McKesson starts to move away from health IT business

McKesson is exiting much of its health information technology product lines in a series of moves that have been expected since reports of change in the organization surfaced in early June.

McKesson today announced it is exploring “strategic alternatives” for its Enterprise Information Solutions product line, and observers say this represents the equivalent of putting out a “for sale” sign on its suite of hospital information systems.

These products include the Paragon hospital information system, STAR and HealthQuest applications for financial and supply chain management, and document management and coding products.

Further, McKesson today said it is combining the majority of its Technology Solutions products—such as imaging, workflow, business performance services, connected care services, analytics and the Relay Health unit-- with Change Healthcare (formerly Emdeon), a major claims clearinghouse and revenue cycle management vendor, thus creating a new company, the name of which has not been disclosed.

Change Healthcare will contribute all of its businesses to the new company, except its pharmacy switch and prescription routing business, which will be owned by existing Change Healthcare shareholders. McKesson will own 70 percent of the new company. However, the McKesson ownership stake appears to be only a temporary one; the agreement provides that McKesson and Change will launch an initial public offering in the months following the close of the transaction, subject to market conditions. After the IPO, McKesson expects to exit its investment in the new company in a tax-efficient manner.

McKesson leader John Hammergren will be chairman of the new company, and Change Healthcare leader Neil de Crescenzo will be the CEO.

The transaction will create a combined entity with $3.4 billion in pro forma combined total annual revenues for the fiscal year ended March 31, 2016. Change Healthcare and McKesson executives say they believe the combination will generate more than $150 million in “annual synergies” by the second year after the deal is closed, although they did not describe whether the synergies would represent increased revenue opportunities or reduced expenses.

The new company has received commitments for $6.1 billion of funded debt related to this transaction, with proceeds to be used to repay approximately $2.7 billion of existing Change Healthcare debt, make $1.25 billion in cash payments to McKesson, and make $1.75 billion in cash payments to Change Healthcare’s stockholders, with the remainder to be used for transaction-related expenses.

Regarding the prospects for its enterprise information solutions, company executives cited the need to meet customers’ needs for the move.

“We appreciate the critical importance of the Electronic Medical Record (EMR) and other core information systems to the success of our provider customers,” said Pat Blake, executive vice president and group president for McKesson Technology Solutions. “As we embark on building a new, EMR-agnostic technology company with Change Healthcare, we believe that it is in the best interest of our customers to identify a strategic alternative that will allow for more focus on core provider information systems. We are committed to supporting our customers as we evaluate these options, ensuring a smooth transition through this process.”

“Exploring a new strategic path forward for Paragon, OneContent and our ERP-related businesses provides the best opportunity to accelerate our ability to meet our customers’ evolving needs,” said Nimesh Shah, president of the EIS division. “While we evaluate the best options, the overall priorities for EIS remain unchanged, and we will continue the many efforts we have underway to serve the long-term interests of our customers.”

Rumors have swirled around McKesson for weeks. In early June, the Wall Street Journal reported that McKesson was considering moves to divest its Technology Solutions unit, a move that the company declined to confirm at that time, calling the discussion “rumors and speculation.”

In essence, McKesson wants to substantially get out of the health information technology business, yet still make money off it, according to Alester Spears, principal and CEO at consulting firm Healthcare EDI Partners.

Earlier this year, McKesson sold its small business practice electronic health records and practice management product lines to ambulatory vendor e-MDs. The health information technology arena is changing with traditional financial lines not as profitable as they used to be, Spears notes. The future is provider-payer collaboration, care quality and analytics.

Further, both McKesson and Change Healthcare want to move more into the clinical space beyond provider-payer financial transactions, with analytics supporting increased provider and payer collaboration, Spears adds. “Together, they could do a whole lot.”