The Push Towards Value-Based Care Is Forcing the HIT Vendor Market Forward

June 4, 2018
For a Market Scan report in our Second Quarter issue, we look at how the policy and payment landscape is impacting the healthcare technology vendor market. Are technology companies meeting providers’ needs to be successful in a value-based care world?

The healthcare policy and payment landscape is rapidly evolving, with the move to value-based care models a driving force behind current healthcare reform efforts. Case in point: in a recent speech at the World Health Care Congress, Health and Human Services (HHS) Secretary Alex Azar laid out his agency’s overall policy strategy and cited accelerating the value-based transformation of the healthcare system as a top priority.

In this landscape, healthcare provider organizations across the country are advancing forward with population health management, accountable care organization (ACO) development, bundled payments and interoperability initiatives that require robust data and analytics capabilities.

This ongoing evolution is, in turn, fueling healthcare providers’ demands on healthcare IT vendors to provide solutions and capabilities to fit their needs for population health management and value-based care models, with core IT capabilities needed around data aggregation, data analytics, care management and patient engagement, to name a few.

Facing these health IT demands, the major electronic health record (EHR) vendors have built out their own population health and analytics capabilities, such as Cerner’s HealtheIntent platform, Epic’s Healthy Planet and athenahealth’s Population Health platform. According to many healthcare IT experts, EHR vendors are making inroads in the PHM space and are challenging some of the best-of-breed vendors.

Liam Bouchier

“About five years ago, there were maybe between 15 to 20 population health tool vendors in the market, but the major EHR vendors were not interested in that space, and that has changed dramatically with the large EHR systems in the past five years, Epic in particular,” Liam Bouchier, principal at healthcare IT consulting firm Impact Advisors, says. “Epic, at this point, is Best in KLAS for their tool set that they provide. Another major competitor, Cerner, also has an incredibly powerful platform. Are these platforms perfect? No. Why? The main reason is, beyond the structured information that you get from health systems, approximately 40 percent of health outcomes are determined by your behaviors, and that’s really where the gold is in terms of data that is needed to drive some of these health outcomes in a positive fashion,” Bouchier says.

A Booming Health IT M&A Market

The evolving payment and policy landscape, shaped in many ways by the drive towards value-based care models, is also driving developments in the health IT mergers and acquisitions (M&A) landscape.

A recent white paper by Berkery Noyes, a New York City-based independent investment bank that provides M&A advisory and financial consulting services, notes that the healthcare technology industry is undergoing a rapid transformation and structural shifts due to reform, cost pressures, and shifting responsibilities between payers and providers. “Private, best-of-breed technology-enabled healthcare IT companies that effectively address market niches and have some level of scale are in high demand by both financial and strategic buyers,” the report states.

The white paper, which examines activity in the pharma and healthcare information and technology M&A trends over the past two years, notes that the breadth of acquirers for healthcare IT companies continues to expand as buyers look to capitalize on the size, rapidly evolving dynamics and growth characteristics of the healthcare market. Acquirers are aggressively looking to broaden product suites, leverage distribution channels, and realize revenue and cost synergies, according to the report, also noting that M&A-driven expansion of strategic healthcare technology platforms is a dominant trend.

According to Berkery Noyes, there were 922 industry M&A transactions from the beginning of 2016 through the end of 2017. Among these deals in the past two years, enterprise value multiples have been strong, with deals averaging about 2.1x revenues and with a median EBITDA (earnings before interest, tax, depreciation and amortization) multiple of 12.5x in 2016 and growing to 13.2x in 2017.

“There’s a boom time in healthcare IT M&A. It’s a great time to be a seller if you have a growth company of scale in healthcare today,” Thomas O’Connor, managing director, healthcare investment banking at Berkery Noyes, says. “The market right now for a recurring revenue growth business of scale is unbelievable. We’re very deep in an M&A cycle; there’s $1.2 trillion of private equity money chasing deals, they can’t find deals of scale and it’s come way downstream in the marketplace today. Most of the deals you’ll see are add-ons to the portfolio companies.”

Thomas O'Connor

The healthcare technology space continues to be tremendously attractive to investors, O’Connor says, because there are significant opportunities going forward. “There’s lots of niches where there are opportunities to solve pain points along the healthcare continuum. You see that in the marketplace; there are a tremendous amount of companies on the market right now,” he says.

Due to large macro/regulatory changes in healthcare and a massive shift to electronic solutions, there is a very favorable climate for sellers with unique offerings, scale, recurring revenue models and rapid growth in attractive niches, including patient engagement, population health and related data analytics, treatment plan adherence, mobile solutions, and regulatory compliance, the Berkery Noyes report states.

