

Workbook overview, sheet legend, units, and tab-colour key.

- Title and scope framing
- Sheet-by-sheet purpose summary
- Units and tab-colour legend

### Dashboard

Headline KPIs, a seven-year summary, trend charts, and an earnings waterfall.

- KPI cards for clients, claims processed, gross charges billed and the blended contingency fee rate
- Revenue, EBITDA, EBITDA margin, revenue per claim, enterprise value and value per share
- Seven-year operating summary that feeds every chart
- Trend grid including the payer-mix drift and revenue-per-claim compression, plus a Revenue-to-Net-Income waterfall

### Assumptions

Every driver in one sheet: client roster, payer mix, denial funnel, fee schedule, costs, tax, valuation.

- Opening clients, new clients signed, churn rate, claims per client and claims growth
- Average charge per claim, charge growth, and the commercial payer-mix share with its annual decline
- Commercial and government allowed-amount ratios, denial rates, appeal rate and appeal success rate
- Commercial and government contingency fee rates on cash collected
- Biller and client-success FTE ratios and wages with benefits and growth, the clearinghouse fee per claim, software & compliance cost, client-acquisition cost, G&A and office overhead
- Corporate tax rate, technology and platform capex, useful life, base PP&E
- Commercial and government remittance lag, base fee receivable
- WACC, terminal growth, net debt, shares

### Operations

Client roster roll-forward, the payer-mix schedule, and the allowed-amount and denial funnel.

- Opening plus new signings less churn equals closing clients; closing clients times claims per client gives claims processed
- Claims processed times the average charge per claim gives gross charges billed
- The payer-mix schedule drifts commercial share down and government share up every year
- Gross charges times the blended allowed-amount ratio gives net collectible charges
- Net collectible charges split into clean, denied-and-appealed-and-recovered, and written-off dollars at the blended denial rate
- The collectible pool splits back into commercial and government cash collected by the same payer mix
- Biller, client-success and corporate headcount, capex and PP&E, and the fee-receivable working-capital build

### Revenue

Two revenue lines split by payer type, plus the compression KPIs.

- Commercial cash collected times the commercial contingency fee rate
- Government cash collected times the government contingency fee rate
- Total revenue as the sum of both
- Revenue per claim processed and the blended fee % of collections

### P&L

Revenue to net income with cost of goods derived from a per-claim transaction fee.

- Cost of goods sold is claims processed times the clearinghouse/EDI fee, a true unit cost, not a margin assumption
- Biller, client-success and corporate labour loaded for benefits and escalated at wage growth
- Software & compliance, client-acquisition cost, G&A and office overhead
- EBITDA, depreciation, EBIT, corporate tax, net income
- Margins, revenue per claim, the blended fee %, and an identity check that resolves to zero

### FCF

Unlevered free cash flow from EBIT to a discounted present value.

- EBIT less unlevered tax equals NOPAT
- Add back depreciation
- Less technology capex per net-new FTE and platform development capex
- Less the change in the fee receivable, the payer-mix-weighted working capital balance
- Unlevered FCF, discount factor and PV

### Valuation

An unlevered DCF to enterprise value, equity value, and value per share.

- Sum of explicit PV plus the PV of a Gordon-growth terminal value
- Enterprise value less net debt equals equity value
- Value per share and an implied EV/EBITDA multiple read off mature-year (Year 7) earnings

## Features

- **Revenue is the output of a claims funnel, not a growth rate:** The billing company earns a contingency fee on cash it actually collects for clients, never on gross billed charges, so revenue has to be built up from the claim itself: gross charges billed run through a payer-specific allowed-amount ratio to net collectible charges, then split into clean claims, denied-and-appealed claims that partially recover, and denied-and-written-off dollars that are explicitly excluded from revenue. Only the resulting collectible pool, split back into commercial and government cash by the payer mix, is priced at each payer type's own contingency fee rate.
- **One payer-mix schedule drives three compounding compression levers:** Commercial payer share is a single visible row drifting from 68.0% in Year 1 to 54.2% by Year 7 as the roster diversifies, and nothing downstream re-derives the mix independently. That one drift pulls the blended allowed-amount ratio down (government payers allow far less of billed charges than commercial contracts), the blended denial rate up (government payers carry stricter documentation requirements), and the blended contingency fee rate down (government fee schedules are capped lower) all at once - so revenue per claim processed falls from $20.05 to $19.59 even as the average charge per claim inflates 3% a year.
- **Working capital is the fee receivable, and growth is a real cash call:** The model tracks the billing company's own balance-sheet item - the contingency fee it has earned on collections but not yet remitted - carried at a payer-mix-weighted remittance lag that lengthens as the government share grows, rather than an assumed percentage of revenue. Year-1 unlevered free cash flow is consequently negative even though net income is already positive, because capex and the growing fee receivable outrun NOPAT plus depreciation; free cash flow turns solidly positive from Year 2.

