Life Sciences Group Healthcare IT and Document Management June 2011

Transcription

1 Life Sciences Group Healthcare IT and Document Management June 2011

2 Aggregate Transaction Value ($ in billions) Number of Deals HEALTHCARE IT & DOCUMENT MANAGEMENT Healthcare information technology (HIT) software is at the forefront of the rapidly changing healthcare industry. The passage of the American Recovery and Reinvestment Act (ARRA) in 2009 and the Healthcare Information Technology for Economic and Clinical Health (HITECH) Act has triggered physicians and hospitals to make strategic decisions usually involving mergers and acquisitions to meet future requirements. The recession has challenged providers to find new ways in cutting expenses while simultaneously meeting requirements set by the HITECH Act to be eligible for incentives. We believe that companies will meet these challenges through acquisitions to stay competitive. With strong incentives from the government to implement electronic health records (EHR), providers of care are searching for value-creating solutions beyond their core EHR system to meet the criteria for meaningful use. Electronic document management systems (EDMS) can fulfill this role by digitizing documents missing from the system or acting as intermediary for those without a system. Either way, the emergence of EHRs will be a catalyst for increased demand for HIT applications like EDMS. More Than Just A Supplement Higher quality of care for patients at a lower cost for providers is the end objective. Administrative tasks such as printing, storage, and retrieval account for 31% of all healthcare spending. 1 Substantial cost savings are attainable, as healthcare spending topped $2.5 trillion in Our last report, Electronic Medical Records: 2011 Outlook, focused on the $19.2 billion incentive package and EHR adoption. The EMR captures the majority of the clinical information, yet some data still lies outside the system including vast amounts of pre-adoption data. A Healthcare IT News study found that a significant portion of providers said that the majority of a patient s record still exists outside their EMR. 3 Capturing images and documents, an EDMS can help tackle the other 50%. A single visit to the doctor generates a substantial amount of paper-work. Taking the time to organize and print the data results in abundant inefficiencies. Savings will be realized from: cutting the paper overload and therefore storage space, imaging a document rather than photocopying, sending a document via internet rather than physically mailing it, and forgoing the need to continuously retrieve patient files. 4 Nearly 80% of Healthcare IT News survey participants said they would consider a document management system as an add-on to an EMR. 3 Cost cutting is only one of the many advantages an EDMS can bring to a practice. The ability to store and utilize financial and clinical data across different departments and/or practices is vital for the transformation of healthcare. A centralized system enables physicians to have an up-to-date, comprehensive view of the patient s entire medical history. Also, EDMS s can incorporate non-clinical information as well, including payroll and HR. Health IT investments will play a critical role for physicians and hospitals in the near future as they strive to meet meaningful use standards and control costs As a first step to transform healthcare, organizations have already begun digitizing paper documents. The end-goal, however, is centralizing this information to use across the whole enterprise. $8.0 Healthcare Technology Deal Value & # of Deals 200 $6.0 $4.0 $2.0 $ Source: Capital IQ Aggregate Deal Value # of Deals

