Electronic Medical Records Are Not a Cure-All

We regularly work with clients that have developed innovative solutions to vexing, long-term problems confronting healthcare.  Some examples include:  enabling hospitals to quantify patient satisfaction, managing the release of patient chart information from the hospital, and providing meaningful drug and disease content to physicians in the course of their daily work.

In discussions with potential buyers and investors for these types of businesses, we regularly hear the following:  “Won’t widespread EMR adoption make this business obsolete?”   In the minds of many thinking about the HCIT industry:

Increased EMR Use = Fully Electronic Records = Integrated Data Whizzing Back and Forth

This is a welcome goal – and it’s theoretically possible that we could live in this world one day – but there are so many barriers to this future state that it’s very likely that none of us will be around to see it.

Consider the following:

• EMRs were first created in the 1960s and 1970s, but as recently as 2011, only about 1 in 3 of office-based physicians reported use of an EMR with basic functionality in place (i.e., medical history, electronic ordering, drug interactions, etc.)  Just over half of the respondents were using any EMR at all (to record basic patient demographics, for example).
• On the inpatient side, with more than $3.1B in Meaningful Use incentives paid out as of 2011, only 35% of U.S. hospitals have now adopted EMRs.
• CMS has been paying incentives for e-prescribing for the past two years.  In the framework of potential healthcare data described above, this is one of the most basic electronic transactions possible:  passing an error-free prescription from a provider’s EMR to a pharmacy.   As of the end of 2010, CMS reports that e-prescribing has grown tremendously – to where fewer than 12% of the nearly 700,000 eligible providers are now receiving incentive payments.

This is progress to be sure, and adoption is up significantly in the past few years.  However, EMR vendors still face a long road to achieving widespread adoption for basic functionality before they dive into the other challenges like data interoperability, clinical analytics, and payer-provider convergence.

In our view, new value-based reimbursement models via prospective population health management and coordination at the point of care simply have to run through the clinical data living in the EMR.   So, as stimulus dollars trail off in the coming years, we expect the more forward-thinking EMR vendors to start looking for tangential acquisitions outside of their core business that will help them make progress toward accelerating these reimbursement initiatives.

In other words, we expect that leading EMR vendors, in an effort to create differentiation in a still-crowded marketplace, will increasingly look to absorb – rather than displace – these innovative businesses that we see every day.  What is still an open question is whether the EMR vendors will be the buyers best positioned to reap the biggest benefits of owning these companies, or if other HCIT participants will put together the pieces that move us toward that future state where healthcare data moves around effortlessly.  In either case, we don’t see much evidence yet that EMRs are the standalone panacea that some seem to think they can be.

Let us know what you think.

Conor Green

Conor Green is a Vice President at TripleTree covering the healthcare industry, and specializing in revenue cycle management and tech-enabled business services. You can email Conor at cgreen@triple-tree.com.

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Does 3M’s Acquisition of CodeRyte Represent a Defensive Strategy?

This week’s announcement that 3M has acquired CodeRyte was a surprise as much as it was completely predictable.  On one hand, 3M Health Information Systems has had enjoyed what seemed at times to be a near ubiquitous presence in the coding solutions market for years and has been noticeably absent in the M&A arena since 2006 when it acquired SoftMed Systems (note: the $230M acquisition of Attenti in 2010 sits within 3M’s Track and Trace Solutions division).  However, with the impending move to ICD-10 in October 2014 as well as a broader trend toward greater levels of clinical documentation granularity and improved data management and analytics capabilities in healthcare, it is completely understandable that 3M had to make a provocative move to both protect its market share and strengthen its ability to deliver value to its provider customers in a highly regulated, increasingly complex healthcare environment.  The fact that 3M has had a reseller arrangement with CodeRyte since 2009 is further evidence of the existing relationship and fit between the two organizations.

