Healthcare Services Industry Update
Robert A. Hauptman, CFA – rhauptman@srr.com David V. Weisberg – dweisberg@srr.com
1 “Accountable Care organizations.” Health Affairs. 27 July 2010. <www.healthaffairs.org>.
2 Gold, Jenny. “Accountable Care organizations, explained. Kaiser Health News and NPR.
18 January 2011. <http://www.npr.org>.
3 Ibid.
Regulatory reforms in the past several years are expected to dramatically affect the delivery of healthcare services in the U.S. these reforms provide incentives to promote the coordination of care among healthcare providers through the development of accountable care organizations (“ACos”) as well as encourage the increased usage of information technology (“It”) within the healthcare field. Buoyed by these regulatory changes and an improving economy, merger and acquisition (“M&A”) activity in both the healthcare It and services sectors continues to increase.
the emergence of Accountable
Care organizations
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the system by which healthcare providers are compensated has long been a subject of debate. Regulators desire a payment system that encourages providers to work together, rewards high-quality healthcare, and discourages provider-induced demand. ACos are considered to be a healthcare delivery model that accomplishes these goals. ACos, which entered the spotlight in March 2010 when the Patient Protection and Affordable Care Act (“PPACA”) authorized the Medicare program to contract with ACos, are networks of providers (e.g., primary care physicians, specialists, and health systems) that share responsibility for providing total care to patients.1 the emergence of ACos
promotes an integrated approach to medical care by making providers jointly financially accountable for the health costs of their patients through strong incentives to cooperate and reduce costs by avoiding unnecessary tests and procedures.2
Under the traditional fee-for-service payment system, most payers compensate individual doctors, hospitals, and other providers for each service provided to a patient. Critics assert that a fee-for-service system creates incentives for providers to furnish or order more services than are medically necessary and leads to duplicative or conflicting treatments due to the failure to coordinate patient care activities.
the Medicare shared savings program for ACos is scheduled to begin in 2012. the Centers for Medicare and Medicaid Services (“CMS”) has proposed rules that define ACos and the shared savings program in which ACos will participate. Although the final version of the rules will likely vary, the proposed rules provide CMS’s initial vision of program. A Medicare ACo must be responsible for the medical care of a population of at least 5,000 Medicare patients and agree to manage all of the respective patients’ healthcare needs for a minimum of three years.3
Patients will be attributed to the Medicare ACo from which they receive most of their primary medical care. CMS will gather data
on patient quality of care and treatment costs. A Medicare ACo would receive bonuses for identified cost savings and for meeting specific quality benchmarks.4 Failing to meet certain benchmarks
could put a Medicare ACo at risk of missing bonuses or even the loss of its contract with CMS, and sanctions may be imposed if it is determined that it is avoiding patients.5 Initial public feedback
with regards to CMS’s proposed rule has been mostly critical and may limit participation in the Medicare shared savings program. Concerns relate to the anticipated significant up-front costs related to forming an ACo vs. modest incentive payments offered by Medicare as well as the inclusion of down-side risks to the ACo if costs increase beyond levels projected by CMS. Additionally, providers argue that the retrospective assignment of patients to an ACo by CMS hinders an ACo’s ability to proactively manage and coordinate patient care.
