Buying MedAssets and keeping its revenue-cycle division while shedding the part that makes more money may seem like a smart play for anyone who has ever tried to decipher a medical bill.
MedAssets, based in Alpharetta, Ga., is one of the largest healthcare billing and collection companies in the U.S., with more than 2,700 hospitals as clients for services such as estimating what patients owe, itemizing bills with insurers' complex codes and wrangling over bills that insurers refuse to pay. The services—known in the industry as revenue cycle—accounted for more than one-third of MedAssets' $720.2 million in revenue last year.
Pamplona Capital Management, a private equity firm based in London, announced this week it would pay $2.7 billion for MedAssets, keeping the revenue cycle business and selling off the company's other assets, which primarily consist of one of the largest group purchasing organizations in healthcare. For Pamplona, the complex and heavily regulated business of healthcare billing is the more attractive opportunity.
“We believe as hospitals face an increasingly challenging and more complex reimbursement environment, that turning to outside revenue cycle solutions, be they technology, be they services or a combination of both, will be increasingly something they are inclined to do,” said Dr. Jeremy Gelber, a Pamplona partner.
MedAssets will be combined with Pamplona's health information management company, Precyse. The company's offerings include actuarial services, a capability that hospitals generally lack and is in growing demand under new reimbursement models, Gelber said.
But even with so many hospitals overwhelmed by the changing business and policy landscape, the competition to sell them services is intense.
The market is expected to remain competitive even as the industry matures and consolidates, said Moody's Investors Service Vice President Edmond DeForest, who tracks revenue-cycle technology companies. “The transaction around MedAssets is not that surprising to me,” he said. "This is going to be playing out over the next several years.”
The healthcare revenue cycle market is an emerging one and highly fragmented, Deforest said. Customers are fragmented, too. Some want to outsource all billing services, and others are reluctant to scrap their existing billing software or fire local administrative staff. “That transition is a difficult one for economic and emotional reasons,” he said. “Doctors are not quick to change their ways.”
MedAssets' rivals include national consulting companies, technology giants and the subsidiaries or spinoffs of major hospital chains, including Tenet Healthcare Corp.'s Conifer Health Solutions and HCA's Parallon.
Conifer last year signed a contract with 92 Catholic Health Initiatives hospitals that won't expire until 2032. Englewood, Colo.-based CHI—one of the nation's largest not-for-profit health systems—also took a minority stake in the company. Conifer also acquired revenue cycle company SPi Healthcare last year.
MedAssets sells revenue-cycle technology and services. In the last two years it has established its own sales force to boost revenue, analysts with Baird said last month. In 2014, MedAssets' revenue from that part of the business increased 7% compared with 4% the prior year and 2% in 2102.
The company has benefited from “hospitals willing to hand over more responsibility with many changes underway” or ahead, such as the new billing codes known as ICD-10 and new reimbursement models, according to Baird.
MedAssets' size made it an attractive target for Pamplona, Gelber said. “MedAssets has worked with just about every type of hospital there is out there,” he said. Pamplona also found its combined use of technology and revenue cycle services appealing because Precyse uses the same strategy.
Technology accounted for about two-thirds of MedAssets' revenue-cycle business; low-margin services accounted for the rest, according to Baird.
After the deal closes, Pamplona will focus on integrating MedAssets with Precyse and improving the combined company's operations before seeking additional deals, Gelber said. The firm sees some opportunity to lower its costs by outsourcing some work to low-cost U.S. cities or internationally.
“Over time, we will turn to acquisitions,” Gelber said. “We will participate in industry consolidation.”