January 2013 Healthcare Services: Healthcare IT Services Insights 2013 Outlook — Focus on Data Analytics Background too soon for the US healthcare system. pressure on federal and state budgets, In 2009 healthcare providers began to make Healthcare is a data-intensive endeavor and employers’ income statements and household their first healthcare IT investments in the wise application of technology to analyze income making the cost trend unsupportable; anticipation of receiving the incentives and data is among the best tools available to and iii) with the enactment of the Affordable avoiding the penalties for achieving improve efficiencies and manage risk in Care Act (the “ACA”), 20 million people Meaningful Use as prescribed by the order to ensure delivery of quality care to an poised to enter the market with coverage at American Recovery and Reinvestment Act of increased population of insured in the face the lowest level of reimbursement. A 2009 (“ARRA”). According to the CMS, as of budget constraints and payment reforms. revolution is underway in which payers of November 2012, about $9.3 billion in — governments, employers and consumers While the macro factors driving trends in the electronic health record (EHR) incentive — are overthrowing the old regime of sector are well known, they are so profound payments had been made to 173,168 fee-for-service and forcing risk-bearing that they bear repeating: i) a multi-decade professionals and 3,393 hospitals. The reimbursement models such as bundled trend of healthcare expenditures rising faster ARRA may or may not have spurred payments, value based purchasing, than GDP, as a result of an aging population recovery, but it certainly stimulated accountable care and readmission penalties and increases in cost of care; ii) extreme reinvestment in healthcare IT, perhaps none onto providers. Source: Public data and information Inside 1 3 4 7 2013 Outlook — Stimulative Impact 2012 M&A Activity Select Publicly Focus on Data of the ARRA on the Traded Companies Analytics HCIT Sector Healthcare Services: Healthcare IT Services Insights - January 2013 2013 Outlook — Focus on Data Analytics Market disruption Several smaller data analytics companies are Disruption is roiling the market. Providers are focused on niches. It is logical to anticipate “As providers spend to comply consolidating, creating heretofore unholy that strategic buyers will be on the hunt for with Stage Two of Meaningful M&A targets in the sector to broaden their alliances among physicians and hospitals. Use, anticipate Stage Three Hospital censuses are under pressure as product and service portfolios. Recent requirements and consider the patients with lower acuity needs are examples include the acquisition of increasingly treated outside of the four walls of MediConnect Global, Inc. by Verisk Analytics, IT functionality required for the hospital in lower cost outpatient venues. At Inc. (NASD:VRSK) in March 2012 and success in this new risk bearing athenahealth’s October 2012 acquisition of the same time, readmission penalties impose environment, many are finding financial risk on hospitals for the post- Healthcare Data Services (“HDS”). Both of their incumbent IT systems to discharge care provided in post-acute care these transactions are instructive. environs such as LTACs, SNFs, occupational be of limited use in meeting their According to Verisk, it made the medicine facilities and the home. future needs.” MediConnect acquisition to advance its As providers spend to comply with Stage position in healthcare data, analytics and 1 Two of Meaningful Use, anticipate Stage decision support solutions. MediConnect’s Three requirements and consider the IT proprietary technology enables clients to for service. In announcing the transaction, functionality required for success in this new access clinical data from medical records in Jonathan Porter, co-founder of HDS, said: risk bearing environment, many are finding facilities and provider locations globally. It “Together with athenahealth, we would be their incumbent IT systems to be of limited also offers scheduling, retrieval, review, data able to bridge the gap between providers, use in meeting their future needs. Specifically, validation and analytics. In announcing the payers, and patients by providing ready-to- the integration of financial and clinical data transaction MediConnect’s Chief Executive use population health management and electronic health record interoperability Officer Amy Rees Anderson, said: capabilities as part of EHR workflows that are now critical to the management of quality “Combining MediConnect’s innovative support restructured payment models and of care and risk. In the most recent quarter systems and services with Verisk’s extensive