2019 Predictions: M&A, Big Tech, and the Fate of ACOs

The Meaningful Use gravy train finally came to an end in 2018. As the strongest EHR vendors struggle to define new revenue streams, weaker ones faded from view through acquisitions or leveraged buy-out. Meanwhile, funding for ‘digital health’ start-ups continued to increase, though it likely hit the high water mark in 2018. And lest we forget, Amazon, Apple and Google continue their forays into the healthcare sector as the market is simply too big to ignore.

So what’s in store for 2019?

We brought together our analysts’ brain trust and came up with the following baker’s dozen of 2019 predictions. Over the near decade of making these annual predictions, our batting average has consistently been well above .500, so don’t ever say we didn’t give you an advanced warning on the following:  

 

Revenue cycle management M&A picks up; Optum acquires Conifer

Revenue cycle management M&A activity will continue to pick up with the most notable acquisition by Optum as it doubles down on its Optum 360 managed revenue cycle business and acquires Conifer Health Solutions from Tenet.

Alternative primary care clinics remain a side-show

Despite the hype and media attention around alternative primary care clinics (e.g. Oak Street Health, Chen Med, One Medical), the actual number of physical locations serving patients will remain paltry at less than ten percent of the number of retail health clinic locations. 

Humana finds a life partner with Walmart 

Walgreens will likely make the first move to acquire Humana in 2019, but Walmart will outbid Walgreens to win Humana over.

Regulatory approvals for artificial intelligence-based (AI) algorithms accelerate, tripling the number approved in 2019

The number of FDA approvals for algorithms in 2018 was impressive and shows no signs of abating. Additionally, 2020 will see a further tripling of regulatory approvals for AI.

Choose wisely: 2019 sees the first major shake-out of DTC telehealth vendors

Consumers’ use of telehealth will continue to see rapid growth and rising competition leading to significant consolidation among the plethora of vendors. By year-end, a major non-healthcare-specific consumer brand will join the mix, and the market will be down to five direct-to-consumer (DTC) nationwide brands.

Data science services see extraordinary growth, nearly doubling in 2019

By the end of 2019, every major healthcare analytics vendor will provide a cloud-hosted offering with optional data science and report development services.

In 2019, healthcare organizations (HCOs) adopt a cloud-first strategy

Cloud offerings have become far more robust, concurrent with HCOs’ struggles to recruit IT talent and control costs. Amazon’s AWS and Microsoft’s Azure will be clear winners while Google’s own cloud infrastructure services will remain a distant third in 2019.

New rules from ONC about data blocking have little effect because the business case does not change

Laws and regulations to-date have not compelled providers to freely share data with patients. ONC’s information blocking rule, which will be released before the end of 2018, will make it easier to transfer data to other organizations but will do little to open the data floodgates for patients, clinicians, and developers.

Big tech companies’ intentions in healthcare do little to disrupt the delivery of care

  1. Despite high-profile hires, the Amazon/Berkshire/JPM initiative will make no substantive progress.
  2. Amazon will focus only on the DTC supply chain, payer, and employer—staying away from anything substantive in the provider space.
  3. Apple’s Healthkit and sensor-laden smartwatch will remain sideshows in 2019 awaiting a more actively engaged healthcare consumer.
  4. Google [Deepmind] will never break out of clinical research and drug discovery.

Majority of MSSP ACOs stay and take on risk; hospital-led ACOs lead exits

Despite loud protests, the vast majority of provider-led MSSP ACOs will take on downside-risk as CMS shows flexibility in waivers. However, hospital-led ACOs, who continue to struggle with standing up a profitable MSSP ACO, will exit the program in 2019.

Closure of post-acute facilities shows no signs of slowing

Continued changes in post-acute care reimbursement, especially from CMS, combined with the migration to home-based services, puts further economic strain on these facilities. Nearly twenty percent of post-acute care facilities will shutter or merge in 2019.

2019 Health IT IPO market fails to materialize

The warning signs are there over the last couple of months that the stock market has become skittish. This will extend well into 2019 (if not lead to a mild recession). It will hardly be an ideal time to do an IPO, and those planned by Change Healthcare, Health Catalyst and others will wait another year.

