Healthcare Services: Revenue Cycle Management

Transcription

1 Industry Insights Summer 2010 Healthcare Services: Revenue Cycle Management Executive Summary 2010 and 2011 are the equivalent of Y2K for healthcare information technology ( HCIT ). Incentives from the American Recovery and Reinvestment Act of 2009 ( ARRA ) continue to drive HCIT spending initiatives focused on meaningful use electronic medical records ( EMR ) systems. We believe that revenue cycle management ( RCM ) providers may benefit from widespread attention on healthcare IT systems. Hospitals have experienced financial challenges in recent years. Unfunded mandates, such as ICD-10 and HIPAA v5010, will exacerbate short-term cash flow concerns. Overall, financial performance concerns and revenue cycle integration with new IT systems will present the RCM industry with new opportunities while also presenting significant challenges. RCM providers are attractive investment opportunities for both strategic and financial buyers. Industry macroeconomic trends drive the need for RCM solutions for healthcare providers, and the transaction-based RCM business model of recurring, non-cyclical revenue reduces financial risk. Strategic buyers are actively seeking acquisition candidates that expand their RCM offerings to create end-to-end customer solutions. Notwithstanding the strong growth of RCM firms in recent years, several challenges persist that may place smaller RCM companies at a competitive disadvantage. Vendor consolidation, capital requirements and scale/scope advantages may lead to a disproportionate division between the haves and the have nots. RCM players with critical mass, sufficient capital, an established track record and a full suite of integrated product offerings will be better positioned to capitalize on market opportunities. We estimate that approximately 350 RCM companies have been acquired since 2004 in the first wave of RCM Merger and Acquisition activity. The revenue cycle management industry is entering a second wave of consolidation. Incumbent strategic buyers are expanding their RCM product offerings via acquisition in order to create end-to-end solutions. Public RCM companies trade at healthy valuations, enabling them to pay full prices for attractive, complementary businesses. Financial buyer interest in the HCIT sector increases daily, and greater availability of debt financing for RCM targets with recurring revenue models supports aggressive bidding by private equity groups. Inside Y2K for Healthcare IT Revenue Cycle Management Industry Overview RCM Investment Thesis RCM Industry Challenges Selected Publicly Traded RCM Companies RCM Mergers and Acquisitions Activity Private Equity Owned RCM Companies RCM Consolidation Case Study: Emdeon (NYSE:EM)

2 Y2K for Healthcare IT With the current wave of ARRA funding, unfunded mandates such as ICD-10 and HIPPA v5010 conversion (described below), and unprecedented financial pressures on hospitals, we believe that 2010 and 2011 may be the equivalent of Y2K for the healthcare IT industry. HCIT providers supplying EMR products and services will benefit from the stimulus package. However, we expect ARRA funding to have a ripple effect on sectors adjacent to EMR. As healthcare providers reexamine their enterprise systems, we expect that many may discover (i) inefficiencies in labor intensive areas such billing management, medical transcription and coding and (ii) opportunities for enhancement in areas such as cash collection and receivables management. We believe this focus on efficiency will continue to spur investment in adjacent areas such as revenue cycle management. ARRA Funding Even though the legislation is one year old, there is plenty of spending yet to come from the ARRA. As of May 2010, only 50% of the initial $149 billion in ARRA funding allocated to healthcare had been spent, leaving approximately $74.5 billion of funding available for new and in-process opportunities. Specific to HCIT, the Health Information Technology for Economic and Clinical Health ( HITECH ) Act within the ARRA stimulus plan allocated $19 billion for healthcare providers that can demonstrate meaningful use of EMR systems. According to the Congressional Budget Office, ARRA stimulus incentives are expected to accelerate HCIT adoption by hospitals from 45% today to 70% by 2019 and increase adoption among physician practices from 65% to 90% over this same timeframe. As hospitals and physician practices upgrade their