Innovative Provider Models Reveal Glimpse into Future of Care Delivery

A new topic we’ve been monitoring in the debate over healthcare spending has been the alarming shift from traditional cost centers such as inpatient care, pharmaceuticals and administration to outpatient care.

While outpatient settings appear on the surface as  more cost-effective alternatives, the limitations of the healthcare system  to establish incentives limiting utilization negates any potential for cost savings. Arguments in support of and against the shift have merit and must be considered as outpatient care is among largest and fastest growing healthcare spending categories.

In an attempt to limit the cost drivers of overutilization and overuse, various initiatives to balance care costs, quality and efficiency have been introduced. The most likely transition that will occur over the next few years will be the continued build-out of a provider capitation system designed to limit cost and utilization yet maintain quality. As the outpatient market braces for this shift, all eyes are on a few of the more progressive models where cost savings and outcome improvement under a provider capitation model are being demonstrated.

Over the past ten years, CareMorehas established itself as among the most vertically integrated Medicare Advantage plans in the country. Through its network of employed physicians and outpatient primary clinic care centers,  they are essentially “at risk” and therefore incentivized to efficiently deliver care – thus shifting the risk from health plans as in  traditional network models. Through a system of care coordination spearheaded by individual care managers who monitor primary and follow up care, Caremore has been able to generate outcomes far superior and more profitable than traditional Medicare Advantage plans.  CareMore has validated that the provider capitation model has potential to generate cost savings if operated effectively.

Perhaps the most comprehensive example of a system that has implemented a provider capitation model is the Department of Veterans Affairs (VA) health system through its network of Community-Based Outpatient Clinics (CBOCs). Over the past 20 years, the VA system has transitioned away from a pure hospital-based system to an ambulatory and primary care based model. In doing so, the VA has established CBOCs in order to improve care access and control spending by minimizing instances where non-acute conditions are treated in an ambulatory setting. Over the course of this transition, the VA has begun a process of soliciting outside groups to provide primary care to veterans in non-VA facilities on an individual capitated basis through the CBOC program. Valor Healthcare (Valor) has established itself as the leader in the contract CBOC market, both in terms of market share and clinical excellence.  Much like CareMore, key to the success of Valor has been their provider incentive system. Valor employs a robust pay-for-performance system for its physicians based on evidence-based guidelines and clinical performance. This program has driven clinical outcomes that exceed the benchmarks established by the VA. In addition to performance incentives, Valor’s use of several innovative care approaches to increase patient engagement and adoption contributed to consistent utilization levels.

With cost continuing to be a key issue across the healthcare system, it is likely that payers will continue to experiment with new incentive models aimed to improve the distribution of care yet maintain quality. As this occurs, innovative care models like CareMore and Valor will serve as building blocks as we continue to refine our delivery approaches to more effectively balance care quality, efficiency, safety, and cost.

Let us know what you think.

Joe Long

Joe Long is a Senior Analyst at TripleTree covering the healthcare industry, covering payer-focused healthcare software and service providers. You can email him at jlong@triple-tree.com.

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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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Healthcare: Survival of The Fittest

According to Levin and Associates, mergers and acquisitions in the healthcare industry totaled over $227 billion, an 11% increase over 2010 and the fourth-largest year of the past decade. Even more interesting, is that the value of healthcare services deals increased 43% while technology decreased 2%. Hospital systems are moving into new communities, integrated health systems are acquiring additional delivery system assets, managed care networks are growing, and specialty care service businesses are expanding their footprint—to be well-positioned for survival in a post-reform world.

This is the type of data we shared with TripleTree’s Health Executive Roundtable–the investment bank’s “think tank” comprised of a diverse group of health industry executives with backgrounds ranging from banking, medical device, education and life sciences; to food services, technology, human capital management, and compliance.

We asked each Roundtable member: “What are the key trends that will emerge from this consolidation?”

