Health IT eyes M&A as market grows up
Allscripts CEO Paul Black issued a prescient ultimatum in October on a stage at Health 2.0.
"Either we need to disrupt ourselves or somebody in this room will come in and disrupt us because it's too easy now that everything is digital," he said.
Allscripts revealed this week it had purchased its cloud-based competitor Practice Fusion for $100 million.
Practice Fusion once touted a $1 billion valuation and toyed with going public. In the end, the company was sold for less than the investment capital it raised. Venrock investor Bob Kocher called the news "disappointing."
The story points to a larger consolidation trend sweeping across the industry.
A confluence of factors is driving the pairings-up, including exhausted Meaningful Use funds, a tapped EHR market and shift toward consumer-centric models. That's driving larger players like Allscripts to hunt for new revenue streams with smaller targets to add code, staff or customer reach.
But the larger companies can't rest on their laurels; new entrants — some major players the likes of Apple — are lurking in every garage in Silicon Valley.
"The EHR market is saturated [and] consolidation is very clear," Kenneth Kleinberg, vice president of research at Chilmark Research, told Healthcare Dive. "Four, five [or] six players is about what we're looking [at] for 2018."
A history lesson on Meaningful Use in under 150 words
The HITECH Act, part of the American Recovery and Reinvestment Act, in 2009 set out to use financial incentives to spur adoption of EHR technology among physicians. To date, $37.4 billion has been paid to eligible providers. Love it or hate it, the program succeeded in getting physicians to adopt the technology. As of 2016, about 95% of hospitals eligible for MU payments achieved meaningful use of certified health IT. More than 86% of office-based physicians now use an EHR.
The MU program is now being replaced by the Quality Payment Program's Advancing Care Information category in the MIPS track. With the program shutting down and most providers with an electronic system in place, the sugar high of government-subsidized sales revenue for vendors is coming down.
Now, legacy EHR companies are looking for new revenue streams in the face of a mature market.
HIMSS Analytics data reported by HIStalk show Epic and Cerner dominated the market, with Epic decimating the competition in the fragmented ambulatory space for 2016, the most recent full year available.
It doesn't help that providers are risk-averse in switching EHR vendors, not surprising given the conservative industry and big costs involved. A recent survey found only 11% of acute facilities and 16% of ambulatory facilities are making a switch.
Given that glacial market movement, vendors are shaking up business strategies as they look to a future focused on mobility and a bit more openness.
The strategy is in full bloom among other vendors as patients increasingly expect consumer-centric options.
Athenahealth announced it would acquire Praxify Technologies last June, for example, to create opportunities for internal and third-party developers to build and launch applications on athena's cloud platform. Last year, "the company made it most of the way through a major flipping of the script from 'it's about the product' to 'it's about the platform,'" athenahealth CEO Jonathan Bush told Healthcare Dive.
Bush called 2017 a big year to lay the foundation for adding microservices onto athenaNet. He hopes these functions can in the long run help take administrative burden out of physicians' hands, shifting to his company or patients themselves.
One such service currently available for athenaOne clients is an open appointment calendar that acts like Open Table. The vision being any consumer could come to the network, search for and schedule an appointment. Patients can schedule on their own or Epic and Cerner customers can use the service for referrals.
EClinicalWorks is launching a virtual assistant.
Epic famously drew a line in the market's sand when CEO Judy Faulkner said she is ready to shift to a comprehensive health record, which emphasizes the importance of growing health data points like social determinants of health.
"The movement to analytics and population care, that's where the action is now," Kleinberg said. "There's a tremendous amount of innovation still possible."
Searching for an exit sign
With a large market share of clinicians making their EHR decision and government funds dried up, the uncaring brute of the market is impressing itself upon the industry.
Some believe that federal programs like Meaningful Use absorbed creative energy in the healthcare sector as the industry was bogged down with the administrative burden of documentation programs.
This "allowed a sense of suspended animation of market forces," Bush said.
In addition, software companies that would have gone out of business or merged got to limp along — buoyed by government-subsidized sales.
"Now that that noise has stopped...market forces that are kind of overdue are coming into sway," Bush said.
For businesses looking for a broader customer reach or line of code, M&A is one means to that end.
Allscripts deployed this strategy in August when it purchased McKesson's hospital IT portfolio. With a lot of smaller ambulatory players in the space, larger companies can pick them off through acquisitions or displacing customers when providers merge and patients are migrated toward the dominant, brand name EHR system.
Other winds are pushing consolidation, including the tax overhaul pushed through in December, giving companies a bargain rate to bring back funds held abroad.
"Repatriation [spurred by the tax bill] could be one factor driving M&A this year as well as cooling valuations that make companies more attractive targets for these companies," Nikhil Krishnan, senior intelligence analyst at CB Insights, told Healthcare Dive.
Practice Fusion's acquisition in lieu of an IPO echoes the concerns of industry investors: Where are the digital health exits?
There were no IPOs last year in the space, Rock Health found, and exits were 18% lower than in 2016 with 119 deals.
At Health 2.0, Lynne Chou O'Keefe, partner at Kleiner Perkins, stated digital health companies have been building value in the last few years, adding most experience meaningful exits around seven years. She expects such exits and IPO creations to occur in the next two to three years.
"We're still waiting for digital health exits as a whole. It's hard to say where we'll see the ROI. One possibility is existing incumbents could acquire startups to help run their tech divisions after realizing the difficulties in building these teams internally, especially in pharma if money is repatriated from overseas," Krishnan told Healthcare Dive.
Still, digital health funding hasn't slowed down.
Rock Health found digital health funding hit $5.8 billion in 2017 with an average deal size of $16.7 million, both an increase over last year. It's hard to believe such funding will continue to increase at the current rate when exits are waning, but the allure of the healthcare industry's $3 trillion price tag continues to call many into the fold.
And the old companies know it.
Behemoths like Amazon and Apple are breathing down the necks of legacy companies.
Meanwhile, startups are cranking away in Palo Alto in hopes of striking gold in the industry with a killer app.
Athenahealth is bracing for such competition, for example.
"One of the reasons why the patient-centered data vault is so important to us this year is so that if Apple or Amazon or Google or anybody wanted to marry up 300 million username, password, credit card numbers to something with actual clinical data, they could shop at athena and literally at one stop be done," Bush said.
"I think there's going to be an interest in doing that both by the big retail aggregators and by their consumers," he said.
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