Expanding Services Portfolios and M&A Defining Payer Landscape in Government Healthcare

The third generation of TRICARE contract RFPs celebrated turning four years old and the contracting process is still ongoing. While the initial contract awards were announced in 2009, heated negotiations are underway for the last remaining TRICARE contract. The last two weeks saw the five year $20B TRICARE West Region contract awarded to UnitedHealth Group – which was promptly counter protested from the incumbent, TriWest. Contract awards and protests are common, and to better understand the driving forces behind the highly combative and contentious atmosphere around TRICARE contracts, it is important to look at the broader market.

The Military Health System (MHS), which includes the TRICARE contracts, and the Veterans Health Administration (VHA) – represent the two largest opportunities for commercial health payers to expand their presence outside of Medicare and Medicaid. Unlike CMS, the MHS and VHA are relatively protected from government budget turmoil and political scapegoating. A decade of global military campaigns and higher combat survival rates have increased demands on DoD and VA care programs and driven combined spending to over $100 billion and counting, while persistent reimbursement challenges and healthcare reform uncertainties have spurred some payers to look elsewhere for diversification.

In order to better align with and pursue future opportunities in the government healthcare space, and recognizing the volatility of the TRICARE contracting process, commercial payers have revisited their government healthcare strategies and developed road maps for expansion going forward . With the most recent award to UnitedHealth Group, the three TRICARE contracts are all expected to be operated by large public commercial health plans, each with markedly different strategies for pursuing government healthcare expansion.

• Health Net operates a small portfolio of VA community-based outpatient clinics and has been a TRICARE North Region contractor since 2004.  It is also the contractor for the Military & Family Life Consultant Program, providing behavioral health and counseling services to youth and adults.  It wasn’t until this year that the Company identified the VA as a key opportunity and separate area of strategic focus going forward as it tries to diversify and expand beyond its TRICARE contract and grow its VA footprint.
• Humana has served as the TRICARE South Region contractor since 1996. Its MHS presence beyond that extends mostly to patient scheduling for some military treatment facilities. Within the VA, Humana has been a frontrunner in leveraging its expansive network of commercial providers to treat veterans through VA pilot programs Project HERO and Project ARCH.
  • Project ARCH (Access Received Closer to Home) is a VA care initiative designed to facilitate healthcare access for eligible Veterans by connecting them with care services closer to home.
  • Through Project HERO (Healthcare Effectiveness through Resource Optimization), Humana provides the VA with pre-screened networks of health care providers who meet VA standards for quality care when specific medical expertise or technology is not available inside the VA health care system. Critical for Humana in expanding its government presence will be continuing to find innovative ways to deploy its commercial expertise, and that of recent acquisitions Concentra and SeniorBridge, into government patient populations.
• While UnitedHealth Group may be the new kid on the block (its military and veterans services division was formed in 2007 to pursue the TRICARE opportunity), it has not spared expenses in clawing out a footprint. The recent TRICARE announcement was a massive strategic uplift for United, which had invested considerable time and resources since 2007 aimed at wresting a TRICARE contract from an incumbent.
  • UnitedHealth Group’s acquisition of Logistics Health Incorporated, a national provider of medical services to the federal government, instantly positioned the company as a government health leader.
  • At the time of LHI’s acquisition in June of last year, LHI’s operations were largely concentrated around the Reserve Health Readiness Program, providing medical evaluation and readiness exams to the military.
  • The contract win in March of last year to provide clinical disability exams to 31 VHA sites had a first year contract value of $120 million and a five year ceiling of $635 million.
  • With a substantial presence across the DoD and VA, a final decision on the TRICARE win would establish UnitedHealth Group as the undisputed government healthcare heavyweight.

The numerous program opportunities expected to enter the government health RFP pipeline in the next 6-12 months provide an impetus for commercial payers to aggressively expand their capabilities in the sector. Given the critical importance of past performance and quality of care in RFP processes, acquiring companies with government contract experience and a track record of superior results will be essential in expanding a government contract footprint in the healthcare sector.

