Ephor Group Healthcare IT Services Brief

Healthcare IT Thesis for Managing the
Business of Healthcare More Efficiently.
The “Yellow Brick Road” to Wealth Creation in IT Outsourcing (ITO)

“Healthcare is a terminal illness for America’s governments and businesses. We are in big
trouble.” - Professor Clayton Christensen, Harvard Business School

Situation Analysis: Patients are not satisfied with the Quality of Care and the Cost of Care.
While Providers of Care are not satisfied with the Vendors.

Preamble: The advent of the ‘Patient Protection and Affordable Care Act ’ provides further
evidence of the need for smart, integrated IT solutions that are effectively and efficiently
implemented and maintained. The successful implementation and maintenance of an effective
system results from IT solutions that are expertly intertwined with process, management and
people. Herein lays the key to prosperously managing the business of healthcare.
The 2010 healthcare reform confirms the governments spotlight on quality, measurement,
transparency and outcomes through the use of regulations, reporting, incentives and penalties.
Additionally, more information will be publically available and consumers will become savvier at
understanding the implications of a bottom percentile result.
Furthermore, healthcare players must respond to
these themes in an environment of declining
reimbursement (Medicare spending will be reduced by We believe that major
almost $500 billion over the next 10 years) and a greater change is inevitable
number of insured (an estimate 32 million) with an because of the economic
increased number of coverage choices.
dynamics including the
Pay for performance is now inevitable, along with
proliferation and increasing
bundled payments etc.; the days of fee for service are in
complexity of healthcare
rapid decline. Healthcare providers will need to become
transactions, consumerism,
more creative and innovative in the funding and delivery
of their services in order to survive.
and the rising importance of

As individual insurance coverage grows, payers will be financial risk management.
driven to develop new products and demand for doctors’
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visits will increase (especially in the primary care arena).
All sectors of healthcare will have to collaborate in order to prosper.
Systems to capture and track data will need to become more sophisticated and user
friendly to allow organizations and ‘patients’ to easily track, measure and understand the
effectiveness of services, coverage, payments, reimbursement etc. . ‘Smart’ integrated IT
solutions will help their users navigate the resulting increased complexities and provide
information to develop new products (e.g. in the case of insurers) and services (in the case of
providers) by capturing data across processes, and providing relevant and meaningful business
intelligence.
Furthermore, adaptability to change will be essential, as, although the government has
outlined a plan, there are many details of the bill yet to be defined.

Introduction: The traditional predictions regarding Healthcare reform is
health care industry trends have been overshadowed by dependant upon adoption
the continual discussion about health care industry
and advances in health IT to
reform, which appears to be a moving target. There is
transform the US health
no clear path to systemic change in the healthcare
while improving quality of
industry, and decades of attempted reform have only
care, safety, control,
contributed to the spiraling cost of healthcare. The
complexity of the industry, the fee-for- service
knowledge while reducing

reimbursement system, the current misalignment of costs and risks.

economic incentives, the structure of the delivery
system, and the lack of innovation and political will suggest that the debate over rising costs and
inefficiencies will continue for years to come.
Reducing the costs of health care services has been and will continue to be the underlying
objective of both legislative and executive branches of Federal and State governments in 2010
and beyond. However, the complexities of restructuring health care could mean that a fully
implemented, comprehensive solution may be a work in progress for many years into the future.
This thesis proposes that information technology can aid the development of a holistic and
integrated approach to health care management, one that provides ongoing support to
healthcare practices/hospitals to reduce inefficiencies and costs.

