Healthcare IT From the Investor’s Chair 12/9/10

Ask the Chair

Apologies to all for the delay in posting the first question, but we still thought it might be relevant and/or interesting to some readers.

What was RSNA like? How does it differ from HIMSS?

RSNA is short for the annual meeting of the Radiological Society of North America. This year was its 96th Scientific Assembly and Annual Meeting.

A long-time attendee (the late CEO of Hologic) once told me that the reason it’s held Thanksgiving weekend in Chicago is because it was started as the Midwest society meeting. It allowed all the radiologists’ wives to do their holiday shopping on Michigan Avenue, the “Magnificent Mile”. I’m sure everyone loves flying in to one of the country’s busiest airports on one of the most-traveled days of the year, but there you have it. I, for one, am glad I can take the train!

RSNA is the largest medical conference/trade show in America (and if not the largest in the world, still one of the top two or three). Why? Radiologists use expensive toys and they’re here in force, along with everyone wanting to sell to them. How many? This year saw an astounding 60,000 medical and science professionals from all over the world (unlike HIMSS, RSNA is truly a multi-national show) and over 700 vendors … I mean technical exhibitors … selling them everything from lead aprons to coding software to MRIs and CT Scanners.

In contrast, I believe HIMSS 2010 attracted about 28,000 registered attendees, of which fewer than 14,000 were actual IT professionals. Yes, HIMSS has more vendors (over 900 last year), but some were virtually on card tables. The cost of admission and scale of RSNA keeps out more of the wannabes.

I’ve attended RSNA for over a dozen years. The scope and scale continues to amaze even this jaded HIMSS veteran. GE and Philips’ booths alone are the size of small city blocks, chock full of demo areas, gleaming machines, and conference rooms where the magic happens.

That’s another key difference: people actually bring their checkbooks to RSNA. Deals are done on everything from the big magnets (MRIs) to the mobile X-ray machines. Restaurants and hotels (not to mention the “helpful” McCormick Place staff) lick their chops at the prospect of separating exhibitors and their sales professionals from their T&E dollars.

The pure-play HCIT companies tend to be lost a bit in the noise of imaging systems, but the usual suspects that have a meaningful radiology offering (such as Cerner and McKesson) had a respectable booth presence that seemed well attended. I actually think I saw a tumbleweed or two blowing through the booth of NLP coding vendor A-Life Medical (recently purchased by Ingenix). Not sure if it’s a coincidence, but its competitor CodeRyte’s booth seemed pretty active.

Speech rec vendors Nuance and M*Model also seemed highly active each time I walked by. Merge Technologies seemed to have a hopping booth, some of which was likely due to the Tesla (see my new picture below) and the candy and video games they were providing, but also no doubt as a result of its re-emergence (no pun intended) from the purgatory of bad accounting and management with a new story and a new CEO. I’m looking forward to seeing what they do at HIMSS.

What’s your take on Medicity’s acquisition by Aetna?

Speaking from my usual perch in the peanut gallery (as I’ve done work for neither company), I’m fairly astounded by the price. Rumor has it that $500 million (twice what Ingenix paid for Axolotl) is approaching 8x revenues, a princely multiple that dwarfs, say, Allscripts’ purchase of Eclipsys for 2x revs or even Ingenix’s purchase of Picis for 3x revs.

Medicity appears to be the leader in its space, with over 750 hospitals and 125,000 physicians using its system. Still, it’s a huge bet on the HIE market that’s not quite emerged.

I believe a good part of the excitement (dare I say frenzy) around the HIE/clinical messaging space is that the emerging government regulations which mandate a minimum proportion of premium dollars that a payor spends on actually taking care of sick people (known as the medical loss ratios) appears to allow them to count this type of business towards the MLR (as opposed to say, marketing spend, corporate art, or even executive salaries). Therefore, I’d posit that United and Aetna see this as a way to improve their MLRs while actually improving patient care.

With health reform reducing the payors’ arsenal to maximize their profits (by prohibiting them from underwriting away sick people and mandating certain forms of community rating), they now have a greater incentive to reduce loss through what HIEs can, in theory, bring: reduced duplicative tests, better access to patient data, etc.

What I wonder most, however, is what will the fact that Axolotl and Medicity are now owned by payors do to their sales prospects, both near and long term? I’ve little doubt that a fair number of potential customers would rather douse their dollars in kerosene and torch them before giving them to the same insurance company that has tormented them (in their view) for years. The half-billion dollar question is: what percent of the market does this preclude them from selling to? I’d guess more than 15%, but less than 50%. I can only assume the buyers took that into account when developing their valuations.

Then again, maybe they didn’t need to, as discussed in a previous post. Lack of materiality can hide a multiple of sins, including overpayment or failure to integrate. I’m not suggesting either is the case, incidentally, just observing that we’ll likely never know. Meanwhile, I’m sure Sandlot, db Motion, CareFx, and the sales forces of other competing vendors are pretty excited.

Best wishes to all for a happy holiday and a joyous new year! I hope to connect with readers at HIMSS in Orlando, if not before. In the mean time, please keep those questions, cards and e-mails coming.

Ben Rooks is the founder of ST Advisors, a consultancy which has worked with dozens of HCIT companies and investors typically on issues around strategy, financing, and outcomes/exit planning. He has served time as both an equity research analyst and investment banker covering the sector. ST Advisors advised A-Life Medical in 2009, Sandlot in 2010, and really enjoyed sitting in Merge’s Tesla last week.