McKesson Will Merge IT Unit with Change Healthcare, But Deal Does Not Include Paragon EHR

June 29, 2016
The speculation swirling around whether McKesson would separate its IT unit is now official as the healthcare services provider and Change Healthcare Holdings announced Tuesday the creation of a new healthcare information technology company.

The speculation swirling around whether McKesson would separate its IT unit is now official as the healthcare services provider and Change Healthcare Holdings announced Tuesday the creation of a new healthcare information technology company.

According to an announcement, the new health IT company will combine “substantially all of Change Healthcare’s business” and “the majority of McKesson Technology Solutions businesses” into a new company. And, according to the announcement, the new company will have total annual revenues of $3.4 billion.

However, the deal to merge McKesson's IT unit into a new company with Change Healthcare apparently does not include its Enterprise Information Solutions (EIS) business, a division of McKesson that provides core hospital information systems such as Paragon.

In a separate announcement, McKesson Corporation stated it was “exploring strategic alternatives for its EIS business.”

“We appreciate the critical importance of the electronic medical record (EMR) and other core information systems to the success of our provider customers,” Pat Blake, executive vice president and group president, McKesson Technology Solutions, said in a statement. “As we embark on building a new, EMR-agnostic technology company with Change Healthcare, we believe that it is in the best interest of our customers to identify a strategic alternative that will allow for more focus on core provider information systems. We are committed to supporting our customers as we evaluate these options, ensuring a smooth transition through this process.”

Nimesh Shah, president of McKesson’s EIS business, also said in an official statement, “Exploring a new strategic path forward for Paragon, OneContent and our ERP-related businesses provides the best opportunity to accelerate our ability to meet our customers’ evolving needs. While we evaluate the best options, the overall priorities for EIS remain unchanged, and we will continue the many efforts we have underway to serve the long-term interests of our customers.”

McKesson’s EIS serves hospitals and health systems with software solutions, managed services, and infrastructure and hosting services. The portfolio includes core solutions such as Paragon hospital information system; STAR and HealthQuest solutions for revenue cycle management, financial and supply chain management; OneContent document and content management; and coding and other professional services.

McKesson also stated in the announcement, “There is no assurance that this evaluation will result in any transaction being announced or consummated. McKesson will not disclose further developments during this process until its board of directors has approved a specific action or McKesson has otherwise determined that further disclosure is appropriate. EIS is reported as part of our McKesson Technology Solutions segment.”

As previously reported by Healthcare Informatics’ Contributing Editor David Raths, health IT industry watchers have been speculating that McKesson might sell its acute care IT business since the company sold its ambulatory electronic health record (EHR) assets to e-MDs back in March. This move signaled, according to some industry professionals, that McKesson could be looking to exit the acute care space as well. That speculation ramped up earlier this month based on media reports citing inside sources at the company that McKesson was weighing a separation of its IT unit.

McKesson is a global healthcare services and IT company with a substantial pharmaceutical distribution business. According to the Healthcare Informatics 100, which ranks healthcare technology companies based on their 2015 health IT revenue, McKesson Technology Solutions ranks at No. 4 with $3.1 billion in health IT revenue. The company fell one spot from No. 3, where it ranked in 2015 with $3.3 billion in revenue. McKesson’s technology solutions business also consists of RelayHealth, a provider of online physician communication services that McKesson purchased in 2006.

Nashville-based Change Healthcare, a provider of software and analytics, network solutions and technology-enabled services, ranks at No. 11 on the Healthcare Informatics 100 this year, with $1.47 billion in revenue. This year, the company jumped up from the No. 12 spot in 2015 when it reported $1.35 billion in revenue. Change Healthcare is currently majority owned by Blackstone Group LP.

The companies stated in the announcement that McKesson and Change Healthcare will own approximately 70 percent and 30 percent, respectively, of the new company and will receive cash proceeds of approximately $1.25 billion and $1.75 billion, respectively, following the close of the transaction.

The new company will be jointly governed by McKesson and Change Healthcare and is expected to generate in excess of $150 million in annual synergies by the second year following the close of the transaction, the press release stated.

“The new organization brings together the complementary strengths of McKesson Technology Solutions and Change Healthcare to deliver a broad portfolio of solutions that will help lower healthcare costs, improve patient access and outcomes, and make it simpler for payers, providers, and consumers to manage the transition to value-based care. As a separate entity singularly focused on healthcare technology and technology-enabled services, the new organization will be positioned to better respond to customer needs and deliver next-generation innovations,” the companies stated in the announcement.

“This is a bold, innovative transaction that creates a company with an enhanced ability to help customers address their increasingly complex financial and clinical challenges,” John Hammergren, chairman and chief executive officer, McKesson Corporation, said in a statement. “The new company will establish a more efficient suite of end-to-end payment and claims solutions, as well as clinical capabilities, while unlocking the value of our MTS businesses in a tax-efficient manner.”

“The combination of these two entities comes at a transformational time in U.S. healthcare,” Neil de Crescenzo, president and chief executive officer, Change Healthcare, said in the announcement. “Together we will create significant value by bringing together complementary capabilities from both organizations to deliver innovative new solutions for customers, create opportunities for team members at a leading healthcare technology company, and drive advancements that address the three critical areas of cost, quality and outcomes across the healthcare sector.”

Neil Simpkins, senior managing director of Blackstone, said in a statement. “The innovative track records and forward-thinking experiences of both organizations create a truly unique opportunity for positive impact across the healthcare ecosystem.”

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