It's too early to know whether population health information technology will save the federal budget. But the vast ramp-up among providers of the technology, which uses Big Data analytics to improve and streamline health care services, turned heads earlier this month when it helped IBM ( IBM ) shares to their best day since 2009.
IBM announced Feb. 18 that its Watson Health unit will buy Truven Health Analytics for $2.6 billion. The price - more than twice as much as a private equity firm paid for Truven back in 2012 - reflects its importance to Big Blue's reinvention, the potential network effect from amassing health data of so many consumers and the rapid shift in the way the government is reimbursing health care providers.
The acquisition boosts "IBM's play to really kind of corner the Big Data market" and offer its clinical decision-support tools on a paid subscription basis, said Jennifer Bresnick, HealthITAnalytics editorial director.
The combination with Truven, IBM's fourth health analytics acquisition in the past year, means that Watson Health now has access to the health data of 300 million patients, which it can analyze in every which way. The goal: to discover what works best for patients, improving health outcomes while reducing costs by billions of dollars a year.
The Watson power play was seen as something of a negative for other major players in the sector, whose stocks traded down modestly on the merger news. Those include Cerner ( CERN ), Athenahealth ( ATHN ) and Allscripts ( MDRX ). But while IBM's Watson is no doubt a formidable competitor, it approaches customers from a different vantage point -- primarily from the cloud.
The other companies offer a broader range of health enterprise IT services, generally from the ground up to the cloud, starting with the management of electronic health records, the digital data that can be mined for cost-saving solutions.
Cerner, for example, "is literally taking over hospital IT departments," said KeyBanc Capital Markets analyst Donald Hooker, putting it in an ideal position to analyze best practices and pinpoint waste in clinical workflows.
Mining Big Data For Better Care
An example of how all this can work is detailed in the January issue of Health Data Management magazine. The issue explores ways in which Advocate Health Care of Downers Grove, Ill., has worked with Cerner to deliver better care at a lower cost.
One productive use has been to better determine the most appropriate next step for patients being discharged. This may mean sending them to a skilled nursing home or providing in-home care to reduce the risk of a readmission within the following 30 days. A test involving 5,600 patients at a system hospital yielded procedures that have reduced readmissions, Advocate says.
Advocate, along with Cerner, developed an algorithm to predict a patient's chances of readmission, deriving a score based on 30 different inputs that are updated every two hours. Not only can physicians monitor the score, but they can quickly drill down to find out why it is elevated and what interventions would be appropriate to lower readmission odds. Once implemented, readmissions of high-risk patients fell by 20% within a matter of months.
The laser-like focus on avoiding readmissions is logical, but a relatively new phenomenon. Until recently, providers were paid based on the volume of care they provided. More care meant more cash. Now, increasingly, financial incentives reward them for the quality of care and penalize readmissions.
Medicare has set a goal of having 50% of payments based on value rather than volume by 2018. Up until now, participation has been largely voluntary. But thousands of hospitals face the possibility of being financial penalized for excessive readmissions of patients treated for heart attacks, heart failure and pneumonia.
Last year, hospitals also began risking a 3% payment reduction for excessive readmissions of patients who had undergone total hip and knee replacements or treatment for obstructive pulmonary disease. The problem: Out of 3,400 hospitals subject to the program, only 799 avoided a penalty. Hospitals complain that socio-economic status has a lot to do with readmissions, but that may not be something that hospitals are well-equipped to fix.
Still, the urgency is growing for medical systems to buy into population health applications in order to maximize the value of the care they provide. In another milestone, Medicare will make bundled payments mandatory for hip and knee replacements in 67 major metropolitan areas, starting this April. Poor performance, perhaps due to after-surgery infections, would put hospitals at risk of paying for a portion of cost overruns, starting in the second year. Medicare expects that the program will save the government $343 million over five years.
Market research firm International Data Corp. predicts that by 2018, physicians will use population-health-type applications to identify the most effective treatment for 50% of complex cancer patients, resulting in 10% reductions in both mortality and cost.
KeyBanc's Hooker notes that the sickest 5% of patients account for 50% of $3 trillion in annual U.S. health care spending. Saving just 10% of the costs for treating those patients -- something he sees as eminently doable, given the "tremendous amount of inefficiencies in the system" -- would net $150 billion in savings, he said.
An EHR Second Act At Last?
After a surge in spending on electronic health records (EHR) systems earlier in the decade, the anticipated second act has been slow to materialize. A Jan. 7 report from RBC Capital Markets analyst David Francis noted that recent capital investment has been focused on facilities. But "the perceived imminence of new reimbursement models for health systems and physicians is ... finally driving the provider market to prepare for the next investment wave in the form of 'Population Health' applications and infrastructure."
With health care inflation back on the rise after historically slow growth for much of the decade, Francis suggests that there's unlikely to be any let-up in Washington trying to tackle health care costs. He's expecting a boost in order activity in the second half of 2016 and solid revenue growth in 2017 and beyond.
That couldn't happen at a better time for IBD's Computer Software-Medical group. Patience has worn a little thin as investors have waited for the population health trend to take off. Cerner, Allscripts and Athenahealth all saw their stock prices slump after falling short of their revenue targets. Yet each of the companies entered the year with momentum, riding important business wins that proved they have staying power.
The Department of Defense in July awarded Cerner, along with Accenture ( ACN ) and Leidos (LDOS), a $4.3 billion, 10-year contract to overhaul its electronic health records for close to 10 million active duty troops and retirees at over 1,000 facilities. Privately held Epic, which along with Cerner is one of the two biggest competitors in the field, teamed with IBM Watson in the bidding.
Francis of RBC Capital Markets expects value-based pricing to drive a new round of consolidation among health care providers. That, in turn, could benefit IT vendors large enough to offer a comprehensive portfolio of capabilities, such as Cerner and Epiq (EPIQ). For providers, Francis writes, "successful implementation of these systems ... will determine who are the hunters and who are the hunted" in the next round of consolidation.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.