Elon Musk reinvents healthcare

Elon Musk will have a nervous breakdown leading him to reinvent the healthcare system from his bed during his two-week recovery at Cedars-Sinai.

Stay up to the minute.

Did You Know?

Revisiting Our 2018 Predictions

As is our custom here, we like to look back on our predictions for the closing year and see just how well we did. Some years we do amazingly well, others we over-reach and miss on quite a few. For 2018, we got seven of our 13 predictions spot-on, two were mixed results and four predictions failed to materialize. If we were a batter in the MLB we would have gotten the MVP award with a .538 batting average. But we are not and have to accept that some years our prediction average may hover just above the midpoint as it did this year.

Stay tuned, 2019 predictions will be released in about one week and it is our hope that they will inspire both rumination and conversation.

(Note: the bigger and plain text are the original predictions we made in 2017, while the italic text is our review of 2018). 

Merger & acquisition activity continues; Humana or Cigna acquired.

Major mergers and acquisitions that mark the end of 2017 (CVS-Aetna, Dignity Health-CHI and rumored Ascension-Providence) will spill over into 2018. Both Humana and Cigna will be in play, and one of them will be acquired or merged in 2018.

MISS – neither happened. However, Cigna did pick-up PBM service Express Scripts and rumors continue to swirl about a possible Humana-Walmart deal or more recently, even a Walgreens-Humana deal.

 

Retail health clinics grow rapidly, accounting for 5 percent of primary care encounters.

Hot on the health heels of CVS’ acquisition of Aetna, growth in retail health reignites, albeit off a low overall footprint. By end of 2018, retail health clinic locations will exceed 3,000 and account for ~5% of all primary care encounters; up from 1,800 and ~2%, respectively, in 2015.

MISS – Modest growth in 2018 for retail health clinics with an estimate of around ~2,100 by year’s end. Telehealth, which is seeing rapid growth and on-site clinics may be partially to blame.

 

Apple buys a telehealth vendor.

In a bid to one-up Samsung’s partnership with American Well, and in a bid to establish itself as the first tech giant to disrupt healthcare delivery, Apple will acquire a DTC telehealth vendor in 2018.

MISS – Apple continues to work on the periphery of care with a focus on driving adoption of its Health Records service in the near-term with a long-term goal of patient-directed and curated longitudinal health records.

 

Sixty percent of ACOs struggle to break even.

Despite investments in population health management (PHM) solutions, payers still struggle with legacy back-end systems that hinder timely delivery of actionable claims data to provider organizations. The best intentions for value-based care will flounder and 60% of ACOs will struggle to break even. ACO formation will continue to grow, albeit more slowly, to mid-single digits in 2018 to just under 1,100 nationwide (up from 923 as of March 2017).

HIT – MSSP performance data showed only 34% earned shared savings in 2017 (up from 31% in 2016) and by year’s end it is estimated there will be ~1,025 ACOs in operation.

 

Every major EHR vendor delivers some level of FHIR support, but write access has to wait until 2019.

While some of the major EHR vendors have announced support for write access sometime this year and will definitely deliver this support to their most sophisticated customers, broad-based use of write APIs will happen after 2018. HCOs will be wary about willy-nilly changes to the patient record until they see how the pioneers fare.

HIT FHIR-based read APIs are available from all of the major EHR vendors. Write APIs are still hard to find. To be fair, HCOs as a group are not loudly demanding write APIs.

 

Cloud deployment chips away at on-premises and vendor-hosted analytics.

True cloud-based deployments from name brand vendors such as AWS and Azure are in the minority today. But their price-performance advantages are undeniable to HIT vendors. Cerner will begin to incent its HealtheIntent customers to cloud host on AWS. Even Epic will dip its toes in the public cloud sometime in 2018, probably with some combination of Healthy Planet, Caboodle, and/or Kit.

HIT – adoption of cloud computing platforms is accelerating quickly across the healthcare landscape for virtually all applications. Cloud-hosted analytics is seeing particularly robust growth.

 

True condition management remains outside providers’ orbit.

Providers will continue to lag behind payers and self-insured employers in adopting condition management solutions. There are two key reasons why: In particular, CMS’s reluctance to reimburse virtual Diabetes Prevention Programs, and in general, the less than 5% uptake for the CMS chronic care management billing code. In doing so, providers risk further isolation from value-based efforts to improve outcomes while controlling costs.

