Health IT

McKesson, Change Healthcare combining IT businesses into new, $3.4B company

The new venture will serve payers, providers and consumers with financial and administrative technology to improve the increasingly complex tasks of medical billing and reimbursements, McKesson and Change Healthcare said.

McKesson HQ

McKesson Technology Solutions, the software, business services and automation technology arm of healthcare services giant McKesson Corp., will form a new company with software analytics and networking firm Change Healthcare Holdings.

San Francisco-based McKesson will own 70 percent of the proposed new venture and will receive $1.25 billion from the cash proceeds, while Nashville, Tennessee-based Change Healthcare and its shareholders will own 30 percent of the merged entity and receive $1.75 billion following the close of the transaction.

The new venture will serve payers, providers and consumers with financial and administrative technology to improve the increasingly complex tasks of medical billing and reimbursements, McKesson and Change Healthcare said. Both companies spoke of capitalizing on the movement in healthcare to a value-based purchasing and delivery system.

The still-unnamed new company will be jointly governed by McKesson and Change Healthcare, which is majority-owned by private equity firm Blackstone. The new entity will combine nearly all of Change Healthcare’s businesses and the majority of McKesson Technology Solutions into a company with combined total annual revenues of $3.4 billion as of March 31.

Under the proposed deal, McKesson will contribute most of its McKesson Technology Solutions businesses to the new company, except for its RelayHealth Pharmacy and its Enterprise Information Solutions (EIS) division, which McKesson Corp. will retain. Change Healthcare — known until late last year as Emdeon — contributes all of its businesses except its pharmacy switch and prescription routing business, which will be owned by the company’s current shareholders.

The deal is expected to close in the first half of 2017. An initial public offering is planned shortly after, the two companies said.

McKesson Corp. President and CEO John H. Hammergren will serve as chairman of the new organization. Neil de Crescenzo, president and CEO of Change Healthcare, will be CEO. Both will be backed by executives from the merging companies.

“This is a bold, innovative transaction that creates a company with an enhanced ability to help customers address their increasingly complex financial and clinical challenges,” Hammergren said in a statement. “The new company will establish a more efficient suite of end-to-end payment and claims solutions, as well as clinical capabilities, while unlocking the value of our MTS businesses in a tax-efficient manner.”

He said the new enterprise will help customers reduce complexity, lower costs and ultimately provide better care.

“The combination of these two entities comes at a transformational time in U.S. healthcare,” added de Crescenzo. “Together we will create significant value by bringing together complementary capabilities from both organizations to deliver innovative new solutions for customers, create opportunities for team members at a leading healthcare technology company and drive advancements that address the three critical areas of cost, quality and outcomes across the healthcare sector.”

Neil Simpkins, senior managing director of Blackstone, said the innovative track records and forward-thinking experiences of both organizations “create a truly unique opportunity for positive impact across the healthcare ecosystem.”

Change Healthcare’s financial and administrative network processed 8.8 billion healthcare-related transactions — nearly $1.7 trillion in claims — in 2015. Its annual revenue was estimated at $1.4 billion in 2015 by the Nashville Business Journal and it employs around 7,000. Blackstone paid $3 billion for a majority stake in 2011.

McKesson Corp. employs 76,000 and has a market value of $39.8 billion, though the IT division accounted for just 2 percent of the overall business in fiscal year 2015. McKesson shares rose 2.3 percent to $176.58 on the New York Stock Exchange Tuesday following the news.

The sale marks the latest chapter in the long history of the Alpharetta, Georgia-based McKesson health IT unit, which started in 1974 as HBO & Co. McKesson Corp. bought HBOC in 1999 and weathered a fraud scandal that predated the acquisition.

Photo: Flickr user thespanishpeach