Change Healthcare’s revenue is generated by payers and providers with a split of roughly 40% and 60%, respectively

Business Strategy & Outlook

Change Healthcare offers variations of over a dozen financial and administrative services to support healthcare payers and providers improve administrative efficiency related to submitting and reimbursing medical and dental claims. The company’s revenue is generated by payers and providers with a split of roughly 40% and 60%, respectively. These processing services are focused on administrative accuracy with relatively low fee rates. As a result, there are no material customer concentration issues and no one customer represents more than 4% of revenue. As these various outsourced services address niche needs, there are no direct comparable peers. These services generally fit into three segments; Network Solutions, Software Analytics, and Technology-enabled Services.

Most of the company’s services were likely born from its Network Solutions segment as it is a medical and dental claim clearinghouse that services both payers and providers. This highly commoditized service drives scale and reach within healthcare claims processing and enables the company to identify incremental tools and evolving needs across its broad customer base. The company’s clinical and healthcare network manages roughly one third of U.S. healthcare claims from 2,200 government and commercial payers, 900,000 physicians, 118,000 dentists, 33,000 pharmacies, 5,500 hospitals, and 600 laboratories. Having connectivity to all these payers and providers will be critical in creating value with incremental software tools bundled from the other two segments. There is some crossover of the provider and payer services within the two segments, Software & Analytics and Technology-Enabled Services. The Software & Analytics segment supports plans covering 100 million lives, provides payment accuracy solutions to 19 of the top 20 U.S. payers, 4,600 hospitals, and nine of the top 10 Medicare advantage plans. The Technology-Enabled Services segment is focused on providing outsourced revenue cycle support and covers $34 billion in annual charges and $9.2 billion in annual collections across 207 million annual cases/procedures.

Financial Strengths

As a spinoff from a larger entity, Change Healthcare was burdened with a significant debt balance of $5.8 billion, or 6 times fiscal 2020 adjusted EBITDA. The company was largely leveraged to fund the integration and investment in its more targeted strategy. The company has a strong revenue base of $3 billion and gross margins and operating margins in excess of 60% and 15%, respectively. Even with the necessary strategic investments, the company would try to pay down some of its debt with free cash flow, which is forecast to be in excess of $250 million annually. The subscription nature of the company’s business will provide stability in revenue and cash flows to expand its leading position in the niche medical claims market. The management may make small tuck-in acquisitions through available cash and cash flows. Even in this scenario, there’ll be an increasing liquidity, as the firm’s reserve of cash should continue to increase.

Bulls Say

Its medical claims data and IT focus should enable the company to become a meaningful contributor with the increased focused toward value-added reimbursement and interoperability policies.
The company’s focus on developing new tools and analytics should further entrench it into mission critical operations of customers, making it increasingly challenging for competitors to gain a foothold.
Change Healthcare’s broad claims network provides broad connectivity and significant amounts of data to captive customer audiences.

Company Description

Change Healthcare is a spin-off of various healthcare processing and consulting services acquired by McKesson over numerous years. Recently, these processing assets were contributed to a joint venture and in June 2019 public shares were issued with McKesson retaining the majority interest. As of the end of the March 2020 quarter, McKesson distributed all its interest in the public processor. Core services consist of insurance (healthcare) claim clearinghouse for healthcare payers in addition to administrative and consulting services to assist healthcare providers improve reimbursement coding, billing, and collections.

(Source: Morningstar)

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