HIT – Awareness of the CCM billing code (CPT code 99490) remains moderate among providers and adoption is still estimated at a paltry less than 15%.

 

Mobile-first becomes the dominant platform for over 75% of care management solutions.

Mobile accessibility is critical for dynamic care management, especially across the ambulatory sector. More than 75% of provider-focused care management vendors will have an integrated, proprietary mobile application for patients and caregivers by end of 2018. These mobile-enabled solutions will also facilitate collection of patient-reported outcome measures, with 50% of solutions offering this capability in 2018.

MIXED – While the majority of provider-focused care management vendors do have an integrated mobile application (proprietary or partnership), collecting PROMs is still a functionality that remains limited through an integrated mobile solution.

 

Solutions continue to document SDoH but don’t yet account for them.

A wide range of engagement, PHM, EHR, and care management solutions will make progress on documenting social determinants of health, but no more than 15% of solutions in 2018 will be able to automatically alter care plan interventions based on SDoH in 2018.

HIT – despite all the hoopla in the market about the need to address SDoH in care delivery, little has been done to date to directly affect dynamic care plans.

 

ONC defines enforcement rules for “data blocking,” but potential fines do little to change business dynamics that inhibit data liquidity.

The hard, iron core of this issue is uncertainty about its real impact. No one knows what percentage of patients or encounters are impacted when available data is rendered unavailable – intentionally or unintentionally. Data blocking definitely happens but most HCOs will rightly wonder about the federal government’s willingness to go after the blockers. The Office of the National Coordinator might actually make some rules, but there will be zero enforcement in 2018.

MIXED – Last December we said, “The hard iron core of this issue is uncertainty about its real impact.” Still true. Supposedly, rulemaking on information blocking is complete but held up in the OMB. The current administration does not believe in regulation. So “data blocking” may be defined but there was and will be no enforcement or fines this year.

 

PHM solution market sees modest growth of 5-7%.

Providers will pull back on aggressive plans to broadly adopt and deploy PHM solution suites, leading to lackluster growth in the PHM market of 5% to 7% in 2018. Instead, the focus will be on more narrow, specific, business-driven use cases, such as standing up an ACO. In response, provider-centric vendors will pivot to the payer market, which has a ready appetite for PHM solutions, especially those with robust clinical data management capabilities.

HIT – PHM remains a challenging market from both payment (at-risk value-based care still represents less than 5% of payments nationwide) and value (lack of clear metrics for return on investment) perspectives. All PHM vendors are now pursuing opportunities in the payer market, including EHR vendors.

 

In-workflow care gap reminders replace reports and dashboards as the primary way to help clinicians meet quality and utilization goals.

This is a case where the threat of alert fatigue is preferable to the reality of report fatigue. Gaps are important, and most clinicians want to address them, but not at the cost of voluminous dashboards or reports. A single care gap that is obvious to the clinician opening a chart is worth a thousand reports or dashboards. By the end of 2018, reports and dashboards will no longer be delivered to front-line clinicians except upon request.

MISS – Reports and dashboards are alive and well across the industry and remain the primary way to inform front-line clinicians about care gaps.

 

At least two dozen companies gain FDA-approval of products using machine learning in clinical decision support, up from half a dozen in 2017.

Arterys, Quantitative Insights, Butterfly Network, Zebra Medical Vision, EnsoData, and iCAD all received FDA approval for their AI-based solutions in 2017. This is just the start of AI’s future impact in radiology. Pioneer approvals in 2017 — such as Quantitative Insights’ QuantX Advanced breast CADx software and Arterys’s medical imaging platform — will be joined by many more in 2018 as vendors look to leverage the powerful abilities of AI/ML to reduce labor costs and improve outcomes dependent on digital image analysis.

HIT – With about a month left in 2018 the count of FDA approved algorithms year to date is approaching 30 and could potentially hit three dozen by year end. This is a significant ramp up in the regulatory pipeline, but more is needed in the way of clear guidance on how they plan to review continuously learning systems and best practices for leveraging real-world evidence in algorithm training and validation.

