While the majority of acquisitions were small, acquirers spent serious money in many instances. More than 20 companies that are household names in the industry changed hands during 2006 (see chart, pages 58-59). At least nine buys were worth more than $100 million and two, McKesson Corp. buying Per Se Technologies Inc. and General Atlantic LLC acquiring Emdeon Business Services, topped $1 billion.
The prevalence of smaller deals, however, will continue, observers believe. In part, this is because the acquisition market is favorable enough that many smaller vendors can get better value by selling than if they tried to grow the business on their own, says Victor Kats, director of business development at Misys Healthcare Systems, Raleigh, N.C.
Customer service concerns also are driving some small vendors to look for a buyer. "As niche vendors continue to grow, they will be challenged with keeping service up to par," Kats explains. "A $10 million company a few years ago that's now a $50 million company may not have the necessary service infrastructure."
Some smaller companies, however, simply don't want to be bought. Acquisition inquiries for mobile computing software vendor PatientKeeper Inc. increased this year but the discussions never got far, says Stephen Hau, co-founder and vice president of marketing and business development at the Newton, Mass.-based firm. "We prefer to remain independent and control our own destiny."
Going public is a possibility for PatientKeeper, Hau says. But public or private, the company is committed to being independent. "We spend about zero percent of our time thinking about being acquired."
A defining characteristic of acquisition activity in 2006 was that 11 claims clearinghouses-including two of the nation's largest, operated by Elmwood Park, N.J.-based Emdeon Corp. and Alpharetta, Ga.-based Per-Se Technologies Inc.-changed hands. Just as significantly, two of the clearinghouse buyers were banks, evidence of the push by financial institutions to stake out territory in the health care market.
With the industry starting to accept standard transactions beyond claims, electronic data interchange is a growth area in health care, says John Osberg, president at Informed Partners LLC, a Marietta, Ga.-based consulting firm. The acquisition activity during 2006 in the EDI market "is the beginning, not the end," he adds.
Banks have dabbled in health care EDI before, but soon lost interest. Now that the industry is starting to adopt standard transactions, their interest has been renewed. "We've got standards and banks follow standards," Osberg explains. "Medical banking is here to stay this time. Banks' core competency is processing consumer debt, and we've got standards now to do that."
In April, PNC Financial Services Group Inc. of Pittsburgh acquired Healthcare Administration Technologies Inc., a Tulsa, Okla.-based clearinghouse. Five months later, Charlotte, N.C.-based Bank of America bought HealthLogic Systems of Norcross, Ga. "There are a lot more banks beyond these looking at the health care marketplace," notes Kevin Cameron, CEO at Emdeon Corp.
Banks not going anywhere
For financial institutions, there is value in managing health savings accounts, flexible spending accounts and health reimbursement arrangements as more employers start to offer consumer-driven health plans. "That's a compelling enough opportunity for banks to stick around, and the fact they're making acquisitions leads me to believe their presence will be permanent," says Kats, the business development director at Misys.
Banks also see EDI as a way to offer value-added revenue cycle management services to providers. For instance, they want to reformat the 835 electronic remittance advice transaction that providers receive from payers to enable automated posting to patient accounts and balancing of the remittance against the actual electronic funds transfer-or payment-from insurers.
More than ever, providers need faster and more complete payment as patients increasingly are responsible for a larger part of their medical bills, Cameron says. "Three to five years ago, consumers were paying 25% of the bill," he notes. "Now, they're paying 35% to 40%. That's putting pressure on the provider market. Uncollected copays used to frequently be written off, but now they're a more significant portion of a provider's revenue."
But while some banks have hired health care professionals to add in-house expertise, Cameron isn't yet convinced that many financial institutions fully understand the complexities of the health care industry. "Some people are greedy, and I'm not sure they know what they're getting into."
Banks soon could be joined by another group of powerful companies-health insurers-in their quest to buy clearinghouses.
Eden Prairie, Minn.-based Ingenix, the I.T. division of giant payer UnitedHealth Group, in 2006 paid $54 million for Electronic Network Systems Inc., a veteran clearinghouse in Colorado Springs, Colo.
Ingenix also acquired Kaysville, Utah-based Claredi Corp., a vendor of transactions compliance testing software. "Because PNC and Bank of America acquired clearinghouses, other banks will buy clearinghouses," Osberg predicts. "Because UnitedHealth Group bought a clearinghouse, other insurers will buy one. These are bellwether transactions that will drive other deals to be done."
While clearinghouses were a hot commodity in 2006, electronic medical records vendors were not.
The EMR highlight was Allscripts LLC of Chicago paying $304 million in cash and stock for A4 Health Systems Inc. of Cary, N.C.
Allscripts for many years sold its EMR software primarily through IDX Systems Corp., but the partnership is changing now that GE Healthcare of Waukesha, Wis., owns IDX. Allscripts also focused on the large physician practice market. Buying A4 enabled Allscripts to pick up practice management software and an accompanying EMR for small and mid-size practices, plus an emergency department information system.
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