Their independent and unique perspectives are published in:

Viewpoint: A Kaleidoscope of Insights Regarding Growth Opportunities amid Consolidation in the Healthcare Industry.

You can view and download the report here.

In addition, you are invited to participate in a webcast on Wednesday, February 29, 2012 from 12-1 pm CST where we will discuss the highlights and key themes from the report. You can register for the webcast at: https://www2.gotomeeting.com/register/771534410. After registering you will receive a confirmation email with information about joining the event.

As a preview. the following are the highlights and key themes from the report:

1. Healthcare costs will increase. It’s all about supply and demand. Market consolidation sets the stage for increasing healthcare costs as fewer, large, hospital and healthcare systems leverage their size and strength during unit cost contract negotiations with payors.
2. Contraction of the delivery system = expansion of demand for meaningful innovation to combat the pressures of #1. However, the only “new new things” that will survive are those that solve real problems with a scalable, cost-efficient solutions that integrate with the existing healthcare infrastructure.
3. B to C solutions require B to B revenue streams. Consumer adoption is critical for demonstrating relevance, but consumers don’t typically fund high growth enterprises.
4. “Health and Wellness” will transition to “Life and Well-Being.” Payers and employers will seek innovations that support life and well-being as the distinction between work, home and health become increasing blurred.
5. Healthcare gaming will emerge–actually, it will explode. Gaming platforms that integrate entertainment, interaction, and achievement will be a transformational solution for driving consumer engagement and behavior change as well as provider education, training, delivery, research and cost containment.
6. Electronic health records will evolve into smart health information technology ecosystems. These ecosystems will (finally) enable the coordination of care and drive shared accountability among healthcare providers.
7. Doctors will be loyal to a single system. (Smart) hospitals and health systems will attract and retain doctors with mobile and wireless software applications that enhance personal income and lifestyle.
8. The most disruptive solutions are likely to come from outside the traditional healthcare industry. The core assets and capabilities that fuel retail, consumer packaged goods, banking, and telecommunications, for example, can be translated into unique and meaningful healthcare solutions by companies and individuals not trapped in parochial “we’ve always done it that way” thinking.

A “perfect storm” is brewing where science and technology have no boundaries, and the convergence of reform and unsustainable medical costs are generating opportunities for change. I can’t think of a more exciting time to be in healthcare.

I look forward to your feedback via blog post comments, personal email, or during the webcast.

Archelle Georgiou

Archelle is a Senior Advisor and Chair of TripleTree’s Healthcare Executive Roundtable, and focused on creating health through innovation.  You can follow Archelle on Twitter, on her blog, or email her at ageorgiou@triple-tree.com.

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Ramping up for HIMSS 2012

It’s hard to believe that HIMSS 2012 is just around the corner.  As we look ahead amid the consolidation and investment opportunities in healthcare, if you are at HIMSS this year and would like to exchange perspectives on the industry or bring us up to speed on your progress for the year, please let us know.

Here is what’s on our radar related to our research and advisor agenda for the year.

• Why ‘consumerism’ is impacting healthcare delivery models at an unprecedented pace
• How mobile applications are key tools for navigating a ‘B2C shift’ in healthcare
• Where innovations are evolving quickly to meet the demographic shift of seniors
• How productivity tied to health is a growing focus for employers
• Why compliance-centric issues ranging from payment integrity to improved patient outcomes are dominating many health care cost debates
• How the shift toward ACOs and Medical homes is radically altering care delivery models
• The impacts of ‘life beyond the EMR’ as more granular clinical documentation will substantially increase risks associated with reimbursement, compliance, and productivity.
• How healthcare is being driven by data and analytics to build a more complete picture of a patient
• Where the pharma market is shifting away from paper-based systems and processes and calling for innovations that reduce cost across the clinical development landscape

Let us know what you’re thinking about…see you at HIMSS in a few weeks!