With that being said 3M’s move to acquire CodeRyte represents, in our opinion, a potential defensive strategy to maintain its leadership position in coding and documentation improvement.  While not conclusive, there are a host of data points that seem to support this assertion:

• Heavy reliance on legacy encoder and grouper technologies – 3M’s leading flagship products provide a lot of financial stability for the organization, but these technologies are becoming dated amid the industry’s ongoing evolution and other, more nimble solutions coming to market
• Success and momentum of Optum and A-Life – Optum’s acquisition of A-Life has been very successful in the marketplace as of late, further challenging 3M’s existing position in computer assisted coding (CAC)
• Uptake of point of care workflow tools – While 3M’s 360 Encompass System provides an intriguing bridge between customer’s financial and clinical data at the point of care, this solution is relatively new and has presumably not had the sort of uptake that meaningfully impacts the division’s top-line
• Limited success in penetrating adjacent markets – 3M has struggled to extend its solution set into growing opportunities with payers, Health Information Exchanges (HIEs), and Accountable Care Organizations (ACOs).  Payers, for one, represent a huge counter-market to the providers as the entire healthcare industry looks to neutralize the impact of the ICD-10 transition

This isn’t to say that the combination of 3M and CodeRyte isn’t innovative – in fact, the addition of CodeRyte’s Natural Language Processing (NLP) and CAC capabilities could greatly improve the workflow efficiencies at the end-user level.  However, the need of 3M to bolster and extend its coding capabilities is apparent as emerging clinical, financial, and compliance objectives increasingly require a more pervasive data management and analytics platform delivered at the point of care and throughout the healthcare ecosystem (providers, payers, EMR vendors, consumers, etc.) to solve a range of increasingly complex and intermingled challenges.

 

Seth Kneller

Seth Kneller is a Vice President at TripleTree covering the healthcare industry, specializing in revenue cycle management, clinical software solutions, geriatric care and healthcare analytics. Follow Seth on Twitter or e-mail him at skneller@triple-tree.com.

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Behavioral Healthcare: Five Key Factors Are Driving Sector Consolidation

Mergers and acquisitions, public equity financings and private equity investments in the Behavioral Healthcare industry closed with a bang in 2011, and the momentum has continued into 2012. Demand and access to behavioral healthcare services, including treatment for mental health and substance abuse disorders, has accelerated in recent years due to a number of favorable industry and legislative trends.

Within this highly fragmented industry, Acadia Healthcare Company, Inc. (NASDAQ: ACHA) has pursued an aggressive growth strategy in the last twelve months, executing a number transformative strategic decisions:

• Equity Offering: On December 15^th, Acadia completed a public equity offering of 9.5 million shares at $7.50 per share for total net proceeds of $67.5 million. Acadia plans to use the offering proceeds principally to fund its acquisition strategy. The Company certainly did not waste much time, announcing on January 5^th that is has signed a definitive agree to acquire three inpatient hospitals from Haven Behavioral Healthcare for $91 million in cash.
• Reverse Merger: On November 11^th, Acadia completed its merger with PHC, Inc., d/b/a Pioneer Behavioral Health (AMEX: PHC) and as a result became the leading publicly traded pure-play provider of inpatient behavioral healthcare services, based upon licensed beds.
• Add-on Acquisitions: Acadia purchased MeadowWood Behavioral Health System, an acute care psychiatric hospital, and Youth and Family Centered Services, Inc., an operator of 13 inpatient and outpatient psychiatric and behavioral health facilities, in July and April of 2011, respectively.

Private equity investors are also playing a meaningful role in this sector, accounting for roughly 30% of overall activity during 2010 and 2011. Just prior to the new year, Cressey & Co, a healthcare-focused private equity firm, acquired a majority stake in InnerChange, a residential treatment provider offering therapeutic services and accredited academics to young women with behavioral, emotional and substance abuse problems. This is investment marks the Cressey’s second investment in the behavioral healthcare sector; Cressey invested in Haven Behavioral Healthcare Inc. in 2008.

So what industry dynamics are catching the attention of both the public and private equity investors?

The following are a few of the more compelling attributes that in our view, will fuel the growth, investment and consolidation in the market.