3 A NEW MODEL: ACO s With healthcare accounting for approximately 17% of GDP, government agencies are searching for cost savings wherever possible. 2 On March 23 rd, the Centers for Medicare & Medicaid Services (CMS) and the Health and Human Services (HHS) released proposed rules under the Affordable Care Act (ACA) that will set up networks of doctors and hospitals called ACOs (Accountable Care Organizations). Under the new model, physicians in the ACO will collectively share in the responsibility and savings of providing care to patients. While not necessarily ending the traditional fee-for-service system, the idea of an ACO is to move towards a value-based purchasing model, in which incentives would be more correlated with quality and efficiency of care rather than quantity. Each ACO will be assessed against certain benchmarks it must meet to qualify for government incentives, but can also be held accountable for losses and capital investments should they not meet the specified standards. The underlying theme of these ACOs is the ability for physicians to share patient data amongst themselves and across practices. Most patients are likely to receive care from multiple physicians which increase the risk of medical errors and expenses. An ACO will see substantial cost savings from the elimination of duplicate testing and lower administrative costs. EHRs and EDMS will play an integral role in making the vision of ACOs a reality. In the proposed Rule the HHS says they seek to align our measures with the adoption of meaningful use standards for HIT as well as including requirements such as electronic prescribing and EHRs. 8 Hence, HIT capabilities drive the foundation of the requirements and ultimate success of an ACO. Since the Act requires ACOs to have a formal legal structure to receive and distribute payments, ACOs will need a solution that is capable of centralizing claim processing. 8 The HHS also advocates that the ACO should have a centralized electronic exchange summary of care information, both within and outside the ACO, consistent with meaningful use requirements under the EHR incentive program. As we discussed in our last report, Electronic Medical Records: 2011 Outlook, Headwaters MB expects to see a large increase in demand for EMRs and related HIT software, and the newly adopted ACO rule further strengthens our view. Start-up costs of transferring to an EHR platform remain an issue for small practices, which account for 75% of practices. HHS found that a key advantage that large physician groups had over smaller groups was the increased probability they utilized an EHR system. 8 The ACO framework will give small physician practices a greater incentive to acquire the needed EHR system by enabling them to share capital expenditures. 105 The # of instances the rule refers to EHRs The process of setting up the ACOs will require some experimentation, and future cost savings are hard to project. Physicians and other parties with a vested interest had until June 6 to provide comments on the proposed rule. HHS believes that ACOs could save up to $960 million in the first three years, with the program expecting to launch at the beginning of While this number is paltry in terms of overall healthcare costs, the real value is in improving the quality of care for patients through an effective HIT framework that aggregates and coordinates data. Regardless of the timeframe, the ACO rule will strengthen the demand for EHR and EDMS. 5,000 Minimum beneficiaries over a 3 year period Minimum beneficiaries over a 3 year period 50% % of an ACO s physicians that must be meaningful users by the 2 nd year 65 Standards by which quality will be judged

4 HEALTHCARE IN THE CLOUD The global cloud computing market is expected to reach $121 billion in 2015, representing over a 26% CAGR over the next five years. 5 The healthcare industry s utilization of the cloud has lagged compared to other industries, but recent developments will make Software as a Service (SaaS) an integral part in the new healthcare model. Provisions in the ACO Act and requirements imposed by the later meaningful use stages will address how the data must be stored. Cloud computing provides a solution for providers whose files might exceed their current capacity to store the medical records virtually in the cloud. By storing the data off-site with a third party, providers can bypass typical upfront capital expenditures and cut expenses from IT support and upgrades. The future of healthcare IT seems destined to rest in the cloud, but many believe the transition is still years away. Security issues of digitizing and storing sensitive data in the cloud, whether warranted or not, remain a concern. Also, since the current SaaS model is based on pay-for-use, the cost advantages for the needed market drivers, large healthcare organizations, are not present. SaaS appeals to smaller practices yet they are behind in implementation. Cloud leaders have already expanded into the healthcare market, as evidenced by Dell s acquisition of medical archiving company InSite One last December and Oracle s acquisition of Phase Forward. AthenaHealth and Quality System s NextGen s EHR & PM System and others are already offering EHR-cloud computing services. Other large players, including Google, HP and Iron Mountain, have also ventured into healthcare cloud computing. One in every three healthcare decision makers is using a form of cloud-based application. 6 The advantages of cloud-based computing, particularly reduced costs, seem to outweigh the privacy concerns. Notable 2011 HIT Transactions Date Buyer Target Target Company Description 6/6 BrainLab Voyant Health Medical digital imaging workflow 6/6 Merge Healthcare Ophthalmic Imaging Systems Provider of digital imaging and informatics solutions 5/25 Phyaura EHR Live Open source EMR system 5/16 IOD Incorporated Confidential Copiers Inc. Health Information Management and records storage 5/12 Cerner Resource Systems Developer of CareTracker, EDS currently utilized by more than 3,000 organizations. 5/10 Mdeverywhere, Inc. Advanced Health Management Provider of practice management and credentialing services Services 5/9 Waud Capital Revenue Cycle Solutions Vendor of healthcare revenue cycle applications Partners 5/3 Arcadia Solutions Concordant, Inc. ehealth service firm that engages with HCOs to implement and manage their HIT infrastructure 4/26 Golden Gate Lawson Software Healthcare enterprise software provider Capital 4/19 Awarepoint Patient Care Technology Healthcare workflow software developer Systems 4/1 Computer Sciences isoft Group Healthcare software provider with solutions for automating care Corp processes and supporting workflows 3/31 Mediware CareCentric Provider of integrated management software 3/24 PerkinElmer Cambridge Soft Maker of software and database services 3/3 McKesson System C EMR, patient management, and other applications 3/1 ADP Advanced MD Developer of practice management and HER software 2/22 Harris Corp. carefx corporation Provider of interoperability workflow solutions 2/22 The TriZetto Gateway EDI Revenue cycle management, enterprise and component software Group, Inc 1/20 Meditech LSS Data Systems Provider of physician practice management software 1/5 AdvantEdge Healthcare Solutions Provider of medical billing and practice management services 1/5 mindshift Technologies Alpheon Corporation Provider of managed IT services to small and mid-size organizations