Chris Hoffmann

Chris Hoffmann is a Senior Director at TripleTree covering ‘consumerism’ and where legacy and edge technologies are impacting healthcare. Follow Chris on Twitter or e-mail him at choffmann@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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ACO Speed Bumps, Courtesy of CMS

We recently reviewed an article outlining the current debate between the American Telemedicine Association (ATA) and Centers for Medicare & Medicaid Services (CMS) regarding the statutory restrictions placed on telehealth by CMS in certain rules effecting accountable care organizations (ACOs).  In summary, ATA is asking that five Medicare requirements that effectively limit the use of telemedicine—by prohibiting reimbursement—be waived or modified.

It is ironic that CMS is supporting unnecessary road blocks to ACO enablement, a care delivery methodology that is a cornerstone of the 2009 health reform legislation.    At the core of the government’s support for ACOs is the idea that Medicare and Medicaid spending is unsustainable and a system that rewards providers for delivering the same (or better care) could be most impactful by better managing patients with chronic conditions, reducing readmissions and minimizing ER visits.

Thus, it seems counterintuitive that new approaches to delivering care (i.e., ACOs), should be encumbered.  As persuasively pointed out by a letter from the head of the ATA to the head of CMS; “telehealth should be an integral part of how ACOs provide healthcare. The benefits of telehealth for Medicare beneficiaries and Medicare program include:

• Reduction of in-person overuse, such as in emergency rooms and preventable inpatient admissions
• Triaging for faster, appropriate specialist care
• Improve[d] patient outcomes and quality
• Increase provider productivity
• Relief for provider shortages
• Reduction in disparities to patient access
• Decrease unnecessary variations in care…”
  – Source

While impactful, yet another memo from the ATA on this same subject was even more persuasive.  Entitled “Recommendations to the Center for Medicare and Medicaid Innovation,” the ATA explored connecting doctors to patients via telehealth instead of traditional office visits, and the significant savings in Medicare spending that could result.  In this memo, the ATA used the example that Medicare spent over $4.5 billion in 2009 on ambulance rides for patients. While it was not argued that this entire amount was wasteful or unnecessary, the memo pointed out that the Center for Information Technology Leadership analyzed this line item and determined that leveraging telehealth would result in $500 million of annual savings.

We haven’t yet seen the reply by CMS to the ATA memo, but it seems that any past reservations about telehealth should be reevaluated to reduce the friction of pursuing the ACO model.  As the ATA’s Administrator ironically points out in his memo to CMS regarding the CMS ‘definition’ of an ACO: “An ACO will be innovative in the service of the three-part aim of better care for individuals, better health for populations, and lower growth in expenditures.  It will draw upon the best, most advanced models of care, using modern technologies, including telehealth and electronic health records, and other tools to continually reinvent care in the modern age.”

Let us know what you think and have a great week.

Jamie Lockhart

Jamie Lockhart is a Vice President with TripleTree covering healthcare software and service providers with a focus on consumer directed healthcare.  You can contact him at jlockhart@triple-tree.com

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Can a New Approach to a Healthcare Claims Database Help Control Costs?

As congressmen and stakeholders across the country continue to debate the best methods for quality improvement and cost containment in the U.S. healthcare system, four of the nation’s largest health insurers have come together to provide access to data that has the potential to significantly bend the cost curve.

A long awaited announcement came last week from  Aetna, Humana, Kaiser Permanente and UnitedHealth Group  revealing that they will be providing access to over 5 billion de-identified claims from over 5,000 U.S. hospitals totaling $1 trillion of healthcare costs incurred since 2000. This data will be made available to researchers and distinguished healthcare economists via the newly formed nonprofit group, Health Care Cost Institute (HCCI).

According to the HCCI web site, its mission is to promote independent research and analysis on the causes of rising US health spending, to provide policy makers, consumers, and researchers with better, more transparent information on what is driving health care costs, to help ensure that, over time, the nation is able to get greater value from its health spending.