These trends are evident in the population health-related activity seen in the market in the past few years. In August, NextGen Healthcare Information Systems acquired EagleDream Health, a cloud-based, value-based care analytics platform. Back in July 2016, Philips acquired Wellcentive for $165 million and also purchased another population health vendor, VitalHealth, last year. athenahealth also expanded its population health portfolio with its $15 million purchase of care coordination vendor, Filament Labs (dba Patient IO). Another population health transaction of note was GE Healthcare’s purchase of the balance of Caradigm from Microsoft. And, IBM has made significant moves in this space, buying Truven, a payer solution, for $2.6 billion, which followed its acquisitions of Explorys, an integration and big data platform;  Phytel, a population health vendor; and Merge.

From an investment and M&A perspective, all this activity adds up to a robust health IT vendor market. However, there are indicators that when it comes to meeting providers’ needs and offering the IT capabilities required to support value-based care, there is much work that still needs to be done.

Are IT Vendors Hitting the Mark?

Many healthcare IT leaders at patient care organizations contend that there are still significant gaps in the capabilities and functionalities of population health management tools on the market today, and many hospitals and health systems use multiple population health solutions working in tandem.

“There is no one vendor that does everything in population health. Nobody has hit the mark yet, as to a solution that delivers everything,” Bradley Hunter, research director, population health at KLAS Research, says. “That being said, everybody is improving and investing a lot in this, and we hear about that from providers. The EHR vendors, they know that there’s a lot of functionality that they can offer that will be helpful to their clients, and they are working on developing that.”

Bradley Hunter

Provider organizations’ needs in managing population health, a key part of value-based care, are as varied as the capabilities of the IT solutions designed to assist them, according to a KLAS report on the population health management market. New vendors have emerged, and longstanding vendors are evolving, resulting in a diverse array of technologies that may address one or all of the different areas of value-based care, such as data aggregation, data analytics and care management, says Hunter.

 “I think the best of the vendors are making real solid progress in these areas, but this has been a space with a lot of different vendors, not just EHR vendors, but other niche players also have rushed into the marketplace, so it can get kind of confusing as to who is doing what and who is good at what,” says George Reynolds, M.D., a retired healthcare CIO and chief medical information officer (CMIO) and currently principal of Reynolds Healthcare Advisors, based in Omaha, Nebraska. He adds, “As far as population health, what parts are you going to look at? Are you just looking at data aggregation and how you’re presenting the analytics of a population of patients? Or are you looking at patient engagement tools? Those are very different ends of a spectrum that wraps into the idea of value-based care, and different players have different strengths in those spaces.”

A survey of healthcare executive leaders conducted by Sage Growth Partners, a Baltimore-based business management consulting firm, found that two-thirds of respondents say EHRs have failed to deliver better population health management tools, and about half claim they would be willing to switch EHRs to get these capabilities. The survey also found that, by and large, providers’ value-based care needs are not being met. Sixty-four percent of providers said EHRs have failed to deliver many critical value-based care tools. Only a quarter of respondents believe that their EHR can deliver on core KLAS criteria for value-based care. And 60 to 75 percent of providers are seeking third-party solutions outside their EHR for value-based care solutions.

“The EHR vendors are certainly players and they need to be a part of your tool set, but you need interoperability components, and you need patient portal components, from a patient engagement perspective,” Chuck Podesta, CIO at the University of California Irvine Health, says. “You see a lot of niche vendors out there in each of their areas, and it makes it tough for CIOs, because we have to cobble things together based on the needs of the organization, rather than relying on one or two of our partner vendors that we already work with, to solve the problem for us.”

Finding solutions with the analytics capabilities required for value-based care is particularly challenging, Podesta says. “There really hasn’t been a single company to figure that out. They are all trying to move in that direction, such as Epic with Caboodle and Healthy Planet, and Cerner has some things it pushes on population health as well, but neither one has really come up with all the various parts and pieces that you need,” he says, adding, “Similar to what you would have in an EHR for an organization, you’re looking for that type of single vendor approach, and in population health you’re not going to find it. A lot of it is because the analytics side hasn’t matured enough in these companies yet to call them a one-stop solution for value-based care.”

Chuck Podesta

Podesta also points out that in the past, health IT vendors have pivoted to keep up with policy and payment changes, such as the passage of the American Reinvestment and Recovery Act (ARRA) in 2009, which included the Health Information Technology for Economic and Clinical Health (HITECH) Act and the advent of the meaningful use program.

