Frost & Sullivan reports that the U.S. high-acuity care information systems market will grow at a healthy compound annual growth rate of 12.5 percent through the year 2012. According to Irving Levin Associated, Inc., publisher of The Dealmakers Forum, there were 991 health care merger-and-acquisition (M&A) deals in 2006 with 471 of those in the health care technology segment. In 2007, there were 1,051 deals announced, a 4 percent increase over 2006 and the highest volume since 2003.

From the perspective of my firm, Virtual CDO, the number of deals will continue to rise as the industry continues to consolidate. However, barring any unexpected market hiccups, the total dollar amount per transaction may decline. We believe that there are too many mega-HIS players and too many niche applications, so the HIT industry is ripe for consolidation. In 2007, we saw a fair amount of consolidation among pharmaceutical, hospital and managed care companies.

Hot segments
We expect the following HIT market segments to be active during the remainder of 2008:

 Wellness/disease management
 BioMed - DNA profiling
 Consumerism
 Surge planning/emergency preparedness
 Local integration/RHIO
 Financial dashboards
 PFP management systems
 Data mining and management
 Staff optimization
 TeleHealth and remote monitoring
 Performance management tools

We also expect the following service areas to be active throughout 2008:

 Ambulatory/outpatient services such as diagnostic labs, respiratory (sleep and DME), rehabilitation, hospice and home health
 Retail clinics and services
 Outsourcing and staffing services
 HSA financial management
 Retail disease management
 Case management
 LTAC/SNF/assisted living

Activity will be driven by the following technology areas:

 Best-of-breed vs. one-size-fits-all
 Integration vs. interfacing
 Language management
 Access management
 Real-time data and decision support

We'll be watching the following buyer categories:

 Financial buyers -- private equity groups and REITs
 Strategic buyers
 International buyers (due to the falling value of the dollar)
 U.S. buyers (due to the rising value of the dollar relative to foreign currency)

And we've noted the following areas of investment concern:

 Credit market hangover
 Presidential election year uncertainties
 Falling value of the U.S. dollar
 Capital gains rate (will it remain at the historically low 15 percent?)

Segment liquidity
Software, biotech, medical devices, health and IT services continue to top the investment lists as detailed in the recent PwC/MoneyTree survey. Most investors require a planned liquidity event before making an investment. Since many of the companies supporting the health care segment are privately held, we expect continued M&A deal flow within the segment. As a medium-term strategy, many of today's investments could liquidate over the next 8-12 quarters.

Healthcare and technology spending
According to Forrester research, in previous years the gross national product (GNP) growth fell between the range of 2 to 3.5 percent. More recently, GNP growth fell to 0.6 percent. That said, Forrester has cut IT spending forecasts for 2008, from 8 percent to five percent. National health expenditures, as a percentage of GDP, are expected to rise to 19.6 percent by 2016. According to HFMA's Healthcare Finance Outlook, the two most significant factors over the next 3 to 5 years are the increasing costs of capital and the threatened tax-exempt status of most not-for-profit US hospitals.

Politics
The upcoming presidential elections are causing some uncertainty within the M&A community as well as most industry sub-segments that are heavily regulated or reliant on continued funding by the Department of Health and Human Services and/or the Centers for Medicare and Medicaid Services.

Workforce optimization
Clinical workforce shortages will continue to stimulate the need for efficient processes, workforce automation and marriages with local universities to increase clinical rotations. According to a recent study, U.S. nursing schools turned away over 40,000 qualified applicants from baccalaureate and graduate nursing programs in 2006 due to an insufficient number of faculty, clinical sites, classroom space, clinical preceptors and budget constraints. According to Healthcare Financial Management magazine, there is an increased connection between nursing and finance. Although smaller than the currently expanding nursing shortage, there is a shortage of qualified pharmacists due to the growing demand created by the boom in retail outlets. According to the Convenient Care Association, the number of retail clinics will grow from 500 in 2007 to nearly 700 in the first quarter of 2008. The U.S. health care consumer seems to favor the extended hours and no-appointment-necessary approach to low-acuity care. Similarly, insurance companies support the use of retail clinics given the lower reimbursements as compared to similar care provided in higher acuity settings.

According to the U.S. Bureau of Labor Statistics, the number of new jobs created in nursing totals 703,000 during a recent 10-year period. The U.S. temporary health care staffing industry is projected to reach 12 billion in revenue this year. Some of the drivers are the aging population of nursing professionals, legislation surrounding nurse staffing levels, hospitals' willingness to outsource and nursing's desire for job flexibility. During times of shortages, workforce optimization tools will become key to better utilizing the existing workforce.

DNA to the rescue
The industry clinical targets haven't changed dramatically since 2007. Aging populations and chronic diseases such as obesity, diabetes, COPD and others top the lists of having the most potential impact on the health (and therefore costs) of our nation. The HIT industry must make the mental shift from reactive, symptom-based care, to predictive and genetic-based proactive care. A growing knowledgebase of biomarkers influence a disease long before we need to react to an N-Stage condition. Some companies are exploring DNA-driven predictive modeling for preventative care.

Stimuating improvement
Pay-for-performance (PFP remains a hotly contested sector. The notion of paying bonuses to physicians for certain activities seems counter to the larger movement of consumer-centered health care. PFP has worked well in most industries. One could argue that a clinician should only get paid for doing the correct procedure and the topic of bonuses should only be triggered on exceptional clinical outcomes. The focus should be on decreasing avoidable procedures, complications, re-admissions, total ownership of patient outcomes and shifting from clinical best practices to better or even world-class practices. If a clinician provides the wrong care, then the industry should shift away from bonus reductions to penalties, full/partial license revocation and/or credentials management. Many providers are deploying scorecards that balance clinical efficiencies, outcomes, patient/family satisfaction and revenue, as a bridge from the new PFP approach and the time-tested sales compensation models of motivation.

PFP and the need for transparency seem to be coupled. PFP programs are expected to grow from 140 in 2007 to over 160 in 2008. Recent analysis done by Premier Inc. and CMS, demonstrate that using financial incentives to reward better quality of patient care avoids complications for the patients. However, PricewaterhouseCoopers (PwC) recently scored U.S.-based PFP programs with an "incomplete" rating. To succeed, PwC suggested that the industry must first agree on a universal set of quality measures. Without such measures, we will never align the priorities of all the health stakeholders.

As CMC continues to trickle out PFP incentives for small/medium-sized primary-care practices to adopt EHRs, this same population of businesses are being sold at a feverish rate. In fact, over the last year, Levin Associates details a 28 percent jump in physician medical group M&A transactions. According to a recent HealthLeaders Fact File, some health care practitioners have questioned whether bonuses and pay incentives are appropriate in medicine, where patient care and adherence to the Hippocratic oath should trump financial concerns.

Finally, a growing body of research and publications support the quality-based payment approach as a savvy next step for PFP. Value-driven health care uses standard quality measures and available transparent pricing, which provides consumers with the ability to make informed health decisions. In order to support PFP initiatives, CIOs across America are being asked to implement systems that satisfy requirements of coupling clinical outcomes to actual reimbursements. A recent survey suggests that CIOs' priorities are now focused on reimbursement, performance metrics and security. It wasn't that long ago that security was No. 1 on the list.