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The U.S. Health Care Industry Today
Healthcare costs continue to outpace the rate of inflation. However, since 2003 the
percentage rate of increases has diminished each year. According to employers and health plans,
this trend is predicted to level off, and premium increases should be expected in 2010 and
beyond.
The current healthcare environment is characterized by increasing revenue pressure,
rising costs, declining reimbursement, and increasing regulatory and compliance integrity with
an emphasis on patient safety and confidentiality. A view of the problem is outlined below in an
excerpt from the report “Cutting Red Tape in Health Care”, by the CALPIRG Education Fund:

“California’s health care system is broken. Costs are rising faster than either
inflation or wages, and wasteful spending is a major culprit. Inefficient and
duplicative administrative systems force doctors and hospitals to spend more time
and money on administrative support than is necessary, which increases costs to
patients.
However, by following the example of other states and streamlining key
processes such as insurance billing and payment and physician credentialing at
hospitals—providers and payers in California can collectively save hundreds of
millions of dollars annually and help lower the cost of health care.
Complicated billing practices and administrative systems result in grossly
inefficient communication between physicians, hospitals and insurers and lead to
higher-cost care for patients. Physicians’ offices spend large amounts of
administrative time on getting paid for the care they provide. In California doctors’
offices, billing and insurance-related costs account for more than half of all
administrative spending, or 14 percent of total office revenues. Insurers share the
burden of inefficient administrative processes. In California, 21 percent of private
insurer health care spending goes to billing and insurance-related costs instead of
direct patient care. This is the rough equivalent of $9 billion, or 5.4 percent of
total yearly health care spending statewide.”

Based on the above trends, the primary emphasis for healthcare organizations next year will
be on reducing costs and creating greater value in the health system. This focus will have a
domino effect from one sector to another and redefine roles, responsibilities and relationships.

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Healthcare Trends for 2010 and Beyond
In an attempt to reduce costs and create greater value, trends to be expected in the coming
years include:

i. Cost containment. Industry-wide, intense efforts to reduce healthcare costs.

ii. Increased reliance on information technology. Healthcare IT expansion, technology
and telecommunications companies are aggressively capturing a growing share of the
healthcare business.

iii. Changes in patient behavior and expectations. Consumers are taking a more
involved role in managing their health. The internet has provided consumers with access
to the same reports as hospital CEOs and other health care leaders. This savvy patient
population will search and compare the data before making health care decisions.

iv. Accessibility. An increase in the number and scope of services offered by work-site and
retail health clinics and home health services, as well as other technology-enabled
delivery such as e-mail, tele-health and remote patient monitoring.

v. Transparency. At all levels and between multiple constituents.

vi. Physician Integration. The percent of hospitals employing physicians has nearly
doubled since 1994, and it is expected that this trend will continue in 2010 as physicians
seek greater stability and electronic connectivity.

vii. Improving the quality and safety of patient care. Increasingly, insurance companies
will measure hospitals by their performance and will move toward a “pay for performance”
method for dispensing reimbursements.

viii. Community health. A new social responsibility, it is supported by employers, health
care leaders and community leaders getting funds from the government for promoting
community health1.

ix. Shortage of healthcare professionals. This will be of particular importance as the
“mandates” associated with “Healthcare Reform” become a reality.

x. Decreasing reimbursement rates to providers. As a result of enhanced utilization
management and further cost containment initiatives, by all payors.

1
Manos 2009
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The Case for Improved Information Technology
In all of the above trends, it is apparent that connectivity and technology play critical roles in
and are fundamental requirements to reducing the cost of administration and compliance.
Innovations in technology are increasingly prevalent in the management of healthcare, and also
in clinical areas2. For example, clinical advances have already permitted many formerly
inpatient services to be offered on an outpatient or even ambulatory basis.
More changes are on the horizon. The pressure to implement electronic medical records
(EMR) will continue to force change during the coming months, in both physician practices and
hospital settings. Because saving time means saving money, innovative information systems
and medical equipment will be sought by medical offices in an effort to perform common tasks
more quickly and efficiently.
Physician practices and hospitals that prosper in this increasingly challenging environment
will be required to be more adaptable to technology, to business process changes, and to
outsourcing capabilities. Strategy development, effective implementation, specific performance
measurement, and performance accountability will be required of physicians, executives, and
staff in every delivery setting.
Improving healthcare information technology is one way to make this process easier for
healthcare providers and networks. Consider the following patient episode; a typical medical
office visit and insurance billing follow-up required in America today:

“A middle-aged woman goes to her doctor’s office with early symptoms of heart
disease. Once her symptoms are diagnosed, office staff will have to spend time
determining what kind of care is covered by her insurance. To prescribe a
cholesterol medication, the woman’s doctor may spend time looking up which
drugs are covered by her insurance plan, and determine the amount of the co-pay
for the drug. In many cases, however, her doctor might be too busy to check, and
the woman would not find out that her drug was not covered until she got to her
pharmacy. This could then cause a lengthy back-and-forth between her doctor and
pharmacist, for which neither would be compensated.