1. Large and Growing Market. National expenditures on mental health and substance abuse treatment are expected to reach $239 billion in 2014, up from $121 billion in 2003, representing a compound annual growth rate of nearly 7%.The demand for behavioral health services has increased in recent years due to earlier and more accurate diagnosis of mental health conditions and the de-stigmatization of seeking treatment. It is estimated that approximately 6% of people in the US suffer from a seriously debilitating mental illness and over 20% of children either currently or at some point in their life, have had a seriously debility mental disorder. Moreover, the influx of returning US veterans from Iraq and Afghanistan will result in a growing percentage of veterans with serious mental and substance abuse disorders including schizophrenia, bipolar I disorder, PTSD and major depression.
2. Favorable Legislative Initiatives.  Recent legislative trends are increasing access to industry services as more individuals obtain insurance coverage in 2014. The Mental Health Parity and Addiction Equity Act (“MHPAEA”) of 2008, which went into effect in January 2010, requires health plans to provide coverage for mental health services on par with conventional medical health services and forbids employers and insurance companies from placing greater restrictions on mental healthcare compared to other conditions. This legislation not only expands coverage for the existing insured population, but also for the newly insured in 2014, a meaningful percentage of which are said to suffer from a mental health conditions.
3. Diverse Payor Mix. Compared to other healthcare services sectors, behavioral health is reimbursed by a diverse mix of public and private payors. With the exception of a few segments within behavioral health, no single payor type (state/local/federal, Medicaid, Medicare, commercial, private pay) dominates that market. That said, Medicaid represents a significant source of funds, so potential cuts to Medicaid funding should be watched closely.
4. Attractive Financial Model. Compared to general acute care hospitals, which typically generate mid-teens margins, inpatient behavioral healthcare enjoy margins in the range of 20-40% for acute hospitalization and 15-25% for residential treatment. Maintenance capital expenditures are minimal at approximately 2% of revenue.
5. Niche markets / delivery models… Downsize fitness. The behavioral healthcare industry includes a number of different sub-segments defined on multiple dimensions, including age, gender, illness severity, diagnosis, delivery model and payors. As a result, tremendous opportunity exists for providers to expand into attractive niche/specialty markets. Companies such as, Downsize Fitness, are pursuing the obesity and eating disorder market(s) by developing niche-specialized facilities. Downsize fitness is new to the fitness center scene and is designed specifically for the chronically overweight and obese individuals. Trim men and women are not allowed as members, providing a more welcoming environment than in most conventional gyms.

With healthcare reform just around the corner, TripleTree expects the barrage of M&A and investment activity to continue and even accelerate. We look forward to sharing our thoughts as this market continues to evolve – let us know what you think.

Jon Hill

Jonathan Hill is a Vice President with TripleTree covering the healthcare industry and specializing in population health management and facility-based services.  You can contact him at jhill@triple-tree.com.

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Wireless Health Innovators…“Where are they now?”

Nominations open next week for the 2012 TripleTree I Award, our annual recognition of innovations in wireless health.  Messaging from new market entrants to physicians, payers, and most notably consumers is fueling a strong venture capital appetite, and looking back at the I Award finalists since 2009, we thought it was useful to list a few notable accomplishments.

Public Markets

• Epocrates – The first mobile healthcare company to successfully go public in early 2011 raising $86m

Funding

• Airstrip Technologies – Received an undisclosed amount of funding from Sequoia Capital
• IntelliDOT – Raised $30m+ from leading investors including Psilos Group, TPG Growth, Camden Partners, Integral Capital Partners, J.F. Shea Ventures, Menlo Ventures and American River Ventures
• Proteus Biomedical – Raised $25m from Medtronic, Novartis, and ON Semiconductor Corp
• TelaDoc – Raised $18m from Cardinal Partners, HLM Venture Partners, Kleiner, Perkins, Caufield & Byers, New Capital Partners, and Trident Capital

FDA Approval

• Calgary Scientific – ResolutionMD^TM  after 23 months received 510(k) clearance from the FDA
• Telcare – Wireless blood glucose meter received 510(k) clearance from the FDA for its device, Telcare BGM

Acquisition

• CellTrak Technologies – Expanded into Canada through its acquisition of MedShare mobile technology for home health care
• Healthagen – Patient access software to providers acquired by Aetna

Since TripleTree’s I Award inception in 2009, one company has gone public, one has been acquired, numerous rounds of funding have been raised, multiple FDA approvals granted, and some businesses have scaled nicely.  As the market continues to mature and awareness and user adoption grow, questions loom…

• Is “connected health” on the verge of a breakout?
• Are wireless health solutions the answer for reduced healthcare costs and improved quality of care?
• Will innovation be driven by non-traditional healthcare vendors (ie device vendors and mobile service providers)?
• How are the ramifications of reform influencing innovation?

