Outsourcing opportunity may be $24 billion over next 4-5 years and interest from firms here rising, despite some challenges
Healthcare regulatory reform in America might prove another Y2K opportunity for the Indian information technology industry, the latter believes.
Tata Consultancy Services (TCS), Infosys, Wipro and HCL Technologies are among those looking at healthcare with a new focus. Their largest revenue contributor till now, banking and financial services, is under pressure.
Analysts estimate the US’ healthcare market at $2.5 trillion and projected to grow to $4.6 trillion by 2020. The outsourcing opportunity is expected to be around $24 billion, including both payer and providers, over the next four to five years. Analysts predict the next two years will see Indian IT firms target the segment for mergers and acquisition.
In the immediate time-frame, the opportunity lies in the change of coding systems the US healthcare segment needs to undergo. According to a mandate passed by the US Centre for Medicare and Medicaid Services, the coding system for billing medical procedures has to move from the World Health Organisation’s ICD-9 to ICD-10 diagnostic classification by October 1, 2013. This alone is an opportunity upwards of $1 billion, say industry sources.
According to a Deloitte report, ICD-10 implementation has the potential to overtake Y2K (the Year 2000 problem, also known as the Millenium Bug, when computer programmes had to be redone to get over a coding problem) in terms of impact and cost. “It will require a massive wave of system reviews, new medical coding or extensive updates to existing software, and changes to many system interfaces. Because of the complex structure of ICD-10 codes, implementing and testing the changes in electronic medical records, billing systems, reporting packages, decision and analytical systems will require more effort than simply testing data fields. It will involve installing new code sets, training coders, re-mapping interfaces and recreating reports/extracts used by all constituents who access diagnosis codes,” said the report.
While many have presence in the healthcare segment, its revenue contribution is still in single digits. The only company that has been ahead in this is Nasdaq-listed Cognizant. One reason for Cognizant's fast pace of growth is its focus on the healthcare segment; it contributes 27 per cent to the firm’s revenue and grew 38 per cent for 2011, more than the company’s growth rate.
Meanwhile, behemoths like TCS, Infosys and Wipro still have their revenue in the single digit range. For the quarter ended December 31, 2011, healthcare contributed 5.3 per cent to TCS revenue (it also includes life science), Infosys’ share was 1.8 per cent and Wipro’s (including healthcare with life science and services) was 10 per cent. HCL’s healthcare division contributed 8.6 per cent to revenue. But all this might change over the next one to two years.
“In the last three quarters, we have seen interest in the US healthcare market by Indian companies steadily increase. Most large Indian outsourcers are now seriously evaluating targets across both the healthcare payer and provider segments. Large Indian outsourcers are looking for acquisition targets with revenue greater than $50-100 million. Specifically, Indian companies have asked us to look for US companies with strong healthcare domain expertise and marquee clients,” said Nirish Mathia, managing director, Technology Holdings.
According to a Technology Holdings survey, US healthcare had seen around 100 deals in the past 25 months, an average of four deals per month, aggregating $20 billion.
The US healthcare payer business process outsourcing (BPO) market was $1.2 bn in 2011, and will continue to grow at a 15-20 per cent compounded annual rate (CAGR) over the next three years.
A Technology Holdings survey says the payer outsourced services market will grow nine per cent CAGR to reach nearly $15 bn by 2016. “But there are challenges. You cannot offshore what a hospital does. Onshore presence is crucial. Two, Indian companies are keen to acquire, but valuations are steep,” said Milan Sheth, partner and technology sector leader, Ernst & Young.
Fragmented market
The US healthcare segment is divided into two parts. The payer segment focuses on services like insurance and the provider segment involves players like physicians, hospitals, hospital chains, etc. It is estimated the payer segment already uses the outsourcing model. Industry sources said in some cases the promoters had asked for 20 times their earnings before interest and tax.
Sheth also says the US healthcare market is fragmented. “The top three players cater to only 20 per cent of the market,” he added.
HCL Tech has, in recent times, signed a couple of deals in this segment. It says some are related to the ICD-10 conversion. “Each of these deals will start from $250,000 to $10 million,” adds Nair. For HCL, the healthcare vertical grew 55 per cent last year. Recently the company announced a deal with Blue Shield of California for transitioning to ICD-10.