HCIT enterprise systems, we expect investments in complementary areas, such as RCM, to increase. Unfunded Mandates for Healthcare Providers HCIT spending may likely also increase as a result of industry-wide implementation of ICD-10 and HIPAA v5010. Effective October 2013, ICD-10 will become the new standard code for diagnoses and procedures under HIPAA. Under ICD-10 which is being implemented to improve the accuracy and efficiency of patient information, claims reimbursement and disease management processes code permutations will increase from the current 13,900 to 120,000. This conversion will require an overhaul of healthcare We are at the beginning of what we believe will be the single fastest transformation of any industry in US history. Glen Tullman, Chief Executive Officer of Allscripts on June 9 announcing the merger with Eclipsys. providers existing coding systems and, in many cases, will require significant new IT system investments. Beginning January 1, 2012, HIPAA v5010 will require significant changes in data content submitted with claims and received in electronic inquiries. HIPAA v5010 provides more robust and consistent transactional data compared to v4010 and will also support the pending shift to ICD-10 for coding. Examples of HIPAA v5010 impacted transactions include eligibility inquiries, claim status requests, claim payment and advice, coordination of benefits, subrogation claims, payroll deductions, benefit enrollment and all related responses to such inquiries. The shift will entail changes in software, systems and processes for all covered entities, which include health plans, healthcare clearinghouses and healthcare providers. ARRA Healthcare Funding ARRA Healthcare Spending Health IT Children & Community Services Scientific Research & Facilities Other Improving & Preserving Healthcare 18% Spent In Process Left to Spend 30% 9% 50% 62% 7% 4% 20% As of May 2010 Duff & Phelps 2

3 Y2K for Healthcare IT Hospital Finances Increased adoption of technology solutions will be one part of the solution to address the financial pressures on hospitals resulting from the convergence of challenging economic conditions, faltering financial markets, eroding endowments and decreasing reimbursement levels from both government and commercial payers. Uncompensated care (bad debt and charity care) reached $36.4 billion in 2008, increasing by a CAGR of 5.8% since Hospitals also suffer from poor cash management, as average collection cycles are 75 days for hospitals compared to 28 days for non-healthcare organizations. Hospital operating margins declined precipitously in 2008 and will likely face continued challenges. While the economy and financial markets are in recovery, significant uncertainty still exists with respect to reimbursement levels and payer mix resulting from healthcare reform. National Uncompensated Care - Community Hospitals ($ billions) Aggregate Community Hospital Operation Margins 8.00% 7.00% Source: American Hospital Association Healthcare Reform Healthcare reform is expected to increase the number of insured Americans by more than 30 million. However payer mix and low reimbursement rates may still cause financial losses for hospitals. In 2008, hospitals received payment of only $0.91 for every $1.00 spent caring for Medicare patients. For Medicaid, hospitals received only $0.89 for every $1.00 spent. Nevertheless, % 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Source: American Hospital Association reimbursement levels continue to face mounting pressures, with significant political attention focused on both government and commercial payers. The increasing complexity of reimbursement and greater burden from reporting and documentation requirements will increase administrative expenses and Medicare s Recovery Audit Contractor ( RAC ) program, which is expected to begin its nationwide rollout during 2010, can only increase reimbursement shortfalls The convergence of ARRA, unfunded hospital mandates and increasing pressure on hospitals to improve financial performance creates a unique opportunity window for HCIT and RCM companies as hospitals and other providers invest significantly in IT systems to meet their financial challenges. 30 million The number of insured Americans healthcare reform is expected to increase. Duff & Phelps 3

