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The Price Cut

July 1, 2007
by Lang Aston
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M&A activity abounds in a market where hospitals outsourceto the tune of billions.

Hospital outsourcing has gained significant momentum over the past few years, with an estimated 75 percent of all hospitals using outside vendors for at least one function. Administrators are looking to cut costs, increase efficiency, recruit more qualified employees, and improve patient satisfaction and clinical quality.

According to Modern Healthcare's 28th Annual Outsourcing Survey, the top 20 outsourcing firms in the survey reported 10,227 healthcare clients, up 16 percent from 8,820 in 2004. Of the 13 firms that provided financial information, revenue rose 6.4 percent in 2005 to nearly $2.8 billion from $2.6 billion in 2004. It is a market that will continue to grow in lock-step with the general growth in the healthcare industry.

Lang Aston

The trend towards hospital outsourcing, coupled with favorable capital markets, has created an attractive M&A environment. Outsourcing firms have acquired smaller complementary clinical and financial services companies in recent years in an effort to offer one-stop outsourcing solutions for hospitals eager to improve quality and reduce costs.

Clinical outsourcing

Hospitals continue to contract out more clinical services, ranging from physician staffing in radiology, emergency, cardiology, laboratory, anesthesia and nursing. As the need has grown, a few names in clinical outsourcing have emerged:

  • Physician: Knoxville, Tenn.-based TeamHealth is a national physicians group, which serves more than 510 hospital clients and affiliated surgical centers, imaging centers and clients in 44 states and Puerto Rico, logging data from more than 6 million patient visits yearly.

  • Hospitalist: Irvine, Calif.-based Cogent Healthcare Inc. offers inpatient management programs to provide clinical, administrative and operational staffing support, information systems, relevant data capture with customer reporting and a 24/7 service center.

  • Nurse Staffing: Boca Raton, Fla.-based Cross Country Staffing provides fixed-term and flexible staffing solutions to healthcare facilities. Focused on nursing and allied healthcare, Cross Country's personnel are hired to improve overall workforce efficiencies and quality while decreasing staffing costs.

  • Radiology: Couer d'Alene, Idaho-based NightHawk Radiology Services LLC is a provider of offsite radiology services for hospitals, clinics and imaging centers. It has a team of board-certified, state-licensed and hospital-privileged radiologists.

Financial health

Financial and business outsourcing has also been embraced, as hospitals are facing challenges posed by the uninsured, billing, eligibility, benchmarking and quality measures. Outsourcing companies assume these burdens, as they are able to provide healthcare IT, supply chain, revenue cycle management and healthcare decision support.

Among the growth names in this segment are: MedAssets Inc., an Atlanta-based firm that offers revenue cycle/supply chain initiatives and decision support technology/services to healthcare providers; Orion HealthCorp Inc., a Roswell, Ga.-based provider of hospital-based physician billing services, which recently raised capital to pursue consolidation opportunities in the fragmented and growing sector; and Passport Health Communications Inc., a Nashville-based provider of patient eligibility and revenue cycle solutions.

Buyers raise temperature

Current outsourcing companies will be active participants in M&A activity in 2007. Why? Meeting the unique needs of each client and carving out niches of expertise has become even more important for outsourcing firms, as the competition for contracts has grown more intense. Moreover, the sector is fragmented with a large number of smaller competitors. Examples of recent strategic activity include:

  • MedAssets Inc.: In 2003, MedAssets purchased Atlanta-based OSI Systems Inc., a provider of revenue cycle management to hospitals; in July 2005, it acquired New Orleans-based Med-Data Management Inc., a healthcare software and consulting company, to expand its suite of revenue cycle solutions. In January 2006, MedAssets acquired Los Angeles-based Avega Health Systems Inc., a provider of business decision support solutions for acute care hospitals; and in February 2006, it acquired Knoxville, Tenn.-based Inobis LLC, a healthcare supply chain data management company. In April 2007, the company acquired Richardson, Texas-based XactiMed Inc., a provider of web-based revenue cycle technologies to the healthcare industry.

  • Orion HealthCorp Inc.: In December 2006, Orion acquired two physician billing businesses as part of a recapitalization to position the company as an emerging consolidator of hospital-based physician billing companies.