Last week I spoke with Dr. Stephen T. Parente, PhD., Professor in the Carlson School of Management at the University of Minnesota and member of the governing board of HCCI. He described the multi-stage approach of the HCCI which includes collecting and aggregating data from the participating private insurers and establishing a database for entities interested in getting a handle on health care costs and utilization.  The HCCI is also designing “rules of the road” related to research protocols, access and review..

Until now, claims data has been limited to federally provided data on Medicare. But with over half of healthcare expenditures coming from private pay insurers, this restricted view hasn’t been broad enough to draw meaningful conclusions.   As its content evolves, the HCCI will publish a bi-annual scorecard to help researchers identify trending information at levels of detail rarely (if ever) seen before.

We’re actively working with healthcare innovators, many of which are working toward the same healthcare cost-saving goal,, and thought it would be useful to list our view of where  we predict the HCCI could (in the near term) positively impact payers, providers and patients related to healthcare cost and quality:

• Develop evidence-based care recommendations and best practices (Providers and patients)
• Design multi-payer quality improvement strategies and evaluate their effectiveness (Payers and patients)
• Understand key bottlenecks along the care continuum where patients spend the most time and dollars (Payers and patients)
• Determine specific diseases, conditions and treatments that are driving the largest cost trends (Payers and patients)
• Identify the most cost-effective providers and medical procedures as well as geographical variations (Payers and patients)
• Isolate cost variances between Medicare/Medicaid and private health plans and help appropriately align pricing with private pay (Taxpayers)
• Analyze healthcare cost trends over time at an heightened level of specificity (Everyone)
• Evaluate the effectiveness and draw comparisons between different types of disease management programs and treatment procedures(Payers, providers and patients)

Our long term outlook on the value of this data is that it can create new metrics of clinical and care performance standards based largely on historical and real-time reporting on claims. We’re hopeful that as such analyses are developed and recognized on a broader stage, they will be used to inform policy on a much more direct basis and make a huge impact on the costs of healthcare.

Have a great week.

Emma Daugherty

Emma Daugherty is a Senior Analyst at TripleTree covering the life sciences sector with a focus on provider technologies and patient safety.  You can contact her at edaugherty@triple-tree.com.

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The Clock is Ticking for Public Health Insurance Exchanges

The success of Obamacare relies entirely on every state having a health insurance exchange as mandated by the Affordable Care Act (ACA) up and running no later January 1, 2014.

By early 2013, the federal government (via Health and Human Services (HHS)) will make a determination as to each state’s readiness to bring their health insurance exchange online. Lack of readiness by the January 1, 2014 deadline means HHS will take over the implementation and operation of each exchange.

The clock is ticking…

We are following closely the progress that is being made by the states are convinced that only a handful will be ready by the deadline.   Moreover, we question whether HHS will be able to step in and offer their working version of an exchange either, or if that federal exchange will even be legally able to offer subsidized policies.

While we are not prepared to unilaterally conclude that ACA’s exchange deadline won’t be met by any state, a former HHS secretary is equally skeptical.

We want exchanges to succeed and believe they ultimately will (in some form).  Our reviews of the exchange initiatives have included studying the Early Innovator grants and interviewing state policy administrators and vendors selling into the exchange concept.  The amount of work that will need to be done in order to get the public exchanges stood up by 2014 is daunting.

TripleTree’s recent report on exchanges, HIX: An assessment of the complexities and opportunities emanating from the ACA’s public health insurance exchange concept introduces these challenges and some innovative solutions that could emerge as part of the solutions.  Since then however, the planning, procurement and testing are in the early innings; and operational integration is far from reality.   Unfortunately very few states have a demonstrated ability to pull off the kind of implementation prowess needed to come online, on time.