As we consider these questions, a few key indicators are influencing the market:

• Four out of five physicians use smartphones, computer tablets, and other mobile devices (Jackson & Coker industry report)
• More than $600m has been invested in the wireless health space since January 2010
• 89% of healthcare decision makers believe telehealth will transform healthcare in the next 10 years (Penn Schoen Berland Study)

Below is the honor roll of past I Award finalists.  Look for more information from TripleTree in the coming weeks as the nomination process commences and we plan for the WLSA Wireless Health Convergence Summit scheduled for May 22-24 in San Diego.

2011 Finalists
BodyMedia*	Wearable body monitoring device
Cambridge Temp Con*	Wireless physiological monitor for infertility
Cardiocom –	Clinical telehealth services
Cellnovo	Mobile diabetes management system
Healthagen	Patient access software to providers
Mobisante	Mobile ultrasound imaging system
Palomar Pomerado Health	Real-time mobile software patient electronic health information
Phreesia*	Touch-screen mobile tablet
TelaDoc	On-demand patient access solution to ERs and urgent care
Telcare	Wireless bloodglucose meter
Vitality	Mobile medication adherence
Wound Technology Network	Telehealth- based wound services
2010 Finalists
AirStrip Technologies	Mobile patient information
Calgary Scientific*	Medical imaging
CellTrak Technologies*	Homecare with GPS cell phones
Corticare	Critical care patient monitoring
Great Connection	Mobile imaging communications
Hopskipconnect	Motivational self management tools
InnerWireless	In-building wireless solutions
Ocutronics	Retinal camera
PerfectServe	Physician and patient care communication
PharmaSecure	Pharmacy brand protection solutions
Zeo, Inc.*	Sleep monitoring
ZMQ Software Systems	Sustainable development
2009 Finalists
BeWell Mobile	Disease management applications via text messaging on cell phone
CellTrak Technologies	Homecare automation with GPS cell phones
Diversinet	Health information transparency in partnership with AllOne Mobile
Epocrates	Rx Drug and formulary reference
GreatCall*	Jitterbug; simple cell phone with 24-hour live service
IntelliDOT*	Workflow manager connecting caregivers with information systems
MedApps	Mobile wireless health monitoring
MicroCHIPS	Continuous glucose management system
PhiloMetron	Passive weight management platform
Proteus Biomedical*	Electronically observed therapy platform
Tagnos	Patient flow management applications
Triage Wireless	Wireless telemetry/vital signs monitoring

*Denotes I Award Winner

 

Joanna Roth

Joanna Roth is a Senior Analyst at TripleTree covering the healthcare and technology industry, specializing in education solutions. Follow Joanna on Twitter or e-mail her at jroth@triple-tree.com.

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Humana Bolsters Care Management Capabilities with Acquisition of SeniorBridge

Humana announced an agreement this past week to acquire SeniorBridge, a New York-based provider of in-home care services to the chronic care and senior populations. The acquisition marks the latest example of Humana’s attempt to position itself as a more retail-focused company through a series of acquisitions and strategic initiatives.

Over the past eleven years, SeniorBridge has established itself as a leader in managing complex chronic conditions for seniors in the self-pay (or private-pay) market. Through the acquisition, Humana will be presented with a host of opportunities to leverage SeniorBridge’s model across a broader market base:

• Medicare – upon receipt of Medicare certification, Humana will be able to leverage SeniorBridge’s suite of care management capabilities across its nearly 2 million Medicare plan members.
• Humana Cares – SeniorBridge bolsters the Humana Cares segment of the company, which provides on-the-ground care management services to over 185,000 chronically ill plan members. The Humana Cares segment of the company has been vital to Humana’s emergence as a leader in the Medicare Advantage Special Needs Plan (MA-SNP) market.
• Other Payer Groups – several reform related initiatives, such as reimbursement reform and medical loss ratios, have positioned in-home care to be a large growth area for SeniorBridge given its significance to payers as a cost-saving tool (managed care has traditionally only contributed to a small portion of SeniorBridge’s overall business).

Humana has been among the most progressive payers in promoting member self-management and wellness through a number of initiatives, including:

• Humana Guidance Centers – “store-front” hubs located in select cities provide members with access to a suite of wellness and self-management products.
• Remote Medical Monitoring – provides real-time condition monitoring solutions to help address member health challenges in real-time.
• Humana Center for Health & Well-being – Humana’s LifeSynch subsidiary provides face-to-face health coaching resources to plan members. In addition, the Company has established a partnership with MinuteClinic to provide quick-access to routine treatments.

