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 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.
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.
Walgreens will likely make the first move to acquire Humana in 2019, but Walmart will outbid Walgreens to win Humana over.
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.
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.
By the end of 2019, every major healthcare analytics vendor will provide a cloud-hosted offering with optional data science and report development services.
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.
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.
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.
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.
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 will have a nervous breakdown leading him to reinvent the healthcare system from his bed during his two-week recovery at Cedars-Sinai.
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Unlocking Healthcare’s Big Data with NLP-powered Ambient and Augmented Intelligence
It wouldn’t be a radical statement to say NLP bridges the human-computer divide more than many technologies. ROI has been elusive, leaving prospective adopters reluctant to embrace it despite the numerous opportunities for NLP-driven solutions. NLP technologies have reached an inflection point with the emergence of advanced deep machine learning methods that are on-par with humans for an ever-increasing list of core natural language skills, such as speech recognition and responding to questions. In our newest report, Natural Language Processing: Enabling the Potential of a Digital Healthcare Era, we profile 12 vendors, all with a track record in text mining and speech recognition, including 3M, Artificial Intelligence in Medicine (Inspirata), Clinithink, Digital Reasoning Systems, Health Catalyst, Health Fidelity, IBM Watson Health, Linguamatics, M*Modal, Nuance, Optum and SyTrue. Each has a reputation for delivering solutions that serve a particular set of use cases or customer groups, distinctions we capture using heat maps for each company.
NLP is particularly well suited to address two huge problems in healthcare – easing the clinical documentation burden for clinicians and unlocking insights from unstructured data in EHRs. Documentation consumes an ever-increasing portion of clinician’s time. Recent research has shown physicians spend as much as half of their work day (6 hours of a 12 hour shift) in the EMR. Another recent study showed clinicians spend two hours on clinical documentation for each hour spent face-to-face with patients. Unsurprisingly it is often cited as a key factor contributing to physician burnout. Ambient Intelligence refers to passive digital environments that are sensitive to the presence of people, aware context-aware, and adaptive to the needs/routines of each end user. The familiar virtual personal assistants (VPAs), such as Amazon’s Alexa and Google’s Assistant, are familiar examples.
Speech recognition technology is approaching 99-percent accuracy, a milestone that some argue means that voice will become the primary way we interface with technology. I am skeptical of this prediction, at least when it comes to the broader utility of voice-based interfaces for consumers. The visual display, with its links and rich media, is an indispensable element of the modern digital experience.
Smart speakers, the input device for speech recognition, are the hottest technology trend of the moment, with an adoption curve that exceeds even the smartphone (see graphic below from Activate). We expect the smart speaker to rapidly become a fixture in both the home and office setting, following a similar path to maturity as the smartphone, offering applications for consumers and enterprises.
Interest and adoption in healthcare is already apparent. In September Nuance announced a smart speaker virtual assistant that uses conversational cloud-based AI (Microsoft Azure) to engage physicians during clinical documentation. In late November a post on the Google Research Blog described internal research and a pilot at Stanford investigating the potential to use a similar smart speaker interface and Automatic Speech Recognition (ASR) technology to create a virtual scribe.
Startups are taking on this problem too. Saykara, led by former executives at Nuance and Amazon, is developing a virtual assistant similar to Google’s. The company claims to have far more advanced speech recognition technology than its heavyweight competitors. Other are developing ambient scribes to passively document patient encounters, including Suki.ai , Robin Healthcare, and Notable Health.
EHR vendors are also making investments in ambient intelligence. Epic has partnered with Nuance and M*Modal to embed their ambient scribe technology directly into clinical workflows. Allscripts and athenahealth have partnered with startup NoteSwift. eClinicalWorks has launched a virtual assistant called Eva. Eva operates is initially intended to respond to queries for things like recent lab data or past clinical note content.
Barriers remain on the road to ubiquitous adoption of NLP technology by healthcare enterprises. NLP provides HCOs a low-risk opportunity to experiment with advanced machine learning and deep learning technologies, but its not the type of technology that can be implemented optimally by just any analyst in the IT department, but instead requires specialized expertise that is in short supply. While free text and mouse clicks will dominate the clinical documentation landscape in the near-term, healthcare enterprises will soon expect their users to talk their applications.