Despite concerns related to the initial proposed shared savings rules, the trend towards coordination of services has led to increased provider consolidation. Hospital systems are pursuing acquisitions of physician practices and contemplating mergers with other health systems in an effort to control the majority of providers participating in an ACo. Due to hospitals’ access to capital markets, they may possess a greater ability to finance the initial investment required by an ACo than independent physician groups, which may incentivize doctors to partner with health systems. Some economists fear that the race to form ACos could lead to significant consolidation, leaving fewer independent hospitals and doctors. the creation of even larger health systems would shift leverage in the hospital’s favor in negotiations with insurers, potentially driving up health costs. Consolidation in the industry has also raised concerns of antitrust and anti-fraud violations, partly due to the fear that ACos, particularly in rural markets, could increase to a size in which they would employ the majority of the providers in a region.6
Although largely undefined, the ACo concept continues to draw the attention of many within the healthcare industry. While the development and implementation of these organizations could prove to be complex, political support could lead to further experimentation and implementation in the near future. If successful, ACos will have a positive impact on the provision of healthcare services through increased coordination of care and cost containment as the Congressional Budget office estimates that ACos could save Medicare approximately $5 billion through 2019.7
Impact of HIteCH on
Providers and Hospitals
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Another trend in the healthcare services sector is the continued integration of information technology into the practice of medicine. the most notable regulatory development in this area was the Health Information technology for economic and Clinical Health Act (“HIteCH Act”), which was part of the American Recovery and Reinvestment Act of 2009 (“ARRA”). ARRA provides substantial funding to encourage investment in heath It infrastructure and to encourage physicians and hospitals to invest in electronic health record (“eHR”) technology.8 eHRs are generally defined as a
repository of information regarding the health of a subject of care in a format that can be processed by a computer. It is important to note that eHRs are not simply paper records viewable in electronic form, but store information in a format that can be easily analyzed. Switching from traditional paper patient charts will benefit both patients and healthcare providers. eHRs can provide physicians with instantaneous access to complete and accurate patient information, which will reduce the chances of medical errors and ordering unnecessary tests as well as allowing treatment to begin immediately rather than waiting for the arrival of a paper chart. Because patients now have the ability to receive electronic copies of their medical records, eHRs will empower patients to become more active in their medical care.9 Additionally, electronic records
may be less costly to create and maintain than traditional paper charts. over the long term, digital records may make it possible to analyze data for large patient populations to identify the most effective treatments or potentially dangerous drug interactions.10
An estimated $27 billion was allocated to incentivize physicians and hospitals to adopt eHR through additional Medicare and Medicaid incentive payments.11 Beginning this year, eligible professionals
may receive additional payments of up to $44,000 over the next five years under Medicare by becoming a “meaningful user” of certified eHR technology. Adopters of eHR can receive up to $63,750 over a six-year period under Medicaid beginning in 2011.12 What starts out as a Medicare “carrot” will eventually turn
into a “stick.” Beginning in 2015, penalties will begin for those who have not yet adopted and begun to “meaningfully use” a certified eHR system. Physicians who have not implemented an eHR system by 2015 will be penalized by a reduction of 1% of Medicare payments, increasing to 3% over three years.13
Regulators continue to develop “meaningful use” requirements of an eHR system. “Meaningful use” is a standard that permits providers to be eligible for incentive payments. In July 2010, CMS
4 “Accountable Care organizations.” Health Affairs. 27 July 2010. <http://www.healthaffairs.org>.
5 Gardner, Deborah K. and Sexton, Michael F. “the time that Are A-Changing: ACos and Payment Reform.” Ropes & Gray. 9 March 2011. 6 Gold, Jenny. “Accountable Care organizations, explained. Kaiser Health News and NPR. 18 January 2011. <http://www.npr.org>. 7 Ibid.
8 “economic Stimulus Package: Policy Implications of the Financial Incentives to Promote Health It and New Privacy and Security Protections.” 20 February 2009. McDermott Will & emory. 9 “electronic Health Records and Meaningful Use.” U.S. Department of Health and Human Services. <http://www.hhs.gov>.
10 Lohr, Steve. “Carrots, Sticks and Digital Health Records.” New York times. 26 February 2011. <http://www.nytimes.com>. 11 Ibid.
12 “eHR Incentive Programs: overview.” U.S. Department of Health & Human Services: Centers for Medicare & Medicaid Services.” 2010. <http://www.cms.gov>.
announced the Stage 1 criteria for incentive payments for eligible professionals, eligible hospitals, and critical access hospitals that meaningfully use certified eHR technology. In addition, providers who adopt, implement, and upgrade eHR technology will be eligible for Medicaid incentive payments during the first year of Stage 1. According to CMS, the Stage 1 criteria, which begins in 2011, “focuses on electronically capturing health information in a coded format and using that information to track key clinical conditions and to communicate the information to better coordinate care.” overall, the Stage 1 criteria features 25 objectives / measures for eligible professionals (24 for eligible hospitals), which are divided into a “core” set and a “menu” set. the core set will contain 15 objectives for eligible professionals and 14 objectives for eligible hospitals that are requirements. Professionals and hospitals will select five of the 10 menu objectives to meet. In this way, the meaningful use criteria will provide some flexibility.14
Any flexibility that may be allowed in Stage 1 may be eliminated when CMS rolls out its Stage 2 meaningful use criteria. In Stage 2, many anticipate the addition of new objectives, with all of the Stage 1 objectives becoming requirements without the option for deferral of some of the menu set items, although commentators have recommended delaying Stage 2 by one year for those attesting to Stage 1 in 2011. Stage 2 is expected to expand upon the initial criteria in areas such as disease management, clinical decision support, medication management, quality measurement, and research. A final rule on the Stage 2 criteria is expected by June 2012, with the start date set for 2014.15 expected to take
effect in 2015, Stage 3 presumes the full implementation of eHR systems and an even more stringent set of requirements. In addition to focusing on achieving improvements in quality, safety, and efficiency, Stage 3 is also expected to concentrate on patient access to self-management tools, decision support, and access to comprehensive patient data, with the overall target of improving population health outcomes.16
With less than an estimated 30% of physicians nationwide currently using eHRs17, the healthcare It industry can be expected
to expand rapidly over the next five years as physicians and hospitals implement eHR systems to lower costs and improve quality as well as to meet the meaningful use requirements set in place by the HIteCH Act in order to capture stimulus dollars and avoid the penalties associated with not having a system in place by 2015.
Merger and Acquisition Activity
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After strong merger and acquisition activity in 2007, the number of healthcare services and healthcare technology deals dropped precipitously from 118 in 2007 to 48 in 2009 as the U.S. endured one of the worst recessions in decades.18 Healthcare technology
deals did not suffer as sharp a decline as in the services sector due in part to the benefits of the HIteCH Act. Due to the economic recovery, the expansion of the healthcare It industry, and the consolidation of healthcare service providers, transaction activity gained momentum in 2010. total transaction value also recovered in 2010 equaling $20.4 billion up from $8.8 billion in the prior year. over the past two years, the industry has witnessed a number of significant transactions. Five transactions in the healthcare services sector topped $1 billion. Healthcare technology has also witnessed a number of significant transactions since early 2010, though the majority involved a deal size below $1 billion.
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IMS Health Incorporated, a provider of information,
analytics, and consulting services to the pharmaceutical
and healthcare industries worldwide, was acquired by
private equity firms TPG Capital and Leonard Green &
Partners, L.P. and the Canadian Pension Plan Investment
Board in February 2010. The implied enterprise value
was approximately $5.1 billion, representing a 10.4x
latest 12-month (“LTM”) EBITDA multiple.
14 “CMS finalizes definition of meaningful use of certified eHR technology.” 16 July 2010. U.S. Department of Health & Human Services: Centers for Medicare & Medicaid Services.” 2010.
<http://www.cms.gov>.
15 Manos, Diana. “Federal panel votes to delay Stage 2 meaningful use by a year.” 8 June 2011. Healthcare It News. <http://www.healthcareitnews.com>.
16 “CMS finalizes definition of meaningful use of certified eHR technology.” 16 July 2010. U.S. Department of Health & Human Services: Centers for Medicare & Medicaid Services.” 2010.
<http://www.cms.gov>.
17 Lohr, Steve. “Carrots, Sticks and Digital Health Records.” New York times. 26 February 2011. <http://www.nytimes.com>.
11 the universe of transactions includes mergers & acquisitions of healthcare services and technology companies located in the U.S. that were closed with total transaction value greater
than $10 million.
Healthcare Services and Technology Transactions
2006 2007 2008 2009 2010 2011 [a]
1 Healthcare technology transactions 16 27 31 20 23 13
2 Healthcare Services transactions 61 91 50 28 67 22
3 Total Transactions 77 118 81 48 90 35
4 total transaction Value $ 63,877 $ 29,124 $ 11,995 $ 8,795 $ 20,380 $ 10,123
In Millions of U.S. Dollars
Source: Capital IQ
Note: transactions include mergers and acquisitions with total transaction value greater than $10 million and in which the target company was located in the U.S. Healthcare services includes companies classified as being in the healthcare services or managed care industries.
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Allscripts-Misys Healthcare Solutions, Inc., completed
its acquisition of Eclipsys Corporation, an information
technology provider for hospitals and clinicians, for
an enterprise value of $1.2 billion as part of a stock
deal. The deal, which closed on August 24, 2010, makes
Allscripts one of the leading players in the healthcare
software industry, increasing its user base to 180,000
physicians, 1,500 hospitals, and 10,000
post-acute organizations.
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Oracle Corporation purchased Phase Forward Inc.,
a provider of an integrated clinical research suite of
enterprise-level software products and services used in
clinical trial and drug safety monitoring. The transaction
was compiled at an implied LTM EBITDA multiple
of 19.5x.
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BC Partners and Silver Lake Partners completed their
acquisition of Multiplan, Inc., an independent PPO, for a
$3.1 billion enterprise value.