“Then, in order to be paid for the care the woman received, her doctor’s staff must
complete billing forms that require specific coverage information to be provided.
Despite a limited degree of federal standardization, this information is coded in
different ways, depending on both her insurance company and on the specific
benefits and co-pays of her insurance plan. Accurately completing the forms
demands large amounts of staff time, and may require the services of billing

2
Plunkett 2009
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specialists or claims clearinghouses—at additional cost to the doctor.

“Once the woman’s claim has been successfully completed, it must be submitted to
her insurer. In some cases it might be submitted electronically; in others, the claim
might be written or printed and then faxed. The woman’s insurer then has to pay
someone to handle the received form and send it to the correct internal location, a
process whose efficiency varies greatly by insurer. Meanwhile, her doctor’s office
must use staff time to track the claim and ensure it gets paid, and deal with the
fact that each service on the woman’s claim may have a different payment
schedule, divided into three parts: what the insurer pays, what the woman pays,
and what the doctor has agreed to cover. The woman herself may not learn for
weeks whether or not her claim has been accepted.

“Further, if there is any dispute between the physician and the insurer, it is the
patient who will have to take the time to sort out the mess—a frustrating and often
time consuming process. All for a $75 payment and probably an unprofitable office
visit.

“The costs of these many steps, repeated for hundreds of patients per week in
thousands of clinics around the state, add up quickly. Doctors’ offices, billing and
insurance-related costs account for more than half of all administrative spending,
or 14 percent of total office revenues.

“The costs of billing and claims processing are not limited to physicians alone:
insurers and hospitals share the burden of these labyrinthine administrative
processes. It is estimated that 21 percent of private insurer health care
spending goes to administrative costs instead of direct patient care. This is the
rough equivalent of $9 billion, or 5.4 percent of total yearly health care
spending in California alone. Hospitals bear fewer (though by no means negligible)
costs, at 7 to 11 percent of their total revenues.”

“21 percent of private insurer health care spending goes to administrative costs
instead of direct patient care.” Administrative costs can and should be cut. Improvements
in information technology will necessarily be at the forefront of changes in the delivery of
medical services. At present, however, the more visible attempts at reducing the cost and
inefficiency of health care administration (for example, the full adoption of an Electronic Medical
Record system by a physician practice) fall far short of creating an efficient, integrated, high-
performing platform.

This lack of efficiency or “point solution orientation” is due in part to a lack of
communication across the design, installation and management of the systems. Generally,
information systems are purchased from one vendor, installed by another, supported or hosted
by yet another, and then in many instances utilized by an outsource provider. Therefore how
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can any one vendor demonstrate a comprehensive understanding of the medical practice, its
processes, its objectives or its inefficiencies? Therefore the need for holistic and bundled
technology enhanced service offerings is present.

Best-of-breed IT providers
In that practice management systems, billing will to streamline costs,
systems, IT support, IT hosting, finance and accounting,
create process excellence
supplies/inventory, maintenance/staffing, and
while increasing response
scheduling/quality improvement/CRM are all generally
and reporting.
piecemeal purchases provided by different vendors,
attempts by medical practices to manage each function
are generally ad hoc and not integrated. IT, Operations and Supply Chain strategies, decisions,
implementations and management suffer as a result. Processes are not optimized because there
is no organizing framework or systems discipline in the design and procurement of these
functions. Systems are in silos and there is no ongoing implementation and process support for
these services. Furthermore, many practice managers don’t have the time and/or appropriate
qualifications, education or experience to perform this support function.