 

What do you think of 2018 for health IT?

What We’ve Been Commenting On

Lately, there have been quite a few big developments in healthcare, including Allscripts acquiring Practice Fusion, Apple’s PHR, and the mysterious Amazon-JP Morgan Chase-Berkshire Hathaway healthcare company. Not all of these developments have enough detail yet for Chilmark to analyze the impact on the future of the health IT market in-depth, but we are commenting elsewhere on the wider possibilities for the healthcare industry.

 

Blockbuster digital health funding to spill to 2018
Brian Eastwood in HealthcareDive
“’We think next year is when we’ll begin to see [predictive analytics] go beyond simply accounting for and noting social determinants of health and barriers to care and start to use that information to inform care plan decisions,’ Eastwood said. Vendors able to adequately take this on will emerge as key players in the care management and population health markets as the year progresses, he added.”

Health IT eyes M&A as market grows up
Ken Kleinberg in HealthcareDive
The EHR market is saturated [and] consolidation is very clear…The movement to analytics and population care, that’s where the action is now,” Kleinberg said. “There’s a tremendous amount of innovation still possible.”

Apple debuts medical records on iPhone
Brian Eastwood in HealthcareDive
“Apple is widely accepted as understanding the user experience,” Eastwood said. “If all of the sudden, a substantial chunk of the population has the capability to tap into a patient portal in a way they haven’t before, then it could be a gamechanger.

Why AI tools are critical to enabling a Learning Health System
Ken Kleinberg in HealthcareIT News
The Learning Health Systems continually improve by collecting data and processing it to inform better decision making. As the amount and complexity of big data continues to increase, organizations are challenged to fully take advantage of it,” said Kleinberg. “AI systems are particularly suited to analyze huge data sets to discover meaningful and actionable insights, and even to carry out actions.”

Apple steps into Epic System’s arena with medical records iPhone app
Brian Eastwood in The Capital Times
“(Health record companies) will still be building their core products,” said Eastwood. “They’ll still be maintaining the records…[Regarding rumors of Apple or Amazon creating EHRs], right now, it’s still a little bit in the realm of fantasy.”

How Amazon, JPM and Berkshire could disrupt healthcare (or not)Health IT eyes M&A as market grows up
John Moore in HealthcareDive
“‘I’m not holding my breath for big changes,’ Moore said. Instead, he expects incremental change are more likely over the next three to five years.”

Will Amazon’s push into health care impact Epic Systems’ future?
Ken Kleinberg in The Capital Times
“Software to power the applications for health care providers come predominantly from a few large players like Epic and Cerner,” Kleinberg wrote. “It’s a great question to ask to what degree they can take their provider and software application expertise and apply it to the needs of payers.”

Amid the Fire & Flurry – #JPM18

This past week I attended the annual J.P. Morgan Healthcare Conference, and the multitude of satellite events surrounding it, which attracts about 40,000 people from across the industry. It is where the business of health occurs, where money (Wall Street, PEs, VCs) looks to make a deal with just about any business in healthcare (life sciences, medtech, hospital systems, payers, start-ups, etc).

It’s a fascinating event to attend and arguably one of the best for getting a broad read on the entire healthcare sector and its future trajectory. Following are 8 significant takeaways:

Loud noises, but steady hand at the tiller. A lot of political “fire and fury” came out of Washington in 2017 regarding the Affordable Care Act, but despite several attempts ACA repeal did not occur. Political noise may continue to spout from Pennsylvania Avenue – but over at HHS, new leadership will quickly get down to business, proceeding with value-based care initiatives. The latest example: CMS’s reinstatement of rules for voluntary bundles as an APM under MACRA.

Medicaid in stormy seas. While CMS stabilizes Medicare, state-run Medicaid programs will see turmoil. As of this writing, CHIP remains unfunded, and Medicaid funds distributed via state designated health programs under 1115 waivers will evaporate. This will impact many states significantly, as healthcare costs are already a leading line item in their budgets – nearly 40% in our home state of Massachusetts. How states address this federal shortfall bears close watching.

