August 20, 2007

1. Perot Systems Buys JJWild

Facts and Background

IT services provider Perot Systems Corp. announced Monday that it had entered into an agreement to acquire Meditech consultants JJWild of Canton, MA for $89 million in cash. Perot announced JJWild's expected 2007 revenue to be $80 to $90 million. All 190 JJWild employees will move to the Perot organization.

Opinion

The senior team of JJWild must have made a bundle. It's interesting that Perot's interest was fueled by an interest to expand its presence in the smaller hospitals that typically run Meditech. It's also interesting that Meditech has so much of the market that a low-profile consulting company specializing in its product could not only generate $90 million a year of revenue, but attract the attention of Perot.

Musings

• Meditech's blessing is almost mandatory to operate as an after-marked provider to their customers. They almost certainly gave their OK to Perot to acquire neighbor JJWild.
• The company's early announcements indicated an interest in expanding internationally. Meditech has some non-US customers, but that isn't their strong suit. Does Perot have plans to do something more? Or, is another acquisition in the cards?
• Perot gets JJWild for 1x revenue.
• JJWild's FAQ about the deal hints at Perot's interest in outsourcing the IT operations of Meditech customers, including data center services and hosting.
• Perot is a big company: $2.3 billion in revenue and 23,000 employees. Meditech hospital IT shops are usually small. Can Perot avoid big-company overhead to keep the cost reasonable?
• Meditech isn't the easiest company to work with. They don't like change and they love control. Perot will have to keep that relationship cordial to keep JJWild successful.
   

2. Quality Systems Shareholder Takes Gripes to SEC Again

Facts and Background

Ahmed Hussein, a director and shareholder in Quality Systems Inc. of Irvine, CA, filed an SEC report saying he's concerned about the company's board and governance. Hussein, an Egyptian businessman, owns 17% of the company, valued at $170 million. He had sued the company previously over the election and composition of director and settled with them in 2006 when offered a seat on the board. The company's flagship product is the NextGen practice management and electronic medical records application for physician practices.

Opinion

This guy won't go away. It must be tough to run a company when an insider is taking public shots. What does he really want? I'm thinking he's unhappy with how the company is run and either wants a management change or to sell it out.

Musings

• Founder Sheldon Razin's shares are worth $102 million at Friday's market close.
• QSII's most recent report was one week ago. Net income was nearly $8 million, but down from recent quarters.
• Some think that Quality Systems may be for sale. Their product is generally acclaimed as excellent and would have high value in today's EMR-centric market.

3. Portland's RHIO the Latest to Implode

Facts and Background

The Health Data Exchange Group of Portland, OR is "stalled because of focus," according to the CEO of the Oregon Association of Hospitals and Health Systems. The system was intended to make electronic patient data available throughout the city. Cost was said to be a factor, with a $3.4 million annual operating expense plus $150,000 for hospitals to operate their portion.

Opinion

Just another RHIO trying to run on noble causes instead of solid financial footing and an accepted business model. Blame David Brailer for getting everybody aroused about RHIOs. Just because the Internet came along as a technology alternative doesn't mean that the problems that doomed CHINs (Community Health Information Networks) in the 1990s have been resolved in the 2000s. This RHIO seemed to have a higher-than-average chance to succeed given local physician electronic health record penetration. That turned out to be irrelevant.

Musings

• Physician resistance appeared to have an impact, although the group didn't mention that.
• Everybody involved gives a different reason why this RHIO tanked. That's not good.
• Legacy Health System CIO Dick Gibson said what everyone knows but few would admit: why should hospitals pay to connect to a system that will save insurance companies money at their expense? Hospitals get paid for performing even duplicated lab tests, after all. The projec itself estimated that hospitals would lose up to $10 million a year in lost revenue.
• Even if all the big hurdles are overcome, patient privacy is still a big problem for any data exchange.
   

4. Verus Shuts Down After Exposing Hospital Data

Facts and Background

Verus, Inc., the Bellevue, WA provider of Web services and billing for several dozen hospitals, shut down quietly several weeks ago after a series of high-profile data breaches, according to a spokesperson for MedSeek, which will take over some of the company's contracts.  The most recent breach was announced this week, bringing the total to five hospitals. No inappropiate access has been detected. Investors pulled funds from the company after the incidents, which occurred when technicians who were moving data between servers failed to reactivate a firewall to protect the information from outside access.

Opinion

This isn't the first time something like this has happened, but it's usually hospitals making mistakes themselves. An outside company is easy to blame and the resulting PR is certain to be front-page news in the local community. One strike and you're out.

Musings

• One sloppy technician brought Verus down, a lesson to which hospitals and IT vendors should pay close attention.
• Verus didn't have much choice. Who would have signed with them after this incident?
• The application that allowed the breach was recently introduced to allow customers to pay their bills online. Hospitals should examine similar applications for vulnerabilities. Knowing what's owed may also mean knowing what was prescribed, ordered, and performed, certainly a cause for caution.
• The company simply shut down its Web site, locked its doors, and turned off the phones. Management may have been worried about being held personally liable.
• HIPAA business partner agreements are important. This might be a good time to have them reviewed by lawyers with this example in mind.

5. Another Private Equity Firm Ready to Make Healthcare IT Investments

Facts and Background

Healthcare-only private equity firm Galen Partners of Stamford, CT announced this week the closing of its $250 milllion Galen Partners V limited partnership. It will focus on healthcare information technology and outsourcing, medical devices, and specialty pharmaceutical companies. Expansion capital will be offered to established companies looking for $10 to $30 million in equity capital in which the partnership can be the lead investor. Previous successes include MedAssets and Pyxis.

Opinion

Private equity money is flowing into healthcare IT like it's the dot-com era all over again. The company stage at which to invest seems to be an unanswered question. Galen is looking for later-stage companies with a track record, while some experts suggest that incubating earlier stage companies increases reward and reduces risk.

Musings

• David Brailer's Health Evolution Fund, a $700 million investment vehicle for California's government retirees, might be looking for similar investments.
• If you're running a mid-sized HIT company that's doing OK (profitable or close to it), you will have many chances to bring in capital.
• Those cash infusions aren't free. Lots of companies regret selling their souls to sharp-pencil outsiders with little interest in the vision of the founders. Before you know it, 30-year-old investment hotshots are running the board and dismissing the founders.
• More investment means more development, which means more competition. Expect HIMSS to do well with annual conference booth fees.
  
  

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