Fingerprints of Value-Based Care Revealed in Much of 2015’s M&A Activity

It’s that time of year again; time to sit back and reflect/opine on another year of mergers and acquisitions (M&A)—and what a year it was. Last year saw M&A at record levels (328 HCIT deals in all, up from 308 in 2014^*)—not to mention a solid number of IPOs (four in core healthcare IT) and a tremendous amount of venture and private equity investment (more than $9 billion invested through 420 transactions, excluding buyouts^*).

Michelle Mattson-Hamilton

Ben Rooks

As we took a deeper look at the year’s most significant transactions (both for companies on and off our Healthcare Informatics 100 list), it became clear that many of the year’s acquisitions fell within a few key themes: (a) transformation to value-based care, (b) payer and provider consolidation, (c) electronic health records, (d) interoperability, (f) population health, and (g) revenue cycle.  Let us briefly touch on each category and highlight a few of the relevant transactions before sharing our predictions for 2016 and sending you on your way.

Transformation to Value-Based Care

While perhaps a tad over-hyped at this point, the transformation of healthcare reimbursement from “volume to value” has finally begun to logically align stakeholders throughout the healthcare landscape, and during 2015, we saw evidence of the industry progressing further along the value-based care continuum. In January, several of the nation's largest health systems and insurers joined together with the goal of shifting 75 percent of their business to value-oriented contracts. A May evaluation of Medicare's payment reform efforts found that 42 percent of each program dollar was flowing to value-oriented payment methods. Then, in December, reports showed that accountable care organizations (ACOs) had increased their total U.S. coverage population to 23 million people (up from 7 million in March).

The transformation from volume to value is the underlying foundation of most of the other trends we’re shortly going to discuss. In addition, three relevant acquisitions bear mentioning as key HCIT companies made direct value-oriented investments in 2015. In April, Quality Systems, Inc. (#27) acquired Gennius, a provider of outcomes-based analytics for addressing value-based care requirements. In November, GE Healthcare (#9) acquired The Camden Group, an advisory firm focused on helping organizations through the changing healthcare environment, and finally, Cardinal Health acquired the majority of NaviHealth for $290 million in August; NaviHealth provides management of post-acute utilization, networks, and management of bundled payments for risk-bearing entities.

Payer and Provider Consolidation

Citing the need to integrate and align more effectively for the universe of value-based care, this past year witnessed heavy sector-specific consolidation for payers and providers. While the reasoning may be sound, there is also the risk of fewer options for consumers, reduced competition, and eventually increased prices both for consumers and the system as a whole.  While not directly related to our Healthcare Informatics 100 list, these acquisitions are worthy of mention as they notably reduce the number of available customers for our vendors and lead to increased customer buying power.

On the payer consolidation front, while the Aetna / Humana ($37 billion) and Anthem / Cigna ($54 billion) transactions got the most attention, 2015 also saw Cigna agree to buy New Jersey’s QualCare Alliance Networks, Centene announce its acquisition of Health Net ($7.8 billion), and Kaiser announce plans to acquire Group Health Cooperative for $1.8 billion.  With 112 transactions (compared to 95 in 2014 and 66 in 2010), providers had a likewise active year, and 2015’s largest announced provider deal was the merger of two not-for-profit, Catholic healthcare systems: Renton, WA-based Providence Health & Services ($12 billion in revenue) and Irvine, CA-based St. Joseph Health System ($5.6 billion in revenue).

Electronic Health Records

While much of the market discussion has shifted away from electronic health records as the regulatory incentives (and their associated pressures) have dwindled, the EHR remains the key source of patient clinical data (foundational for effective value-based care), and the desire to own that data source, and expand the platform by adding additional solution offerings, remains a strategic imperative for some vendors.