4 Revenue Cycle Management Industry Overview Payers and providers spend an estimated $150 billion annually on revenue and payment cycle activities. The market for these services is highly competitive and fragmented. RCM companies serve customers ranging from small physician practices to large hospitals and offer a variety of products and services including billing, collections, coding and transcription. Products and services can target specific RCM functions or encompass complete end-to-end solutions. However, RCM is an over-hyped term in the market today, often used by mundane single-point businesses cloaking themselves with an RCM mantle in order to create a perception of value that really only exists only when many RCM functions are carefully integrated into an end to end solution. The healthcare revenue cycle consists of a series of interrelated processes that manage patient/provider transactions, from initial contact through final reimbursement. Historically, the revenue cycle has involved labor-intensive and often disjointed processes at the provider and payer staff level; RCM processes have often been associated with more isolated functions such as billing and collections management. True RCM firms today consist of technology-enabled solutions, serving providers and/or payers, in ensuring proper and timely receipt of compensation from payers to providers for medical services rendered to patients. In addition, RCM systems have become increasingly popular due to their ability to better integrate financial and clinical data, and provide end-to-end solutions. The Three Stages of RCM: Stage 1: Front End RCM Pre-Admission Stage 2: Mid-Level RCM Patient/Physician Encounter Stage 3: Back End RCM Post-Discharge Scheduling Eligibility verification Patient credit worthiness Pre-authorization Patient registration Case management Diagnosis and treatment Medical transcription Medical coding Claims generation and billing Receivables management Denials management Release of information Payment analysis Reporting and benchmarking Stage I - Front End RCM encompasses all pre-admission patient processes. Data accuracy in the front end is critical to creating clean claims and minimizing the disruption of back-end collections. Industry studies indicate that 90% of denied claims are caused by inaccurate collection of patient information on the front end. Critical front end data include source of payment and patient demographic information. Stage II - Mid Level RCM encompasses the physician/patient encounter and the related documentation. As the patient receives medical care, mid level RCM systems ensure complete and accurate documentation, transcription and coding. Complexity in this middle process often results in improper coding and revenue leakages as procedures are improperly documented and billed. In this stage, RCM companies create value by ensuring charge integrity and eventual creation of clean claims. EMR initiatives are likely to significantly impact mid level RCM companies, as case managers transition from manual reporting and traditional patient records to real-time reporting and electronic records. Stage III - Back End RCM encompasses all billing, follow-up and cash collection processes. While back end RCM systems are most commonly either credited or blamed for the cash collection cycle, the success of back end RCM systems is highly correlated with effective front end and middle processes in the revenue cycle. RCM firms serving providers offer software and services that maximize cash flow to healthcare providers by carefully managing and documenting the patient process from admission to discharge. Within the provider client base, RCM firms serve hospitals, physicians or both. RCM firms serving payers (often referred to as payment cycle management) manage the process from the opposite standpoint, ensuring payments provided meet coverage eligibility and ensuring claims accuracy. RCM companies claim that adequate revenue cycle management systems can improve hospitals net revenues by 1% to 3% and bolster operating margins by 1.5% to 5.0%. Duff & Phelps 4

