For those following the healthcare IT market, you will more than likely already be aware of what has happened between Cognizant and Health Net. For those who are not, I shall quickly set the scene.
In August 2014, Cognizant won a seven year, $2.7b engagement with California-based care management provider Health Net. Service was due to commence in the second half of 2015 but in July, it was announced that Centene Corporation was intending to acquire Health Net, which would delay the contract until after the merger had been completed and may not even go ahead at all due to the overlap with Centene's current IT services vendor landscape. Cognizant instead was able to extend its existing applications outsourcing (AO) and business process outsourcing (BPO) services for Health Net out till 2020 at a value of $520m as well as being able to licence some of Health Net's IP.
So what can we learn from this?
All IT service providers must be on red alert: The chart at the top of this page was produced by Everest (link to the article at the bottom) and shows how deeply entrenched IT vendors are within Healthcare Payer organizations. This chart acts as a warning to all vendors that they should be wary of their current client base and how it could potentially be affected by a merger/acquisition.
The Healthcare Payer ecosystem is shrinking: Centene's intent to acquire Health Net is just one of a series of acquisition announcements in the Healthcare Payer market this year. This was followed by Aetna's $37b purchase of Humana as well as Anthem's $54b purchase of Cigna. Suddenly, we're faced with a market where the top 7 have consolidated into a top 4 in a matter of weeks. There's even speculation that UnitedHealth Group may put in a counter offer for Health Net, which, if higher, would dissolve Centene's offer. These deals have been driven by market changes such as the Accountable Care Act (ACA) and the Supreme Court’s recent decision to subsidize poorer Americans. Keep an eye on UnitedHealth Group to see what its next move will be.
Consolidation equals both opportunities and threats for IT service providers: Although Cognizant's deal may have gone sour after the announcement, it looks as though they will survive after renegotiating the existing AO & BPO contract. As other Payers consolidate, existing deals may come under threat and clients may look to consolidate their vendor landscapes but new opportunities will arise as the newly merged organizations require IT support to ensure the transition goes smoothly and that IT systems are integrated properly.
Thank you once again for taking the time to stop by, I hope you found this interesting and thought provoking. If you have any comments, feel free to leave them below and share via social media.
Best Regards,
Jonathan Cordwell
Research Analyst, Healthcare Strategy
ResearchNetwork, CSC
- Everest, Health Net – Centene Merger Leaves a (Slightly) Bitter Pill for Cognizant, 6th July 2015, http://www.everestgrp.com/2015-07-health-net-centene-merger-leaves-a-slightly-bitter-pill-for-cognizant-sherpas-in-blue-shirts-18205.html
In late 2014, Cognizant (a leading provider of IT, business consulting, enterprise applications and business process services) acquired TriZetto (a healthcare IT solutions vendor to the payer and provider market) for $2.7bn. This was a major acquisition and will undoubtedly reap a number of positive effects for Cognizant going forward although there are still some concerns. In this blog post, I'm going to lay out the pros and cons that I have seen throughout my research to hopefully get a rounded picture of what the future may hold for Cognizant.
Pros
- This acquisition adds a comprehensive range of innovative and complex software solutions (especially core payer software) and consulting capabilities to Cognizant’s portfolio, enabling it to offer end-to-end solutions in the US healthcare market – one of its key verticals.
- TriZetto reaches almost half of the insured American population through its 245,000 healthcare provider clients as it dominates the core claims marketplace. Cognizant's long standing reputation in services will serve to compliment this position as they look to take advantage of the synergies between the two. This will also create the opportunity to enhance EHRs from claims and EHR data. Finally, Cognizant may seek to expand joint capabilities in care management, population health and PBM-related services.
- This acquisition will put pressure on other India-led outsourcers as Cognizant pushes away from Infosys and Wipro and further towards TCS. Cognizant will also look to move away from the stigma of a low-cost India-led player and start positioning itself as more of a direct threat to global MNCs. It will also be harder for smaller software and IT services providers to compete with the combined size of Cognizant and TriZetto.
- Cognizant will look to cross-sell and up-sell to clients covered by both parties (estimated to be over 30.) This will enable Cognizant to forge deeper relationships, capture greater wallet share and potentially upgrade some clients to strategic clients.
Cons
- The acquisition has brought about a law suit by fellow solutions provider Syntel. Syntel claims that the acquisition terminated a contract it had with TriZetto as well as mishandled information. Syntel is asking for $3.4m in rebates as well as $6.1bn in punitive damages. If this goes through then it will be a very significant blow at a time when Cognizant is onboarding TriZetto, making the transition even more difficult [1].
- Cognizant will need to reduce its partnership network to avoid overlap with the additional capabilities TriZetto brings to the table. For example, both Pegasystems and TriZetto have claims management solutions and so this may lead to Pegasystems being ousted to avoid a clash of interests. Whether this will be a positive or negative in the long run is up for debate but it should be interesting to see how it pans out.
- Some analysts believe that Cognizant may have overpaid for the acquisition as the $2.7bn price tag comes in at almost four times TriZetto's revenues last year. Although Cognizant is confident that this is a positive move going forward, TriZetto hasn't matched Cognizant's growth pace as of late and so it is bargaining on combined market presence rather the sum of two products [2].
- There may be integration problems both geographically and from a business perspective. With Cognizant being very consulting/systems integration/services heavy and TriZetto focusing on software, they may have a few differences in opinion of how to approach the market although it seems as though Cognizant will keep TriZetto as a single entity rather than attempting to merge it into their business. Geographically, Cognizant is primarily based in India whereas only a third of TriZetto's staff are based over there [2]. Although this will give Cognizant a positive local presence, there may be some teething issues.
In my personal opinion, a lot of the concerns are focused on the "now" and how TriZetto will be integrated into Cognizant's organization and strategic plan. Although this may cause some initial problems, if they can work these out then there is an abundance of opportunity to both differentiate itself from competition, improve its current and future client base and expand its software and services portfolio. Whether this will slow down Cognizant's acquisition and geographical expansion strategy is yet to be seen but the future looks bright in my view.
That's all for now folks, as always I'm interested to know your thoughts on this topic so feel free to comment below and finally, if you like my content please subscribe, follow me on Twitter and share on social media.
Best Regards,
Jonathan Cordwell
Research Analyst, Healthcare Strategy
ResearchNetwork, CSC
- CRN, Syntel Sues Cognizant For More Than $6 Billion After TriZetto Acquisition, 13 Jan 2015, http://www.crn.com/news/managed-services/300075362/syntel-sues-cognizant-for-more-than-6-billion-after-trizetto-acquisition.htm
- Financial Times, Cognizant rejects claim it overpaid for TriZetto, 15 Sep 2014, http://www.ft.com/cms/s/0/56a0d63c-3cec-11e4-a2ab-00144feabdc0.html#axzz3QxY763G9