TripleTree is closely watching a range of upcoming contracts to underscore any possible trend including:

• TRICARE for Life: $29B program providing supplemental coverage for two million TRICARE/Medicare dual eligible military/veterans projected to grow to $48B by 2021.
• TRICARE Overseas: TRICARE services for overseas personnel
• Military OneSource, a telephonic employee assistance program
• Reserve Health Readiness Program (RHRP), providing medical and dental readiness services to all Reserve forces

The competition for government contracts will increase in pace with government healthcare spending as more large-scale public players enters the market (i.e. Lockheed Martin’s acquisition of QTC) and the scarcity of independent quality assets with scale becomes more acute. The earlier and more meaningfully a payer is able to carve out a platform in the government healthcare services area, the more defensible such a position becomes down the road. We fully expect that in addition to the proactive interest defense contractors are displaying in expanding their healthcare presence, commercial players will continue to become more active and aggressive buyers as well.  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, informatics, and facility-based services. Follow Marc on Twitter or email him at mbaudry@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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Focus, Economics and Patient Satisfaction…three keys to understanding Ambulatory Surgery Centers

Historically, surgical procedures were performed within the four walls of a hospital.  However, the past decade has seen a dramatic rise in surgery volume being performed in an outpatient setting—largely ambulatory surgery centers (ASCs).  As seen below, the number of U.S. ASCs is approaching 6,000, and overall procedure volume has shifted dramatically from inpatient to an outpatient setting.

Source: VMG Intellimarker 2011 and 2010

ASCs are outpatient facilities at which surgical procedures are performed on patients who do not require an overnight stay.  ASCs were originally established in 1970 and most commonly perform elective procedures with short anesthesia and operating times.  Typical procedures include eye, orthopedic, hand, plastic surgery, pain management, podiatry, ear-nose-and-throat, endoscopy, and laparoscopy at facilities usually ‘free-standing’ (not part of a hospital campus).  ASCs operate within a highly regulated industry with each facility being required to comply with rigorous oversight and certification.  Many of the same standards, constraints and requirements as inpatient hospital operating rooms apply to ASCs.

ASCs receive less of their total payments from Medicare/Medicaid than an average hospital – 37% for ASCs vs 61% for an average hospital which reduces some of the reimbursement pressure.  This makes sense as most of the procedures performed in this setting are elective in nature, which tend to come from the population not utilizing government health benefits.  We’ve assessed three key advantages offered by with the ASC approach to care:

• Compelling economics:  ASCs are able to provide lower-priced procedures because they have a lower cost structure than a traditional hospital setting along with a “focused factory” approach which creates efficiencies.
  • By shifting just half of all eligible outpatient surgeries to the ASC setting, Medicare could save an additional $2.3 billion annually (Ambulatory Surgery Center Advocacy Committee, 2010)
• Consumer appeal:  ASCs are generally free standing and located in the suburbs, which provide patients with better access.  Also, ASC schedules are better maintained because there is no possibility of emergency surgeries preempting a scheduled procedure.
• Focus, specialization and quality:  It’s difficult to track the quality of care provided in ASCs compared to hospitals because ASCs are not yet required to report comparable outcomes data – which will likely change in the near future.  We do know, however, that ASCs focus on a select number of procedures at a high volume, which allows doctors to perfect their craft and deliver high quality results to patients.

The advantages are not only for patients, but also for payers and providers.  Payers are able to negotiate more favorable rates for procedures performed in the ASC which lowers their overall costs of care.  Providers which are part of the ASCs have seen large economic gains as they’re able to take economic stakes in the operations.  Overall, ASCs have grown to become an important part of the care delivery landscape and as the three advantages listed above might dictate, this an area we predict will have an increasing relevance in the healthcare landscape.

Let me know what you think.

Judd Stevens

Judd Stevens is an associate at TripleTree covering the healthcare industry, specializing in the impacts and transformation of health plans in a post-reform world.  Follow Judd on Twitter or e-mail him at jstevens@triple-tree.com.

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Utilization Sits at the Forefront of Recent and Future MCO Performance

As a host of leading managed care organizations (MCOs) roll out their most recent earnings reports, it is important to analyze some of the key drivers of plan performance. A key driver of success for MCOs recently has been low utilization, which has driven earnings that exceed market expectations.