In addition, Humana’s recent acquisition of Concentra, along with several urgent care clinics from NextCare, signaled their entrance into the provider marketplace. These strategic moves have provided Humana with a mechanism to execute on their strategy to become more consumer-facing and the flexibility to adapt to some of the new realities established through health reform as they are implemented over the next few years.

Other recent investment activity in the payer marketplace signals that Humana might not be alone in their efforts to diversify and establish an “on-the-ground” presence (for example, UnitedHealth’s purchase of Inspiris, BlueCross Blue Shield of Florida’s investment in CareCentrix).  Payers appear to have realized the disconnect that has existed historically between themselves and their customer base. Given the “bets” that payers have made across the landscape, it is clear that payers are seeking to re-orient themselves around the consumer and provide consumers with an opportunity to take a greater role in controlling their healthcare. While a variety of strategies are being used, payers have been prioritizing investments and services around the “consumer experience” to increase overall access and transparency.

Let us know what you think.

Joe Long

Joe Long is an analyst at TripleTree covering the healthcare sector, with a focus on the approaches and technologies surrounding health insurance exchanges.  You can email him at jlong@triple-tree.com.

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Preserving the Quality of Care amidst Surging Hospital M&A

Over the past 18 months, the healthcare industry has experienced a tremendous uptick in the volume of hospital mergers and acquisitions. Since January, over 60 transactions have been announced, a 65% increase year over year. While the barrage of activity can be attributed to a number of structural changes stemming from healthcare reform (e.g. emergence of ACOs, reimbursement cuts, reporting requirements etc.), it is clear that non-profit hospitals under mounting financial pressure have become prime acquisition targets for for-profit hospitals and private equity investors.  Vanguard Health’s purchase of Detroit Medical Center and Steward Health’s purchase of Charitas Chrisiti in 2010 marked the beginning of a wave of acquisitions that will likely roll on through 2011 and into 2012.

Source: Ponder & Co. and Irving Levin Associates, Inc.

We believe the hospital industry will continue to consolidate and undergo tremendous structural and organizational changes in the decade ahead. Perhaps Fortis offers a few key principals to emulate in order to ensure the preservation of high quality care. Nearly 80% of U.S. acute-care hospitals are non-profits and a significant portion of them failed to break-even in 2010. Amidst the financial crisis in 2008 and the subsequent sputtering of the U.S. economy, non-profit hospitals have been required to delay critical investments that could meaningfully enhance efficiency and profitability. Concurrently, revenue growth has been challenged by with both price and volume trends. In addition to cuts in Medicaid and Medicare, many Americans are electing to cut back on medical services and are forgoing elective surgeries, the most lucrative procedures for hospitals. With declining revenues and scarce resources for investment in modernized technologies, non-profit hospitals are seeking partnerships with competitors or other investors with much deeper pockets.

So what are the implications of this flurry of recent hospital M&A activity for you and me?

• How will the quality of our care change, if at all?
• Can the culture and mission of a non-profit hospital be integrated with that of a for-profit, often publically traded organization, and how can it affect coordination and communication across the continuum of care?
• Let’s not forget about the reaction of the individuals providing us care. Can these mergers agitate the physicians and result in significant turnover?

While the rationale for many of these transactions makes sense, in theory, integration can be the most critical and challenging component of a transaction. A botched integration plan can have tremendous consequences on the quality of care.

Fortis Healthcare – A Mini Case Study in Consolidation

Although there is not a standard playbook that each hospital can follow, one hospital system has successfully architected an aggressive M&A strategy and may be a model other hospital systems can follow. Fortis Healthcare, one of India’s largest healthcare hospital systems, has experienced tremendous growth since its founding in 2001. Fortis now has 54 hospitals within its system, one-third of which were acquired. Over the past nine years, Fortis has grown its patient capacity and revenue at CAGRs of 40% and 70%, respectively, and has also enjoyed significant margin expansion. What is most remarkable is that this explosive growth has not come at the expense of quality. Fortis continues to deliver clinical outcomes that rival those of Kaiser, Mass General and Mount Sinai.

