To build its revenue-cycle giant, Pamplona Capital will invest in call centers and a sales force across the U.S. and overseas; make equity investments in promising companies; and acquire others. Pamplona may also seek health systems to become minority owners in Alpharetta, Ga.-based MedAssets, which will be spinning off its traditional group purchasing organization assets and consulting arm to the VHA-UHC Alliance.
That strategy could spur consolidation in the nation's $43 billion revenue-cycle market. Pamplona Capital will merge MedAssets' revenue-cycle business with Precyse, the revenue-cycle technology company the firm acquired last year. This month, it said it would acquire a stake in Atlanta-based Patientco Holdings, which develops technology to collect money owed by patients.
The firm seeks to capitalize on what it claims is fatigue among hospital executives, who in recent years have been forced to navigate a multitude of products and contracts to bill for medical services and get reimbursed in a timely fashion. Pamplona executives say the market is littered with companies that can do a slice of what's needed.
Their company, they say, will be wide-ranging and, unlike other major revenue-cycle players, the company is not owned by hospitals or an insurer. “We felt that some of them had a lack of independence,” Gelber said.
MedAssets' success, however, will depend on how well the company performs in a market where competitors are also angling to grow and capture business from hospitals turning to outsourcing.
“The market for revenue-cycle management software and services is still a relatively new market,” said Edmund DeForest, a vice president with Moody's Investors Service.
“The outsourcing trend is really still gaining strength” and revenue-cycle companies are just starting to merge. The push “to try to create a competitive advantage from the benefits of scale and a larger customer base is in process.”
The overall revenue-cycle market is projected to grow to $52 billion by 2020, according to McKinsey & Co., with a larger percentage of that business going to companies such as MedAssets instead of hospitals that handle their own billing.
Pamplona isn't alone in seeing the opportunity. “Providers are increasingly seeking one vendor who can deliver end-to-end revenue-cycle management solutions,” Tenet Healthcare Corp. CEO Trevor Fetter said this month at the JPMorgan investors conference in San Francisco. Tenet owns revenue-cycle subsidiary Conifer Health Solutions, which operates in 40 states and has roughly 800 customers.
“While many of them maintain their revenue-cycle operations in house, there is greater demand across the board to outsource these activities,” he said. “Conifer has tremendous growth prospects.”
Gelber said rival companies do not have the full scope of offerings that MedAssets will develop through capital spending, equity investment and acquisitions. The combination of MedAssets and Precyse “gets us part of the way to where we want to be,” he said.
The merger would combine two companies with very different services, said Chris Powell, CEO of Precyse. “There is so little overlap, really no overlap in offerings,” he said.
MedAssets, with operations that collect $450 billion in gross revenue from patients at 2,700 providers, sells services that estimate patients' bills and oversees collections from households and insurance companies. Precyse is an information technology company that handles documenting medical treatment for insurers and actuarial services more common among insurers.
But those services are increasingly needed by hospitals and medical groups entering new payment models, such as bundles and accountable care, or starting or purchasing their own insurance arms. Pamplona has already invested to build new call centers in less-costly labor markets, both in the U.S. and overseas, and has hired a global leader to oversee international operations.
“We are going to break ground offshore in the next month.” Gelber said. “MedAssets has never had that capability.” Other industries have made more headway in the use of overseas call centers and healthcare is increasingly willing to look abroad for opportunities, he said.
Not every deal to expand MedAssets' products and services will be an acquisition. The firm may make capital investments in attractive companies—as was the case with Patientco—to accelerate growth without disrupting corporate culture. MedAssets and Precyse will use Patientco technology as part of the deal.
“Patientco is a dynamic, young, entrepreneurial technology company that's growing extraordinarily quickly,” Gelber said. “If I came in there and acquired them with my big behemoth MedAssets-Precyse corporation, I am going to squash that entrepreneurial spirit.”
Acquisition targets will be companies with services or products that can expand MedAssets' reach, but also companies that can quickly grow to operate in a larger organization.
Pamplona's investment capacity may also help the company avoid costly mistakes as it invests in information technology, where complex technical details can undermine an investment. For example, new acquisitions must be easily integrated into other technologies. “One good thing about private equity is that we can afford really expensive IT consultants,” Gelber said.
New deals are not likely in the next few years as the company seeks to integrate MedAssets and Precyse and improve the combined operations. But look for acquisitions after that, he said.
Pamplona, as a long-term investor, has time to build the company, Gelber said. The firm could remain an investor in the company for as long as a decade before the market or company matures to the point an exit makes sense.
The market is expected to grow at an annual compounded rate of 4% through 2020. Changes to how hospitals and doctors are paid and growth of high deductibles are also creating booming niche markets for new services, he said. More hospitals are expected to outsource revenue cycle in coming years as hospitals look for savings from scale or struggle to fill vacancies in billing and collection departments.
“Why should every doctor's office have a small finance team inside of it?” he said “Why should every hospital have a small finance team inside of it? It doesn't necessarily make sense. Why shouldn't those things be centralized and delivered at scale?”
That is perhaps easier said than done, which may dampen demand for revenue-cycle outsourcing to companies like MedAssets and Precyse, Moody's DeForest said.
“Implementation is difficult,” he said. New revenue-cycle technology and services mean upending hospitals' business processes. “The transition and impact of the new service is disruptive.” Potential savings from outsourcing may not be worth it.
Hospitals that consider outsourcing may be overwhelmed by the number and variety of companies and products in the market. “There's no clear leader,” DeForest said. Executives may wait for the market to mature rather than bet on the wrong technology or service.
Health system-owned revenue-cycle companies are the largest rivals to MedAssets.
Ascension Health, the largest private not-for-profit health system, signed an exclusive 10-year contract in December with Chicago-based revenue-cycle firm Accretive Health. Ascension—Accretive's first and largest customer—also increased its stake in the company in a deal with private equity firm TowerBrook Capital Partners.
Ascension owns 300 primary-care clinics and 103 acute-care hospitals. It operates another dozen hospitals under joint ventures and management agreements.
Meanwhile, Englewood, Colo.-based Catholic Health Initiatives agreed last year to an exclusive contract for 92 hospitals through 2032 with Conifer. Conifer has also grown through deals (last year it acquired revenue-cycle company SPi Healthcare) and CHI holds a minority stake in the company. And UnitedHealth Group and Dignity Health, San Francisco, have a revenue-cycle joint venture, Optum360.
Tenet executives also recently discussed the conditions under which the company might spin off Conifer. The company has the management strength to go public, but would need an expanded number of customers before entering the market, Fetter said. Tenet and CHI account for 80% of Conifer's business.
Gelber said MedAssets' independence will be a selling point with prospective customers. “If I am a health system and I am in the same geography as an HCA, do I really want to buy my outsourced revenue-cycle services from an entity that is owned by HCA when I am competing with them?”
