By Ray Falci

December 2010 – The passage of the American Reinvestment and Recovery Act (ARRA) in 2009 which led to the subsequent  “Meaningful Use” Standards, and Health Reform in 2010, have clearly added considerable tailwinds to the broader Healthcare Information Technology (HCIT) Sector. These developments have in some ways extended earlier trends toward redefining the role of payors, while in other ways (e.g., the advent of health exchanges) they have created a new set of challenges and opportunities for payors and their IT vendor partners.

Simplistically, Health Reform puts in place elements of an initial framework for reallocating risk from payors to providers, while also opening up consumer access to health plan choices, thereby impacting many elements of traditional health plan marketing and administration.  Combined with conversion to ICD-10, and increasing emphasis on payment integrity through the Medicare RAC programs and commercial payor initiatives, the next several years should provide extensive opportunities for payor IT vendors to help their clients address this evolving landscape through creation of new and extended capabilities.

The impact that this evolution has across a broad range of existing payor IT vendors will likely vary.  Core payor adjudication and administrative platform providers clearly have the advantage of an installed base of clients and deep integration with health plan workflow in many cases. But arguably most lack the deep clinical provider connectivity to offer effective interaction with risk-bearing health systems and to deliver higher degrees of clinically based, member level care interaction.  Conversely, most of the Electronic Data Interchange (EDI) companies have been positioned as commoditized or value-add financial claims intermediaries.  They have only recently begun attempting to add elements of increased analytics to drive improved payment integrity and in some cases risk management, while less has been done in this sector to drive increased connectivity of true clinical level data.  

This goal of achieving higher clinical data connectivity has historically been hampered by the highly fragmented nature of the provider IT systems that collect and store this information, as well as the lack of standards to enable seamless integration of this data.  The advent of ICD-10 and particularly Stage 2 and 3 of the Meaningful Use criteria (to the extent the latter is adopted as broadly as hoped) create potential for addressing the above impediments. These advances will create both challenges and opportunity for payors and their IT suppliers to develop new approaches toward care management, which surpass the traditional claims based and call center driven methods.

Healthcare is on its way to representing a greater percentage of the US economy based on generally escalating costs and 30 million additional members due to hit the system in a few years. Yet, with a few exceptions, the HCIT industry has historically drawn fairly distinct lines between vendors targeting providers and those targeting payors. The above trends are likely to change this paradigm, with provider focused IT vendors needing to develop increased capabilities around data analytics, population health management, and overall risk management, all of which have historically been in the domain of the payor IT. Conversely, the payor IT vendors will likely target deeper integration with providers and individuals in the context of defining a role within Accountable Care Organizations (ACOs). They also need to address the increasing involvement of the consumer in health benefits and care related decisions.  These dynamics argue for substantially increased collaboration among payor and provider focused IT vendors and likely suggest a basis for further continued consolidation of the HCIT market, both within and outside the traditional sector players.

On the periphery of this likely consolidation sit several additional groups of payor IT vendors that have built analytics based capabilities around specific complex payment models like Medicare Advantage, Pay for Performance, and others. In most cases these companies have initiated their businesses to address an existing client need in a very specific area. Yet it can be argued that their core competency in accessing and integrating clinically specific data around member health status and treatment activity positions these companies well for expansion of their target business models in a post ACO, Health Exchange world. Interestingly, there is a wide range of technologies and operating models employed by these companies, ranging from brute force medical chart review and coding, to Natural Language Processing (NLP), which enables technology based searches of transcribed provider dictation. Some also use a broad range of retrospective and real-time predictive algorithm based approaches that “guess” at potential clinically based discrepancies, often through use of claims data, and often requiring manual follow-up to confirm the initial hypotheses.

As payors retool their businesses to address this changing landscape, the need to increase clinician and consumer touch points is evident as an offensive strategy to create a role in ACOs and an increasingly consumer driven health payment world. Defensively, these strategies serve to minimize impact of commoditization of network contracting and core claims administration, while adding more substance to the presumed care oversight role of the classic payor model.  As the industry evolves, it will be interesting to follow the various approaches taken to create deeper clinical connectivity and overall care coordination between payors and providers given their historical relationship, but it will surely create many opportunities for existing and new payor IT businesses to flourish.

About the Author

Raymond Falci, Managing Director, New York, joined Cain Brothers in early 2006 as an investment banker to lead the firm’s franchise in Healthcare Information Technology (HCIT) and Pharmaceutical Services, and has completed 10 transactions in these sectors. As a former sell-side equity research analyst, Ray has followed HCIT since 1994. During his career as an analyst, Ray worked primarily at Bear Stearns, where he was named to Institutional Investor’s Top-rated list in 5 of his last 6 years, including two number 1 rankings. In addition to HCIT, Ray’s research coverage historically included pharmaceutical outsourcing, pharmaceutical distribution and publicly-traded hospital companies. Prior to working on Wall Street, Ray worked for 5 years at a start-up company focused on energy efficient lighting products, where he held various positions ranging from Engineering Manager to National Sales Manager.

Ray grew up in Queens, NY and currently resides with his family in Westchester County. He received a BE from the Cooper Union in New York, NY; an MS in Engineering from Columbia University, and an MBA from The Wharton School of the University of Pennsylvania.

Ray Falci can be reached (212) 981-6959 or rfalci@cainbrothers.com.