Information Technology: The Time to Change is Now
According to McKinsey & Co. the U.S. healthcare payment system, which processed $1.9
trillion in 2007, is ripe for transformation.
“…the system is inefficient, consuming 15 percent or more of each dollar spent on health
care, compared with about 2 percent for the payment system in retailing. Expenditures on
the processing of bills, claims and payments: bad debt: and other transactions total more
than $300 billion a year.”
Change is happening in health care IT already, however clearly not rapid or systematic
enough. At present, technology and telecommunications companies are partnering the
healthcare sector in a significant way. The federal government’s America Recovery and
Reinvestment Act is a boost for the IT sector. Doctors and other providers have entered in the
race to benefit from the Act by adopting healthcare IT in 2010 to qualify for the bonuses in
20113.

3
Manos 2009
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The investment potential in healthcare IT and technology-enabled healthcare business
services is significant. Recent trends and developments demonstrate that information
technology change is coming to the healthcare industry. IBM’s acquisition of Cognos, and the
development of business intelligence software for fulfilling patients’ demand of timely and
correct reporting, may soon bring the following advances:

• The promotion of performance management through healthcare analytics, which
should increase the overall efficiency of hospitals tremendously;
• The development of a repository of all data, and a structure provided to it, which,
through the application of business intelligence tools, can help in reducing costs,
informing consumers, and delivering better patient outcomes;
• The reduction of workflow issues between all providers, payors and administrators;
• The implementation of demographic computing;
• The creation of customized demographic dashboard portals with real time
information about patients, which can be accessed by doctors and nurses;
• The availability of meaningful data mining, making it possible to move from static
reporting to real time data mining, enabling prediction and modeling of future costs and
quality of systems on historical data; ultimately allowing insurers and practitioners to
compete on quality4.

The federal reforms aimed at the insurance industry, reimbursement, grant programs, and
more suggest that the US is taking focus and making progress in healthcare IT. However, the
implementation of change is being delayed by the outcome of healthcare reform. Decades of
attempted reform have only contributed to the spiraling cost of healthcare. At present, there is
no clear path to systemic change in the healthcare industry.

4
Plas & Klein 2008
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How Do I Position My IT Business to Maximize Value?
Operational Strategic

Established Measurement and Metric Systems beyond Financial
Measures.
Recurring Revenue Model.
The Business Process is more Salient then One Person or
Core competencies identified and creating
Team.
value.
Top quartile growth created through market differentiation at
Positioned as attractive platform for
service level.
additional investment or as a strategic
Portfolio of Distribution Venues are Proven: Effective and
acquisition.
Proven “Go-to-Market.”
Balanced portfolio of revenues: service
End-user Customer Satisfaction is a Critical Brand Equity.
offerings, industries served and customer
Compensation has a Variable Cost Component and Supports the
concentrations.
Business Objectives.
Unique Attributes of the Business Model are
Illustrates the Attributes of Effective Risk Management.
Brand Equities.
Outsourcing is Part of the Business Model.
Illustrates a Results Oriented Culture.

How Do I Position My IT Business to Create Wealth?

Market • Acqusition platform
• Become "need‐to‐have" capability for
others to reach customer base

Leadership •Defensible market niche
•Excellent growth prospects

• Above average margins
• Higher multiples attributed to larger

Scale firms
• Ability to add financial leverage
• Proven ability to generate consistent
performance

Strong • Focused strategy & vision
• Clear leadership with strong
supporting team – – well defined roles

Leadership • No reliance on owner to achieve
objectives

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Factors Impacting Valuation
(and thus Wealth Creation)
1. Carve out dominance;
2. Quantity and quality of recurring revenues;
3. Profitability of the platform;
4. Scalable operating infrastructure to ensure performance is maximized, cost-efficient
and delivers on the full promise of the value-proposition; plus
5. Company has best-in-class customer acquisition economics, has significant
alternative distribution, and is realizing the benefits of having achieved “Branded
Franchise Effects.”

Enterprise Revenue Multiple Valuation
LTM EBITDA EBITDA
Services Sector 2006 2007 2008 2009
GM Margin Avg
Business Process Outsourcing 1.3x 1.2x 1.2x 1.2x 39% 14% 8.0x
Outsourcing 1.2x 1.1x 1.2x 0.9x 27% 13% 7.3x
Consulting 1.9x 1.7x 1.1x 1.0x 41% 15% 7.1x
Systems Integration 0.7x 0.7x 0.9x 0.2x 27% 7% 5.5x
Staffing 0.5x 0.4x 0.2x 0.2x 23% 4% 7.4x

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Offering Bundles
1. Managed Services
a. Attributes
i. IT management us automated and streamlined.
ii. Consulting occurs at client offices.
iii. Shared Services.
iv. Technology (beyond ticketing system) behind the veil.
1. Data Center and other 3rd party software utilized by IT provider
b. Services
i. Help Desk
ii. Network Management
iii. IT Consulting
iv. Reporting and analytics
v. Business Intelligence

2. Back-Office Platform
a. Attributes
i. Technology IT Management Platform as a service including infrastructure
platform
ii. Who owns the technology?
iii. Shared Services
b. Services
i. Data Center
ii. Hosting
iii. Backup
iv. Remote Network Management
v. Remote Monitoring
vi. Security

3. Hybrid
a. Attributes
i. Onsite staffing model coupled with remote management
ii. Client owns technology.
b. Services
i. Data Center
ii. Hosting
iii. Backup
iv. Remote Network Management
v. Remote Monitoring

Systems (Point Solution) Implementation will be less and less prevalent.

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Key Performance Indicators

Improvement Median
Goal Measures Top Performers
Initiative Performers

• # of Raving Fans (i.e. customers that provide • <30 • 30+ in
Predictable, cost-
Revenue testimonials and referrals) secondary
effective revenue.
and tertiary
markets

• Revenue per Operations Employee • $70k • $150k+

Operations Efficiency and scale. • Profit Per Employee • $6k • $20k+

• Quality Scores: Client satisfaction/At-risk • NA • 95%+
clients

• Revenue Under Management Per Account
Manager Per Month • $15k • $25k+
Motivated, Capable of
Workforce
Growth, and Productive.
• Days from onboarding to references • NA • 90 days
(marketing results realized)

• % of operations with process mapping and • NA • 90%+
documented instruction
Management
Platform for growth. • NA • YES
Science
• Balanced portfolio of revenue streams
• NA • 90%+
• % of ‘A’ and ‘B Players’

Process scalability is implemented when key results and activity measurements and
indicators are benchmarked and outperform the competition.

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Conclusion
In the context of managing the healthcare business more effectively in the U.S.
among the stakeholders Ephor Group believes that better deployment and management
of information technology through a holistic and integrated approach will offer significant
improvements in administrative efficiency of the healthcare delivery system, as well as
provide significant financial savings to providers.
Healthcare IT and technology enabled services are only as good as the
implementation, utilization, management and support of the tools deployed. Our
collective experience in the healthcare industry and our deep understanding of the
unsatisfied and underserved needs across the healthcare stakeholders; suggests an
investment opportunity in bringing together healthcare technology, process
enhancement and business services to holistically address the macro and micro
economic challenges. The result being a more efficient and comprehensive support
infrastructure for doctors, hospitals, health plans, patients, and payors.
By empowering complex systems to work smoothly, we believe we can provide the
complicated healthcare system with much needed structure, process and comprehensive
functionality. We believe that by focusing on the non-clinical issues of improving
technology, operations and supply chain management, we can provide an opportunity to
create value in the uncertain and dynamic industry of healthcare delivery.
Until there is a comprehensive approach to implementation, support and
management of Technology, Operations and Supply Chain investments in healthcare IT,
improvements will continue to fall short of the opportunity to drive real, sustainable
improvements in the cost of healthcare administration. Ephor believes that a significant
investment opportunity exists by bringing together companies providing complimentary
products and services that build a comprehensive, well orchestrated, integrated solution
addressing the Technology, Operations and Supply Chain needs of the healthcare trading
partners across the U.S.

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Ephor Group Healthcare IT Services Brief

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