5 RCM Investment Thesis RCM firms may offer attractive investment profiles for both strategic and financial buyers as evidenced by the number of successful M&A transactions over the last decade. The general investment thesis for RCM consolidation includes: Strong Industry Macroeconomic Fundamentals We expect that RCM firms may continue to benefit from complementary HCIT demand drivers such as ARRA funding, ICD-10 conversion requirements, increasing reimbursement scrutiny from both government and commercial plans, historical underinvestment in hospital IT systems, political pressure to reduce healthcare costs and financial pressures on hospitals. As healthcare providers continue to face the greater complexity and lower reimbursements, hospitals and physicians will increasingly look to RCM companies as a means to lower costs and improve cash flow. The convergence of economic stimulus, unfunded government mandates, political activism and incumbent system inadequacy has created an impetus for HCIT investment. As healthcare providers make infrastructure investments and adopt more advanced HCIT systems, RCM firms stand to benefit from peripheral infrastructure investment. Attractive Business Model De-risks Investing in RCM Companies RCM firms typically have transaction-based contracts, providing them with recurring revenue streams and high revenue visibility. Given the transaction-based nature of their contracts, RCM companies have limited exposure to broader economic cycles typically influenced by factors such as consumer and business spending, credit terms, interest rates and financial markets. The service-oriented nature of the RCM model can lend itself to the use of offshoring, which has grown in use and acceptance in recent years after initial resistance. We believe that offshoring could become an even greater factor in RCM firms in the coming years, substantially reducing costs. End-to-End solution Providers are Taking Market Share Larger RCM players are expanding their product portfolios through internal product development, strategic partnerships and selective acquisitions. Integrated providers realize that attracting new customers and further penetrating existing customers requires a comprehensive suite of products. End-to-end solutions provide more complete patient information and reduce inefficiencies. Once one-stop-shop providers establish a toehold within a healthcare provider s HCIT infrastructure, the displacement of singlepoint solutions providers is highly likely. Additionally, as healthcare providers face potential consolidation resulting from financial pressures, we expect that single-point solution may become further disadvantaged to full-service providers. Labor vs. Technology Arbitrage Revenue cycle management activities involve expensive, labor-intensive processes, from eligibility verification, to medical coding, to billings and collections. Political and financial pressures call for widespread reduction of costs and inefficiencies in the healthcare system. Payers and providers seek to use a combination of technology and outsourcing to automate and simplify administration, lower costs and reduce errors. Technology arbitrage includes technology-enabled procedures such as voice recognition software that automates manual processes. Automation results in a permanent shift from labor to capital and significantly reduces variable costs for healthcare providers. This benefit is balanced with upfront fixed costs and data integrity concerns involved with emerging technologies. Labor arbitrage, on the other hand, involves the use of lower-cost, offsite (and frequently offshore) labor in lieu of onsite hospital staff in the revenue cycle process. Offshoring involves a smaller fixed investment, using an offshore BPO specializing in RCM procedures such as eligibility verification, transcription, coding review, receivables follow-up, et al. Offshoring can be viewed a lower-cost version of the incumbent manual system, and therefore may be a less radical change than emerging technologies. Patient health information confidentiality and the stigma of offshoring are potential obstacles for the labor arbitrage model; however, our discussions with industry participants indicate that these concerns ease as the business case becomes more compelling. Duff & Phelps 5

6 RCM Industry Challenges Notwithstanding the strong growth of RCM firms in recent years, several challenges persist that may disadvantage smaller RCM companies. Vendor consolidation, capital requirements, and scale/scope advantages may lead to a disproportionate division between the larger RCM haves and the smaller have nots. Vendor Consolidation Winning new accounts and maintaining old ones will present challenges for many RCM firms. The largest challenge may be the preference of hospitals and providers to reduce the number of vendors with whom they deal. Until recently, the industry was largely populated by niche players offering single point services in the RCM value chain. Few, if any, RCM firms