Consumer Directed Healthcare

The current push from business and government to shift healthcare responsibility and costs to individual consumers, often called Consumer Directed Healthcare, is laying the groundwork for the creation of a wide array of new kinds of businesses, services and products, with many health care providers turning to mergers and acquisitions as the fastest way to meet the new demand.

The biggest and most wide ranging CDHC program is the Health Savings Account, which allows consumers to put aside tax-free dollars in portable accounts that consumers can then use to pay for medical care. HSAs belongs to the worker, can travel from job to job, and be passed on to heirs. Anyone can open an account either with a bank or through several major health insurance companies.

Both employees and employers can make tax-free contributions to these accounts. However, individuals are still at a huge disadvantage in purchasing health care because they don’t get to deduct their insurance premiums from their federal income tax as do employers.

These savings accounts offer employees a potential way to save money and have better control over their health care spending, yet they also provide a safety net with employers still paying for traditional preventive measures such as annual physicals and immunizations.

With HSAs and other CDHC programs predicted to grow at an annual rate of 102 percent over the next six years,providers of healthcare services are often caught in a time crunch and are turning to mergers and acquisitions of new product providers instead of taking the time to create them in-house. For example, Aetna, which was the first of the large health insurers to institute consumer-directed HSAs and Health Reimbursement Arrangements, has gone through several product evolutions in the past three years through a series of aggressive CDHC acquisitions. In 2005, they acquired ActiveHealth Management, Inc., a technology-driven health management and data analytics company for a reported value of $400 million in cash.

The increased demand for consumer focused healthcare content was the catalyst that prompted eDiets, the premier online diet, fitness and healthy lifestyle website, to purchase is a south-Florida based private company providing web-based nutrition, fitness and disease management content. PCE advised in the sale.

New financial products are also in demand. Unitedhealth Group Inc., a Minnetonka, Minnesota-based provider of Medicare Supplement and Medicare Advantage health benefits, has made three major acquisitions over the past two years, purchasing Definity(CQ) Health Corporation, which operates a Health Savings Account system, for $300 million in 2004; Medical Network, Inc., of Monmouth Junction, New Jersey, which provides web-based solutions and consulting services for healthcare providers (no financial details available) in May 2006; and the Brookfield, Wisconsin firm of ProcessWorks, Inc., which administers healthcare reimbursement accounts (HRA), and medical reimbursement plans (no financial data available.)

While traditional companies in the healthcare industry are making changes to compete, others outside the industry are seeing the need and jumping in to create new competition. Revolution Health Group, a Washington DC-based company founded by Steve Case who used to run America Online, had done several deals lately to form a comprehensive, consumer-driven health company. In 2005 they acquired myDNA Media Inc., a web-based medical scheduling company, and also purchased a minority stake in InterFit Health, which operates 11 non emergency medical services company called RediClinic and is planning to expand that number to 500 by 2009.

In this new environment, we will likely see new companies emerging and old ones asking how to change their services. A key question is will they be able to change quickly enough to stay up with the trend or will they end up on the sidelines.

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David Jasmund

Investment Banking
Orlando Office

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