Taking a Deep Dive into the Healthcare Informatics 100—and the Health IT Market, Broadly

Editor's note: Rather than our typical review of mergers and acquisitions in the prior calendar year, this year, in an effort to capture and portray the breadth, acceleration, and impact of consolidation and M&A on the entire healthcare arena (e.g., payers, PBMs, providers, healthcare IT vendors, etc.), we’re going to look from Jan 2017 through year-to-date 2018 (i.e., May 2018).

For the last 18 months, bigger has (generally) been better, but in the mergers and acquisitions realm, the gambit has been run: from vertical integration to smaller strategic acquisitions (and it didn’t hurt that changes to tax policy, along with low interest rates, left a few extra coins in the couch cushions in Dec 2017). Let’s dissect some of this “deal mania” behavior from the last six quarters and consider the potential ramifications for healthcare technology vendors in 2018 and beyond.

Note: The 2018 Healthcare Informatics 100 list in full can be viewed here.

Payers Buy PBMs and Vice Versa! In our view, one of the most interesting, and potentially transformational, deals in healthcare this past year was CVS Health’s planned acquisition of leading health insurer, Aetna (which saw its attempt to acquire Humana thwarted by regulators). This will give CVS a host of assets to arrange in the healthcare sandbox including, a major PBM, a leading retail presence, nurse clinics, and now the full ability to underwrite risk and manage care. Meanwhile, Cigna announced its intentions to purchase Express Scripts for $68.4 billion in March ‘18.  (recall that Express Scripts had acquired eviCore in Dec 2017 for $3.6 billion.) Assuming these deals close successfully, the nation’s largest PBMs will all be aligned with the three largest payers, creating impressive, vertically-integrated healthcare entities. No doubt Amazon’s abandoned (for now) exploration of this space also got these companies’ attention!

Payers Buy Providers: Insurers continue to blur the line between payer and provider as they push further into the provision of patient care. In a move to expand the organization’s outpatient care services, in Dec 2017, United (Optum, #1) reached an agreement to acquire DaVita’s medical unit for $4.9 billion. Optum also acquired Surgical Care Affiliates in Jan 2017 and gained 210 ambulatory surgery centers performing ~1 million procedures annually and is now one of the largest owners of physician practices. Similarly, Humana made a big bet in home health when it spent $800 million on a 40 percent stake in Kindred at Home through a joint venture with TPG and Welsh, Carson, Anderson & Stowe in April 2018. Not to be outdone, Anthem secured HealthSun (Sept 2017), an integrated Medicare Advantage plan and healthcare delivery network in Florida, and Centene bought Community Medical Group, an at-risk primary care provider, in Mar 2018.

Payer Consolidation: No year would be complete without additional payer consolidation. In 2017, Centene’s acquired Fidelis Care (Sept 2017) and Anthem acquired America’s 1st Choice (Oct 2017).

Provider Mega-Mergers: In the face of continued vertical integration from payers, movement towards cheaper settings of care, and expanding financial pressures (e.g., high technology and staff expenses, reduced reimbursement, rising bad debt from increased consumer financial responsibility), providers have been seeking alternatives to remain competitive (and, in our view, materially increase their pricing power). This movement led to some massive provider deal announcements at the end of 2017, including:

• December 5 - Illinois’ Advocate Health Care and Wisconsin’s Aurora Health Care (new system to be known as “Advocate Aurora Health Care” – catchy!). Serving 3 million patients annually, the combined entity would encompass 27 hospitals with annual revenues of ~$11 billion
• December 7 - Catholic Health Initiatives and Dignity Health, where the combined organization would include 139 hospitals with operations in 28 states and combined revenue of $28.4 billion
• December 10 - Merger of Ascension Health and Providence St. Joseph Health, where the resulting entity would have 191 hospitals in 27 states with annual revenue of $44.8 billion. (Although, reports indicate talks halted in March ‘18 due to the organization’s differing priorities.)

What about Healthcare IT Vendors?

Just as in other sectors of healthcare, in healthcare IT, tax policy and low interest rates enabling the current cycle of consolidation and vertical integration (and the need to “keep up with the Jones”). Healthcare IT vendors either keep up or get left behind, as competitors explore partnership, merger, and acquisition opportunities that enable significant leverage and economies of scale (among other advantages).

We’ve observed, for literally decades, that HCIT is harder than it looks, and in a dismal end to the HCIT career that came from its acquisitions of MedicalLogic, IDX Systems and API Healthcare, GE Healthcare (#16) divested its "value-based care" Division to Veritas Capital for $1 billion (20 percent less than it paid for IDX Systems alone in 2006!). Meanwhile, McKesson also left the pure IT world by divesting its connectivity (and some other) assets to Change Healthcare (#4) and its Enterprise Information Solutions business to Allscripts (#10), finally putting an end to its ill-advised HBOC debacle.  

Having freed itself of these properties, McKesson returned to its distribution roots acquiring both Francisco Partners-backed CoverMyMeds (electronic prior authorization vendor) in Jan 2017 (for the princely sum of $1.1 to 1.5 billion – there’s an earn-out) and RxCrossroads (specialty patient support services) from CVS in Nov 2017.

