Last year when McKesson Corp. announced the creation of a new healthcare information technology company with Change Healthcare, it also said it would seek strategic alternatives for its EHR-focused business unit and promised a smooth transition for its customers. On Aug. 3, Chicago-based Allscripts (NASDAQ:MDRX) announced it has agreed to pay approximately $185 million in cash to acquire McKesson’s (NYSE:MCK) hospital and health system IT business, Enterprise Information Solutions.
The Enterprise Information Solutions portfolio includes Paragon (EHR); STAR and HealthQuest (revenue cycle solutions); Lab Analytics and Blood Bank; and OneContent (content management solutions).
Previously, McKesson had divested itself of ambulatory EHR assets. In March 2016 the company, which ranked No. 4 on the 2017 Healthcare Informatics 100 with $2.8 billion in HIT revenue, agreed to sell several of its ambulatory EHR assets to Austin, Texas-based e-MDs. Included in the sale were McKesson Practice Choice, its cloud-based EHR; its Medisoft and Lytec MD server-based EHRs; and Practice Partner, its practice management software.
Allscripts said that after the transaction closes, the combination of Paragon and Allscripts Sunrise hospitals will double the company’s EHR hospital client count in the United States.
“Adding these assets to Allscripts existing portfolio enables us to better serve our clients, increase our scale and further drive our investment in innovation,” said Allscripts CEO Paul Black in a prepared statement. “The healthcare IT market remains highly fragmented. Today’s announcement is a proactive and strategic measure to maintain Allscripts’ long-term leadership and position Allscripts for continued growth.”
John H. Hammergren, chairman and chief executive officer, McKesson, noted in a statement, “We have selected a company that can serve the long-term interests of our customers and has the experience and capabilities to deliver value through its population health, precision medicine, consumer and care management solutions. The conclusion of this process demonstrates our commitment to support the success of our hospital customers and provide growth opportunities for Enterprise Information Solutions employees.”
Allscripts, which ranked No. 13 on the 2017 Healthcare Informatics 100 with $1.3 billion in revenue, stressed that it would invest in and continue to offer Paragon as its integrated EHR and revenue cycle management solution for the small hospital market segment, while Allscripts Sunrise will continue as the primary platform for larger institutions.
Industry Observers React
Given the moves that McKesson has made in the health IT market in the last 12 to 18 months, industry watchers seem not at all surprised that the company ended up selling off its hospital and health system IT business. Ben Rooks, founder of strategic and financial advisory firm ST Advisors, says that this latest deal was a “finishing off of the Change Healthcare transaction.” He notes that it was well-known that McKesson had been looking for a home for these assets for the past few years, and that it was not a matter of if, but when they would close a deal. “The price [of the deal] was a low one; it’s a fixer-upper in a bad neighborhood. McKesson wanted to get rid of it. I think it’s safe to say that it was broadly shopped and that this was the best they could do,” says Rooks. An analysis of the deal from Jamie Stockton, senior analyst at Wells Fargo, also noted that Allscripts bought McKesson’s hospital software business “on the cheap.”
Rooks notes that while this move on the part of Allscripts carries some risk with it, it would have been far riskier had the price been higher. He says Allscripts bought the assets at a price that “buffers the execution risk,” and that in his view, “the product is not great and its customers are not incredibly happy.” Adds Michelle Mattson-Hamilton, associate principal at ST Advisors, “The deal is about McKesson doing what they needed to do to move back to their core, and Allscripts doing what they needed to do to maintain relevance.”
A key question that will emerge is if this acquisition could tighten the gap that currently exists between the two dominant vendors in the marketplace—Epic and Cerner—and others. Rooks notes that Allscripts needed to do something to this effect to maintain its market relevance and perhaps close up that gap. “You have two sides of the Cold War with Epic and Cerner battling it out, and Allscripts is one of the non-aligned states. They can take some customers of course, but I don’t think it will end up being [substantial],” he says.
Noted Wells Fargo’s Stockton in the above-mentioned analysis, “More importantly, [the deal] gives Allscripts more logos in a hospital landscape what has been increasingly dominated by Cerner and Epic. Choosing Sunrise on the high end or Paragon on the low end should now seem like a safer idea.”
Coray Tate, KLAS vice president of clinical research, agrees that since Epic and Cerner are so dominant in the market, the other EHR players aren’t “throwing big rocks into their pond at this point.” But that said, notes Tate, Allscripts was one of just four EHR companies that had net positive growth last year. “So they are hanging in there and they are actually picking up market share, and this deal does double their market size,” Tate observes. He adds, however, that Paragon has been in a state of limbo over the last year or so, with customers leaving and no net wins to speak of in the last year.
To this point, another question that comes with this deal centers around the Paragon customer base, which Tate—who has worked intimately with both companies over the years—says has been in limbo for quite some time with rumors swirling that McKesson was looking for a sale. He notes that Paragon customers have been through an interesting history with McKesson from the pre-meaningful use days in which expectations were reasonably set and everyone was happy. But then came meaningful use and all of the requirements that came with it, and it was at that same time when McKesson decided to shift resources away from its Horizon product with the goal to have Paragon step up and take on bigger hospitals, he explains. “Paragon was then asked to be more than just a community solution by being able to organize billing and other things, as meaningful use pushed clinicians to be much more involved. So you had to meet the expectations of bigger hospitals. They got hit with a perfect storm,” says Tate.
However, he notes that soon after that, the rumblings about poor coding quality with Paragon diminished and the quality of its updated releases started to get better. So while the customer base doesn’t have all they want at this point with Paragon, their EHR has been more stable and on a steadier path of progression, he attests.
Tate draws a parallel of this acquisition to Cerner’s purchase of Siemens' health IT division a few years back, though he cautions that there are some differences. For one, Cerner at the time bought what it thought was the leading-edge technology on the market, Soarian. But that customer base was different than Paragon’s, as it was a group with more money and more options. On the contrary, most Paragon customers likely bought the solution due to its lower cost compared to other market options. To this point, Tate says that KLAS will likely do a survey a few months down the road to gauge how the deal has landed with the Paragon customer base.
In the end, Tate notes that Allscripts has purposely tried to be the vendor that ties things together, with offerings such as dbMotion and a focus on population health. The company has tried to facilitate what’s going on without having to be the monolithic solution. “That’s who they are openly trying to be,” he says. “So from that standpoint, this move creates energy and doubles its customer base.”
One more point Tate makes is that Allscripts is also an international EHR company and has traction in other countries, so this gives them another option since pricing is a bigger issue internationally than it is in the U.S. “Paragon might now be a viable option outside the U.S; it was never offered as one when it was with McKesson,” he says.
This transaction is expected to close early in the fourth quarter of calendar 2017, subject to closing conditions, including the expiration or termination of the waiting period under U.S. antitrust laws.
In its second-quarter 2017 earnings statement, Allscripts posted revenue of $426 million, up 10 percent from last year.