IT firms fail to cash in on Obamacare

Even though almost all of them work with healthcare companies, their range of services is limited and they don't cater to all the segments in the sector

When the Patient Protection and Affordable Care Act was signed into law by President Barack Obama in 2010, there was a mood of quiet optimism among information technology (IT) services companies, among them many Indian players. Called the Affordable Care Act (ACA), or Obamacare in popular parlance, the law was widely believed to be a great boost for the IT industry since it promised creation of huge opportunities for service providers.

Healthcare insurance products in the US were traditionally offered through the employers. So the US health ecosystem primarily followed a business-to-business (B2B) model. It was not as if the consumers were prevented from buying insurance products directly, but those tended to be very expensive. The process changed under ACA, when the government decided that individuals had to directly go and get subsidised insurance for themselves from the specially created healthcare exchanges.

This meant huge opportunity for Indian IT services companies in providing technical support to insurance marketers and hospitals. But four years later, the IT vendors are not exactly singing their way to the bank. Cognizant, which has been fairly successful in the healthcare business in the US, reported tepid growth in the segment last quarter. It attributed the lacklustre performance to indecision on the part of some of its clients in the healthcare insurance services. With almost a quarter of its revenues coming from healthcare, the Nasdaq-listed company's reliance on this segment is quite high, but Cognizant says it is not expecting an uptick in the segment in the first quarter of 2014 as customers are expected to lower spending to adjust to the healthcare reforms in that country.

Despite Cognizant's performance, industry analysts believe that the opportunities that ACA represented have not dissipated just yet. They say the slow enrolment of beneficiaries has cast a temporary shadow, impacting the spending decisions of some clients who are primarily healthcare insurance service providers. Till April, only around eight million of the expected 30 million people had enrolled at the healthcare exchanges, or organisations set up under the new Act to provide government-subsidised health insurance.

"This whole ability to go as a consumer and buy insurance is a big revolution in the US health system. That's what the exchanges were created for," says Jimit Arora, vice-president of US-based Everest Group, which is engaged in the IT services programme and healthcare services research.

With the slow rate of enrolment, healthcare providers are taking a wait-and-watch approach. "Some insurers who were planning to set up healthcare exchanges have withdrawn or are waiting for clarity from the government because both the federal and state governments in the United States are setting up healthcare exchanges," explains Arora.

According to Everest Group's research, the market opportunities for IT services players in the healthcare and life sciences segment in the US stood at $30 billion in 2013. It is expected to be upwards of $43 billion by 2016. "If you look at some of the underlying requirements of the healthcare industry, there is a huge push for consumerisation and there is a huge requirement to reduce the cost of care delivery. So, long-term opportunities still exist, though in the short term there could be some seasonality," says Arora.

Adds Frances Karamouzis, vice-president and analyst at Gartner: "Healthcare has given so much at any given time in the US. We think Obamacare is going to continue to generate revenues in IT and IT services sector. There are a lot of opportunities for the service providers to provide value."

Indian companies lag

None of the Indian IT services company, except Cognizant (which is technically a US-headquartered company), has been able to make a big dent in the healthcare segment in North America. However, companies like TCS and Wipro did quite well in the healthcare segment in the January-March quarter despite their bouquets of offerings not being as diverse as Cognizant's. TCS reported an industry-leading sequential growth of 5.3 per cent in January-March. Its smaller peer, Wipro, has shown consistency in its healthcare vertical with average growth of 5 per cent in each of the last four quarters.

Industry experts explain the performance of these companies as largely due to their not being as hugely exposed to the sector as Cognizant. Most Indian IT service providers bank on offerings like infrastructure services, cloud, analytics and BPO services, whereas Cognizant follows a more intellectual property-led approach with a "combination of internal R&D and customer co-creation". Others don't offer a full breadth of services catering to the different segments in the healthcare sector, including health exchanges, hospitals and medical devices manufacturers.

Healthcare has traditionally been considered one of the growth areas for IT services companies. But the Indian companies lag in many aspects. "The Indian players have not been well-represented in government works, for example, in the healthcare exchanges," says Peter Bendor-Samuel, CEO of Everest Group. "That has gone to entities like Xerox, CGI and Accenture." But he adds, "In the payer (insurance companies) works, a meaningful part has gone to players like Cognizant and TCS." Most of the work related to digitisation of records in the hospitals has gone to domestic IT vendors.

The main disappointment for IT companies has been the less than expected number in the insurers setting up shop under ACA. Over 30 million people were to be provided medical cover at low costs under the new health policy. There was optimism among the IT services companies because it meant insurers would have to enrol many new customers. But the insurance companies are also forced to provide coverage to people who have pre-existing conditions, or diseases and ailments for which they could not earlier get medical insurance. Insurers are apprehensive of this proviso affecting their profitability profiles.

WHAT'S THERE FOR INDIAN IT FIRMS?

In healthcare, opportunities in the US are primarily driven by three segments - healthcare exchanges (online marketplace for selling insurance products); insurance companies and hospitals. Besides, Indian companies also consider the healthcare equipment space a promising area of growth. However, Indian IT services company don't cater to all the segments even though almost all of them work with healthcare insurance companies.

Also, outsourced work from healthcare exchanges and hospitals is primarily executed by the American system integrators. The setting up of healthcare exchanges by the respective state and federal governments has ensured most contracts have gone to large American companies such as CGI and Xerox.

In this scenario, the Indian IT services companies have a long way to go before they can hope to become a part of the overall healthcare spending in the US. The opportunity is huge. Indian IT companies are capable of providing services to all the segments opened up by Obamacare. Once the healthcare exchanges register an adequate number of insurance buyers and the business becomes remunerative, IT companies can look forward to a share in a pie that will be worth $43 billion by 2016.