Analysis: Aetna Jumps into HIE Market Acquiring Medicity

First it was United Health Group’s (UHG) Ingenix Division’s acquisition of leading HIE vendor (and top competitor to Medicity) Axolotl. Then this morning Aetna counters by acquiring Medicity. In just a few short months these two payers have completely changed the landscape of the HIE market by acquiring the two leading HIE vendors in the market today. Now that both of these vendors are in the hands of payers what are the implications both to the HIE market and more broadly the healthcare sector? Following is our assessment based on our continuing research of the HIE market and a number of interviews today, not only with the Aetna and Medicity, but also several other active participants in the HIE market.

The Deal:
Aetna acquired Medicity for a King’s ransom of $500M, a handsome multiple of Medicity’s 2010 gross revenue. Medicity will operate as a separate entity under the Aetna brand maintaining its current headquarters in Utah. According to Medicity, initial conversations began in late October/early November and quickly accelerated to the deal announced today. Aetna plans to close the deal before the end of year. As part of the deal, the senior management team of Medicity has agreed to stay in place for the next few years.

The Motivation:
While some may argue that Aetna was simply looking to counter the move by UHG or Aetna’s new CEO was looking to make a mark, Chilmark sees a more thoughtful and strategic move at play here which in the end may justify the price paid.

With the passage of the healthcare reform and subsequent actions by CMS, the industry is moving towards a shared risk payment model based on Accountable Care Organizations (ACOs) and Patient Centered Medical Home (PCMH). The implications are many-fold but a couple of big ones are:

Self-insured employers will begin directly contracting with ACOs, relegating payers to the low margin role of a third party claims administrator (TPA). This is already starting to happen and will accelerate in the future. Therefore, payers need to rethink what their value-add is to the market in this changing landscape to maintain healthy margins. It appears that both UHG and Aetna see their role as leveraging their core competency in IT as both of these companies have been clear leaders among payers in the innovative and effective use of IT.

As new payment models are introduced and IDNs move to an ACO model, diagnosis-related groups (DRGs) will expand their definition in both directions and these ACOs will need solutions to help them more effectively manage risk across an expanded definition of care. This is a daunting challenge for IDNs who today struggle with just managing their physicians and affiliated practices, let alone risk. This will likely force closer relationships between ACOs and payers as a payer’s core competency is indeed managing risk and ACOs look to tap that expertise.

The Outcome:
For Aetna it’s quite clear: Link Medicity to their care management/CDS solution, ActiveHealth, to deliver best practice medicine at the point of care thereby morphing Medicity’s existing market presence and network from one of just data pipes, to intelligent pipes. Also, having ownership of Medicity may allow Aetna the opportunity to obtain much better, timely and accurate population health data to more effectively manage risk and concurrently create more personalize benefit plans for their customers.

For Medicity it is less clear. Yes, they now have a huge public company backing them and viability will no longer be an issue, but there is that thorny issue of payers being so close to clinical data, something that makes many in the industry uncomfortable. In the near-term, Medicity will likely lose several prospects to competitors and several current customers may rethink their relationship with Medicity going forward. Both Aetna and Medicity will need to be extremely artful in their messaging to the market to belay fears and minimize these defections for at least in the case of the Ingenix/Axolotl deal, Ingenix had a history of neutrality and their solutions are used by many payers. But in the case of Aetna/Medicity, Aetna has less of a track-record demonstrating such neutrality.

For the broader market there are a few clear outcomes:

  1. Analytics will play an ever increasing role in healthcare as we digitize the sector through the HITECH Act and the accelerated adoption and use of standards (e.g. IHE stack in HIE market).
  2. Administrative and clinical data will increasingly become co-mingled as healthcare/payment reform takes hold. The solutions available today to assist with managing that data and delivering it where it is needed when it is needed are still immature. Acquisitions such as this and others to come will focus on addressing this need/opportunity.
  3. The high valuations paid for both Axolotl and Medicity are reminiscent of the dot-com days of yore though unlike those dot-com brethren, both Axolotl and Medicity had clear brand equity, were neck and neck leaders in the HIE market and have impressive customer-bases. The few independent HIE vendors left are likely thinking big acquisition thoughts of their own but those may be pre-mature as leaders in any market always get the highest valuation. But what is certain is that in 12-18 months time there will likely not be an independent HIE vendor left in the market.

Thanks to Aetna, Medicity, Axolotl, ICA and NaviNet who all entertained Chilmark’s calls today that ultimately provided input and guidance to this post.

John Moore is an IT Analyst at Chilmark Research, where this post was first published.

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