Cost consciousness arises. The transition to value-based care (VBC), contractions in CMS spend and likely increase in uncompensated care will force healthcare organization (HCOs) to take a hard, deep look at costs. Administrative and supply chain costs will be primary targets. As a corollary, this cost consciousness extends to health IT. If your solution does not deliver a clear ROI in a year or less, you will get the brush-off.

New breed of CIO. The majority of CIOs that oversaw go-lives of enterprise EHRs over the last decade are not likely to be the ones to drive their HCO’s digital health strategy going forward. A new breed of CIO is on the rise: One with a combination of clinical, business, informatics, and IT skills. They intuitively understand the operational and strategic value of IT in both a clinical and business context.

Tax reform accelerates M&A. Recent passage of the tax reform bill brings fresh cash into the coffers of businesses. This cash influx will be leveraged to drive further consolidation rippling across all sectors of the healthcare market. The proliferation of start-up health IT companies with few exit options will lead to rapid consolidation as larger companies leverage cash for strategic fold-in acquisitions.

Next generation of start-ups emerge. I spent some time at the Startup Health Festival to hear many a pitch from young start-ups. Instead of conversations on how to disrupt or transform healthcare, which were the norm a couple of years back, conversations this year addressed a specific issue or problem in the healthcare system. These companies demonstrate a deeper level of understanding of healthcare than years past – typically on how they will provide a “tech-enabled service.”

There’s gold in removing administrative burden. From physician burnout to increasing expenses, administrative friction creates a huge burden across this sector. HCOs will increasingly look for solutions that minimize this burden. During a panel I moderated on Blockchain, the panel was unanimous: Blockchain, in conjunction with cloud computing and smart contracts, shows significant promise of removing administrative friction in provider-payer interactions.

Blockchain is coming, and coming fast – but it will not be widely deployed until ~2022. More near-term is the use of AI/ML to optimize and automate administrative activities. I spoke with several companies, typically at Series A funding level, which have already gained significant wins in relatively short order. This is one area to watch closely in 2018; growth in demand for these solutions will ramp up significantly.

 

The Fury

Vice President Joe Biden spoke at the Startup Festival, reflecting on his son Beau’s death due to cancer. Biden spoke passionately to the crowd about the Cancer Moonshot initiative and the dire need to change the current system of health in this country.

He did not mince words.

Biden implored the audience to dedicate themselves to improving healthcare delivery and persist until they get it done. But Biden also deplored the industry for failing to deliver, after $38B in federal investment, a digitized healthcare system with data liquidity at its core. Unlike most, who readily level this charge at vendors, Biden placed blame squarely on HCOs, which is not unfounded.

Will FHIR come to the rescue in 2018? Unlikely in any significant degree, as we wrote in our 2018 Healthcare IT market predictions, outside of clearly defined clinically integrated networks.

 

The Flurry

It is clear that the flurry of activity that concluded 2017 (Optum-DaVita, CVS-Aetna, Providence-Ascension, Dignity-CHI, Advocate-Aurora, Humana-Kindred) will not subside anytime soon. 2018 will be yet another year of significant consolidation as the entire industry grapples with tighter margins and the need to migrate from tertiary, system-centric care to preventive, consumer-driven care.

Evolent Health’s Acquistion of Valence Health and Its Broader Implications

Valence Health

Evolent Health

In the continuation of a trend this summer, population health management vendor Evolent Health acquired the majority of one of its competitors Valence Health, for $145 million. Valence Health has a broad suite of services including, value-based administration, population health and advisory services for mid-size provider organizations making the transition to value-based care. The acquisition fills a few gaps in Evolent’s current offering while concurrently providing Evolent an opportunity to serve a broader swath of the market.

Valence Health serves over 600,000 lives across 10 clients including the University of Chicago, Cincinnati Children’s and North Shore. This new combined entity is expected to serve more than 1.8M lives across 23 operating customers – about a 50% increase in lives from the 1.2M lives and a 77% increase from the 13 operating customers currently under Evolent.

The acquisition raises two broader questions about the current state of the PHM market in the U.S. The first is what is the rationale behind this deal:

Why was Valence Health sold?

Not meeting aggressive growth targets: This answer to this question is fairly straight forward. Valence Health has underperformed expectations recently. The company was widely publicized as expecting to do $140-145 million of revenue in 2016 with an annual growth rate of 20-30%.