In 2015, a handful of vendors made EHR-related acquisitions.  As a first step into the in-patient market, athenahealth (#15) acquired both WebOMR, a self-developed EMR from Beth Israel Deaconess Medical Center, and Razor Insights, a cloud-based health information system for rural, critical access, and community hospitals.  Cerner (#2) completed its acquisition of Siemens Health Services in February, with Siemen’s more financially-focused products providing a nice complement to Cerner’s more clinically-focused solution suite.  CPSI (#53) acquired Healthland (#72) for $250 million; this acquisition broadened CPSI’s critical access customer portfolio, as well as providing the company with exposure to the post-acute market and strengthening its revenue cycle solution (through Healthland’s 2015 acquisition of Rycan).  Exiting the stage, ADP divested AdvancedMD to Marlin Equity Partners in August, five short years after acquiring it in an attempt to enter the healthcare market (as we’ve always said, healthcare is harder than it looks from the outside). Finally, with the goal of providing the company with a solid SaaS migration strategy, Quality Systems, Inc. (#27) acquired SaaS-based EHR/PM vendor HealthFusion for $190 million.

Interoperability

Essential for care coordination, patient engagement, and public health and quality reporting – just to name a few, interoperability stayed squarely in the headlines last year with the federal health IT coordinator calling for providers to use their EHR systems to send, receive, and use “a common set of electronic clinical information ... at the nationwide level” by the end of 2017. The ONC also released its 10-year interoperability roadmap, the media spotlight shined brightly on information blocking, and there were innumerable industry discussions around FHIR. That said, there is still a long way to go, with only 10 percent of hospitals today relying exclusively on electronic information exchange.

There were several interesting interoperability-related acquisitions throughout 2015. Creating an end-to-end device and application connectivity platform, Qualcomm Life acquired Capsule Technologies (#93) in September.  Sunquest (a Roper Technologies company - #23) acquired Data Innovations, a provider of laboratory connectivity solutions. (Sunquest also acquired Clinisys, a European laboratory information management system, for $261 million, and Atlas Medical, a clinical process and connectivity solution, for $48 million last year.) NTT Data, Inc. (#47) acquired the global exclusive rights to InteHealth, Inc.'s technology, which allows users to connect and share information among key stakeholders. Finally, NantHealth acquired Harris's FusionFX product line, which includes an HIE, patient and provider portals, secure messaging, and single sign-on capabilities – readers might recall that Harris’s analytics and middleware products came from its 2011 acquisition of Carefx.

Population Health Management

We consider population health to be the intersection of analytics (both healthcare and performance management), care management, patient engagement, and network management. While analytics has received the most attention to date, in January 2015, when CMS launched the Chronic Care Management program (paying for non-face-to-face care coordination services), care management sprang into the population health spotlight. Although there are a plethora of bright and shiny new patient engagement offerings available in the market, active efforts within populations remain immature, and proving ROI remains elusive to say the least. Finally, the network management function feels like it is still emerging as a vendor solution, with most capabilities remaining housed within the payers themselves, although this is slowly changing.

The majority of population health acquisitions in 2015 occurred within the analytics realm (both in the health and performance management arenas). On the health side, IBM (#25) acquired both Explorys (analytics) and Phytel (care coordination and patient outreach tools), with the intention of bolstering Watson’s analytics and cognitive computing efforts utilizing the combined 50 million patient records the two companies provided.  (While not population health, IBM also made a whopping $962 million acquisition of Merge (#46) last year, a play to combine Merge’s medical image processing, interoperability, and clinical systems (and 30 billion anonymized images) with the Watson platform – although it’s unclear how long it will take to make headway on that strategic vision. As we always say, immaterially means never having to say you’re sorry…)

Also in the population health analytics realm, Welltok acquired Predilytics, which provides actionable information around gaps in care and member receptiveness to engagement. (Welltok also acquired Silverlink in December, a provider of technology-enabled patient outreach solutions.) In August, Health Catalyst expanded its analytics suite with the acquisition of Healthcare Dataworks. Two other notable healthcare analytics acquisitions included Xerox’s (#7) acquisitions of RSA Medical, a medical assessment and medical management provider, and Healthy Communities Institute, provider of a cloud platform for socioeconomic and community health information.

On the performance management side, Premier (#44) led the field with three acquisitions – its $400 million acquisition of CECity, its $65 million acquisition of Healthcare Insights, and its $6 million purchase of InFlow Health – all performance management and financial analytics solutions. Not to be forgotten, Roper Industries, Inc. (#23) spent $140 million to acquire Strata Decision Technologies, which offers a cloud-based financial analytics and performance platform to help healthcare systems reduce costs.