Hospital	Mortality (%)
Beth Israel Deaconess Medical Center, MA	0.58
Fortis Health Care, India	1.13
Brigham and Women’s Hospital, MA	1.15
Massachusetts General Hospital MA	1.61
Kaiser Foundation Hospital, CA	2.03
State of New York aggregate, NY	2.09
Mount Sinai Medical Center, FL	4.20

Source: Data excerpted from Regina Herzlinger and Pushwaz Virk, MD, “Fortis Healthcare (A),” HBS No 9-308-030 (Boston: Harvard Business School Publishing, 2008), p. 13

• Shared Learnings. The target company should not always be forced into the acquirer’s model. The target company may possess superior “best-practices”, and the acquirer must be willing to accept and implement them into the combined organization.

• Patient Care Delivery. Be mindful of all patient touch points from admittance to discharge. Develop support systems that will guarantee a repeatable, high-end service that exceeds the patient’s expectations.

• Retain Top Talent. The acquirer should be prepared for cultural differences and implement the proper incentives and leadership development programs to retain the top talent. Effective leadership within a hospital system requires a delicate mix of senior clinicians and management professionals.

• Efficient Systems. Measure and quantify clinical and non-clinical processes, identify areas of improvement and eliminate variability. Develop standardized processes that are both replicable and scalable.

Let us know what you think. Have a great week.

Jon Hill

Jonathan Hill is a Vice President with TripleTree covering the healthcare industry and specializing in population health management and facility-based services.  You can contact him at jhill@triple-tree.com.

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Successful M&A Exits in the Consumer Healthcare Device Market

Consumer healthcare devices are everywhere. They help people track physical activity, measure caloric intake, and play a vital role in personal health and wellness achievements.  Driven by consumer engagement, technology proliferation and a billion dollar-plus market opportunity – investors are pouring millions of dollars into this market with the hopes of a big return (see examples below).  Public exits (IPOs) are tough, so the path to liquidity for many of these firms will be acquisition.

• $70 million raised by Bluetooth headset maker to enter health monitoring market.
• $50 million raised by mobile consumer focused diabetes management system.
• Best Buy invests in mobile fitness ear bud technology.

Few companies have yet reached a size and adoption threshold to be deemed a success, but as the winners emerge product design, value proposition, access to customers, defensible intellectual properly and ability to integrate will factor into their strategic paths. Here is a check list for the CEOs who are considering an exit in the next 8-10 quarters:

• Competition – Separating from the pack of consumer health device companies is difficult.  There are dozens of credible companies and scores of wannabes (100+ according to our market definition).  While most of companies in this category are below $15 million in annual revenue, the strongest players have venture backing, cash reserves and relevant consumer and healthcare experience sitting on their Board.

• Customer Adoption – Consumers are tough critics and prone to device abandonment.  Winners in this category with figure out how to provide a consumer health device that is easy to use, convenient, and effective.  Also, given that consumer health devices today attract a narrow user based, successful vendors will figure out a way to expand adoption and find a broader audience of which to market and sell its product.

• Distribution – Signing a big distribution deal can be the best way to gain quick, sustainable market exposure. For these vendors it can be a great way to develop a strong, sustainable partnership that could lead to M&A down the road if the partnership is successful. Especially in the consumer market these major distribution channels can make or break a business in the early innings.  Acquirers will look for devices that can be sold effectively through multiple channels. Winners will maintain a broader sales strategy and not become dependent on a single distributor, which makes the business susceptible to channel risk and unattractive for a premium M&A event.

• Finding the Right Business Model – This is the biggest stumbling block for most consumer healthcare device companies.   In most cases, larger companies are less acquisitive when a business cannot demonstrate a scaleable business model.  Many vendors in this space simply want to achieve user adoption at the expense of a longer-term revenue plan, when they should be thinking about keeping customers over a five year (or longer) period.

• Recurring R&D costs – Companies in this market must continuously re-invent themselves with smaller, sleeker devices.  This can be the most taxing aspect of the market and certainly hurts a company’s chances of becoming highly profitable, especially when they are investing in growth.  Manageable cost structures, vertically integrated manufacturing models, web-based user interfaces and other features are all relevant to a complete product experience.

TripleTree has monitored the consumer health devices space for years and we’re bullish about the prospects for continued innovation and growth.  We’re watching the emerging companies address consumerism in thoughtful and innovative ways and look forward to watching the evolving strategic relationships between these innovators and global players.

