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Leading vendor of cloud-based services for physician practices and inpatient facilities Athenahealth (ATHN - Analyst Report) recently reported it had inked a definitive agreement to take over Healthcare Data Services (HDS). The deal is expected to close in October 2012.

HDS, based in Boston and conceived in 2004, is a provider of offerings on the web with expertise in population health management and analysis of health care information. It provides a composite analysis of health care data.  Consequently, the takeover is likely to enhance Athenahealth’s offerings to include population-oriented quality and cost data and reporting ability. Athenahealth will bolster HDS’ ability to help health care entities manage risk-based payment plans and tailor the requirements of the population with the care provided to them.

Athenahealth is expected to benefit from the take over of HDS in several ways such as progress toward a health data open exchange, synergies and economies of scale, growth in enterprise segment and creation of a winning platform amidst payment reform.  

Risk-based contracts provided by health plans intertwine quality of health care with reimbursement and eventually lead to global cuts in healthcare expenditure. Such contracts are available in several formats such as bundled payment and pay-for-performance.  

Athenahealth’s web-based deployment provides a low-cost scalable service while its flexible rules engine leads to higher efficiency in claims settlement. The Software-as-a-Service (SaaS)-based approach allows for a more flexible delivery mechanism that is expected to help Athenahealth win deals. The company has traditionally enjoyed high customer satisfaction rates, which facilitates a larger number of referrals.

Athenahealth’s unique business model makes it a strong provider of RCM services (athenaCollector) designed for small physician practices. Its EHR product (athenaClinical) is a key player in ambulatory settings.

We believe that sales of athenaClinical are likely to remain robust, given the opportunity for physicians to earn incentive payments under the federal stimulus. In addition, the company will harness its newer products, namely athenaCommunicator and athenaCoordinator.

The company should benefit from its extensive athenaCollector client base, as only a minority of its subscriber base also utilizes athenaClinical. Cross selling represents a real growth opportunity in the near term. In this regard, Athenahealth has made rapid strides in capturing the EHR business of physician practices. However, this segment is shrinking, as hospitals increasingly absorb physician’s medical practices.

Athenahealth is geared to enter the enterprise segment through its strategic alliance with Microsoft (MSFT - Analyst Report) and the acquisition of Proxsys, both completed in 2011. The company has recently signed on, and executed several enterprise-sized deals, which provide it with a credible and referenceable client base.

Though the federal stimulus will gradually wind down, the replacement market has been growing. Competition is fierce and larger competitors may benefit from the incumbency factor. Industry stalwarts such as Cerner (CERN - Analyst Report) offer long-standing seamless products integrating inpatient and ambulatory-care systems. Quality Systems (QSII - Analyst Report) and Allscripts Healthcare Solutions (MDRX - Analyst Report) are two other well-known competitors in a crowded field.

We have a long-term Neutral recommendation on Athenahealth. The stock currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
 

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