offered a complete product array capable of meeting end-to-end needs more effectively than the incumbent systems. RCM consolidation has resulted in more provider accounts being held by larger firms offering a full suite of services. Indeed, according to the June 9, 2010 press release announcing the $1.3 billion merger of Allscripts (NASDAQ:MDRX) and Eclipsys (NASDAQ:ECLP)...the combined company will offer a single platform of clinical, financial, connectivity and information solutions. As a result of consolidation, large players such as Emdeon, Intermedix and Ingenix have emerged with significant competitive advantages over niche players. Capital Requirements Unfunded government mandates, while offering significant opportunities for RCM companies, require capital investment for product development and upgrades. The shift to ICD-10, severity adjusted DRG and HIPPA 5010 involve product reengineering and/or require new product investments for smaller firms, which may be more limited in their access to capital. Economies of Scale, Learning and Scope Cross-selling efforts by larger firms threaten to displace smaller firms that offer niche RCM solutions. Product proliferation in recent years has exacerbated this customer risk for smaller firms, which has resulted in more integrated products. Network benefits also favor larger RCM companies with client accounts at both payers and providers. RCM firms with larger networks generate a more standardized workflow and information exchange between payers and providers. As the healthcare system becomes more automated, and as more scrutiny is placed upon reimbursements, established players such as Emdeon (with a network of approximately 500,000 providers, 1,200 payers, 5,000 hospitals, 81,000 dentists and 55,000 pharmacies) are likely to benefit from this operating advantage and considerable barrier to entry. As RCM systems have grown in popularity in recent years, larger firms have benefited from accumulated product development efforts, resulting in a learning curve advantage. We believe the RCM players that may be positioned to benefit the most are those with critical mass, sufficient capitalization, an established track record and a full suite of integrated products. These scale benefits, combined with today s restrictive capital market conditions, may make go-it-alone strategies more difficult to execute for small and mid-sized RCM players. Duff & Phelps 6

7 Selected Publicly Traded RCM Companies Given that RCM processes often blend with other healthcare IT solutions, we have compiled a broad group of publicly traded healthcare IT companies that range from Emdeon (NYSE: EM), a pure play RCM provider, to Cerner (NASDAQ: CERN), a more diversified healthcare IT systems and solutions provider. Revenue Cycle Management Company Information Market Data LTM Operating Performance Multiples Company Name Ticker Price as of 6/9/10 % of 52-Week High Equity Value Enterprise Value 2 Revenue Revenue Growth Gross Margin EBITDA Margin 3 EV 2 / LTM REV EV 2 / LTM EBITDA 3 Advisory Board Co. ABCO $ % $598.8 $527.1 $ % 48.0% 13.2% 2.2x 16.7x Allscripts-Misys Healthcare Solutions, Inc. 1 MDRX % 2, , % 55.6% 13.0% 3.8x 29.3x Athenahealth, Inc. ATHN % % 58.4% 11.7% 3.5x 30.3x Cerner Corp. CERN % 6, , , % 83.4% 25.2% 3.5x 14.0x Computer Programs & Systems Inc. CPSI % % 40.2% 18.0% 3.3x 18.1x Eclipsys Corporation 1 ECLP % 1, % 46.1% 10.5% 1.9x 17.7x Emdeon Inc. EM % 1, , % 38.9% 22.4% 1.9x 8.5x HMS Holdings Corp. HMSY % 1, , % 47.5% 28.3% 5.5x 19.4x MedAssets, Inc. MDAS % 1, , % 77.6% 27.6% 4.4x 15.8x Quality Systems Inc. QSII % 1, , % 62.0% 27.8% 5.1x 18.3x Source: Capital IQ (1) Data subsequent to June 9, 2010 announcement of merger between Allscripts and Eclipsys. (2) As shown, enterprise value is calculated as market capitalization plus preferred stock, less net debt. (3) EBITDA reduced to account for minority interest expense. EBITDA = Earnings Before Interest, Taxes, Depreciation and Amortization; LTM = Latest Twelve Months; EV = Enterprise Value Note: Equity value, enterprise value and revenue data presented in millions. Average Enterprise Value to EBITDA Multiples 25.0x Mean $ % 55.8% 19.8% 3.5x 18.8 Median $ % 51.8% 20.2% 3.5x x Historical Average 17.3x 15.0x 10.0x 5.0x 0.0x Q Comparable Company Aggregate Historical Average *Multiples calculated based on the average daily LTM EBITDA multiple for the preceding tweleve months. Source: Capital IQ Duff & Phelps 7