Utilization: As indicated, utilization has been a primary driver of recent MCO performance upside; in addition to the important role it plays in setting future pricing, capitation rates and earnings expectations. So what exactly drives utilization among managed care plans? In short, utilization refers to the use of services by members or the patterns of rates of use of certain services such as hospital care, physician visits and prescription drugs. Utilization has long been viewed to be driven primarily by the economy, which has benefited MCOs in the near-term.  The current economic climate has been beneficial to many of the MCOs in terms of utilization in that people have deferred medical care. For example, given the current economic climate, it is likely that consumers are more than likely to wait it out a few days rather than going to a doctor and incurring a co-pay plus a prescription charge. As people have put off medical care, MCOs have benefited from lower than expected medical expenses. Lower medical expenses relative to premiums collected equal more profitability (all other things like MLR rebates aside).

One of the big questions right now surrounding MCOs has to do with what future utilization will look like.  MCOs have benefited greatly from the recent 3-year cycle of lowered utilization rates starting in 2009. Perhaps the biggest question is whether the broader implications of this trend should be accounted for in setting future plan pricing or earning expectations. Is the trend of lowered utilization correlated to the recession, unemployment and economic concerns or is there a fundamental change in how people look at medical care, especially related to consumer-directed health, higher deductible plans and the cost shift to the consumer?

Given the current economic impasse in the United States and abroad, one would expect that trend is expected to continue driving continued earnings upside among MCOs. However, this has not been the case in the guidance provided by many leading MCOs. Several MCOs are predicting higher utilization for 2012. This higher utilization will have a direct impact on the earnings performance among these plans and have been a key topic among analysts and industry commentators. These recent utilization suggestions have been supported by analyst estimates that utilization rates will increase by up to 50-150 basis points in the near-term. As analysts are just now updating their 2012 models to reflect increased utilization, it is likely that model updates will lead to lowered 2012 analyst earnings forecasts and related price downgrades in the MCO sector. The analyst community generally has taken a hard stance on MCO utilization and it is likely that we will witness several MCO downgrades in the near term as analyst work to assess the impact of increased 2012 utilization assumption.

Several counter viewpoints exist that utilization rates will not move increase as much as the carriers are suggesting. The prevailing viewpoint from this camp is that although there might be marginal utilization increases this year, the profit spread will remain as pricing increases will exceed the expected increases in medical cost spending as a result of increased utilization. This stance prevailed in 2011 as utilization last year was below expectations, leading to overall MCO sector public market performance that exceeded other healthcare sectors.

While low healthcare utilization is generally beneficial to MCOs, it generally has the opposite effect on other healthcare sectors, including hospitals and healthcare IT and services companies. These groups generally benefit from the consumption of services, which was the focus of the most recent HCA earnings release. During this release, HCA cited a rise in same-facility admissions to be a key driver of their earnings increase despite a decline in domestic surgery admissions and revenue-per-equivalent admission fell amid Medicaid reduction.

However, it is important to note that role that several other factors play in formulating earnings expectations and guidance. Almost equally important to some MCOs as utilization (particularly those with Medicare enrollment) are factors related to new member enrollment and Medicare Advantage conversion rates. In addition, several MCOs face huge earnings upside related to expansion of Medicare / Medicaid dual eligible enrollment as well.

It appears that the uncertainty that plagued MCOs following PPACA’s passage has been pushed to the back burner as most MCOs have generally benefitted from the legislation. While there is still some fine-tuning on the edges of reform that still present an overhang for MCOs (namely, MLR limitations, administrative cost constraints), that is a topic for another day as the current focus appears to be squarely on near-term medical cost expenses and new opportunity capture (courtesy of dual eligible expansion, state Medicaid RFPs and commercial market pricing pressure).

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.

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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Hospital Readmission Stats Can Have a Meaningful Impact on Reimbursement

With the New Year fast approaching, and the start of the Centers for Medicare & Medicaid Services’ (CMS) fiscal year shortly behind us (it began October 1, 2011), it seems appropriate to evaluate the major initiatives implemented by CMS in FY 2012.  When doing so, one program stood out more than many others—the implementation of the hospital readmission reduction program. In short, CMS has implemented a program—consistent with its value-based purchasing program—designed to improve the quality of medical treatment provided to patients by penalizing hospitals that are deemed to have an excessive number of Medicare inpatient readmissions.

