Broadlane, MedAssets and the Future of Healthcare Spend

Earlier this morning MedAssets announced it was acquiring fellow healthcare GPO Broadlane. According to the announcement, MedAssets "has entered into a definitive purchase agreement to acquire The Broadlane Group ... Broadlane Group is a leading provider of supply chain management, strategic sourcing of supplies and services, capital equipment lifecycle management, medical device or PPI cost management, centralized procurement, clinical and lean process consulting, and clinical workforce optimization." The announcement suggests that together, "MedAssets and The Broadlane Group would have reported non-GAAP combined net revenue of $508.9 million and non-GAAP combined adjusted EBITDA of $161.8 million for the year ended December 31, 2009."

MedAssets, like other GPOs, targets what it suggests in its own investor presentation is an $800 billion hospital market that is comprised of 5,700 acute care hospitals (nearly half of which are part of a healthcare system). This segment "represents the single largest component -- nearly one-third -- of the $2.5 trillion healthcare market" and is expected to "grow at a 6.5% CAGR through 2018 to $1.4 trillion." Our cursory analysis of the combined entities suggests that MedAssets will continue to face significant competition from the two largest GPOs, Novation and Premier, as well as the healthcare advisory ecosystem, including Accenture, Deloitte, etc. Still, Broadlane does bring a somewhat differentiated legacy in the group purchasing field.

Indeed, to label Broadlane just a GPO is to diminish at least some of its software and solution assets, especially in the e-sourcing and contract management areas. For years, Broadlane invested material sums before e-sourcing and contract management software really caught hold among GPOs and integrated delivery networks (IDNs) in technology -- built off of SAP's Frictionless platform. This focus included enterprise sourcing capabilities, including project management, RFX, auctions and decision optimization. It also included contract management, which accounted for all of the complexities of the different contract thresholds and agreements amongst GPO members (no small feat, and why the SAP platform, with its significantly configurability, was originally chosen at the time).

Yet nearly five years after these original capabilities were announced, as other GPOs began to focus on strategic sourcing services and related capabilities as auxiliary offerings, Broadlane's capabilities in these areas are beginning to look less differentiated. Moreover, Broadlane has done little to fix, let alone even address, the conflicts of interest inherent in healthcare GPO purchasing environments (i.e., representing the buyer, but getting paid by suppliers on a volume basis with little or no financial incentive to reduce purchase costs as a core revenue model).

Still, perhaps the ultimate GPO business model will prove self-correcting as MedAssets and its primary GPO competitors, Novation and Premier, continue to target additional revenue streams resulting from the healthcare funding windfall provided by recent legislation mandating universal coverage. But whether or not any GPOs actually reduce the ultimate cost of patient care and patient outcomes in the process -- especially relative to the cost of care in other first-world nations -- remains to be seen.

Having looked closely at this sector from a procurement angle, I'm personally not convinced that when it comes to Spend Management, the healthcare GPO universe, including MedAssets and Broadlane, is capable of the type of reform needed to reduce the cost of patient care to the levels necessary to avoid out of control spiraling health costs. Perhaps radical new offerings that advocate only on behalf of IDNs and taxpayers -- without relying on a percentage supplier revenue while also maintaining an information asymmetry advantage over their healthcare buying organizations -- is what is needed most.

Jason Busch

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