“Everyone realized you needed a single system that had all the functions and features integrated, so you could pull all the information together from a meaningful use perspective. Now, with value-based care, we really don’t have that. We have all these best-of-breed solutions right now. Just like we chose one solution to solve MU for us, it would be nice to choose one solution that would solve value-based care. But, the value-based care side is more complex that meaningful use ever was; it’s going to be awhile before you see one vendor come to the forefront that has an end-to-end solution,” Podesta says.

Larry Kocot, a principal at New York City-based advisory services firm KPMG and also national leader of the firm’s Center for Healthcare Regulatory Insight, says, “I think vendors are trying to go directionally where providers need them to go, but, in defense of the vendors, the transition is not smooth and frankly, it’s not uniform. Vendors are in a difficult spot trying to match the needs of a community that is in transition, and there’s no homogeneity across the country in terms of where physicians are on this journey. You can either get out in front of them and give them more capabilities than they need, or you can lag behind in what they want.”

Ralph Fargnoli, managing director, advisory at KPMG, notes that population health and analytics tools are evolving, and he sees vendors’ capabilities improving. With population health efforts, he says, the end-state goal is for providers to have a complete picture of a patient, including social and environmental factors: “We’re still years away from having that capability. We can see what we need; we’re getting a much clearer vision of where we need to go, but we’re still in an evolution.”

A Shifting Vendor Market, and Potential Collaborations

The sea of changes occurring in healthcare have already significantly impacted the vendor market and more changes are on the horizon, many healthcare IT experts say. 

Reynolds says, “One of the universal truths of the big players, the major EHR vendors, is that the burden on the customer, the cost of moving away from a given vendor, is quite substantial. Historically, that has been the case that once you’ve signed on with them, it costs too much to change. I’ve been hearing that most of my career in health IT. Yet during that time, I’ve seen the top vendors of five to seven years ago being acquired or getting out of the market entirely and vendors that were not at the top of the food chain back in 2002 to 2010, are now at the top of the food chain. It would suggest that there is going to continue to be significant change.”

George Reynolds, M.D.

He continues, “Now where is that change going to come from? Someone might ask, will Cerner or Allscripts be going out of business in 10 years? I doubt it, but they may be in a very different business, in terms of how they provide that service, how modular that service is. Is it a menu system, is it all cloud-based? They are either going to adapt, get acquired by someone else or go out of business because the market is going to continue to drive change.”

And, Podesta notes, there continues to be some uncertainty around the Trump administration’s plans for healthcare reform and the administration’s continued interest in dismantling the Affordable Care Act, which has implications for the healthcare IT market. “We’re in a bit of a stagnation period if you’re looking towards the future. A lot of venture capital companies that are investing in these startups to fill some of these niches are struggling with the idea, is this where value-based care is going? Is this where care is going in the U.S.? That’s one side of it. The other side is you’re seeing a lot of players that typically weren’t in the healthcare market moving in rapidly, such as Amazon, Google and Apple, and all these large organizations have a lot of money to spend.”

Many of these companies, through their public cloud offerings, are already working with health IT vendors, such Epic’s partnership with Microsoft Azure and Amazon collaborating with Cerner to use its cloud service, AWS, for Cerner’s HealtheIntent platform. “He who owns the data, wins, when it comes to value-based care and if they can be the aggregator and do something with it, that’s very powerful. I think that’s what you’re going to see from them,” Podesta says.

“It’s hard to say how all of that is going to play out. I think what you’re going to see is a lot of organizations joining forces and picking solutions together rather than just going forward by ourselves, with consortiums starting to happen as well. Everybody is trying to come up with what they think the solutions might be going forward and it’s fascinating watching it play out,” he notes.

Bouchier with Impact Advisors sees an interesting intersection between the entrance of new disruptors in healthcare and the evolving healthcare reform efforts. “The policy and payment landscape is changing the paradigm of how care is delivered. It’s not a fee-for-service model anymore, it’s about the quality of care that is being delivered, and part of the metrics being tracked are about the patient experience and the patient satisfaction with the service that’s being offered. The starting point for that is already there.”

Companies like Apple and Google will change how healthcare information is delivered to patients and consumers, making it more convenient and efficient, Bouchier says, although he doesn’t see those big technology companies going into the EHR market. “The lift to do what EHR vendors do today is challenging. There’s always the possibility that another big EHR vendor will come along. But, I think that everybody is coming to the table with their capabilities, Amazon, Microsoft, Apple, and Google. They know what their strengths are and won’t deviate beyond that. It’s going to be more about partnerships, and leveraging strong partnerships, to attract a patient population,” he says.

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