## Use cases

- **Intrinsic valuation:** Set the client roster and claims growth, the payer-mix schedule, the allowed-amount and denial rates, the contingency fee schedule, the cost stack and a WACC, and read enterprise value, equity value, value per share and an implied EV/EBITDA multiple off mature-year (Year 7) earnings, in the range small, illiquid outsourced-services businesses actually trade at.
- **Payer-mix and reimbursement stress testing:** Flex the commercial-to-government drift rate, either payer's allowed ratio, denial rate or fee rate to see how much a faster shift toward government payers, or a reimbursement schedule cut, compresses revenue per claim and EBITDA margin - and how much operating leverage from the fixed corporate and client-success cost base can offset it.
- **Client acquisition and cash planning:** Flex new clients signed per year, churn, claims per client and the client-acquisition cost per signing to see how fast the roster and the fee receivable grow together. Because working capital is modelled as the fee receivable rather than a percentage of revenue, the model makes the funding gap between earning a fee and actually being remitted it explicit rather than smoothing it away.

## Frequently asked questions

### What is a medical billing (RCM) financial model?

A medical billing financial model captures the seven-year operating economics and intrinsic value of an outsourced revenue-cycle-management company that processes claims on behalf of physician-practice clients. It rolls a client roster forward, converts the roster into claims processed and gross charges billed, and runs those charges through a payer-mix-weighted allowed-amount and denial funnel to arrive at cash actually collected. The billing company earns a contingency fee on that collected cash, split by payer type, and the model charges biller, client-success and corporate labour, a per-claim clearinghouse fee and revenue-geared overhead down to EBITDA, then discounts an unlevered free-cash-flow stream to enterprise value, equity value and value per share.

### Why is revenue based on cash collected instead of gross billed charges?

Because that is how RCM companies are actually paid. A billing company's contingency fee is a percentage of what it recovers for its client, not of what was originally billed, so the model has to build a real claims funnel: gross charges run through payer-specific allowed-amount ratios, a first-pass denial rate, an appeal recovery rate, and a write-off for claims that are never recovered, before the resulting collectible cash is priced at a contingency fee rate. Modelling revenue as a top-down growth rate would miss the economics entirely, since it is the funnel, not a percentage, that determines how much of every billed dollar actually turns into fee revenue.

### Why does revenue per claim processed decline even though charges are inflating?

Because the payer mix drifts from commercial-heavy toward government payers as the roster scales, and that one drift pulls three levers down at once: the blended allowed-amount ratio falls, since government payers reimburse far less of billed charges than commercial contracts; the blended denial rate rises, since government payers carry stricter documentation requirements; and the blended contingency fee rate falls, since government fee schedules are capped lower. All three compress together, so revenue per claim processed still falls from $20.05 to $19.59 across the horizon even against 3%-a-year charge inflation - the model shows the payer-mix cost of scaling into government-heavy claims, rather than smoothing it away.

### Why is Year-1 free cash flow negative when the business is profitable?

Because working capital in this model is the fee receivable - the contingency fee the billing company has earned but not yet been remitted - carried at a payer-mix-weighted remittance lag, not a percentage of revenue growth. As the government share of the payer mix grows, that remittance lag lengthens, so the receivable grows faster than the model's still-ramping EBITDA can fund out of NOPAT and depreciation alone. Year-1 unlevered free cash flow is consequently negative despite positive net income, turning solidly positive from Year 2 as EBITDA margin expands.

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