Putting politics and policy aside, there are at least three major challenges that each state will need to overcome (quickly) if the public exchanges have any chance of meeting the 2014 deadline:

1. States need more clarity on what they are building even though many states have RFPs out for technology and have drafted high level architectures.  There is universal uncertainty and lack of guidance from HHS on major issues such as to exactly how payments and subsidies will be processed  or how the carriers will integrate their workflow into the exchanges
2. States lack successful architectural models and commercially proven technical capabilities because there is no working model of an exchange. Those charged with building the models – the Early Innovator grantees – are far from ready, or have dropped out of the program and/or returned their remaining funds.  The often cited Massachusetts and Utah models fall short of the ACA requirements (as do the Medicare exchanges).   And no vendor has a turnkey solution.
3. States need more time – Given the massive scale and complexity of the exchanges and the integration that needs to be done with existing state and federal systems, it will be next to impossible to build an automated exchange as envisioned by the ACA in the next 16 months.

In our report, we also introduced the notion of private entities that may have the acumen and motivation to bring an insurance exchange online by the 2014 deadline.  We speculated that the private exchanges would start to roll-out in the second half of 2011 and even identified some of the likely players that would have compelling capabilities to drive the private exchange concept.

Our research asserted the real opportunities for the private sector to capitalize on the HIX mandate through a market-aligned solution that will have more impact to improve health insurance access than the federal mandates.  We are excited to see and will continue to watch the early launches of the private exchanges and believe the states and public HIX will benefit from modeling their efforts and approaches around the early successes from the private exchanges.

Let us know what you think.

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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A Big Week for ACOs

Given that this Friday is the deadline for applying for CMS ACO “Pioneer” status and is also the assumed release date for the final ACO regulations, this is sure to be a busy week for ACO news.

And as if we needed more proof that still no one knows how ACO adoption is going to shake out, we took note of the following last week:  on August 19^th, Forbes published a blog post titled “How ObamaCare is Destroying Accountable Care Organizations.”   (This was based on a post by noted healthcare policy analyst John Goodman: “Health Care Schizophrenia” )

As a key argument, the post cites how an innovative medical group in Texas called IntegraNet wouldn’t qualify for CMS ACO status, despite all the good work they are doing around measuring practicing evidence-based medicine and driving down costs because they rely on a Fee-for-Service model.

One week later, on August 26th, guess what happens?  IntegraNet became one of the first groups in the country to formally apply for ACO designation.  (To be completely fair to Goodman and to Forbes, IntegraNet clearly states that they are applying early in order to have some influence on the “burdensome rules” imposed in the regulation).

However this drama plays out, we here at TripleTree have been thinking a bit about the broader picture.  While most of the drama and headline news (and criticism!) is happening at the federal level of the CMS ACO program, there are a number of hospitals and physician groups that have quietly undertaken their own shared savings and bundled payments experiments.

In fact, Modern Healthcare published its first survey of accountable care organizations this week, identifying 13 ACOs respondents around the country (this despite the fact that CMS ACO program does not launch until 2012). To us, these experiments are the real market opportunity for ACOs, and one that has finally gotten some deserved attention on the back of the government’s healthcare reform legislation.

In fact, a great example can be seen here in our backyard with Fairview Health System’s developing relationship with the payer Medica.  A case study can be found here, but in short:  Fairview, a seven-hospital system with 49 clinics and 450 employed physicians, and Medica, with 1.6m members in the upper Midwest, decided that they could seek a more mutually beneficial relationship.  In 2009, they entered into a contract that pays Fairview based on the achievement of defined outcomes for quality and total risk-adjusted cost of care based on Fairview’s performance on certain diabetes and vascular care measures.  Essentially, if Medica members have better outcomes and lower costs than the community at large, Fairview shares in those savings.  Preliminary data is encouraging, though the relationship is requiring a “total cultural transformation” on the hospital system’s part, including a total redesign of workflow, compensation, and responsibilities. (Just think of what kind of transformation will be required to measure and achieve CMS’s 65 proposed quality measurements!)

While these quiet moves will never get the attention that Highmark’s acquisition of West Penn Alleghany that we profiled recently, this the real story of the ACO debate going on right now.  These experimental relationships between providers and payers are the ones that will prove if shared savings and bundled payments can truly bend the proverbial cost curve.

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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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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