CMS’ program to curb readmissions, which began in 2009 when it started publicly reporting 30-day readmissions, is part of its overall effort to reduce costs and improve the quality and coordination of patient care.  The premise of the campaign against readmissions is to punish and dissuade providers from releasing patients that will likely need follow-up care for the same ailment as they were just treated, which, theoretically, will cause providers to make sure patients are provided with the necessary treatment the first time they are treated and, as a result, reduce the number of expensive follow-up trips to emergency rooms.  The program, which currently only covers readmissions for pneumonia, acute myocardial infraction (AMI) and heart failure, takes a step forward in FY 2012 from being a program that is intended to “shame” providers by making the 30-day readmission information publically available, as was done until now with CMS’ pay-for-reporting program, to being a true “penalty” program.

Beginning October 1, 2011, providers’ 30-readmission data will be collected and used to generate an overall score for each hospital for FY 2012.  This score will then be used to determine if a hospital’s readmission rate is higher than the Medicare-calculated “baseline” readmission rate (which was calculated by CMS using reported readmission information from July 1, 2008 through June 30, 2011).  If so, the total operating payments due to the hospital will be reduced by CMS, with the maximum reductions being as follows: FY 2013 =1%, FY 2014 = 2%, and FY 2015 = 3%. In addition, beginning in FY 2015, CMS can expand the list of covered conditions to broaden the impact of the program.

While the reimbursement risk associated with this program may seem insignificant to some, many providers are operating under very thin margins, which will make even a 1% reduction in Medicare reimbursement meaningful.  For example, if a hospital’s total inpatient operating payments for FY 2012 were $25mm, that hospital will have $250k at risk for reimbursement reduction pursuant to this program. With the maximum penalty increasing 1% per year until FY 2015, the penalty and dollars at risk will undoubtedly heighten providers’ focus on their readmission rates. It stands to reason that many will also look to new solutions, technologies, and programs to help them avoid being penalized. New solutions aimed at patient engagement as well as remote-patient monitoring are areas of opportunity that we think will continue to be instrumental in addressing the readmission dilemma providers are facing.  

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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State Health & Wealth Benefits Administration: Simple Coordination…Millions in Savings

As government’s role in the provisioning of health care and welfare benefits continues to increase, the number of participants in state administered benefit programs and the burden of supporting those programs is also growing.   Anti-poverty spending as shown in the graph below, has reached 4% of GDP, of which healthcare entitlement programs represent more than 1.5% (and is speculated to be the largest risk of runaway spending). Given the demographics of the low-income population served by these programs, a high level of duplicative efforts are taking place on a state administrative level in order to manage and administer these benefits.

Below are a few more details –

What types of state funded programs potentially have significant overlap in addressable market?

• Medicaid
• Medicaid Transportation Payments
• Low Income Energy Assistance Program Payments
• SNAP (Supplemental Nutrition Assistance Program)
• WIC (Women, Infant & Children Program)
• TANF (Temporary Assistance for Needy Families)
• Child Care Time and Attendance
• SCHIP – State Children’s Health Insurance Program

The tip of the iceberg

In most states, individuals qualifying for food stamps, welfare, Medicaid, etc., must separately apply to different state agencies for these programs.  An individual enrolling in multiple programs is just the beginning, as separate departmental processes, eligibility compliance checks and inevitable movement in and out of various programs compound the issue.

Finding an efficient path

As with any inefficient system, waste evokes opportunity. The ability to bundle benefits and combine or transfer the management of those benefits across state agencies will be extremely important in the lowering of administration costs and streamlining the benefits distribution across the states. As states realize the efficiencies gained from this exercise, they will likely invest in solutions that help manage multiple benefit plans and technology that is able to track eligibility and even auto-enroll the appropriate individuals to the appropriate programs. Unfortunately, this is much easier said than done.

Clearing hurdles

The main obstacle in this situation is the lack of administrative and payment capabilities to enable the states to provide the benefits to the eligible consumer (enroll and administer the programs), track usage/transactions, and appropriately distribute the funds. While this will not happen right away, once the public health insurance exchanges are established, it would make a lot of sense to use that exchange infrastructure to allow people to enroll in not only Medicaid, but other government benefits.

This area of compliance in health care is a focus for our team and is rife with opportunities – let us know what you think.

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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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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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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Dispelling the Myths of a Healthcare IT Investment ‘Bubble’

The U.S. healthcare industry is undoubtedly going through one of the most pronounced transformations in its history.  At the most fundamental level, the means and methods by which patients, providers, and payers interact is changing dramatically.

• Consumers (patients) are increasingly at the epicenter of the healthcare delivery and decision making processes.
• Providers (hospitals, clinics) are mobilizing to take advantage of new delivery models that assume the accountability for the quality and cost of healthcare for a defined population, the long-term goal of the ARRA legislation (health reform).
• Payers (health plans) are expanding their focus beyond a traditional coverage and benefits orientation to include advanced health management and decision support capabilities.

For innovators and investors, these structural changes in conjunction with the ongoing trend toward more granular clinical documentation and code sets (i.e., the new HIPAA 5010 standards and transition from ICD-9 to ICD-10) as well as the lure of billions in financial incentives related to complying with HITECH/Meaningful Use rules are creating brittle calculus for valuing technological advancement and innovation.

In many respects the U.S. health system has been caught flat-footed by a wave of long-overdue regulatory mandates aimed at dragging an industry long resistant to change into the twenty-first century.  The impending need for innovative healthcare IT solutions has created substantial demand for forward-looking vendors with the capability to provide greater efficiency and quality within the care delivery continuum and/or improve transparency within healthcare’s convoluted reimbursement system.  Companies with these general characteristics are rare and truly valuable.

When taken together, the combination of pent-up demand and a scarcity of viable alternatives create a “bubble-like” atmosphere where valuations have crept well outside their historical bounds.  Leading healthcare IT vendors are experiencing unprecedented interest from a range of potential acquirers that fall into three broad categories:

• Traditional Healthcare-Focused Companiesare uncharacteristically entering new, adjacent domains and paying high prices for healthcare assets deemed strategically significant in the context of a long-term strategy.  Here are a few examples of firms that are paying up to remain innovative, out-front, and relevant to their healthcare constituency:
  • Aetna’s acquisition of Medicity
  • UnitedHealth’s acquisition of Axolotl
  • McKesson’s acquisition of Portico
  • IMS Health’s acquisition of Med-Vantage
  • Verisk Health’s acquisition of Bloodhound Technologies
  • Wolter Kluwer’s acquisition of Lexi-Comp and Pharmacy OneSource
  • TriZetto’s acquisition of GatewayEDI

• A host of New Global Entrantsview healthcare as a big opportunity and are aggressively pursuing the best-in-class assets that provide a platform for growth or fill out their existing, complementary capabilities.  The following new entrants have made aggressive moves in the past few months:
  • Experian’s acquisition of Medical Present Value – complementing its existing investment in SearchAmerica
  • ADP’s acquisition of AdvancedMD
  • Harris Corp’s acquisition of CareFx
  • Stanley Black & Decker’s acquisition of Infologix – extending Stanley’s alerts and tracking capabilities
  • Capgemini’s recent announcement that it is looking to build out a significant presence in the U.S. healthcare IT market via a string of acquisitions

• Meanwhile, Private Equity Firms have begun to reemerge following an ’08-’10 hiatus to compete aggressively against strategic acquirers for some of healthcare’s best positioned assets.  Generous option programs and new operating partner structures comprised of experts with decades of experience are viewed as highly attractive by business owners/founders.  Additionally, due to a stockpile of committed and uncalled capital as well as a preponderance of cheap debt, private equity firms are eager and willing to compete aggressively on M&A opportunities:
  • Parthenon’s investment in Eliza
  • Founders Fund series B investment in Practice Fusion
  • Golden Gate’s and Infor’s acquisition of Lawson Software
  • JMI Equity’s investment in PointClickCare
  • Norwest Equity Partner’s investment in Surgical Information Systems

The flurry of activity has resulted in a sellers’ market in which revenue multiples (computed as enterprise value divided by trailing twelve months revenue) have exceeded 8-9x.  This begs the question: is healthcare IT in a bubble?  The answer would be unequivocally “yes” if it weren’t for a range of trends that will persist for the next 10-20 years:

• 78 million Baby Boomers are reaching retirement age
• Over-utilization and high cost prescription drugs and medical procedures are not proving to be cost-effective
• Increasing incidence and complexity of chronic and co-morbid conditions.
• Healthcare, as compared to most other industries is in infancy in terms of technology adoption – creating a long-standing demand for IT implementation, integration, and optimization
• Need for new and creative approaches to funding the rising cost of healthcare in light of the strain put on the Medicare and Medicaid entitlement programs
• Prevalence of fraud, waste, and abuse within the administration and reimbursement processes

A constantly replenishing pipeline of new, entrepreneurial companies is fueling the pioneering spirit and innovation required to advance and redefine the U.S. healthcare system.  Any resemblance to a “bubble” is snuffed out by the sustainability of the current demand and expanding interest from the nation’s leading entrepreneurs, business builders, investors, and advisors that will continue to be attracted to solving healthcare’s complex, long-standing problems.  All in all, it’s a great time to be an innovator in healthcare.

Let us know what you think.

Seth Kneller

Seth Kneller is an Associate 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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HIX: Finding the pony hidden within the ACA’s “exchange concept”

Change is coming to the U.S. health insurance market and the road will be bumpy.  Nowhere is the change more apparent than the current debate surrounding the state-run public health insurance exchanges. Our research underscores that the Affordable Care Act of 2010 underestimated the cost and complexity of establishing public exchanges. In spite of these issues, new and unforeseen opportunities are emerging relative to health insurance distribution. The application of retail, product design and customer service expertise could be transformational relative to the health insurance market for individuals.

As the Affordable Care Act (ACA) marks its first anniversary, a number of key questions remain. One of the largest revolves around the costs and benefits for the federally mandated and state-run competitive marketplaces called Health Insurance Exchanges (HIX), where individuals will be able to shop for and purchase health insurance. The public (state-run) HIX is one of the cornerstones of the health reform legislation, and for individuals without healthcare coverage today – an estimated 34 million people – the public HIXs are the intended mechanism by which individuals will acquire health insurance.

Our latest research report assesses the ACA requirement that each state build and operate a multi-channel (i.e. online, phone, and paper-based) marketplace where any qualified individual can shop for and buy health insurance.  The legislation provides some specifics as to what types of “essential health benefits” must be provided within the exchange, dictates guidelines and mandates as to how the states must run the HIX, and defines specific features the exchanges must possess. These include:

• A choice of certified and approved health plans from different carriers.

• Simple plan comparison tools that allow consumers to research and select the best policy for their needs.

• Enrollment assistance for those purchasing private insurance, and eligibility information for those qualified to receive government subsidies or Medicaid enrollment.

• A process for recouping operational costs of the HIX through surcharges in order to make them self-sustaining.

For these exchange-based insurance policies, federal and state law will closely regulate the products and benefits offered and the prices insurance companies can charge for their products. To keep the HIXs viable, insurance companies are forbidden from undercutting prices of products sold on a public exchange with competing products in the open market. They will also be required to pool risks across exchange and non-exchange participants. Further, the U.S. Department of Health and Human Services (HHS) will mandate a set of essential health benefits that must be provided under each policy, including coverage and deductible tiers for each plan offered.

While the public HIX concept seems simple and straight forward, our research predicts that their implementation will be fraught with costs, technical challenges, and sustainability issues that are neither recognized nor acknowledged, much less understood. Thus far, much of the debate about HIXs has focused on constitutional questions – and therefore political issues – related to the individual mandate which would compel citizens to purchase health insurance. As the states ramp their HIX implementation efforts in order to meet the 2014 deadline, we anticipate that several new challenges will come to the forefront. They will need to be addressed and will propel further change.

Healthcare reform and the resultant need for serving the individual market are propelling new approaches to capturing share in the insurance marketplace, and we expect that a range of new market entrants are just around the corner. Recognizing that it is still early in the progression of these alternative, free-market approaches, this report will review the concept of “private” insurance exchanges and reveal how they will likely serve a larger population than their public counterparts, and will provide more compelling insurance options and opportunities.

Thanks and 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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