ensure the delivery of appropriate and both Cerner Corporation (NASD:CERN) and data analytics will provide a turnkey solution necessary care to patients.” While terms of athenahealth, Inc. (NASD:ATHN) reported that will transform the way the healthcare the transaction were not announced, that a large percentage of their respective industry manages medical costs and athenahealth is trading at 6x revenue, 50x bookings came from outside of their installed improves the quality of care.” While financial EBITDA and 149x LTM EPS, affording it base, suggesting market share increases at information for MediConnect is not publicly ample cushion to structure an accretive the expense of legacy systems. available, the purchase price of $324mm transaction. (net of $25mm in tax and working capital Increasing importance of data analytics benefits) has been estimated to be Conclusion A major benefit from the deployment of approximately 5.5x MediConnect’s revenue In 2013 demand drivers and infrastructure technology is the exponential increase in the and 14.7x its EBITDA. may drive growth in investment and M&A amount of clinical data now collected and activity in data analytics. The ARRA-fueled According to athenahealth, it expects to stored. However, much of this data is spending on EHR technology has enabled strengthen its capabilities in the analysis and captured within the EHR or in siloed systems. the collection of vast amounts of patient data reporting of population-based cost and To make full use of this data, it needs to flow that increasingly resides in cloud-based quality data in support of healthcare from discrete locations and be aggregated storage that can be aggregated and shared organizations’ need to improve care and analyzed on a population basis so that via health information exchange tools. coordination and reimbursement levels.2 trends can be identified and predicted. Providers and payers will increasingly apply HDS provides analysis of population-based Ultimately, data analytics are fundamental for analytics to this data to measure, analyze and cost and quality data to health systems. Its improving population health and quality of predict care quality and financial risk. risk management tool allows health systems care. With spending on EHRs, cloud-based Investors and acquirers may seek to calculate spending by provider and per storage and mobile technologies well opportunities to profit from this trend. patient, information that is essential in the underway, data analytics may be a major area era of new reimbursement models that pay of focus for investment and M&A activity. for performance and outcomes versus fee Source: Capital IQ and public information 1. Verisk March 2012 press release 2. athenahealth September 2012 press release Duff & Phelps | 2 Healthcare Services: Healthcare IT Services Insights - January 2013 Stimulative Impact of the ARRA on the HCIT Sector “I’m absolutely convinced, and the Aggregate HCIT Headcount1 vast majority of economists are convinced, that the steps we took 45,000 in the Recovery Act saved millions 40,000 of people their jobs or created a CAGR: 20.2% whole bunch of jobs,” 35,000 30,000 – President Obama, July 2011 25,000 Economists have debated the direct impact of the ARRA on employment in the US labor Headcount (employees) 20,000 market as a whole. There can be no debate 15,000 of its impact on the HCIT industry. Employment at the 17 HCIT companies in 10,000 our index that disclosed headcount at December 31, 2009 December 31, 2010 December 31, 2011 year-end 2009 increased by 44% from 2009 to 2011. 1. Headcount as reported by Accretive Health, Advisory Board Company, Allscripts, athenahealth, MedAssets, Quality Systems, Accelrys, Cerner, CPSI, Healthstream, Healthways, HMS Holdings, Medidata, Merge Healthcare, National Research, Omnicell and WebMD. Figures include transactions that were announced during the period. Duff & Phelps | 3 Healthcare Services: Healthcare IT Services Insights - January 2013 2012 M&A Activity There were 108 HCIT transactions 2012 Healthcare IT M&A Activity announced during the second half of 2012, slightly fewer than the 112 transactions Number of Healthcare IT Transactions 2H 2012 Transactions by Acquiror Type announced during the first half of the year. As compared to the same period in 2011, 250 18% HCIT transaction activity increased by 1.9% 13 in the second half of 2012. For the full year, 200 8 44 2012 HCIT M&A activity increased by 9.5% 42 6% year over year, outpacing overall U.S. M&A 150 activity which grew by 4.6%. Strategic acquirers, including portfolio companies of 100 163 financial investors, represented 94% of 151 activity with new platform acquisitions by Number of HCIT Transactions 50 financial investors represented the 76% remaining 6%.