Lab IT Update

McKesson, Change Healthcare Decide to Create New Company

McKesson’s units for pathology billing/collections, advanced diagnostics management are involved

ACROSS THE NATION, the hundreds of pathology groups and clinical labs that use McKesson Technology Solutions for their billing and collections, along with labs that use the Advanced Diagnostics Solutions group, should pay attention to a major corporate deal announced June 28.

On June 28, McKesson Corporation of New York and Change Healthcare (formerly Emdeon) of Nashville, announced a deal whereby a new company will be formed by merging nearly all of McKesson’s businesses in its Health Technology Solutions group with Change Healthcare. The company is expected to have annual revenue of $3.4 billion.

Two of the McKesson business units in the MTS group serve pathology groups and clinical laboratories and are believed to be included in this transaction. One is the McKesson Revenue Management Solutions division that provides billing and collection services to hundreds of pathology groups and clinical laboratories nationwide.

The second is McKesson’s Advanced Diagnostics Solutions group, familiar to labs doing molecular and genetic testing as the business unit that manages the McKesson Diagnostics Exchange that provides the database labs use to obtain Z-codes when registering proprietary molecular and genetic tests for coverage decisions by government and private health plans.

Change Healthcare is best-known as one of the nation’s biggest transaction clearinghouses that connects payers, providers and patients. It also offers revenue and payment cycle management and clinical information exchange solutions.

Many labs know that Change Healthcare has a laboratory interface built into more than 40 EHR systems to support electronic lab test ordering/reporting. This is one more way that the proposed transaction could trigger changes that affect labs that use Change’s EHR interface to connect with their client physicians.

New Owners and Managers

Clinical lab and pathology group customers of the two McKesson service and product lines that are involved in this deal will want to stay informed about how the changes in ownership affect the man- agement of these business divisions. McKesson, Change Healthcare, and the Blackstone Group (a private equity group that holds a majority interest in Change) plan a two-step process for this transaction.

In step one, a new company will be created that is comprised of McKesson’s HTS group and Change Healthcare. Once that is accomplished during the first half of 2017, McKesson will own 70% and Change will own the remaining 30%.

Step two comes after the merger and integration of the different businesses is completed. The owners of the new co pany, subject to market conditions, intend to go public by conducting an initial public offering (IPO). Once the IPO is done, McKesson has stated that it “expects to exit its investment in the new company in a tax-efficient manner.”

A name for the new business was not announced. The deal is expected to close in the first half of 2017 and is subject to antitrust clearance and an audit of financial statements from the MTS businesses.

Big dollars are involved in this transaction. The new company has commitments of $6.1 billion in funded debt. The new company will use those funds to retire approximately $2.7 billion of Change Healthcare debt; pay $1.25 billion to McKesson in cash; and pay $1.75 billion to Change Healthcare’s stockholders, also in cash. The remaining $400 million will cover expenses related to the transaction, the companies said.

New Health IT Company

At a press conference discussing the transaction, McKesson executives identified these businesses within McKesson Technology Solutions as moving to the new company:

  • McKesson Health Solutions
  • Connected Care and Analytics (excluding RelayHealth Pharmacy Imaging and Workflow Solutions)
  • Business Performance Services (BPS)

Although the RelayHealth Pharmacy and the Enterprise Information Solutions (EIS) division of MTS will stay with McKesson, in a separate press release also issued on June 28, the company said it is “exploring strategic alternatives for its Enterprise Information Solutions (EIS) business, a division of McKesson that provides core hospital information systems.”

This division includes McKesson Lab, the laboratory information system (LIS) that is used by several hundred hospitals and labs throughout the United States. Thus, McKesson is signaling its interest to divest those service lines if it can find the right buyers or venture partners.

What do these developments mean for clinical laboratories and pathology groups—whether they are a McKesson customer or not?

How Lab Market May Change

First, it shows that consolidation is ongoing in healthcare. In the proposed transaction, Change Healthcare is becoming significantly bigger as it takes on the business units from McKesson.

Second, pathology groups and clinical labs that use McKesson Revenue Management Solutions for billing and collections may see some interesting synergies once Change Healthcare has full operating control of that business. Among other things, Change Healthcare’s clearinghouse service may help labs collect more claims faster. Also, its EHR interface service may make it easier for client labs to bring on new physician clients and support electronic test ordering and reporting.

Three, McKesson disclosed its interest in “exploring strategic options” for the Enterprise Information Solutions business and this may have two consequences for McKesson Lab, its LIS product. On one hand, it will probably become more difficult for the McKesson sales team to win new LIS clients in coming months. On the other hand, LIS competitors will emphasize to McKesson Lab customers that, given the uncertainty about the future of that business division and the LIS product, their clinical laboratory would be best served by switching to another LIS.

Closely Monitor Events

For these reasons, lab executives and pathologists using the McKesson services involved in this transaction will want to monitor developments. This is particularly true because it may involve the McKesson team that handles their labs’ billing and collections.

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