Signify View: McKesson IT sell-off
Published: July 16, 2016
- Company plans to spin-off large part of healthcare IT business
- Includes PACS software and image management for radiology & cardiology
- New business will be partnership with Change Healthcare Holdings (previously known as Emdeon) with estimated revenues of $3.4B
- Plan for new firm IPO then McKesson exit
- Excludes McKesson EHR unit (ParagonEHR product) and software products for document management, intelligent coding, lab, surgery and associated managed services
- Company exploring “strategic alternatives” for EHR unit
The Signify View
The recent announcement from McKesson of plans to spin-off a large portion of its health IT business came as little surprise. McKesson’s health IT business has long been the side project to the $188B pharmaceuticals distribution arm; with competition in the North America market intensifying (around 90% of McKesson customer base), significant investment was going to be required to continue to compete. Instead, it plans to spin-off and merge with competitor Change Healthcare Holdings, predominantly focusing on Revenue Cycle Management (RCM) software and end-to-end billing services. A later initial public offering (IPO) is then intended to raise significant funds for McKesson to extract itself from the newly created company.
Here’s three key takeaways:
Large-scale Health IT investment is gradually slowing down
Despite the ongoing push for digitalisation of healthcare (mostly fueled by various EHR incentive programmes) this strategic move from McKesson highlights the dwindling profitability and ferocious competition that exists in the health IT software market today. The “boom” in a wide array of health IT solutions is slowing, after strong demand in 2010-2014. Health providers are instead increasingly focusing on optimising and gradually improving their current solutions, rather than making massive capital outlays on brand new implementations.
In an already crowded marketplace, aggressive pricing, installed base protectionism and a longer-term move towards managed-services business models are also hitting short-term profitability. For vendors with other interests outside of the healthcare IT sector, this could be seen as the right time to strategically exit before margins shrink too much.
More strategic partnerships and vendor consolidation is on the way – especially for clinical apps
A key question yet to be addressed from any communication is the fate of the clinically focused parts of McKesson’s business in the new firm, namely the Imaging and Workflow Solutions business unit. The challenge for McKesson has been the rapid and dynamic change in this market of late. No longer can products be focused around a single department (as was the case before with clinical PACS and radiology/cardiology software). Instead, major vendors in the clinical IT arena are vying to provide clinical “platforms” and “ecosystems” for all clinical content (such as the GE Healthcare “Healthcloud”). The shift in vendor neutral archives (VNA) towards “Clinical Content Management” platforms is also driving this trend (see our “Evolution of VNA” white-paper here)
This area is also filled with a complex and diverse array of specialist applications, standards and regulations, making it increasingly challenging to compete. Most vendors are either pushing to become the “ecosystem” for clinical application partnerships (the GE Healthcloud approach) or pushing a managed-service end-to-end approach with platform and clinical applications (such as Philips Healthcare Enterprise Clinical Informatics solutions). Consequently, traditional single-focus clinical IT vendors will find dwindling opportunities for solo operation; they must either be assimilated into an end-to-end platform, or focus on single-function best-of-breed capability and partner with a central clinical IT ecosystem provider.
EHR customer base is retaining value
The exclusion of the Enterprise Information Solutions business line (home of Paragon EHR) is also particularly telling: there is considerable value in the acute EHR customer base. According to recent Center for Medicare and Medicaid (CMS) statistics, McKesson was one of the leading acute primary EHR vendors by volume (http://dashboard.healthit.gov/quickstats/pages/FIG-Vendors-of-EHRs-to-Participating-Hospitals.php), a market increasingly dominated by the likes of EHR behemoths Epic, Cerner and MEDITECH.
To exclude the EHR unit from any spin-off could be seen by some as tearing out the central link of the McKesson healthcare IT portfolio, as EHR is often seen as the fundamental bedrock for upsell of clinical and billing IT into the acute care hospital market. Instead it suggests that McKesson sees significantly more value in a sale to a major competitor in this hugely competitive area, compared to the potential value the ParagonEHR offering provides to the newly formed spin-off unit. When considered that for most in the industry the US EHR “boom” is over, it highlights at least significant value in the existing EHR customer base.