Insurance Exchange Enablement Heats Up as the Clock Ticks Down

Today’s news that Wellpoint and two other Blues (HCSC and BCSB MI) acquired a 78% stake in Health Insurance Exchange vendor Bloom Health is not the first – and won’t be the last – move in what is sure to be a consolidating market.

The Accountable Care Act (ACA or Obamacare) requires each state to establish an online shopping portal, known as a Health Insurance Exchange (HIX) for individuals and small groups to purchase health insurance no later than January 1 2014. We have written and blogged extensively on the topic. In our estimates, HHS and the states will need to spend in the neighborhood of $4-$6 billion dollars on technologies order to create these exchanges. In addition to the ACA HIX, there is perhaps a bigger market opportunity in the private sector to create non-government sponsored insurance exchanges, creating even a bigger market opportunity. Bloom Health is one of many vendors specializing in the private exchange market.

Wellpoint, the Blues, and in fact all health insurance companies are making the individual and small group markets a top priority for new business and growth initiatives. These markets will explode in growth due to the Obamacare legislation and the carriers recognize the opportunity and the challenge with tapping this market.

The insurance exchanges, both public and private, will be the primary vehicles to reach into the individual and small group markets. Wellpoint’s move on Bloom, and Optum’s acquisition of Connextions, is recognition of this fact.

In addition to the Connextions and Bloom transactions, the vendor community is also coming together to help create insurance exchanges. Accenture’s acquisition of Duck Creek, announced partnerships from Oracle, Microsoft, CSC and others such as Maximus’ partnership with Connecture, portend of additional transactions to come in the space.

Insurance companies need help in positioning into the individual market, and also need technology to help them more effectively participate in the public and private exchanges.  Several vendors are positioning into the market but only a few have broad, proven experience with exchanges.

Companies like eHealth and Extend Health, which have consumer engagement and online shopping capabilities from market adjacencies (a leading online brokerage for eHealth and a robust Medicare exchange from Extend) will be important players in the new world of insurance exchanges. Other players like DestinationRx are similarly active in the exchange marketplace, working with HHS and multiple insurance plans, and will have a meaningful impact on the public and private HIX marketplace.  These vendors already have a head start in exchange operations, plan comparison features and tools to help consumers sort through the confusing world of insurance costs and coverage.

TripleTree’s recent HIX research report lays out a number of vendors that are currently engaged in HIX solutions. The report concludes that no vendor provides a complete solution.  Given the importance of the exchanges and the immediate market opportunity, no doubt consolidation will continue.

Have a good 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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Competition Spurs Consolidation and Innovation for Government Contractors Interested in Healthcare

A lot can happen in two months as evidenced that amid global economic chaos, merger and acquisition activity in the government contractor space has been among the most active sectors.

Concerns for long-term growth amid budget wrangling is driving government defense and IT contractors to recognize that while their core market could shrink, growth can be found in areas like healthcare IT and cyber security. The likes of Lockheed Martin and General Dynamics are paving the way.

• Lockheed Martin’s acquisition of QTC, the largest provider of outsourced medical evaluation services to the U.S. government and the U.S. Department of Veterans Affairs (VA), was announced in August. QTC delivers Lockheed a highly strategic relationship with the VA while provides services that are highly complementary with Lockheed’s growth plans into new verticals and creates an IT-enabled platform in healthcare and the VA for Lockheed to leverage its government and IT expertise upon.
• General Dynamic’s purchase of Vangent, a major provider of healthcare IT systems and solutions to the federal government, military, and commercial healthcare markets, was announced in August. While not a strategically new area for GD, the acquisition significantly expands its presence in healthcare IT and highlights the growing importance of the sector for GD. Combined with the $225 million acquisition of ViPS in 2008, GD’s double-down play on government healthcare IT firmly establishes it as one of the leading players in the space.
• SAIC’s acquisition of Vitalize Consulting Solutions, a market-leading provider of clinical, business and information technology services for commercial healthcare organizations, closed in August. Already leader in the government space, SAIC seized the opportunity to expand into the commercial healthcare provider market and leverage its information and data analytics expertise, while simultaneously capitalizing on the macro trend of the convergence of commercial and Federal healthcare markets.

The Lockheed Martin and General Dynamics deals highlight the growing competition and pressure from shareholders to acquire independent “crown jewel” companies within the government contracting space crucial for driving strategic transformation and growth. These prime assets can sell at significantly higher multiples than their peers because of their scale, depth of relationships, and scarcity.

We also expect to see M&A activity driven by “golden ticket” companies, best represented by the General Dynamic’s acquisition of Network Connectivity Solutions, a DoD enterprise services and cloud computing provider. Driving the transaction for GD was access to the DoD’s $12.2 billion multibillion dollar IT systems contract. The VA announced the winners of its $12 billion IT systems contract last month – the groups left off the list of awardees is long, including General Dynamics, Lockheed Martin, IBM, Northrop Grumman, CSC, Dell, and L-3. Given the competitive dynamic and relative scarcity of multi-billion dollar contracts, we expect acquisition activity to fall among the nine independent awardees as well.

Behind the headline deals, other recent acquisitions in this space included:

• Boeing’s purchase of Solutions Made Simple, a federal information services provider
• GTSI acquired federal IT consulting firm InSysCo
• The merger and rebranding of correctional healthcare companies Valitas Health Services and America Service Group as Corizon
• Ayelet Investments LLC bought Conmed Healthcare Management, a provider of correctional healthcare services to county and municipal detention centers
• CACI bought federal cyber security and enterprise IT solutions provider Paradigm Holdings
• Sotera Defense Solutions acquired Software Process Technologies, a cyber software company, five months after being acquired by private equity firm Ares Management for $315 million
• Moelis Capital Partners acquired CyberCore Technologies, a provider of IT services to the federal government

Given the growing public and private investor appetite for quality businesses in the government contractor space, we expect further public company spin-outs along the lines of L-3’s divestiture of some government services operations and the ITT conglomerate breakup as profit margins shrink and corporations look to liquidate underperforming assets. We predict M&A activity to continue to be driven by strategic diversification into higher growth areas, stockpiled cash, and opportunistic action. Because we anticipate the government outsourcing market continuing to adjust through a period of significant transformation for their strategy, watch our research and deal flow for further insights and perspective.  Until then, let us know what you think.

Marc Baudry

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