First it was United Health Group’s (UHG) Ingenix Division’s acquisition of leading HIE vendor (and top competitor to Medicity) Axolotl. Then this morning Aetna counters by acquiring Medicity. In just a few short months these two payers have completely changed the landscape of the HIE market by acquiring the two leading HIE vendors in the market today. Now that both of these vendors are in the hands of payers what are the implications both to the HIE market and more broadly the healthcare sector? Following is our assessment based on our continuing research of the HIE market and a number of interviews today, not only with the Aetna and Medicity, but also several other active participants in the HIE market.
Aetna acquired Medicity for a King’s ransom of $500M, a handsome multiple of Medicity’s 2010 gross revenue. Medicity will operate as a separate entity under the Aetna brand maintaining its current headquarters in Utah. According to Medicity, initial conversations began in late October/early November and quickly accelerated to the deal announced today. Aetna plans to close the deal before the end of year. As part of the deal, the senior management team of Medicity has agreed to stay in place for the next few years.
While some may argue that Aetna was simply looking to counter the move by UHG or Aetna’s new CEO was looking to make a mark, Chilmark sees a more thoughtful and strategic move at play here which in the end may justify the price paid.
With the passage of the healthcare reform and subsequent actions by CMS, the industry is moving towards a shared risk payment model based on Accountable Care Organizations (ACOs) and Patient Centered Medical Home (PCMH). The implications are many-fold but a couple of big ones are:
Self-insured employers will begin directly contracting with ACOs, relegating payers to the low margin role of a third party claims administrator (TPA). This is already starting to happen and will accelerate in the future. Therefore, payers need to rethink what their value-add is to the market in this changing landscape to maintain healthy margins. It appears that both UHG and Aetna see their role as leveraging their core competency in IT as both of these companies have been clear leaders among payers in the innovative and effective use of IT.
As new payment models are introduced and IDNs move to an ACO model, diagnosis-related groups (DRGs) will expand their definition in both directions and these ACOs will need solutions to help them more effectively manage risk across an expanded definition of care. This is a daunting challenge for IDNs who today struggle with just managing their physicians and affiliated practices, let alone risk. This will likely force closer relationships between ACOs and payers as a payer’s core competency is indeed managing risk and ACOs look to tap that expertise.
For Aetna it’s quite clear: Link Medicity to their care management/CDS solution, ActiveHealth, to deliver best practice medicine at the point of care thereby morphing Medicity’s existing market presence and network from one of just data pipes, to intelligent pipes. Also, having ownership of Medicity may allow Aetna the opportunity to obtain much better, timely and accurate population health data to more effectively manage risk and concurrently create more personalize benefit plans for their customers.
For Medicity it is less clear. Yes, they now have a huge public company backing them and viability will no longer be an issue, but there is that thorny issue of payers being so close to clinical data, something that makes many in the industry uncomfortable. In the near-term, Medicity will likely lose several prospects to competitors and several current customers may rethink their relationship with Medicity going forward. Both Aetna and Medicity will need to be extremely artful in their messaging to the market to belay fears and minimize these defections for at least in the case of the Ingenix/Axolotl deal, Ingenix had a history of neutrality and their solutions are used by many payers. But in the case of Aetna/Medicity, Aetna has less of a track-record demonstrating such neutrality.
For the broader market there are a few clear outcomes:
- Analytics will play an ever increasing role in healthcare as we digitize the sector through the HITECH Act and the accelerated adoption and use of standards (e.g. IHE stack in HIE market).
- Administrative and clinical data will increasingly become co-mingled as healthcare/payment reform takes hold. The solutions available today to assist with managing that data and delivering it where it is needed when it is needed are still immature. Acquisitions such as this and others to come will focus on addressing this need/opportunity.
- The high valuations paid for both Axolotl and Medicity are reminiscent of the dot-com days of yore though unlike those dot-com brethren, both Axolotl and Medicity had clear brand equity, were neck and neck leaders in the HIE market and have impressive customer-bases. The few independent HIE vendors left that could possibly be acquired are likely thinking big acquisition thoughts of their own but those may be pre-mature as leaders in any market always get the highest valuation. But what is certain is that in 12-18 months time there will likely not be an independent HIE vendor left in the market as those that remain get acquired by larger companies.
Thanks to Aetna, Medicity, Axolotl, ICA and NaviNet who all entertained Chilmark’s calls today that ultimately provided input and guidance to this post.
Excellent post John!
You are right on the money, as always!
I wonder how other large payers will react…
Good post and bringing out the connection to ACOs is helpful. I hadn’t followed it through that far.
I think this statement is off the mark, though: “Self-insured employers will begin directly contracting with ACOs, relegating payers to the low margin role of a third party claims administrator (TPA). ”
If the employer is self-insured, then it already relegates the payer to the role of TPA. Also, it isn’t so much that being a TPA is low margin (health insurance is low margin!) as that being a TPA is low revenue (about 20% of the revenue of fully insured business per life). So, same profit margin but lower revenue means lower profit in absolute terms. Finally, I’m not sure about self-funded employers contracting directly with ACOs. Isn’t that what a TPA would do for them? I’m not saying you’re wrong, just that I don’t understand. That’s something I’d like to learn more about.
