Shifting Healthcare Landscape Drives Interest in IT Solutions for Post-Acute Care and Human Services

Rising healthcare costs and a shift toward value-based reimbursement are increasing the importance of post-acute care (PAC) providers and health and human services (HHS) organizations across the healthcare landscape. The recent acquisitions of Brightree and Netsmart highlight the rising interest in IT solutions providers that are focused on these end-markets.

Wednesday, May 4, 2016

Healthcare spending in the United States has grown to unsustainable levels, and providers are seeking ways to control costs. As a result, the provision of services in less expensive post-acute care (PAC) settings and through health and human services (HHS) organizations is vital to the long-term sustainability of the U.S. healthcare system. At the same time, government mandates and commercial payer reimbursement arrangements are shifting the healthcare industry from a fee-for-service model toward value-based care, leaving hospitals and other traditional acute care providers and ambulatory organizations to bear greater financial risks of the outcomes of the patient care they provide.

In this environment, increased care coordination with PAC providers and HHS organizations can reduce healthcare costs, improve outcomes, prevent hospital readmissions, and minimize the use of expensive acute care settings. IT solutions are a critical component of these coordination efforts—and an area of historical underinvestment by PAC and HHS providers. Backed by these tailwinds driving demand for IT solutions in post-acute and human services settings, we are seeing strong interest from strategic acquirers and financial sponsors for companies that service these markets. William Blair recently advised on two transactions—the sale of Brightree to ResMed for $800 million and the acquisition of Netsmart Technologies by a joint venture between Allscripts Healthcare Solutions and private equity firm GI Partners in a $950 million transaction—that reflect these macro trends.

Rapid Growth of PAC and HHS Markets

PAC settings are healthcare venues beyond the traditional hospital or physician clinic. Examples include skilled-nursing facilities, assisted-living facilities, home health, hospice, home medical equipment and durable medical equipment (HME/DME) providers, home infusion, and outpatient rehabilitation facilities. HHS providers include organizations focusing on behavioral health, addiction treatment, child and family services, intellectual and developmental disabilities, and public health.

Both PAC and HHS are large, fragmented markets that are growing faster than overall healthcare spending. HHS constitutes the third-largest category of healthcare spending behind only hospital and physician services. According to data from the Substance Abuse and Mental Health Services Administration (SAMHSA) and other sources, total domestic spending in HHS reached approximately $311 billion in 2013, and about 60 million people in the United States experience mental illness in a given year. Spending on home healthcare, which is just a portion of the total PAC market, is expected to increase from $67 billion in 2009 to $140 billion in 2020 (or at roughly a 7% compound annual growth rate), according to estimates from the Department of Health and Human Services and the Centers for Medicare and Medicaid Services. While the growth of PAC and HHS spending is particularly robust in the United States, similar trends are occurring globally.

Technology will play a vital role in allowing PAC and HHS organizations to handle the growing volume of work and deliver care efficiently. In addition to improving these providers’ ability to keep up with basic business functions like billing, scheduling, and reimbursement, IT solutions also improve providers’ capacity to satisfy regulatory compliance efforts, which can vary greatly from state to state. There are important clinical benefits as well. PAC and HHS typically require longer-term care and often involve multiple, varied caregivers, so the documentation requirements are often greater and more complex than in acute settings. Lastly, IT solutions are critical in establishing interconnectivity. Traditional medical providers often do not have point-to-point connections between PAC providers, equipment vendors, referring physicians, rehabilitative specialists, and psychiatrists, and creating a hub for these entities to communicate and share information delivers powerful benefits for providers and patients alike.

Projected post-acute care spending, 2016-2024

Trends Driving Interest in Healthcare Technology Companies

As demand for PAC and HHS services continues to grow, companies providing IT solutions in these sectors are attracting a tremendous amount of interest from strategic acquirers and financial sponsors. The primary forces driving this interest include:

  • Rising costs of healthcare and shift to value-based model: To succeed in a value-based, “accountable care” reimbursement model, acute care providers and physician groups must improve patient outcomes, prevent readmissions, and minimize the use of expensive acute care settings. Often, risk-bearing providers specifically require PAC partners who can cost-effectively manage high-acuity patients in outpatient settings, further making technology and care coordination essential to PAC providers. In addition, the introduction of newer, more advanced pharmaceuticals and a renewed focus on reducing expensive acute care services are leading providers to increasingly encourage behavioral health and substance abuse care in outpatient settings.
  • Expense of treating comorbidities. Research shows that there are significant comorbidities between medical conditions and behavioral health conditions and that those patients with behavioral health issues are inherently more expensive to treat. According to a 2010 report by the Center for Health Care Strategies, healthcare costs for people with chronic medical conditions and behavioral health and substance abuse conditions can be two to four times greater than for people without such comorbidities. As a result, this population has become a key focus of new care coordination models, and it presents opportunities for significant savings with improved care coordination.
  • New legislation and complex regulatory compliance. The Affordable Care Act and other legislation implemented in recent years will provide behavioral health and substance abuse treatment coverage for an estimated 25 million previously uninsured people, further accelerating the growth rate of HHS spending. In addition, both PAC and HHS are complex from a regulatory standpoint and have specific clinical, billing, and compliance requirements, which often vary by state. The complexity of compliance in this regulatory environment drives the high return on investment of IT solutions.
  • Historical underinvestment in IT solutions in PAC and HHS. The PAC and HHS markets have significantly underinvested in IT to date. According to Brightree’s management, the PAC space drastically trails primary and acute care in terms of IT investment, and closing this gap has the potential to deliver meaningful improvements in efficiencies and patient outcomes. In HHS, Netsmart estimates that only 50% of providers use commercially available electronic medical records systems, compared with approximately 85% of the acute care hospital market and 78% of physician practices. As a result, there is significant opportunity for companies providing software, analytics, connectivity solutions, and IT-enabled services in these markets.

Behavioral health comorbidities have significant impact on healthcare cost

Recent Acquisitions of Brightree and Netsmart Technologies

William Blair served as a sell-side adviser in two recent transactions that highlight the attractiveness of leading IT solutions providers to the PAC and HHS markets. These transactions are among the largest acquisitions involving providers of cloud-based solutions for the healthcare industry.

Brightree acquired by ResMed: Brightree is the leading provider of cloud-based software to improve clinical and business performance for PAC providers. Brightree garnered tremendous interest from both strategic acquirers and financial sponsors and was ultimately acquired by ResMed, a leading technology-driven medical device company, for $800 million in a highly competitive process. The transaction was announced in February and closed in April 2016. With the acquisition of Brightree, ResMed adds to its portfolio of digital healthcare solutions; provides recurring, stable revenue growth opportunities for software for HME/DME providers; and creates expansion opportunities in home health, hospice, and post-acute coordination. The acquisition also represents a continuing trend of nontraditional buyers outside the healthcare technology space acquiring healthcare IT companies. 

Netsmart acquired by Allscripts and GI Partners: Netsmart Technologies, a leading provider of software and technology solutions designed specifically for the HHS industry, was acquired from its previous majority shareholder, Genstar Capital, for $950 million by a joint venture between Allscripts and private equity firm GI Partners. William Blair’s decade-long advisory relationship with Netsmart includes three sell-side transactions, including its take-private transaction in 2007. Allscripts’ and GI Partners’ acquisition of Netsmart creates the largest tech company exclusively dedicated to HHS and PAC. The acquisition allows Allscripts to participate much more deeply in the HHS and PAC sectors and leverage its scale and effective distribution capabilities to further drive Netsmart’s growth. The Allscripts/GI Partners joint venture highlights a creative way to combine the benefits of strategic and financial acquirers to prevail in a competitive process.

Both Brightree and Netsmart increased their potential acquisition value by expanding their product and service offerings (ancillary SaaS modules, connectivity solutions, RCM and other managed services) and entering adjacent markets (Brightree into home health and hospice; Netsmart into public health). Their values were also bolstered by the scarcity of companies in these sectors (and all of healthcare IT) with more than $30 million of EBITDA, the strong track records of their management teams, and their positions as clear leaders in their respective markets.

William Blair will continue to monitor these and other trends shaping the deal-making landscape in healthcare technology. To learn more about these trends or the Brightree and Netsmart transactions, please do not hesitate to contact us.

Technology underpenetrated in health and human services

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