5 HIT SPACE STILL FRAGMENTED Consolidation across the board is expected as reform in healthcare has made companies highly attractive to strategic buyers, especially in the lower middle-market. Cost issues, government incentives, and the need for integration between providers continue to drive consolidation of EMR vendors, hospitals, physician groups and companies offering EDMS. In the 1 st quarter of 2011, M&A activity in healthcare totaled $54.4B, a 65% increase from the $32.9 billion in Within the healthcare industry, biotechnology and healthcare services (IT, practice management, telemedicine) are expected to see the largest percentage increases in M&A activity. Physicians and hospitals will be looking for HIT services to integrate into their practices to demonstrate their quality of services for the ACO Act and meaningful use requirements. With access to more flexible, cheaper capital than a few years ago, providers will be looking to expand their services to remain competitive. Opportunities will arise as the movement continues from a payer-based to provider-based platform. The new model for providing care will require extensive IT support to handle the aggregation and centralization of vast amounts of patient information. Headwaters MB expects companies offering complete enterprise content management solutions to be highly targeted. The means by which providers store their patient s records will be of greater issue as the transformation to paperless records continue, and we believe that HIT companies offering SaaS features coupled with their products will see higher valuations. Companies in the HIT space can see multiples from 1.5x-4.5x revenue and up to 14x EBITDA. Multiples are dependent on the size of the company and other variables. Valuation of healthcare companies has continued to increase from their lows in 2008 from the recession, and the future outlook is promising. Valuation LTM Growth 3-Year CAGR Industry EV/Revenue EV/EBITDA Revenue EBITDA Healthcare Sector 1.7x 11.9x 11.6% 17.0% MM Healthcare Sector 4.5x 13.4x 7.9% 8.3% Healthcare Technology 3.3x 19.4x 16.0% 59.6% MM Healthcare Technology 1.7x 11.8x 11.0% 14.0% Average 2.8x 14.1x 11.6% 24.7% LTM as of May 16, 2011 MM Companies with revenues between $1-$100M Source: Headwaters MB & Capital IQ The Headwaters Life Science Practice is comprised of professionals with varied experience including early stage, venture backed companies to large national healthcare payors. With many years of hands on experience in EMRs coupled with a long track record of advisory services, the Headwaters team is well positioned to assist in emerging and established EMR companies with investment banking services. Headwaters MB is an independent, middle-market investment banking and advisory firm providing strategic merger and acquisitions, corporate finance services and merchant banking through proprietary sources of capital. Headwaters is headquartered in Denver, CO, with offices in Boise, ID; Boston, MA; Burlington, VT; Chicago, IL; Greenwich, CT; Newport Beach, CA; Pittsburgh, PA; San Francisco, CA; Washington DC and West Palm Beach, FL. For more information, visit References: 1. New England Journal of Medicine. Costs of Health Care Administration in the U.S. and Canada. 2. U.S. Department of HHS. Center for Medicare & Medicaid Services 3. Healthcare IT News Survey. Driving Value Across Your Enterprise. 4. Laserfiche. ROI for Medical Billing. 5. Marketsandmarkets. Cloud Computing Market- Global Forecast ( ). 6. Accenture. Six questions every health industry executive should ask about cloud computing. 7. SK&A. Physician Office Usage of Electronic Healthcare Records Software. 8. Department of HH&S. CMS-1345-P. Pages: 13,16,173,220, Irving Levin Associates. The Healthcare M&A Report.

6 Contributors to this report have been: Don Warriner Managing Director Brad Rosborough Managing Director Matt Krier Analyst Other Life Sciences Team members include: Anant Vashi, Jeff Schottler and David Traylor One Tabor Center th St. Suite 900 Denver, CO Office: