Mergers & Acquisitions recently named ResMed’s $800 million acquisition of Brightree, a provider of cloud-based software for post-acute care (PAC) providers, as Mergers & Acquisitions’ 2016 Mid-Market Deal of the Year—and with good reason. Not only was the acquisition the second-largest healthcare SaaS acquisition ever, but it also demonstrates how software solutions focused on the PAC market are generating intense interest from a broad base of strategic acquirers, as well as technology-focused private equity firms.
Since the beginning of 2016, the PAC technology sector has seen a flurry of M&A activity and infusions of private capital—trends that show no signs of slowing. Shifting a greater proportion of care away from hospitals and physician clinics to lower-cost PAC settings will be a critical element of efforts to control healthcare spending in the United States. PAC providers, however, have traditionally underinvested in software and other technology solutions, which are necessary for efficiently handling higher patient volumes and allowing better connectivity to other medical providers. As a result, technology companies that provide tools to help PAC providers monitor patient outcomes and improve coordination of care face an enormous growth opportunity.
Trends Driving Demand for PAC Software
In the healthcare industry, “post-acute care” refers to care that typically is delivered after a patient has been treated at a hospital or physician clinic. Examples of PAC providers include skilled-nursing and assisted-living facilities, home health, hospice, home medical equipment and durable medical equipment (HME/DME) providers, home infusion, and outpatient rehabilitation facilities.
Because of the aging U.S. population and the aforementioned goals of shifting care to lower-cost non-hospital settings, PAC expenditures are expected to outpace overall healthcare spending. Spending on home healthcare alone is expected to increase from $89 billion in 2015 to $130 billion in 2021, a 6.6% compound annual growth rate, according to the Centers for Medicare & Medicaid Services.
Technology will play a vital role in allowing PAC organizations to deliver the growing volume of care both more efficiently and effectively. In addition to improving these providers’ ability to manage basic business functions like billing, scheduling, and clinical reporting, IT solutions also improve providers’ capacity to satisfy regulatory compliance efforts, which can vary greatly from state to state. PAC typically requires longer-term care and involves multiple, varied caregivers, making documentation requirements often greater and more complex versus acute settings.
As the United States shifts from a fee-for-service reimbursement model to a value-based model, PAC providers are facing additional pressure to implement technology solutions that allow caregivers at these organizations to coordinate with hospitals and physicians. The U.S. Department of Health and Human Services has set a goal of tying 50% of Medicare fee-for-service payments to quality or value through alternative payment models by 2018. To succeed in a value-based, “accountable care” reimbursement model, hospitals and physician groups must improve patient outcomes, prevent readmissions, and minimize the use of expensive acute care settings.
Software platforms that promote information-sharing across the healthcare continuum deliver powerful benefits for providers and patients alike. Unfortunately, many healthcare networks lack point-to-point connections between PAC providers, equipment vendors, referring physicians, and rehabilitative specialists. Historically, PAC providers have been the weak link in the technology chain within healthcare networks.
Relative to hospitals and physician clinics, PAC providers have lagged in technology investments. Adoption of electronic health record (EHR) systems serves as one telling barometer of this underinvestment. As of 2014, nearly 97% of hospitals and 74% of office-based physicians had adopted certified EHR systems, according to the Office of the National Coordinator for Health Information Technology. Among long-term PAC providers, however, adoption rates were estimated at 60%, according to a survey conducted by LeadingAge New York, an advocacy organization that represents the state’s PAC industry. Because of this underinvestment, PAC providers will need to aggressively invest in technology in the years to come.
Flurry of Recent Transactions in PAC Software
Hearst’s 2013 acquisition of Homecare Homebase, a provider of home health software, sparked increased interest in the PAC technology sector. Transactions such as this and ResMed’s acquisition of Brightree have shined a light on the tailwinds that are driving the sector’s growth.
While interest from strategic buyers and financial sponsors in PAC technology has been growing for the past several years, it seemed to hit an inflection point in early 2016. Including the ResMed-Brightree deal, there have been nine transactions involving PAC software companies since April 2016.
- Brightree acquired by ResMed, April 2016: The acquisition significantly expanded ResMed’s push into informatics and creates expansion opportunities in home health, hospice, and other post-acute coordination.
- Netsmart acquired via joint venture between Allscripts and GI Partners, April 2016: Allscripts and GI Partners’ $950 million acquisition of Netsmart created the largest technology company exclusively dedicated to PAC and health and human services (HHS) and gave Allscripts increased penetration in these key end-markets.
- Curaspan acquired by naviHealth (Cardinal Health), April 2016: NaviHealth, which was acquired by Cardinal Health in August 2015, acquired Curaspan less than a year later. Curaspan and naviHealth both provide software that facilitates the sharing of clinical information and the efficient transfer of patients from hospitals to PAC settings.
- ClearCare receives growth-equity investment led by Battery Ventures, August 2016: ClearCare, a software platform used by agencies that provide daily in-home care, received a $60 million growth-equity investment that was led by Battery Ventures, a technology-focused investment firm (and former owner of Brightree).
- Casamba merges with HealthWyse and TherapySource, October 2016: The three-way merger was designed to support Casamba’s vision for creating an end-to-end solution across the PAC continuum. TherapySource had been a division of SourceMed; Casamba and SourceMed are portfolio companies of ABRY Partners.
- HealthMEDX acquired by Netsmart, October 2016: The addition of HealthMEDX’s long-term care solutions advanced Netsmart’s plan to build a comprehensive platform for community-based healthcare providers.
- Mediware Information Systems acquired by TPG Capital, December 2016: TPG acquired Mediware, a supplier of software platforms for healthcare and human services providers and payers across alternate care, acute, and community-based settings, from Thoma Bravo.
- PointClickCare receives minority investment from Dragoneer Investment Group, February 2017: PointClickCare, a leader in SaaS EHR platforms for senior-care providers, raised $85 million from a group that was led by Dragoneer and included existing investor JMI Equity.
- Kinnser Software to be acquired by Mediware, Announced May 2017: Kinnser, developer of cloud-based clinical, financial, and administrative software for home health and hospice providers, complements Mediware’s existing software solutions and positions Mediware to gain market share as PAC providers expand and consolidate.
Outlook for Continued Consolidation
The trend of increased investment in and consolidation of PAC software companies shows no signs of slowing. Private equity firms will continue to build platforms in this attractive end-market, and the universe of strategic acquirers continues to expand as out-of-segment buyers—whether device companies such as ResMed or diversified healthcare companies such as Cardinal or Philips Healthcare—look to widen their software capabilities. A large strategic acquirer in the healthcare industry recently told us that the company is waiting for further consolidation in the industry to occur before the company escalates its acquisition activity. This will allow them to gain better clarity into who the true winners will be in PAC software and to pursue larger, more mature targets.
Karl Palasz is a managing director in William Blair’s healthcare technology investment banking group. Since joining William Blair in 1998, Palasz has completed transactions involving many healthcare technology companies, including Brightree’s acquisition by ResMed, Netsmart’s acquisition by Allscripts and GI Partners, and Kinnser Software’s acquisition by Mediware.