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Financial sponsor Clayton, Dubilier & Rice, Inc., completed
its acquisition of Emergency Medical Services Corporation
(“EMSC”), an operator in the ambulance and facility-based
physician services market in the U.S. EMSC provides
emergency and non-emergency ambulance
transport as well as outsourced emergency department
staffing. The enterprise value was approximately $3.0
billion, implying a 9.5x LTM EBITDA multiple.
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US Oncology Holdings, Inc., a provider of medical
oncology, cancer centers, pharmaceutical, and research
services, was acquired by McKesson Corporation on
December 30, 2010. McKesson paid $2.1 billion for US
Oncology, representing a 9.4x LTM EBITDA multiple.
equity Valuations
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Due to the growth of the healthcare It industry from the continued adoption of technology, we focus on trends in the valuations of companies expected to benefit from the incentive payments of the HIteCH Act. As the equity markets began to decline in late 2007, healthcare It multiples dropped from 16.0x LtM eBItDA in the third quarter of 2007 to 13.1x LtM eBItDA in the first quarter of 2008. Multiples have generally recovered from the 2008 lows, increasing to 17.6x LtM eBItDA in the second quarter of 2009 and up to a five-year high of 19.3x in the second quarter of 2011 after dipping in the second and third quarters of 2010.
Recent Healthcare Services and Technology Transactions
Source: Capital IQ
Enterprise EV /
Target Acquirer Value ($Mill) Filing Date EBITDA
Healthcare Technology
IMS Health Incorporated CPP Investment Board; Leonard Green & Partners, L.P.; tPG Capital $ 5,071.93 2/26/2010 10.4x eclipsys Corporation Allscripts-Misys Healthcare Solutions, Inc. 1,169.81 8/24/2010 21.6x Phase Forward Inc. oracle Corp. 591.11 8/11/2010 19.5x Medicity, Inc. Aetna Inc. 500.00 1/3/2011 n/a Anthelio Healthcare Solutions Inc. Actis Capital, LLP; Conjoin Group 250.00 10/29/2010 n/a Logibec Groupe Informatique Ltee oMeRS Provate equity; Societe Generale de Financement du Quebec 248.38 7/16/2010 10.5 AMICAS, Inc. Merge Healthcare Incorporated 174.74 4/23/2010 26.5x Carefx Corporation Harris Corp. 155.00 4/4/2011 n/a Vital Images, Inc. toshiba Medical Systems Corporation 151.26 6/15/2011 nmf Healthcare Services
MultiPlan, Inc. BC Partners; Silver Lake Partners $ 3,100.00 8/26/2010 n/a emergency Medical Services Corporation Clayton, Dubilier & Rice, Inc. 2,968.36 5/25/2011 9.5x US oncology Holdings McKesson Corporation 2,114.90 12/30/2010 9.4x Rehabcare Group Inc. Kindred Healthcare Inc. 1,265.55 6/1/2011 7.7x inVentiv Health, Inc. thomas H. Lee Partners, L.P. 1,189.03 8/4/2010 8.7x Genzyme Genetic Laboratory Corp. of America Holdings 915.90 11/30/2010 n/a odyssey Healthcare, Inc. Gentiva Health Services Inc. 900.79 8/17/2010 10.5x the Broadlane Group, Inc. MedAssets, nc. 850.00 11/16/2010 n/a Rex Healthcare, Inc. WakeMed Raleigh Campus 750.00 5/12/2011 n/a
Conclusions for the Healthcare
Services Industry
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the healthcare services and It industries are poised for change over the next few years as new legislation and various government incentives come into play. the emergence and evolution of ACos will continue to change the manner in which patient care is delivered and may contribute to increased provider consolidation. Due to the large market opportunity and regulatory tailwinds, healthcare It displays great upside potential and should exhibit strong growth for the foreseeable future.
Robert A. Hauptman, CFA, is a Director in the Valuation & Financial opinions Group at Stout Risius Ross (SRR). Mr. Hauptman has significant experience in valuing healthcare- related entities. Mr. Hauptman can be contacted at
+1.216.373.2997 or rhauptman@srr.com. Long-Term Relative Performance
Trailing EV to EBITDA Multiples
Q3 ‘06 Q1 ‘07 Q3 ‘07 Q1 ‘08 Q3 ‘08 Q1 ‘09 Q3 ‘09 Q1 ‘10 Q3 ‘10 Q1 ‘11 22.0x 20.0x 18.0x 16.0x 14.0x 12.0x 10.0x 8.0x 6.0x 4.0x 2.0x 0.0x
Heathcare It Composite Five-Year Average
Heathcare It Composite S&P 500 Index
Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10
300 250 200 150 100 50 0