8 RCM Mergers and Acquisitions Activity The First Wave: We estimate that approximately 350 RCM companies have been acquired since M&A activity has resulted primarily from incumbent players amassing scale among fragmented industry players and financial investors pursuing opportunities to capitalize on positive industry fundamentals. Established firms such as Emdeon and Ingenix have built scale and scope through several complementary acquisitions in recent years, which should increase their product offerings and deepen their entrenchment in the market place. As these full service providers integrate their acquisitions and offer complete solutions to their customers their performance will further improve. Financial buyer activity has also been significant. As presented in Section VIII, we have identified 80 private equity groups that hold RCMrelated companies in their portfolios. The following table presents a list of the most active buyers in the sector between January 2004 and March Aggregate U.S. M&A Compared to RCM Transactions Financial Statistics for RCM Transactions # of RCM Transcations ,000 12,000 10,000 8,000 6,000 4,000 # of U.S. M&A Transactions Enterprise Value (EV) Enterprise Value Revenue EBITDA Mean $ x 13.4x Median $41 1.8x 11.9x Transactions occuring between January 1, 2004 and March 31, Source: Capital IQ 10 2, Q Annualized US M&A RCM Deals 0 Duff & Phelps 8

9 RCM Mergers and Acquisitions Activity Second Wave: Looking forward, we see a potential opportunity window for small to mid-sized RCM companies to capitalize on attractive market valuations. We continue to see strong interest from financial buyers looking for platform investments or add-ons to existing portfolio companies and strategic buyers looking to increase their product portfolio and deepen their customer penetration. According to John Casillas, founder of the Medical Banking Project at the Healthcare Information and Management Systems Society (HIMSS), RCM technology is approaching a level of maturity following a period of technological innovation. Mr. Casillas indicated that RCM technology consolidation was the likely the next step. Now is the time to find your dancing partners, said John Casillas. Valuations for publicly traded RCM firms remain strong, which is evidence of the healthy growth expectations in the nearterm. Sellers may still achieve attractive valuations, but time is of the essence. We expect that larger, strategic buyers M&A appetites may moderate (resulting in lower Now is the time to find your dancing partners. John Casillas, founder of the Medical Banking Project at HIMSS. valuations) as they are able to organically grow their product portfolios and penetrate new clients through cross-selling opportunities. Early movers who understand their strategic alternatives will have an advantage, as slow moving firms may be left behind if larger firms achieve critical size and scope. Additionally, competitive dynamics in the RCM industry will continue to favor larger, Most Active Buyers by Number of Transactions Company Name # Deals Ingenix, Inc. 9 The Outsource Group, Inc. 8 Affiliated Computer Services, Inc. 7 Accuro Healthcare Solutions, Inc. 6 Emdeon Inc. 6 MedAssets, Inc. 6 Intermedix Corporation 5 Allscripts Healthcare Solutions Inc. 5 1 Francisco Partners 4 McKesson Corporation 4 MDI Achieve, Inc. 4 Zavata, Inc. 4 Source: Capital IQ Transactions occuring between January 1, 2004 and March 31, (1) Includes recently announced merger with Eclipsys. Duff & Phelps 9

10 Private Equity Owned RCM Companies The following is a sample of RCM companies owned by private equity firms. Private Equity Group Company Private Equity Group Company ABRY Partners, LLC Executive Health Resources, Inc. JHW Greentree Capital, L.P. PhyServe Physician Services, Inc. ABRY Partners, LLC Gateway EDI, Inc. JMI Equity Navicure ABRY Partners, LLC HealthPort Incorporated JMI Equity TC3 Health ABS Capital Partners Source Medical Solutions, Inc. k1 Ventures Limited Ajuba International, Inc. Accretive, LLC Accretive Health, Inc. Kennet Partners MedeAnalytics, Inc. AIG Altaris Healthcare Partners Precyse Solutions, LLC Lemhi Ventures, Inc. Recondo Technology, Inc. AIG Altaris Healthcare Partners Specialty Care Services Lovett Miller & Co. CareAnyware, Inc. American Capital, Ltd. Marina Medical Billing Service, Inc. Main Street Capital Corporation California Healthcare Medical Billing, Inc. Austin Ventures Revenue Cycle Solutions Marlin Equity Partners MDeverywhere, Inc. Ballast Point