Dispelling the Myths of a Healthcare IT Investment ‘Bubble’

JUL 15

The U.S. healthcare industry is undoubtedly going through one of the most pronounced transformations in its history.  At the most fundamental level, the means and methods by which patients, providers, and payers interact is changing dramatically.

  • Consumers (patients) are increasingly at the epicenter of the healthcare delivery and decision making processes.
  • Providers (hospitals, clinics) are mobilizing to take advantage of new delivery models that assume the accountability for the quality and cost of healthcare for a defined population, the long-term goal of the ARRA legislation (health reform).
  • Payers (health plans) are expanding their focus beyond a traditional coverage and benefits orientation to include advanced health management and decision support capabilities.

For innovators and investors, these structural changes in conjunction with the ongoing trend toward more granular clinical documentation and code sets (i.e., the new HIPAA 5010 standards and transition from ICD-9 to ICD-10) as well as the lure of billions in financial incentives related to complying with HITECH/Meaningful Use rules are creating brittle calculus for valuing technological advancement and innovation.

In many respects the U.S. health system has been caught flat-footed by a wave of long-overdue regulatory mandates aimed at dragging an industry long resistant to change into the twenty-first century.  The impending need for innovative healthcare IT solutions has created substantial demand for forward-looking vendors with the capability to provide greater efficiency and quality within the care delivery continuum and/or improve transparency within healthcare’s convoluted reimbursement system.  Companies with these general characteristics are rare and truly valuable.

When taken together, the combination of pent-up demand and a scarcity of viable alternatives create a “bubble-like” atmosphere where valuations have crept well outside their historical bounds.  Leading healthcare IT vendors are experiencing unprecedented interest from a range of potential acquirers that fall into three broad categories:

Traditional Healthcare-Focused Companies are uncharacteristically entering new, adjacent domains and paying high prices for healthcare assets deemed strategically significant in the context of a long-term strategy.  Here are a few examples of firms that are paying up to remain innovative, out-front, and relevant to their healthcare constituency:
A host of New Global Entrants view healthcare as a big opportunity and are aggressively pursuing the best-in-class assets that provide a platform for growth or fill out their existing, complementary capabilities.  The following new entrants have made aggressive moves in the past few months:
Meanwhile, Private Equity Firms have begun to reemerge following an ’08-’10 hiatus to compete aggressively against strategic acquirers for some of healthcare’s best positioned assets.  Generous option programs and new operating partner structures comprised of experts with decades of experience are viewed as highly attractive by business owners/founders.  Additionally, due to a stockpile of committed and uncalled capital as well as a preponderance of cheap debt, private equity firms are eager and willing to compete aggressively on M&A opportunities:  

The flurry of activity has resulted in a sellers’ market in which revenue multiples (computed as enterprise value divided by trailing twelve months revenue) have exceeded 8-9x.  This begs the question: is healthcare IT in a bubble?  The answer would be unequivocally “yes” if it weren’t for a range of trends that will persist for the next 10-20 years:

  • 78 million Baby Boomers are reaching retirement age
  • Over-utilization and high cost prescription drugs and medical procedures are not proving to be cost-effective
  • Increasing incidence and complexity of chronic and co-morbid conditions.
  • Healthcare, as compared to most other industries is in infancy in terms of technology adoption – creating a long-standing demand for IT implementation, integration, and optimization
  • Need for new and creative approaches to funding the rising cost of healthcare in light of the strain put on the Medicare and Medicaid entitlement programs
  • Prevalence of fraud, waste, and abuse within the administration and reimbursement processes

A constantly replenishing pipeline of new, entrepreneurial companies is fueling the pioneering spirit and innovation required to advance and redefine the U.S. healthcare system.  Any resemblance to a “bubble” is snuffed out by the sustainability of the current demand and expanding interest from the nation’s leading entrepreneurs, business builders, investors, and advisors that will continue to be attracted to solving healthcare’s complex, long-standing problems.  All in all, it’s a great time to be an innovator in healthcare.

Let us know what you think.

Seth Kneller
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