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NextGen Healthcare Information Systems, a full subsidiary of Quality Systems (QSII - Analyst Report), recently revealed an agreement with CommUnityCare, a Federally Qualified Health Center (FQHC) system that runs 22 clinics in Texas, under which it will provide revenue cycle management (RCM) offerings.

CommUnityCare provides care to 67,000 people at 22 sites in Travis County of Texas. Its facilities include outpatient care, certain specialty care and dental and mental health services. CommUnityCare accepts Medicare, Medicaid and other eligible persons whose pay level and absence of private coverage qualify them as recipients.

CommUnityCare chose NextGen RCM services to optimize NextGen know-how throughout its operations and reform its cash management system. The new offerings from NextGen will optimally intertwine with pre-existing NextGen processes at CommUnityCare. By consolidating NextGen RCM services with its existing capabilities, CommUnityCare will come up with reporting capability adequate to satisfy federal, state and other requirements.   

Quality Systems runs a pure-play business model in an attractive industry with a large number of catalysts, which provoke frequent speculation about mergers and acquisitions. On the positive side, we observe the high proportion of recurring revenues. Of late, however, growth of its pipeline metric has seen a falling trend along with progressively lower number of signed deals on a quarterly basis.

Furthermore, greenfield opportunities are shrinking. The company is faced with the loss of a critical customer in the replacement market.

The company has made multiple acquisitions to bolster organic growth with acquisitions expected to facilitate its entry in the small hospital segment. We are concerned about execution risk emanating from Quality Systems’ entry into the rural inpatient market.

Moreover, competition is intense from well regarded players such as Athenahealth (ATHN - Analyst Report), Allscripts Healthcare Solutions (MDRX - Analyst Report), Cerner Corporation (CERN - Analyst Report) and others. Price discounting is frequent, particularly on the lower end, and Software as a Service (SaaS)-based model appears to have exacerbated pricing pressure.

Quality Systems has traditionally focused on providing solutions for physician practices. However, core ambulatory EHR providers such as Quality Systems will see opportunities shrinking for product sales as physician groups are increasingly absorbed into hospitals.

Our Underperform recommendation for Quality Systems is supported by a short-term Zacks #5 Rank (Strong Sell).
 

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