Ventures, L.P. GHN-Online, Inc. Nautic Partners, LLC PHNS, Inc. Battery Ventures Brightree, LLC Oxford Financial Group, Ltd. Ontario Systems, LLC Beecken Petty O'Keefe & Company Heartland Information Services Pacific Onset Capital, LLC H & R Accounts, Inc. Bertram Capital Management LLC PMG Partners, LLC Parthenon Capital Partners Abeo, Inc. Bessemer Venture Partners Kelson Physician Partners, Inc. Parthenon Capital Partners Intermedix Corporation Capital Point Partners Integrated Medical Partners, LLC Pegasus Blue Star Fund Physicians Practice Management Cardinal Growth, L.P. Pulse Systems, Inc. Peninsula Capital Partners, L.L.C. Etransmedia Technology, Inc. Cardinal Partners CodeRyte, Inc. Petra Capital Partners, LLC Superior Global Solutions, Inc. ClearLight Partners LLC The Outsource Group, Inc. Primus Passport Health Communications, Inc. Code Hennessy & Simmons, LLC Dental Health Resources, Inc. Providence Equity Partners LLC ikasystems Corporation Columbia Capital LLC Avolent, Inc. Quilvest Private Equity Kadent Corporation Copeley Capital Management EMS Management & Consultants, Inc. Riordan, Lewis & Haden Cymetrix Corporation Diaz & Altschul Advisors, LLC Medrium, Inc. RiverRock Holdings, LLC Dynamic Energy Systems, Inc. EGL Ventures CareCentric, Inc. RWI Ventures BulldogIT Corporation Enterprise Partners Venture Capital BMS Medical Management, Inc. Sage Capital, LLC Revenue Cycle Partners, LLC Ferrer Freeman & Company PHNS, Inc. Saints Capital espoc, Inc. Founders Equity Inc. Advantedge Healthcare Solutions, Inc. Salem Halifax Partners Receivia, Inc. Francisco Partners Management LLC Quadramed Corp. SE Capital, LLC Medcon Financial Services, LLC Francisco Partners Management LLC AdvancedMD Software, Inc. Sequoia Capital ZirMed, Inc. Francisco Partners Management LLC Healthland Stripes Group Sandata Technologies, Inc. FTV Capital MedSynergies, Inc. Summit Partners "HealthCare Partners, LLC GE Equity Ciraden, Inc. Summit Partners Medical Information Technology Inc. General Atlantic, LLC Emdeon Susquehanna Capital Management HealthWyse, LLC Great Point Partners Health Systems International Technology Crossover Ventures Origin Healthcare Solutions LLC Gryphon Investors PHNS, Inc. The Aurora Funds, Inc. ALN Medical Management, LLC HealthEdge Investment Partners Omega Health Management Services The Riverside Company HEALTHCAREfirst Inc. HealthEdge Investment Partners POC Network Technologies, Inc. Universal Capital Management, Inc. ivolution Medical Systems Inc. Hellman & Friedman, LLC Emdeon Village Ventures Clinicient LLC Insight Venture Partners Netsmart Technologies, Inc. Waud Capital Partners, L.L.C. Advanced Reimbursement Management Investor Growth Capital Greenway Medical Technologies, Inc. WFD Ventures LLC Avisena, Inc. J.H. Whitney & Co., LLC PatientKeeper, Inc. Yorkville Advisors, LLC Transax International Ltd. Source: Capital IQ, Company websites Duff & Phelps 10

11 Emdeon (NYSE: EM): RCM Consolidation Case Study Over the past 15 years, Emdeon has created a business valued today at $1.8 billion by creating, through a carefully executed M&A strategy, an industry-leading RCM firm. Emdeon s revenue and payment cycle solutions connect payers, providers and patients to integrate and automate key business and administrative functions throughout the patient encounter. Emdeon claims to have connections to more payers, providers and vendors than any other healthcare business in the marketplace, with a network of 340,000 providers, 1,200 government and commercial payers, 5,000 hospitals, 81,000 dentists, 55,000 pharmacies, and 600 vendor partners. In 2009, Emdeon processed a total of 5.2 billion healthcare-related transactions, including approximately one out of every two commercial healthcare claims delivered electronically in the United States. The Emdeon Story Emdeon s predecessor was incorporated in December 1995 and commenced operations in January 1996 as Healtheon Corporation. The company changed its name to Healtheon/ WebMD Corporation in November 1999 and began trading on the Nasdaq exchange. In September 2000, the company changed its name to WebMD Corporation and then to Emdeon Corporation in October The business that is now known as Emdeon was spun out in a partial sale transaction to the private equity firm General Atlantic in November General Atlantic acquired a 52% equity interest in Emdeon for $1.2 billion. As a result of the transaction, the parent company changed its name to HLTH Corporation. In December 2007, Emdeon