Evolent is only buying the part of Valence that focuses on provider-sponsored health plans. It supposedly was offered and did not want the legacy Cicerone business focused on insurance co-ops. Even if you assume the high end of the $80-85 million of revenue Evolent expects Valence to do this year and add $35 million for Cicerone, the combo is $20-25 million short of what was originally expected for 2016.

The majority of the revenue shortfall is likely to due to the Cicerone business, given that about half of the insurance co-ops have shut down and many others are struggling to stay in the black. However, the core Valence business that Evolent is buying does not seem to have very diverse growth among its existing client base or adding many new clients in 2016.

Why did Evolent Health make this deal?

Profitable sooner: Due to the transaction, Evolent expects to achieve an adjusted EBITDA break-even earlier in 2017 by a quarter or two, which is important to investors and shareholders.

Expanded service capability and expertise: Roughly 75% of Valence’s business is providing back-office technology/services needed to run health plans for provider organizations. Evolent currently outsources this function to UPMC for Medicaid lives and Evolent collects low-margin third party administrator (TPA) fees. We expect Evolent to transition those services from UPMC to Valence Health allowing Evolent to capture additional top-line profit on what was largely a pass-through cost to UPMC.

Valence could help Evolent be a very low cost provider of TPA services that it uses to leverage and win broader population health deals with health systems and IDNs or be used to provide TPA services for all the health plan lives (Medicaid, Medicare and Commercial) that a provider covers.

While there may be concern about this undermining Evolent’s relationship with UPMC, both parties have already accomplished the primary goal of this relationship (commercializing the UPMC population health platform via the creation and broader adoption of Evolent’s solutions) and UPMC has already embarked on ventures with other quasi-Evolent competitors in population health.

Evolent also acquires over 600+ outsourced case and care managers as part of the acquisition which will give them additional capacity to serve existing and new clients with their outsourced care management and care coordination offerings.

Cross-selling opportunities: While 75% of the Valence business is TPA, the other 25% is estimated to be a split – 10% non-recurring implementation and consulting engagements and 15% recurring technology and consulting engagements that are focused on building and managing physician networks. Valence has 90+ customers that apparently do not use it for the core TPA services, but rather technology and consulting around population health.

This should create a foot in the door for Evolent to try to sell its broader platform and services including (e.g., pharmacy services, additional IT capabilities, etc.) into the Valence client base. Evolent would possibly transition clients onto its Identifi platform from Valence’s Vision solution, although that might just be the estimated 10-15 clients that are using analytics on top of the TPA services.

Evolent does not plan to market the Valence Vision platform as a standalone solution, but it would be surprising if it were shut down for software-only clients anytime soon. There may also be large parts of the Vision platform (specifically around pediatrics) that are re-written onto Identifi.

Aside from the 90+ non-TPA clients, it is worth noting that Valence signed a co-marketing agreement with Aon in January. It is expected Evolent would try to maintain this relationship given that Aon apparently advises 500+ hospitals on benefits for the employees they self-insure. That self-insured population is typically the first cohort of lives that Evolent takes on when engaging with a new provider client.

Broader implications for the PHM market

While there seems to be nearly an untapped potential in the PHM market, this deal should pose as a cautionary sign for vendors especially those that are promising their investors high double digit annual rates of return. While the long-term market opportunity may be huge, near-term it remains small with most HCOs dipping their toes into PHM. This may have contributed to Valence Health’s revenue hiccup this year and subsequent sale. Even Cerner, a company that has done a very good job of marketing and selling its Healthe Intent platform, admits that sales, while robust, by and large remain on the smaller side in terms of covered lives and revenue.

Which also highlights another risk Valence likely saw – the entry of larger, well-financed companies into the PHM market that have the resources to be both patient and gradually scale over time. The Valence acquisition and the Wellcentive-Philips deal that came after are both indicative of a market that is beginning to coalesce around a smaller number of vendors that have the scale and breadth of capabilities to enable a HCO’s PHM strategy.

It also shows that if vendors really want to be able to command a larger PPM fee (>$10M PPM) from their larger provider clients, they need to have a broad set of capabilities and solution offerings to serve different patient populations and meet the varied needs of their provider clients especially the growing Medicaid market.

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