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Everything to Everyone

February 1, 2007
by Greg Goth
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Big fish swallow little fish for market share; should providers take the bait?

From the beginning of 2006 to the end, the healthcare IT market was characterized by mergers, acquisitions, and strategic alignments. From one of the year's early major deals, in which GE Healthcare, Waukesha, Wis., picked up IDX Systems Corp, Burlington, Vt., to a year-end announcement that CorVel Corp., Irvine, Calif., paid $12.5 million for Hazelrigg Risk Management Services, Chino, Calif., the pace of healthcare vendor consolidation remained red hot. Paul sikora

Industry insiders say the surge in M&A activity may not be driven so much by existing customer demand than by vendors with deep pockets looking toward the goal of a national health information network, and filling holes in their portfolio.

"The more you move outside the four walls of the hospital, connecting with practices and creating a community, the more you're going to have to shore up all avenues of your product line, and that really has these companies on the front line of acquisition," says Steve Tobin, industry analyst for consultant firm Frost & Sullivan, Palo Alto, Calif.

"A lot of it is vendor driven," says Paul Sikora, vice president of IT transformation for the University of Pittsburgh Medical Center. "A lot of it is vendors taking certain parts of the market or to fill in certain parts of their portfolio. The problem that presents to us, from the consumer and provider side — and it's also a problem for the vendors themselves — is how to license and sell all these complex components. Each had their own little margins they produced for the individual vendor. When you put 12 of them together, you can't have 12 times that margin. That's like you or I buying a car a part at a time and trying to assemble it."

A provider's strategy

UPMC has undertaken an innovative consolidation program around its core hardware and server software, reducing the platforms from a long roster including Hewlett-Packard (Palo Alto, Calif.), Sun Microsystems (Santa Clara, Calif.), Hitachi (Tokyo), and EMC (Hopkinton, Mass.) to a single IBM (Armonk, N.Y.) platform.

Sikora also says the consolidation allows users within the UPMC community to continue to deploy best-of-breed applications, but with an asterisk.

"We're doing application consolidation as well; yet some applications, particularly like a radiology system, we still have best-of-breed. But we have a caveat. We don't let it come in on the ISV's preferred computer platform, we use our standard and that drives additional efficiencies."

The UPMC project — which also includes joint software development stipulations and clauses that protect UPMC's investment in CPU power over the course of the deal — illustrates the breadth of flexibility available to strategic thinkers with plenty of resources, but analyst Tobin also sounds a cautionary note about how far many provider organizations can go.

"I think we in the media and analyst community tend to cover more of the academic side, which skews what's really happening down at the level of the 200-bed hospital," he says. "And when you look at that, they say, 'I'm a McKesson shop, or a GE shop,' or 'I don't have an EMR and I'm going to RFP it.' And they'll go with the niche vendor that integrates best with their predominant vendor."

M&A narrow the field

The "last mile" of the healthcare provider community is especially ripe for capture. Some of the latest deals involve industry behemoths such as McKesson, San Francisco, buying browser-based physician/patient messaging vendor RelayHealth, Emeryville, Calif.; others signal the entry of non-healthcare vendors into what they perceive as a sweet spot in the market.

One such acquisition was the August purchase of Emdeon Practice Services, Tampa Fla., by Sage Group, Newcastle upon Tyne, United Kingdom. Paul Stinson, senior vice president of marketing at Sage, says providers have reacted well to the deal; many already use Sage products such as the Mas 90 ERP suite and Peachtree Accounting. So, brand recognition, he says, has appeared to overcome the issue of healthcare specificity.

Acquiring companies are using various strategies to attract new customer bases. For example, Stinson says Sage can approach the small- to medium-sized practice market with a cross-selling strategy. That plan includes applications which will interface with each other, as well as other Sage products requiring no integration, like its recently purchased Verus credit card payment processing system. GE, on the other hand, is going to use its IDX acquisition to attract those interested in a "high-end" integrated practice management and EMR suite.

"Customers really want to buy an integrated product," says Vishal Wanchoo, president and CEO of GE Integrated Healthcare IT Solutions.

UPMC's Sikora says this trend will drive even more consolidation, as combining technologies becomes even more complex.

"Many of the smaller startups are looking to be acquired because many of them are smart enough to know sustaining in this complex environment is extremely difficult. Just the sheer infrastructure and expertise it takes to sustain something as complex as the EMRs of today will force a lot of compression."

Author Information:

Greg Goth is a contributing writer based in Oakville, Conn.