Let us know if you have additional thoughts on this market or a different perspective.

Michael Boardman

Michael Boardman is an associate at TripleTree covering the healthcare and technology industries, specializing in clinical software solutions.  Follow Michael on Twitter or e-mail him at mboardman@triple-tree.com.

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Does Highmark’s Move Portend a Payers’ Path to Financial Health?

The  recent acquisition by Highmark, Inc. of the five-hospital West Penn Allegheny Health System brings into focus an emerging healthcare provider model in which payers are assuming direct control of medical facilities. Payers, seeking to curb costs amid U.S. health reform are motivated by numerous factors, including:

• Gaining an early leadership positioning in developing a self-sufficient ACO model that can be leveraged nationwide.
• Providing direct insight into best practices they can use in contracting with other medical groups.
• Allowing the capture of new efficiencies in the healthcare system by accruing part of the costs that would have gone to providers

Over the years, payers have attempted a number of different cost control mechanisms ranging from preferred drug lists to performance incentives – but have had minimal success. This feet-on-the-street approach is their most direct attempt to control spending through managing the doctors directly. The thought is that the Payer-Provider Facility strategy will truly “incentivize” doctors to control spending as it affects their direct employer; as opposed to other historical financial incentive arrangements that have failed to hold ground.

In the mid ‘90s managed care failed in its attempt to take a greater role in the care delivery as consumers rebuffed limits on provider choice and treatment options. This time around (and as depicted the graphic below), insurers adopting this strategy appear to be focused on the controlling the provision of services and owning providers as opposed to network or treatment restrictions.

Source: TripleTree, LLC

A recent Washington Post article analyzes the ongoing transition of the major managed care players – namely UnitedHealthcare, WellPoint, CIGNA and Humana – into the provider space.  Further analysis by TripleTree underscores that the strategy appears to be driven by the insurers’ desire diminish the financial pressure of health reform, however, this could also viewed as a long-term strategic move by insurers to position themselves as the central hub of future ACOs.

Source: TripleTree, LLC

Highmark’s acquisition is unique in that it is one of the only significant payer-hospital acquisitions to occur in well over a decade.  Payers (such as Humana and Wellpoint) have routinely purchased clinics in recent years in an effort to push care further outside of the hospital towards more efficient, less costly outpatient settings. The acquisition represents a bold strategy to align Highmark with their hospital provider base. However, the move also poses the risk of competitive backlash from competitors who choose to not use West Penn and withdrawal from customers fearing provider choice and location limitations.

In the coming months, TripleTree will be spending a considerable amount of time monitoring the movement of payers to reposition themselves as “clinical” and “provider-focused” as ACOs develop.   In addition, we will also be analyzing how each payer’s provider strategy aligns with their efforts to expand their clinical technology platforms into the provider market.

Let us know what you think.

Joe Long

Joe Long is an analyst at TripleTree covering the healthcare sector, with a focus on the approaches and technologies surrounding health insurance exchanges.  You can email him at jlong@triple-tree.com.

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Big Defense Contractors Take Aim at Healthcare

The U.S. Defense Department budget experienced a $2+ trillion surge from 1998 to 2010 and was the primary driver behind the growth and sky rocketing valuations of “defense IT” contractors over the same period. Government contractor M&A activity and valuations peaked in 2007 and have since stalled pending government budget cuts and evolving spending priorities. Despite the slowdown, recent indications are that M&A activity in the sector is roaring back – here’s why:

Facing stagnant growth in their core industry, recessionary pressures, and shareholder demands for higher revenue and earnings, defense IT contractors are increasingly exploring non-traditional avenues for growth. Unlike defense spending which faces the specter of spending cuts for the next several years, U.S. federal government healthcare spending has its own projections set now at $985 billion this year, with growth only accelerating. These combined factors have led leading industry players such as CACI, CSC, and General Dynamics to see healthcare as a major opportunity for growth and a strategic imperative going forward.  Financial sponsors are becoming acquisitive too – consider the following deals:

• NCI acquired AdvanceMed for $62 million
• Vangent acquired Buccaneer Computer Systems for $70 million
• Smartronix acquired HIE firm Cogon Systems for an undisclosed amount
• SRA International acquired by Providence Equity for $1.9 billion
• Global Defense Technology and Systems acquired by Ares Management for $315 million
• General Atlantic Partners and KKR purchased TASC from Northrop Grumman for $1.65 billion
• Veritas Capital purchased the Enterprise Integration Group from Lockheed Martin for $815 million

We believe that as comfort with the changing dynamics of the federal budget and healthcare reform grows in the new post-recession environment, strategic defense and IT contractor interest fueled by cash war chests and shareholder demands will drive premium market valuations. Reuters recently announced that Veritas Capital government HCIT portfolio company Vangent has entered a process with valuation expectations north of $1 billion and significant early interest from private equity and strategic buyers.