Thanks for your thoughtful comments and indeed guidance as I am somewhat familiar with the payer market, but likely not as familiar as you are so your points are welcomed.
Yes, it is lower total revenue, thus lower net profit, my mistake.
In recent conversations with employers and benefits consultants (ground work for report on changes in employer market) indeed some employers are now directly negotiating with large hospital networks for rates regarding care and letting TPA manage the billing/transactions. This is a very new trend (only a few doing it today) but will likely grow under new ACO model.
Do we happen to know the revenue and EBITDA multiples on this deal yet?
Chilmark’s own estimate is north of 8x projected gross revenue for Medicity in 2010
Ben Rook posted an article on HISTALK that spoke to the multiples – http://histalk2.com/2010/12/09/healthcare-it-from-the-investors-chair-12910/
Here are Ben’s comments – …”Rumor has it that $500 million (twice what Ingenix paid for Axolotl) is approaching 8x revenues, a princely multiple that dwarfs, say, Allscripts’ purchase of Eclipsys for 2x revs or even Ingenix’s purchase of Picis for 3x revs.”…..
So who does this leave for major independent players in the field? Not everyone is going to want to contract with a payer organization to get their data exchange services.
The other point to raise is the biggest value to the payers is going to be real clinical data that they can user to better target services to their covered lives. Informatics is the key to the next generation of health care delivery.
You are absolutely correct that getting their hands on clinical data, even de-identified, will greatly assist payers in their ability to put together very competitive benefit plans on a regional and even community basis. While this offers an opportunity for more personalized benefit plans, it can also lead to abusive practices, while within the law, may not be seen as ethical.
There remain a number of competing vendors not associated with a payer ranging from IBM, who acquired Initiate, to RelayHealth, owned by McKesson, GE Healthcare who is making a major push via a complete rebuild of offering to companies such as ICA, Orion Health, etc. Significant information on these vendors and others will be in upcoming HIE Market Report that Chilmark will be publishing shortly.
Firstly a big THANK YOU for such cogent analysis targeted in one of the most important but under served areas of Healthcare and IT.
I’m interested in delving a little deeper on the perspective you provided on Payers acquiring HIE vendors to allow better risk management and providing personalised health plans for ACOs. I feel this is putting the cart before the horse.
Surely Payers were always struggling to minimise their medical loss ratio and had to perform actuarial analyses to do this because they could not easily predict the care that would be given to patients – owing to them not owning the care giving process, fragementation of healthcare delivery, lack of adherence to evidence based guidelines etc? The potential of ACOs, whether physical or virtual is that they will be co-operating across the care continuum, having a complete patient history available and with the right solutions, ensure that Clinical Pathways are defined and follow the evidence base that wants to be used.
If you apply this to patients with Long Term Conditions alone the potential money saving is quite frankly bogglingly large. 5% of patients consume 50% of Healthcare costs and all of these are people with Long Term Conditions. So surely, if you get the clinical care co-ordinated across the care continuum and you are better able to keep patients’ conditions stable and reduce unplanned admissions, the risk diminishes and care predictability increases. Medical Insurance becomes somewhat more straightforward.
So surely it could be argued that the actions of Payers buying HIE vendors is completely defensive on their part…..they see the writing in the wall for their business?
Thank you for the very kind words of appreciation for the post on the Medicity acquisition. To do a cogent analysis such as this really does take a tremendous amount of work, far more than what most people probably realize. Thus, it is nice to get a high five every now and then.
Agree with your comments and basically that is what I was one of the points I was trying to convey in this post. There are numerous issues at play here from your example of better care coordination for chronic care (“long term conditions”), to the future co-mingling of administrative and clinical data, to the need for better operational analytics delivered via the HIE back-plate, to payers wanting closer, more immediate access to community population health data to improve plan design and lower MLRs.
Looking at these two payer acquisitions, I see slightly differing strategies:
With UHG/Ingenix I see more of a Trojan horse play where the Axolotl platform will be used to deliver more Ingenix apps to the market and better leverage data in the HIE for more informed decision making. Analytics will be big here.
The Aetna/Medicity, I foresee greater focus on the ActiveHealth Manager and delivering decision support at the point of care. Thus, the focus will be more on care/disease management.
Will be attending HIMSS and one thing I’ll want to find out from IBM is what does Aetna’s acq do to their own relationship with ActiveHealth. If you are attending HIMSS David, check in with Kelly as I will be visiting Orion Health.
[…] Analysis: Aetna Jumps into HIE Market Acquiring Medicity …Dec 7, 2010 … Rumor has it that $500 million (twice what Ingenix paid for Axolotl) is approaching 8x revenues, a princely multiple that dwarfs, say, Allscripts’ … […]
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