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.
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.
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 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.
McKesson Corp: In November 2006, San Francisco-based McKesson acquired Atlanta-based health administration company Per-Se Technologies Inc. for $1.23 billion, broadening its portfolio of healthcare software. Per-Se sells software and services to hospitals, physicians and pharmacies. The company followed up in February 2007, with the acquisition of Seattle-based Physician Micro Systems Inc. (Practice Partner), a software provider for electronic health records, medical billing and appointment scheduling for independent physician practices.
TeamHealth: In July 2006, TeamHealth acquired Sunrise, Fla.-based Florida Acute Care Specialists, expanding its hospital medicine division to 400 hospitalists serving more than 80 hospitals.
NightHawk Radiology: In April 2007, NightHawk acquired Irving, Texas-based The Radlinx Group, the third largest provider of teleradiology services in the country. In February 2007, the company purchased Arcadia, Calif.-based Teleradiology Diagnostic Services, a provider of off-hours teleradiology services on the West Coast.
The introduction of private equity and hedge funds has created an active and competitive hospital outsourcing M&A market. In 2006, private equity saw the highest fundraising year since 2001 with 200 funds raising $28.5 billion; buyout/mezzanine funds recorded the highest year ever with 138 funds raising $102.9 billion, according to the National Venture Capital Association and Thomson Financial. Driven by the abundance of available debt capital and significantly larger pools of equity funds, private equity firms are becoming particularly active in the M&A market.
There have been notable transactions by private equity firms in the hospital outsourcing sector. In November 2004, Warburg Pincus and Soros Private Equity acquired Spheris Inc., a medical transcription technology and outsourcing services company based in Franklin, Tenn.
In February 2005, Onex Partners, the private equity arm of Canadian-based Onex Corp., acquired Greenwood Village, Co.-based American Medical Response, Inc. and Dallas-based EmCare Holdings Inc. to form Emergency Medical Services Corp. EMS is a provider of ambulance and outsourced emergency department staffing services.
In November 2005, The Blackstone Group acquired TeamHealth, which provides outsourced physician staffing and administrative services to hospitals and other healthcare providers.
In December 2006, J.W. Childs Associates L.P., a Boston investment company, acquired healthcare staffing company, CHG Healthcare Services Inc. of Salt Lake City, for more than $300 million from a group of venture capital investors led by New Enterprise Associates.
J.W. Childs was also the owner of Sheridan Healthcare Inc. until May 2007, when it was announced that the company was selling Sheridan to Hellman & Friedman LLC, an investment firm with offices in San Francisco, New York and London. Hellman & Friedman will acquire Sheridan in a secondary buyout Moody's Investors Service valued at $925 million. Hellman & Friedman will be the third private equity firm to own the medical outsourcing company.
Private equity firms and clinical/financial outsourcing companies, looking to complement their product line/geographic reach, are well positioned for growth in light of strong industry fundamentals and the availability of small outsourcing acquisition targets. Healthy capital market conditions currently offer sellers the ability to monetize their ownership positions at favorable levels (as evidenced by the McKesson/Per-Se transaction). Private equity buyers with an abundance of capital are seeking to make investments in a wide open sector. The hospital outsourcing industry appears to be entering a dynamic time.