Blockchain in Healthcare: Enthusiasm is growing, but still a long way to go to realize impact
The speculative craze around Bitcoin and the Initial Coin Offering (ICO) market for startups in the digital currency and blockchain space has heightened the interest in blockchain beyond the crypto-community and into the mainstream. The speculation in the ICO market has driven investment in these vehicles to reach nearly $7 billion in 2017 virtually dwarfing venture capital for startups across all sectors including healthcare. Among the hundreds of startups in the blockchain ICO count are over 70 dealing with healthcare according to industry observer Vince Kuraitis. But speculative capital rarely translates into long-term sustainability and the disruptive business models that startup founders espouse. Limitations with scalability, transaction speeds, energy consumption have been some of the dominant concerns. This is particularly true in healthcare and we have reached an important point in the evolution of the blockchain space where it is worth pausing to take stock of how blockchain applications are evolving and what specific pain points in health IT can current blockchain infrastructures realistically address.
Blockchain can be valuable in contexts where there is dependency between transactions and an asset, such as data, passes from one party to another. Furthermore, when verification of the integrity or provenance of the data is valuable the immutability and time stamping features that blockchain provides are very useful.
Chilmark Research is releasing our “Market Scan Report (MSR) on “Blockchain in Healthcare” with this goal in mind. We wanted to explore the first generation of use cases and startups in the blockchain space and provide a strong foundation for understanding the potential applications in areas that speak to the core capabilities of blockchain as they relate to payers and providers: identity management, data sharing/exchange, provider directories, patient indices, claims adjudication, supply chains and revenue cycle management. We can think of blockchain as having a role in addressing pain points in the healthcare system where we see some of the following challenges:
Contexts where there is dependency between transactions and an asset, such as data, passes from one party to another are important areas where blockchain can be valuable. Furthermore, when verification of the integrity or provenance of the data is valuable the immutability and time stamping features that blockchain provides are very useful.
Our research into the current applications in development and most-ready for prime time in the next year include companies working in the following areas of the provider-payer nexus:
We provide brief vendor profiles of consulting firms, large tech providers and startups working in the blockchain space and an analysis of where we see this market going in the coming years. These also include some of the larger consulting and tech firms offering enterprise Blockchain-as-a-Service offerings including IBM, Accenture, Deloitte and T-Systems. The startups profiled include PokitDok, Simply Vital Health, Solve.Care, MedRec, Change Healthcare, Factom. There are also alternatives to blockchain or a growing number of companies that have chosen to develop “blockchain friendly” applications until the blockchain ecosystem reaches a higher level of maturity. Google’s DeepMind Health is using an alternative distributed ledger technology with patient records in the UK’s National Health System after creating an uproar over perceived misuse of patient data without approvals or prior consent. Blockchain offers an auditable way to address this controversy. A supply chain/cybersecurity offering by Cloudface provides an analytics solution for hospital supply chain with plans to create blockchain applications in the near future. There is also growing interest in IOTA’s Tangle for the Internet-of-Things (IoT).
One interesting example that emerged at the end of our writing this report was the recently announced Optum-Quest-Humana-MultiPlan blockchain initiative to improve provider directories. This is part of an effort to streamline back-office operations for payers. The initiative was developed to address the problem that arises when claims from providers enter the system and there is a mismatch between the records payers have on providers and the provider identity. Often the payer directories are not up to date and the resulting lack of reconciliation of claims submitted by providers results in delays or non-payment of claims. The initiative will launch a pilot during the summer of 2018. What is important about this initiative is the involvement of multiple stakeholders making it a more salient use-case of blockchain for pain points resulting from lack of coordination and effective sharing of data across multiple companies. We view blockchain as a tool for industry transformation rather than disruption of companies, this is a prime example of how to begin thinking about utilizing blockchain in a transformative manner. Over the next decade, we expect to see fewer discussions of blockchain in isolation and it will be a component alongside the cloud, AI and other technologies used to automate administrative functions and enable more efficient sharing of data.
Over the next decade we expect to see fewer discussions of blockchain in isolation and it will be a component alongside the cloud, AI and other technologies used to automate administrative functions and enable more efficient sharing of data.