acquired the information management company, IXT Solutions, for $15.9 million. IXT Solutions provided Emdeon with information technology infrastructure that enabled patient communication and payment processing solutions. In February 2008, HLTH Corporation sold its remaining 48% interest in Emdeon to Hellman & Friedman and General Atlantic for $574.6 million. Following this transaction, General Atlantic owned 65.8% of Emdeon, and Hellman & Friedman owned 34.2%. In September 2008, Emdeon acquired the Information Technology Patient Statement business of GE Healthcare Ltd. In the United Kingdom for $16.7 million. The business provided Emdeon with printing and mailing services to hospitals, including statements, invoices, claims and appointment reminders for patients. In June 2009, Emdeon acquired the assets of The Sentinel Group from Optimal Business Services for $3.6 million. The Sentinel Group provided healthcare fraud and abuse management services. In July 2009, Emdeon acquired erx Network, LLC for $100.3 million to bolster the company s pharmacy services business. erx Network provided third-party claims management, billing and physician communication services to the retail pharmacy industry. In August 2009, Emdeon completed its $367.4 million initial public offering on the NYSE. In January 2010, Emdeon acquired FutureVision Technologies for $60 million. FutureVision provided document imaging, digital conversion and workflow management services. In March 2010, Emdeon acquired of Healthcare Technology Management Services (HTMS) for $25 million. HTMS provided consulting services to the healthcare payer market, and specializes in assessing the healthcare IT software market. In May 2010, Emdeon made a minority equity investment in Enclarity, a healthcare technology firm that focused on improving the quality of provider information. Through its strategic alliance with Enclarity, Emdeon will offer its payer customer access to more accurate provider data. Over the past several years, Emdeon has built a diversified RCM business that serves payers, providers and pharmacies across all RCM channels, front-end, mid-level and back-end. June 9, 2010, Emdeon had an enterprise value of $1.8 billion. Emdeon has increased its revenues from $690.1 million in 2005 to $918.4 million in 2009, representing a compound annual growth rate of 7.4%, despite a severe recession. During the same period, the company has improved its profitability, growing EBITDA margins from 18.7% in 2005 to 22.8% in We believe that well capitalized, fully integrated RCM firms such as Emdeon, are well positioned to capitalize on forthcoming healthcare IT challenges and opportunities in the near term. Emdeon will likely be a competitive threat to smaller RCM firms and may capture market share through (i) crossselling opportunities to existing customer base, (ii) vendor consolidation trends and (iii) scale and network benefits, which may be increasingly important with the continued trend towards automation in the revenue and payment cycle. Emdeon had $220 million in cash in June 2010, providing capital for product development, internal initiatives and/ or additional acquisitions. Duff & Phelps 11

12 For more information about our industry expertise or to subscribe to Industry Insights visit: Industry Insights Contributors Brooks Dexter Managing Director Chris Mercier Managing Director Sean Sullivan Director Brad Hileman Vice President About Duff & Phelps As a leading global independent provider of financial advisory and investment banking services, Duff & Phelps delivers trusted advice to our clients principally in the areas of valuation, transactions, financial restructuring, dispute and taxation. Our world class capabilities and resources, combined with an agile and responsive delivery, distinguish our clients experience in working with us. With offices in North America, Europe and Asia, Duff & Phelps is committed to fulfilling its mission to protect, recover and maximize value for its clients. Investment banking services in the United States are provided by Duff & Phelps Securities, LLC. Investment banking services in the United Kingdom and Germany are provided by Duff & Phelps Securities Ltd. Duff & Phelps Securities Ltd. is authorized and regulated by the Financial Services Authority. Investment banking services in France are provided by Duff & Phelps SAS. For more information, visit (NYSE: DUF) Copyright 2010 Duff & Phelps Corporation. All rights reserved. DP101102