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Mergers and acquisitions in the health care information technology industry slowed substantially during much of 2009 as the nation's economy remained mired in a deep recession. While the economy remains troubled, the recovery that began in the fourth quarter spurred an increase in health I.T. acquisitions. And that momentum gained speed in first quarter 2010.

Health Data Management tracked 64 acquisitions during all of 2009, and 27 in 2010's first quarter alone. Industry observers expect the M&A increase to continue this year as questions surrounding the HITECH Act-particularly a definition of meaningful use of electronic health records and how EHRs will be certified-start being answered and Medicare incentive payments begin in the 2011 fiscal year starting Oct. 1.

In addition, private equity investment firms are back in the game. "When the debt market seized, it took private equity firms out of the picture because they use debt to buy," says George Lazenby, CEO at Emdeon Inc., a revenue cycle management vendor. "Now they are back and are getting active."

Emdeon was one of the few busy acquirers since the start of 2009, making four deals. But the company's acquisitions-pickups of niche vendors that provide value-added services-mirrored many of the other buys in the past 18 months.

So while acquisition activity in 2009 and early 2010 hasn't been record-breaking and industry game-changing, a lot of best-of-breed or otherwise well-known vendors got new owners. The list includes AMICAS, Concuity, HealthVision, Initiate Systems, MEDHOST, MedPlexus, QuadraMed, Spheris, Sentillion and TheraDoc.

There were some whopper deals as well, although these primarily involved companies that serve the life sciences industry or multiple industries.

Two investment firms-TPG Capital and CCP Investment Board-in November 2009 paid $5.4 billion for IMS Health, whose drug databases serve pharmaceutical firms. This April, Oracle Corp. announced it intends to buy clinical trials software vendor Phase Forward for $685 million, which is more than three times Phase Forward's 2009 revenue.

Additional billions have been spent for multi-industry outsourcing firms with big stakes in health care. Hewlett-Packard Co. in 2008 bought Electronic Data Systems for $13.9 billion, which was the first domino: Dell Inc. followed by acquiring Perot Systems for $4.1 billion, and Xerox Corp. picked up Affiliated Computer Services for $6.4 billion.

These buys follow a trend of manufacturers, worried that their business models are in jeopardy, trying to increase services revenue, says John Osberg, principle of Informed Partners LLC, a Marietta, Ga.-based consulting firm.

In general, however, the deals since 2009 started have been quite small. For acquisitions with a disclosed price, the median deal size for a pure health I.T. company in 2009 was $9 million, compared with $26 million in 2008, according to Healthcare Growth Partners LLC, an Elmhurst, Ill.-based strategic and financial advisory firm.

But bigger deals were just around the corner. Acquisitions during the first quarter of 2010 had median disclosed values of $48 million, compared with $15 million in the last quarter of 2009 when the economy started to improve, according to the firm.

Other "environmental" indicators are improving. There remains uncertainty on the impact and timing of stimulus provisions, although the answers are becoming clearer, says Duncan James, CEO at QuadraMed Corp., a hospital software vendor. But there's also a high valuation expectation among EHR vendors "and that's always a hurdle to climb," he adds. Some vendors believe they can grow because of the stimulus' incentive programs so they aren't looking to sell. Over time, valuations could fall if vendors don't do as well as they expect, and that could spur some buyouts.

The lending environment, which fuels acquisitions, also has improved significantly, James says. "The market is back to where it was before for funding deals." QuadraMed itself was sold in early 2010 (see story, page 50).

Ramping up

The rest of 2010 could be a busy in terms of mergers and acquisitions. "If the first quarter is an indicator for the rest of the year, it will be a very active year," says Jason Backer, a managing director at Healthcare Growth Partners.

What hasn't happened in the wake of the HITECH Act is a big increase in the number of EHR vendors being acquired. That could change as meaningful use becomes real, but there's one sticky issue holding back that market: "There are a lot of EHR vendors that haven't shown they have the ability to operate profitably," Informed Partners' Osberg says.

The acquisition environment for ambulatory EHR vendors will become clearer during the next year as the degree to which physician practices will automate becomes evident, predicts James of QuadraMed. While hospitals are clamoring for incentive funds because they can get at least $2 million, many ambulatory practices haven't yet decided if incentive payments would make adopting EHRs worthwhile.

"Many hospitals already had an I.T. strategy and HITECH accelerated it," James says. "Doctors didn't have plans for an EHR and now have to consider it for the first time." But a three-to-five physician practice may not see a $44,000 incentive per physician, paid over a multi-year period, to be enough of an incentive for EHR adoption, he notes. For larger practices that enjoy certain efficiencies because of their size, those dollars become more meaningful.

So there will be EHR deals, but struggling companies won't necessarily be bought, Osberg notes. There may be some consolidation in the EHR market, but also some contraction as small, unprofitable firms simply disappear. Companies with respectable market share or good products that a deep-pocket partner could turn into opportunity will be attractive.

For instance, needing physician software built on modern architecture, GE Healthcare in March acquired MedPlexus Inc., which doesn't have much of a client base but does have Web-based, hosted practice management and EHR applications that support newer Microsoft technologies. "GE made a shrewd purchase, I think the technology is excellent," Osberg says. With MedPlexus having a large development organization in India, GE's move was more of a technology acquisition than buying market share, notes Baker.