The example above also leads us to how Chilmark Research is beginning to think about the future of blockchain in healthcare. Blockchain is an inherently complex new technology that necessarily involves coordination across networks of stakeholders. This means that blockchain ‘disruption’ of healthcare that solves the interoperability challenge or other major pain points with a single technological quick fix is not anywhere even remotely close on the horizon, but we do believe the full impact of the transformative potential of blockchain will play out over the coming decade. 2018 will see a growing number of pilots and experimentation as the hype of 2016-17 spurred considerable interest.
Even government has gotten involved with a Blockchain Caucus in Congress. The ONC’s white paper challenge and recent Trust Exchange Framework bode well for blockchain’s future as well. Blockchain proponents would be well served in the long run by moving beyond a strict techno-centric approach and developing more robust thinking on managing consortia, governance mechanisms, and the broader cryptoeconomics of blockchain in the context of the health economy. Thinking is lagging on these fronts and the froth around easy money via ICOs in 2017 has not helped matters in developing the critical thinking tools towards long-term success for blockchain in the health IT ecosystem.
For those interested in learning more Chilmark Research will be attending the Second Annual Healthcare Blockchain Summit on June 11-12 in Boston where many of the vendors and use cases we analyze in our report will be represented.
Optum’s Deal With DaVita: Vertically Integrated Healthcare Continues to Grow
As we kick off 2018, we rest in the wake of the announcement of the largest M&A deal to date in the healthcare industry between CVS and Aetna. While stakeholders speculate about implications, another deal was announced between healthcare payer UnitedHealth (UNH) and provider group DaVita (DVA). UNH’s Optum announced an agreement to buy a division of DVA, DaVita Medical Group (DMG) – not the dialysis management business for which DVA is well known – for approximately $4.9 billion in cash. If the deal passes through regulatory oversight, Optum will have removed an attractive acquisition target for competitors looking to acquire provider groups.
Along the same line, within 2 weeks of the Optum-DVA deal, Humana indicated plans to acquire Kindred Healthcare. These M&A data points reinforce the trend toward healthcare payer and provider convergence that Chilmark Research highlights as the theme of our annual conference. The race is on for market share of vertically integrated health systems.
With the DMG acquisition, Optum’s healthcare delivery division, OptumCare, gains yet another provider group (see Table 1). The acquisition will bring with it roughly 1.7 million patients served annually across a range of specialties and forms of care delivery.
DaVita is one of eight healthcare providers in the Fortune 500 for fiscal year 2016-2017 (see Table 2).
DaVita had been acquiring provider groups aggressively. It is reasonable to presume that DaVita continued to acquire provider groups to be more attractive for DMG acquisition. It is unclear whether this divestiture serves as an example of providers challenged by the prospect of risk management, which is in the DNA of neither a payer nor a provider, or another strategic business decision.
While DaVita’s dialysis management business continued to thrive, DMG struggled. In third quarter SEC filings, the company highlighted divisional losses attributed mostly to a change from shared risk to global risk contracts, increased utilization, growth, and increased labor costs.
DMG has 300 primary and specialty care clinics, 35 urgent care centers and six surgical care centers in California, Florida, Colorado, New Mexico, Nevada and Washington. DMG only represents about 25% of DVA net revenues, but there are a finite number of acquisition targets for Optum and its competitors to pursue with the same consolidated magnitude, breadth, and geographic distribution of DMG.
As with the CVS-Aetna deal, the promise of the Optum-DMG deal has to do with the vertically integrated business and care operation. By aligning business interests of organizations across the risk spectrum and the care continuum, population health management, optimization of risk based contracts and cost management all promise to be more effective.
As with the CVS-Aetna deal, the promise of the Optum-DMG deal is the vertically integrated business and care operation. By aligning business interests of organizations across the risk spectrum and the care continuum, PHM and the optimization of risk-based contracts and cost management all promise to be more effective.
Integrating and driving efficiency across provider organizations acquired by Optum is not a simple task. The organizations listed in Table 1 use a litany of technology solutions from various vendors including Cerner, Allscripts, NextGen, Meditech, Conduent, Inovalon, Healthfusion, IBM, Medelytics, McKesson, and Softcare. As Optum acquires provider groups, it must decide how prescriptive and assimilative to will be. This includes process and protocols, as well as other aspects of system interoperability.
Components of OptumInsight, including analytics, short-form health surveys, consulting and decision support (Impact Intelligence) may all offer a means of improving efficiencies at the DMG subsidiaries that had been performing poorly for DaVita. It is not clear, however, how Optum specifically will be able to convert these provider groups into more profitable organizations.