Looking at these counter-parties’ activities, Change Healthcare (#4) continued its core growth since the combination, expanding its credentialing capabilities by acquiring Docufill in Nov 2017, and National Decision Support Company, with its cloud-based imaging clinical decision support solutions, in Jan ‘18. In addition to its acquisition of McKesson’s fixer upper special, Allscripts (#10) continued to try to bulk up and join the two-horse Epic/Cerner race by buying Practice Fusion, a “free” ambulatory EMR, in Jan 2018. Its goal now is to move notoriously thrifty physician groups from a free to a paid solution. While on the subject of Allscripts, its partner/portfolio company Netsmart (#44) expanded further into homecare with its acquisition of DeVero, a home health EMR in July ‘17 and bought Change Healthcare's Home Care and Hospice Solutions in April ‘18

While we’re talking about connectivity vendors, Navicure and ZirMed combined to form Waystar, leaping to number 47 on this year’s list, and Availity (#49) brought in a significant capital infusion from active sector investor, Francisco Partners, so we’d expect to see it to deploy some of that capital and give us something to write about next year!

Meanwhile, many of our other Healthcare Informatics Top 100 vendors have also ridden this wave of consolidation and made big moves to vertically integrate, enter new markets, and / or increase scale over the last 18 months:

• In addition to the aforementioned United and Optum (#1) acquisitions, Optum acquired The Advisory Board Company (Nov 2017) in an attempt to enhance its brand with ABCO’s provider credibility (and, of course, expand its advisory and technology capabilities). While threading the needle of vendor and oftentimes antagonistic payer has been something United has managed before, this iteration could prove more challenging.
   
• Cognizant (#3) strengthened its revenue cycle position with the addition of Bolder Healthcare Solutions (Mar 2018) and its business process platforms for government and public healthcare programs with the acquisition of Medicare Advantage outsourcer, TMG Health (June 2017)
   
• Royal Philips (#5) went on a bit of a shopping spree, acquiring TomTec Imaging Systems (July 2017), a provider of image analysis software for diagnostic ultrasound, Analytical Informatics (Nov 2017), a provider of vendor-agnostic workflow tools for the imaging department, VitalHealth (Dec 2017), a cloud-based population health solution, and Forcare (Dec 2017), an interoperability vendor
   
• In what to us seemed a non-intuitive change in direction, Inovalon (#33) shelled out $1.2 billion for revenue cycle management consolidator ABILITY Network in Mar 2018. Supporting our “5 minute rule of M&A” (if a company makes an acquisition where price or valuation can’t be explained in five minutes of focused conversation with the CEO, Inovalon proceeded to miss its Q1 ‘18 numbers (1st quarter post ABILITY announcement) and the stock is now trading ~17 percent below the stock price on the date of the March transaction announcement (and 40 percent from its 52-week high).
   
• TPG-backed Mediware (#53) acquired Kinnser in May ‘17 expanding into home health and hospice software. To complement the RCM capabilities acquired with Kinnser, Mediware also acquired MEDTranDirect, an RCM solution and an approved Medicare network service vendor, in Jan 2018
   
• Continuing its move towards population health begun with its 2016 acquisition of Essette, HMS Holdings acquired PE-backed patient engagement vendor, Eliza Corporation for $170 million
   
• A few other smaller, but interesting, deals: Battery Ventures-backed WebPT (#97) acquired adjacent companies, BMS and Strive Labs to expand its physical therapy market dominance, and Medecision (#90) tucked-in Axispoint’s care management products (HCIT Jeopardy players might recall that Axispoint was divested from McKesson a few years ago, and old timers would remember them from HBOC/HPR)

While not part of our Healthcare Informatics 100 list, Roche’s Feb 2018 acquisition of the remaining 87.4 percent equity stake in Flatiron Health deserves a brief mention before we sign-off – primarily because of the eye popping $1.9 billion price tag! Oncology therapeutics contribute ~60% of Roche’s total revenue, and the U.S. patents of the company’s key drugs, Rituxan, Herceptin, and Avastin, are set to expire in 2018, 2019 and 2020 respectively. The company is likely looking to expedite new drug development and approval through real-world evidence and analytics; enter Flatiron. While Roche obviously felt that was worth paying up for, we wonder why they felt it had to own the asset and how they justified it to its board. As ever in cases like this, recall our oft stated view that "immateriality means never having to say you’re sorry!"

What are the Implications for Healthcare IT Vendors?

At the end of the day, healthcare IT vendors will struggle as total market size (number of customers) declines, the buying power of remaining customers significantly increases, and, in some cases, new or stronger competitors emerge as a result of industry M&A. Many vendors are responding through strategically-focused inorganic growth; this will leave small (or under-funded) vendors, especially those with limited differentiation, at a disadvantage. As competition heats, all companies will need to hone their product, craft and message, but it will be especially important for companies of limited scale to ensure differentiation and to be extremely focused in target market and go to market approach.

With those extra coins from tax reform continuing to burn a hole in the pockets of healthcare companies (and mountains of dry powder available from private equity firms and their portfolio companies) the remainder of 2018 should continue to be a rollercoaster of M&A fun. Stay tuned!

ST Advisors is a strategic and financial advisory firm focused in healthcare IT and healthcare services that serves both companies and their investors (as well as, occasionally, plans and providers).  Of the companies mentioned above, ST Advisors has provided advisory services in the past three years to Medecision and TPG Capital.