Notably on the care management front, McKesson (#4) divested its care management division to investors Comvest and Mosaic Health Solutions in June; the business was renamed Axis Point Health.

Revenue Cycle

Many providers already struggle financially; 30.5 percent of hospitals have negative operating margins and 24 percent have negative total margins. Further, the effects of risk shifting from payers to members – higher deductibles, larger balance after insurance amounts, value-based reporting and control requirements (just to name a few) – have significant implications for the future of the revenue cycle.  While it may not be the sexiest of sub-sectors, given its strategic importance to the health of an organization and the ongoing implications of value-based care, revenue cycle got a lot of press on the M&A front this year, especially with the large take-private transaction of MedAssets (#43) by Pamplona Capital. 

Pamplona’s acquisition of MedAssets was, in fact, the largest deal of 2015 at $2.7 billion. After agreeing to divest the Spend and Clinical Resource Management segment (primarily purchasing-related) of MedAssets to VHA-UHC, the nation’s largest GPO, Pamplona combined MedAssets revenue cycle management business with Precyse, one of its portfolio companies.  Other noteworthy revenue cycle deals of 2015 included Emdeon / Change Healthcare’s (#11) acquisition of Altegra Heath, a national provider of technology-enabled payment solutions for $910 million, PE firm Thoma Bravo’s acquisition of MedeAnalytics (#77) from Bain Capital in September, not to mention SourceMedical’s (#96) acquisition of LaClaro, a RCM business for ambulatory surgery centers.

Finally, the Health Information Management (HIM) space had a very busy year. First, IOD, the third largest HIM business in the sector acquired Care Communications, a HIM consulting and outsourcing services provider. Then, Healthport, the second largest HIM business in the space, acquired Trackstar, a release of information company. In May, Healthport and IOD merged to become CIOX (#22), and then the combined entity acquired Enterprise Consulting Solutions, a record retrieval services business, in September. Let’s not forget Anthelio Healthcare’s (#54) acquisition of Pyramid Healthcare Solutions, a HIM and RCM business. By far, however, the largest deal in the HIM space last year was one that failed to occur. In September, 3M (#18) announced its intention to explore strategic alternatives for its HIM business unit; however, after several months of discussions (and, in our opinion, quite likely due to the tax consequences of selling the division), the company decided in early 2016 to keep and invest in the business. We’re tired just writing about all the activity!

More Cautious M&A Outlook for 2016

The topic of a healthcare IT “bubble” was a hot button in 2015 – was there a bubble in healthcare IT? Was there not? There was a lot of discussion with many folks on both sides of the line. 2015 was a record year for everything – M&A, investment, IPOs (albeit poorly performing ones) – adding fuel to the fire. In these first few months of 2016, while there have still been many financings and acquisitions, there is a definite sense of increased caution in the market. We hope this period of caution helps “right size” valuations (and expectations) in the sector back to more reasonable levels. We also predict that this caution will last at least through the remainder of 2016, but that investment and acquisition activity will not dry up completely, if only because so many institutional investors raised new funds in recent years when money was more freely flowing. We’re excited to see what the rest 2016 will bring, and we look forward to seeing you again next year!

^*Source: Healthcare Growth Partners Q4 2015 Transaction Report

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Michelle Mattson-Hamilton ([email protected]) spent three years in corporate strategy in the telecommunications industry before making the move to healthcare IT and joining ST Advisors five years ago.

Before founding ST Advisors in 2009, Ben Rooks ([email protected]) spent 15 years on Wall Street as both an equity research analyst and investment banker focusing on healthcare IT.

ST Advisors is a strategic and financial advisory firm focused in healthcare IT that serves both companies and their investors (as well as plans and providers).  Of the companies mentioned above, ST Advisors has provided advisory services to AdvancedMD, Change Healthcare (fka Emdeon), GE Healthcare IT, CIOX (fka Healthport), Healthland, Healthy Communities Institute, and IOD.