Over the past decade care delivery has trended toward a decentralized model, migrating from acute to ambulatory care. Surgical centers, alternatives to traditional primary care, and urgent care clinics arose to provide alternatives to a traditional hospital-centric care model. This has challenged stand-alone hospitals and yielded a further fragmented care system.
With ubiquitous EHR systems, the challenges of interoperability began – but as the industry has made steps toward better integration, the hurdles toward providing efficiencies have become more business driven. Consolidation is an inevitable remedy – and it appears to be upon us.
Consolidation of payers and providers will be a battle for patients under management and their ability to create greater efficiencies as consolidated organizations. Administrative efficiencies, risk reduction and lower costs of care management are feasible at scale, but coordinating care across a diverse set of care environments can be challenging and systems integration remains difficult. By owning more layers of care, the payers can reduce integration friction. Care coordination in network can be improved and decentralized care environments more effectively leveraged for their individual contributions to cost reduction and improvements to care quality.
We will be watching to see if UNH and Optum can turn this acquisition into a win by leveraging their data, the skill of their services, the quality of their technology, and the ability capitalize on the reduction of organizational barriers.
In this acquisitive environment, the power appears to lie with the payers and other large health brands such as CVS, as most providers have less capital and haven’t been moving as fast. It is worth evaluating, though, whether partnership or acquisition is the more suitable strategy in this time of flux. We will explore this topic in a Domain Monitor for CAS clients in the upcoming weeks.
As 2018 begins, what is the next big deal on the horizon? How will organizations like Partners HealthCare or Kaiser Permanente respond to acceleration of M&A around them? Will the potential mergers of Dignity and CHI or Providence-St. Josephs and Ascension give provider organizations enough depth and breadth to counter payer M&A moves? We will certainly ask ourselves these questions as these mega-deals continue to unfold in an increasingly convergent provider-payer market.
Risky Bet: Optum’s Acquisition of The Advisory Board
On Aug. 29th, Optum announced it will acquire The Advisory Board’s (ABCO) healthcare business unit for about $1.3 billion. Rumors first began swirling about this acquisition in early July, though the Advisory Board had been “shopping” itself to the market since February. This is a significant play by the acquisitive Optum, which has been relatively quiet for the last few years.
What Brought Us to Today
Optum and ABCO share a similar characteristic in that they were primarily built through acquisition. But unlike the Advisory Board, who had to sustain itself without a large parent organization, Optum has United Healthcare (UHG), a behemoth in the payer sector. Many of the solutions that Optum acquired over the years are being used today by UHG.
Within Optum, there are three distinct business units:
In 2016, OptumInsight generated $7.33 billion in revenue making it arguably the largest healthcare IT vendor in the industry. It is within OptumInsight that the majority of ABCO’s assets will likely reside due to technology, market and services synergies.
The Advisory Board is a well-known entity in the provider market providing both technology and strategic advisory services to provider organizations. For 2017, ABCO projected revenue in healthcare services of $551 million distributed across three main service lines (see Table 1).
Despite its broad and well-respected presence in the market, ABCO stumbled In last couple of years with lackluster growth and missed earnings estimates. Efforts to rationalize its diverse portfolio and trim expenses (RIF of 220 employees in early 2017) were in the works but these efforts were too little too late for impatient investors.
With the ABCO purchase, Optum now has direct access to the C-suite of most hospital systems across the country – a huge asset if Optum can maintain those relationships. However, many a hospital executive will be reluctant to fully trust a company that is directly tied to a payer. It is one thing to purchase technology assets from Optum, quite another to seek strategic advice.
How Optum negotiates this and maintains these client relationships bears careful watching. Other firms such as Accenture, BCG, Deloitte, Oliver-Wyman, PWC and the like will certainly capitalize on this opportunity. Looking ahead, Optum will have done well if it can keep at least 60% of these clients but it will likely be south of 40%.
It will be ABCO’s largest asset, its technology solutions including Crimson that will be the greatest benefit to Optum. These solutions are widely deployed across the healthcare sector and will provide Optum sales a ready entry into many a new account. The challenge for Optum will be to rationalize these many assets with its own technology solutions and providing existing ABCO clients a clear path forward.
