|Shares Out. (in M):||34||P/E||58.0x||36.0x|
|Market Cap (in $M):||986||P/FCF||0.0x||0.0x|
|Net Debt (in $M):||-78||EBIT||0||0|
Athenahealth (ticker: ATHN), ever since its 2007 IPO, has been hyped as a SaaS company with a federal stimulus story on top. The company earns substantially all of its revenue from its revenue cycle management (RCM) software, yet the street values them as if they will garner significant market share in the electronic health records (EHR) space as the government begins to pay out "meaningful use" bonuses. We think the street is egregiously overestimating the part that ATHN will play in the EHR narrative. ATHN has managed to grow their physician client base nicely over the past 3 years (although that growth has slowed), nonetheless, we believe they are targeting the wrong market as it will be hospitals that drive the adoption of EHR going forward. Once investors realize that, as far as athenahealth is concerned, the EHR story is just a bunch of hot air, its earnings multiple will be cut in half and consensus estimates will come down, resulting in a per share price in the $15-$20 range.
ATHN provides internet-based services for physician practices. The company's principal offering is athenaCollector, a revenue cycle management (RCM) system that automates and manages billing-related functions for physician practices. ATHN's other offerings are athenaClinicals, a service that automates and manages medical record-related functions for physicians practices and includes an electronic health record (EHR) platform; and athenaCommunicator, a patient cycle management (PCM) service suite that includes an automated messaging and reminder system, live operator services and a patient web portal.
ATHN makes most of its money via its athenaCollector product which brings in around 95-97% of the company's revenue. Again, athenaCollector is a revenue cycle management product which is a fancy way of saying it is a "help-doctors-get-paid-by-insurance-companies" product. ATHN charges doctors a small fee for system implementation and training, typically around $4,000 for a small practice (Implementation Revenues) and then they charge 4-5% of collections for athenaCollector (and an incremental 2-3% for athenaClinicals and another ~1.5% for athenaCommunicator if these products are purchased as well) once the system is up and running (Business Services Revenues). Make no mistake, athenaCollector is an effective RCM product that is attractive to small practices as there is a very small up front capital commitment. In addition, the method by which ATHN provides this RCM system via the internet using its athenaNet "rules engine" appears to be a very efficient way to provide such a product. ATHN is using the success it has had with athenaCollector to leverage its way into the Electronic Health Records (EHR) business by up-selling its athenaClinicals and athenaCommunicator products to those doctors either currently using, or interested in purchasing, athenaCollector. This is where we think the ATHN story weakens.
On July 13 of this year the Center for Medicare and Medicaid Services (CMS) issued its rules for "meaningful use" (MU) of electronic health records (EHR). Doctors and hospitals will be required to meet 20 and 19 practical objectives, respectively, in order to qualify for bonus funds allocated to them in the Health Information Technology for Economic and Clinical Health (HITECH) Act, a portion of the 2009 American Reinvestment and Recovery Act (ARRA) federal stimulus bill. This program is completely separate from the health reform bill (H.R. 3590 - Patient Protection and Affordable Care Act) signed in late March 2010; the billions of dollars in funding for EHR bonus payments has already been allocated. Over the next 5 years, physicians can earn up to $44,000 and $63,750 in Medicare and Medicaid incentive payments, respectively, should they prove meaningful use of EHR as early as 2011. Beginning in 2015, eligible professionals that do not comply with the meaningful use requirements will see their Medicare payments docked by up to 1%, and up to 2% in 2016. This legislation has effectively created a gold rush in the world of healthcare IT which is one of the reasons why ATHN trades at such an obscene PE of nearly 60x 2010 estimated EPS. What remains to be seen, however, is precisely how this legislation will be put to use in the private world. Currently there are dozens of companies offering EHR systems, most of them private, and each one of them fighting for that federal stimulus dollar. The key to the legislation being considered a success will be uniformity; a single patient record that can be accessed and maintained by doctors, dentists, hospitals, and long-term care facilities alike. Case in point, the recent merger of Allscripts (ticker: MDRX) and Eclipsys. Allscripts and Eclipsys, leaders in EHR offerings to the ambulatory and inpatient segments, respectively, took a look at the trends in medical care developing today and decided they would be best positioned to profit from the implementation of a national health information exchange by joining forces. On the merger conference call Glen Tullman, Allscripts' CEO, cited an important trend in medicine today: "It is about the shift that we see and more and more physicians becoming employed by hospitals. And those hospitals using the Stark safe harbor exemption are actually starting to organize the market and drive adoption, and that is really the reason for this [merger]." In October 2006, congress enacted the Stark Safe Harbor legislation that allows hospitals to donate EHR related hardware, software, internet connectivity, implementation and training, and support services to physicians. The hospital benefits from this arrangement as there will be greater name recognition among physicians with admitting privileges, greater recognition of the hospital in the community, and the potential to have better integration of data between doctors' offices and the hospital. As detailed in a September 2009 article in the New York Times, big hospitals are subsidizing their affiliated physicians' cost of EHR adoption in order to "share data among doctors' offices, labs and hospitals to coordinate patient care, reduce unnecessary tests and cut down on medical mistakes." For example, the North Shore-LIJ health System in New York has a program underway that offers its 7,000 affiliated doctors subsidies of up to $40,000 over 5 years to adopt EHR in addition to the HITECH bonus money. The North Shore program happens to use Allscripts. According to the article, many hospitals are even offering assistance to unaffiliated doctors in hopes that physicians with privileges at multiple hospitals will develop an allegiance to the one that helps them into the digital age.
