If you’re a stakeholder – any stakeholder – in the United States’ healthcare system, the data in the following charts is troubling and flummoxing.
The U.S. Healthcare System Paradox
Although the country’s outlay on healthcare (as a share of GDP and per capita) substantially exceeds that of other developed countries, it ranks behind most nations on many measures of health outcomes, quality, and efficiency. In fact, a June 2014 study by the Commonwealth Fund ranked the U.S. dead last on most performance dimensions – e.g., access, efficiency, and quality – when compared against 10 other developed countries (Australia, Canada, France, Germany, Netherlands, New Zealand, Norway, Sweden, Switzerland, and the United Kingdom).
Winds of Change
The health insurance space in the U.S. is undergoing a radical transformation driven by regulatory changes and consumerization of demand. So it is not surprising that the current focus of the massive reform underway in the country focuses on cost rationalization and efficiency enhancement.
Reforms (primarily rising from the Affordable Care Act, or Obamacare) are reshaping health plans’ operating model. The onset of a value-based reimbursement model (moving from “defined benefits” to “defined contribution”) raises fundamental questions about current business paradigms. The impetus provided to Accountable Care Organizations (ACOs) and the blurring lines between payers and providers are leading to a fundamental realignment of incentives, ownership, and priorities. Obamacare and ICD-10 have had a sizable impact on payers’ technology portfolios as they look to leverage next-generation IT and modernize legacy platforms.
Payers are embracing the challenge of consumerization as their customers take increasing ownership of health outcomes, signaling the shift from large national accounts to the individual segments. This directly impacts their sales, outreach, and member engagement channels and methodologies. There is a renewed focus on approaching traditional buyer segments through non-traditional channels, primarily Health Insurance Exchanges (HIX) and direct engagement. These wide-sweeping changes are leading to a rethink of current systems, processes, interfaces, and vendors.
Payers Looking Ahead
Payers are marrying reform-driven changes with their overall technology portfolio in an effort to pivot from a primarily B2B business to a B2C model. These regulatory changes call for increased systems integration efforts, establishment of public portals, customer outreach, remediation, testing, and revenue cycle program management.
Healthcare reforms, a dynamic regulatory landscape, and consumerization of demand are transforming the healthcare industry. Payers need to understand, assess, and be proactive in navigating these choppy waters.
For further insight, check out our recent publication, “IT Outsourcing (ITO) in the Payer Industry – Annual Report 2014: Regulations on Payers’ Mind.” This report provides an overview of the ITO market for the payer industry. Analysis includes market size and growth, forecasts (up to 2020), demand drivers, adoption and scope trends, key areas of investment, and implications for buyers and service providers.
Two converging forces – reforms mandates and consumerization of health care – are fundamentally changing payers’ operating models and driving them to ITO
Nearly US$5 billion in payer ITO contracts are due for renewal from 2015 through 2020, and rising anti-incumbency, coupled with intensifying competitive landscapes, have heightened the risk profile for incumbent service providers
Today, Cognizant announced the acquisition of TriZetto® (a leading provider of healthcare IT software and solutions) for US$2.7 billion. The deal ties in favourably with Cognizant’s dominant position in the healthcare IT marketplace, with the combined entity having US$3 billion in healthcare revenue. TriZetto has around 3,800 employees across the U.S. and India, who will join Cognizant’s existing healthcare business, which currently serves more than 200 clients.
The acquisition is a landmark deal within the Indian IT service provider community, given the size, scale, intent, and implications to the status quo, but what makes it unique is its focus on industry solutions vs. other services-centric acquisitions.
Indian IT service providers’ notable acquisitions
What it means for Cognizant’s services focus
TriZetto primarily develops and licenses IT platforms and service for healthcare providers and payers, competing with the likes of Allscripts, DST Systems, and McKesson. Cognizant aims to leverage its dominant position in the market–a healthcare IT portfolio in excess of US$2 billion–to provide an integrated portfolio across services and platforms. Investing in products and solutions has been a key area of focus for Indian IT service providers as they look to embed their solutions within enterprises buyers, use technology adjacencies, and leverage the technology-platform model instead of flexing just the labor arbitrage card. This acquisition could be one of the steps allowing Cognizant to cross-pollinate and build an integrated (applications/infrastructure/business process services) services play in an industry in which it has primarily relied on its application services strengths.
What it means for Cognizant’s growth story
Cognizant will get access to multiple software platforms and aims to realize nearly US$1.5 billion of potential revenue synergies over the next five years. TriZetto currently operates at 18.5% margins on a revenue base of US$711 million. The numbers are right in the zone for Cognizant, as it wants to continue to drive its growth-plus-margin story in the high revenue base in which it currently operates. The products, platforms, and solutions play has very unique challenges, opportunities, and operating dynamics. Whether Cognizant can navigate this fundamental transition and still maintain its growth story, will be an interesting study.
How it relates to the way Healthcare IT industry is evolving
The ongoing transformation in the U.S. healthcare system is shaping service provider’s strategies as they look to capture the incremental opportunity that is up for grabs. The focus on driving down healthcare costs, wide-sweeping reforms (driven by Obamacare and ICD-10), and blurring lines between payers and providers, are principally reshaping the healthcare delivery model. Cognizant will aim to drive increased stickiness with healthcare buyers to drive retention in an increasingly complex vendor landscape. It is aimed at garnering a large share of the growth pie, when it comes to the payer and the provider ITO market. This acquisition is an unmatched clear indication that service providers must evolve from a services-only play to a platform-based solutions play, to stay relevant in a market that has an immense potential to grow.
What this means for the competition
The deal will also have myriad implications for the overall healthcare IT services competitive landscape. Most competitors of Cognizant already have a steady revenue stream (large or small) implementing TriZetto solutions, most importantly Facets™, which is used by most payers in the U.S. How this impacts its engagements and partnerships will be tricky. Whether Cognizant will want to (and if so, how) assume a dichotomous role of a partner and competitor will be another interesting area to watch. Additionally, whether Cognizant plans to ultimately absorb TriZetto (thereby dissolving the brand) or leverage its unique positioning is also unclear.
Cognizant is ideally placed in healthcare with few like-sized competitors, allowing it to consolidate. Two things that are definitely salient here–one, Cognizant is going all out to bet big on healthcare; and two, this acquisition has the potential of taking it to a different league altogether! There are already murmurs in the healthcare IT industry equating Cognizant to a new “IBM,” when it comes to its negotiating power at the table. This is another step in ensuring it stays ahead of peers as the competitive intensity in the market increases. The deal definitely has characteristics of a long-term strategic bet than a tactical manoeuvre.
Download the complimentary breaking viewpoint: Cognizant Acquires TriZetto for US$2.7 Billion.