As with advisory services, a plethora of healthcare IT vendors will readily go after these ABCO accounts. Optum will need to act quickly to reassure ABCO clients that their technology investments are sound and future-proofed. This will be a far easier task for Optum, a company well-versed in IT, data and analytics than their challenges in reassuring advisory service clients that Optum, owned by UHG, has their best interest at heart.
Provider Directories: An Opportunity Fraught with Challenges
A primary goal of insurance expansion under the Affordable Care Act was to improve access to healthcare. Yet as thousands of people are finding, simply having insurance coverage does not guarantee that ‘the doctor will see them now.’
Due to poorly managed provider directories, a significant percentage of clinicians who are listed on a health plan’s website may not be operating at a given facility, accepting new patients, accepting certain insurance plans, or even actively practicing.
The Center for Medicare and Medicaid Services (CMS) has taken matters into their own hands with a series of regulations and reforms aimed to improve consumers’ experiences and protect them from out-of-network charges. These looming requirements around the creation and upkeep of accurate, up-to-date provider directories offer an opportunity for technology companies – though not without a fair set of challenges for vendors as well as health plans themselves.
The Unraveling of Alere
Early last week, Optum announced that it would buy Alere’s health management business in a $600M cash deal. With this spin-out, the vision of Ron Zwanziger – Alere’s founder and former CEO – to create a comprehensive PHM platform that extended from devices, through IT infrastructure and care management services has come to an end.
This announcement has three implications for the market at large:
1. The market is simply not ready to sole-source such a significant, complete PHM platform from any one vendor. There are too many moving pieces, too many legacy apps, services and tools already adopted and many question marks remain as to just how big PHM will become to make such a big bet this early.
2. Vision is great, but being able to effectively execute on today’s more mundane market needs is critical to keep investors from getting overly anxious and involved.
3. Optum continues to effectively use the cash spill-over from UHG to remain acquisitive. While this acquisition will likely see more internal business from UHG than outside, Optum continues to aggressively build out its portfolio and more acquisitions are assured.
Alere Unravels: What Went Wrong, What it Means
This week we published a new Domain Monitor digging into the recent Optum acquisition of Alere’s health management business, which mostly pertains to their remote monitoring devices and related technology services. This announcement follows a series of events at Alere showing a rapid shift away from the vision of a comprehensive population health management solution, which, though needed, proved overly ambitious for the current market as well as the company. The beginning of this unraveling came back in late June, when differences emerged within the boardroom and Ron Zwanzinger, founder and CEO of Alere, was essentially ousted – along with a couple other senior members of the company.
Since then, the company has shifted its focus, selling off anything not related to their point-of-care diagnostics business (or in the case of their Alere Analytics offering – formerly DiagnosisOne – still looking for suitors). Their AlereACS component, formerly Wellogic, was bought back by Mr. Zwanzinger and is being led by essentially the same team, just significantly reduced in workforce size (Alere had deeper pockets). The sale of the health management division to Optum for $600M in an all-cash deal signifies just how quickly the board is trying to offload non-core products associated with their new vision. This represents an approximately 2x multiple on sales and a $580M loss relative to what was spent on acquiring Matria, which was the foundation of this division, in 2008 (for $1.18B).
This announcement has three implications for the market at large:
While the strategy Alere had been pursuing was sound, the goals lofty and in theory achievable, there were a number of reasons this didn’t end up working out. Most importantly, the market just isn’t quite ready to make a large investment in one solution provider for all their PHM needs, especially when any true value proposition was sketchy beyond the ever-touted readmissions reduction opportunity. Secondly, the acquisition-spree the company went on ended up leading to more headaches than new deals. In-fighting about vision and resource allocation, combined with the operational nightmare that comes with cobbling different companies together without a strong unifying core slowed development and new-customer acquisition to a practical standstill.
Our research throughout 2014 has found time and again that the vast majority of HCOs are not ready for the full enterprise platform play that many vendors are pitching to enable PHM. Rather, these organizations are taking a wise and cautious approach that is in relative lock-step to the pace of VBR contracts that they are now signing. There is a significant amount of change management required within an HCO to enable their PHM strategy and this cautionary tale is further evidence that the roll-out of PHM-enabling solutions will rarely be enterprise-wide for the next 12-24 months.