Problems with the Athena Story
The bottom line here is that for a ~60PE stock (~40x 2011) there better not be any chinks in the armor. The problem with ATHN is that there are quite a few and as such, we think that the stock is priced for a perfection that may not materialize.
Risks to our Short Thesis
|Subject||Shift from privately owned practices to hospitals|
|Entry||08/30/2010 01:16 PM|
Very interesting write-up. I'm interested in your view that physicians are selling their practices and going to work for hospital. The recent letter from some health policy staffers at the White House seems to strengthen your case.
However, I'm not convinced that doctors are moving quite as quickly as you suggest into the hospital setting. Do you have a link for the information from the Medical Group Management Association? I was not able to confirm that information anywhere on the web. Specifically, the idea that the percentage of practices owned by physicians has declined from 68% to 48% during the 2005-2008 period.
It possibly conflicts with information I've found elsewhere. Two data points: the Center for Studying Health System Changes conducted physician surveys in 1999, 2001 and 2005. They showed the percentage of physician-owned practices went from 57% to 56% to 54% in those three surveys.
Their 2008 survey, done with a different methodology, so the results are not strictly comparable, shows that 62% of physicians in 2008 were in solo or group practice smaller than 50 physicians.
This latter statistic does not speak to who owns the practices, just the practice setting. It seems possible that doctors were selling their practices while remaining in their existing practice setting. Still, the shift from 68% to 48% over just 3 years seems too good to be true for the bear case against ATHN. Any information you can provide on where your Medical Management Association data is coming from and how reliable it is would be welcome.
|Subject||RE: Shift from privately owned practices to hosp|
|Entry||08/30/2010 03:47 PM|
|Subject||Impact of shift in practice ownership|
|Entry||09/07/2010 12:10 PM|
Thanks for the URL sourcing the claim that practice ownership went from 68% to 48% from 2005 to 2008. For what it is worth, athena's IR team says the Medical Management Association survey that data is based on is biased toward large practices, which may have higher physician ownership levels. The Center for the Study of Health System Change conducted a survey in 2008 which indicated that 19% of physician practice respondents were partially or wholly owned by hospitals. They haven't published this data - I just have it in an email from them.
More problematically, I question the extent to which share shift from physician ownership to hospital ownership constitutes a problem for ATHN. To wit, whatever shift in practice ownership did in fact happen from 2005 to 2008 coincided with ATHN going from 6,131 physicians using their collector product (March 30, 2006) to 12,589 using the product at the end of 2008. Stipulate a one-year lag between the time a practice sells to a hospital and the time such sale has an impact on ATHN's doc adds, then you would look at the yearend 2006 to yearend 2009 period for ATHN - their doc count went from 7,393 to 15,719. In other words the growth rate slowed down but their average yearly doc add went up, not down.
As regards the ehr product, their penetration of the collector physician base with ehr went from 4% to 9% over the last 6 quarters. Again, to the extent there is a shift to hospital ownership, it is hard to infer that the shift is actually having much of an impact on their effort to sell the clinicals product.
I'd welcome any evidence tying the shift in practice ownership to reductions in sales of the ehr product.