At the same time, cross-aisle matchmaking between commercial and government healthcare players (CSC’s acquisition of iSoft Group for $188m; Harris’ acquisition of Carefx for $155m; and UnitedHealth Group’s acquisition of federal medical evaluation provider Logistics Health Inc) is being supported beyond the increasing federal involvement in healthcare. UnitedHealth Group has taken an early leadership role with respect to diversifying beyond TRICARE and we expect other payer groups to follow. Some of the macro forces we see driving growing commercial-government convergence are:

• Fewer single department or one-of-a-kind government systems and solutions
• Technology upgrades are prevalent for cost-cutting purposes and streamlined workflows
• Growing mindset around collaboration between governmental agencies
• Diversification between stable government revenue and higher-margin commercial revenue

Despite the heydays of the defense spending boom being over, the government IT/services M&A market is showing it can still generate billion dollar deal flow. With existing industry players doubling down on their investments, new entrants (including financial sponsors) will continue to pursue and capitalize on undervalued assets. Let us know what you think.

Marc Baudry

Marc Baudry is an analyst at TripleTree covering the healthcare industry specializing in government healthcare services, population health management and informatics. Follow Marc on Twitter or email him at mbaudry@triple-tree.com.

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Feeding the Giants – 09/24/10

It’s official. The recession is over and has been for some time. According to the folks who track this at the National Bureau of Economic Research (NBER), the recession ended in June 2009. While most folks on main street may not have heard this news yet, a few of the global software master brands have been busy delivering the good news to a fairly large group of software shareholders over the last 16 months in the form of aggressive acquisitions.

Among the corporate development groups at IBM, HP, Microsoft, Oracle, SAP, and Cisco, a total of 57 deals have been transacted since the recession ended. Throw in Intel, EMC, Google, and Dell – all of whom are active in targeting software acquisitions – and the total deal count passes 100!

Software is not only hot, but it’s a market that is consolidating quickly. There is clearly an active race to shore up enterprise spend on software and related IT technologies. With hundreds of billions in cash lying around corporate balance sheets of the largest master brands, the fevered pace of software acquisitions will continue.

Just look at Oracle’s statements within the last couple weeks. In explaining why they hired Mark Hurd, Oracle Co-president Safra Catz stated “… we need people experienced in operating a $100 billion business”. Hurd ran the largest technology company in the world at just about $125 billion in annual sales. For Oracle to almost quadruple in size to hit the revenue target Catz mentions, the company will have to step-up its already aggressive acquisition pace.

So the race is on. The tech giants will continue their acquisition spree with sights set on filling portfolio gaps and entering net-new areas. With literally thousands of software vendors, the landscape is on one hand a target rich environment. However, in considering sale, size, solution uniqueness, profitability, architectural and cultural fit and a host of other factors that go into acquisition decisions, the universe of highly attractive targets which are large enough to move the needle for these behemoths is limited. Aggressive competitive bidding will become the norm.

Case in point is the much publicized bidding war between Dell and HP for 3Par which saw the acquisition price more than double from $1.13 billion to $2.4 billion in a matter of a few days. While 3Par may seem an anomaly and extreme case, competitive bidding is a fairly common occurrence, especially for the best assets in the market.

Even though the recession does not feel over for the folks on Main Street, the corporate development groups in some of the largest master brands have never been busier. Oracle, HP, IBM, and others mentioned will continue to target best properties in the race to round out their stacks and become the dominant players in enterprise IT.

Have a great week!

Scott Donahue

Scott Donahue is a Vice President at TripleTree covering infrastructure and application technologies across numerous industries and specializes in assessing the “master brands” of IT and Healthcare. Follow Scott on Twitter or e-mail him at sdonahue@triple-tree.com

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