MedCity Influencers, Payers

What’s old is new again: Rethinking classic payer investment models for health IT

An examination of the advantages and drawbacks of traditional investment models: Investing in health IT partner companies and partnering with other organization on joint ventures.

Healthcare has seen a boom in sexy new “killer apps” that have drawn a lot of attention from payer organizations seeking to advance their health IT investment strategies. Many have opened innovation centers or spawned new sister organizations to evaluate, invest in, and market new innovations venture-capitalist style. This is all well and good but typically makes for better PR than ROI.  

Perhaps, amid so much hype, it is a good time to revisit a couple of classic, less sexy, health IT investment strategies that can – if executed with discipline – reduce risk, add higher margin revenue and accelerate progress on strategic goals like patient experience, expedited billing and collection, and improved member population health.

Two of these traditional investment models are investing in health IT partner companies and partnering with other organization on joint ventures.

Investing in existing technology partners

It has long been a classic risk mitigation tactic for payers to invest heavily in or even acquire existing health IT partners. As the larger payer organization becomes more dependent on a smaller partner organization to meet its current or future goals, the many existential threats facing any small company can begin to present a significant risk for the payer. These kinds of deals can make a lot of sense for both organizations.  

For example, a Fortune 100 company liked their partner’s custom-coded solution but wanted to move to a commercial, off-the-shelf solution to reduce costs and minimize risk.  Upon approaching the smaller partner with this goal, it turned out that the health IT vendor had wanted to shift to this model, too, but lacked the financial capital to do it. The deal that resulted financially stabilized the software partner and not only reduced ongoing risk and expense for the Fortune 100 company, but it also gave it strong influence on the smaller firm’s new products and features development, which in turn helped the software vendor better meet market needs.  This became a huge win-win for both parties.

Looking at recent examples in the payer world, we speculate that the deal between ikaSystems and Blue Cross Blue Shield of Michigan ( BCBSMI ) had a similar impetus.  BCBSMI had a growing list of strategic and tactical initiatives that were dependent on the ikaSystems technology and had both the desire and the cash to protect their investment.  In this case, they purchased ikaSystems outright and then sought to explore the possibility of marketing the acquired solutions to other payers à la UnitedHealth Group/Optum.  

As in the previous example, BCBS is ideally positioned to best inform future product development on the needs and wants of the payer industry, positioning it to participate in a potentially high-growth, high-margin segment and improve its own bottom line. In this case, ikaSystems looks like a great candidate for this type of investment, because it has a solution that has proven to be worthy, but the company needed a capital infusion and better guidance on development to reach higher into enterprise-level services.

There are some pros and cons to this model:

Advantages:

  • Investment in a target partner allows the payer to influence product development to suit its goals and objectives.
  • Payers know what payers need and can help the partner develop optimally to meet those needs.
  • Payers tend to have ample capital resources, and for a smaller partner, the attractions of a cash infusion and a large long-term customer can give the payer significant leverage in the deal.

Drawbacks:

  • Acquisitions are an expensive and capital-intensive way to lock down IP, and contract covenants can often provide similar – though weaker – protection.
  • Other payers will likely be skeptical about buying into technology controlled by a competitor. Special skills are required for effectively structuring an acquisition and managing the new entity.

Payers are investing in joint ventures with other entities

Joint ventures between payers and providers is a growing trend in this age of value-based care and narrow networks.  Less common recently, but highly effective in the right circumstances, are joint ventures between two or more payers.  One shining example is Availity, which  Florida Blue and Humana launched in Jacksonville, Florida back in 2001 as a way to share risk around a project to streamline and enhance electronic communications between payer and provider organizations. More than 15 years later, Availity continues to enhance automation of payment process between payers and providers. It has also added revenue cycle management services via acquisitions Availity made in 2010 and 2014.

Here are some of the pros and cons of joint venture models:

Advantages:

  • Diversifying into new lines of business can be both future-proofing and margin-building for payer organizations.
  • Joint investment creates a neutral third party to manage areas of mutual interest.
  • With two or more payers backing and patronizing a new venture, the chances of success and of returning a profit are greatly enhanced.
  • Risk is spread and exposure is lowered.

Drawbacks:

  • Management of the joint venture can prove challenging as it takes executive focus and resources; sometimes procedure and process integration are affected.
  • To the extent that the payer becomes its own customer, the impact to the bottom line is reduced.
  • Controlling IP ownership between companies can be challenging.
  • Shared risk means only partial participation in the profits of a successful venture.

These two classic models are not new concepts in IT investment strategy in healthcare, but they bear revisiting.  There are also newer players at the table on the payer side who are unfamiliar with them, as both the business and IT sides of the healthcare organization are now more involved in these strategic decisions.  It’s always a good idea to learn as much from history as you can because as much as things are changing in healthcare today, many of the same dynamics persist. And you know what they say about those who do not learn from history.

Photo: SergeyNivens, Getty Images 

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