Credit Suisse’s https://www.credit-suisse.com note CHNG Reportedly Exploring Divestiture of the PI Business in Light of UNH Merger; Our Quick Thoughts, reports that an article in Bloomberg discusses that part of their ongoing process to close the merger with UNH/Optum, Change Healthcare (CHNG), is considering a possible divestiture of their Payment Integrity (PI) business, ClaimsXten.
Credit Suisse analysts highlight that ClaimsXten is only one aspect of CHNG’s PI business and therefore, given the EBITDA figures noted in the article, a potential sale could comprise more than just ClaimsXten, such as the company’s solutions around coding advisor, audit/recovery etc.
While the Bloomberg article notes that there is no certainty a deal for ClaimsXten will be reached or that it will be enough to satisfy regulators. Analysts see this development, if true, as a positive read through for the UNH/CHNG merger.
Credit Suisse analysts have always believed that there were remedies to address the market share overlap between the two companies and the only way the deal gets blocked is on the account of “too much” data concentration with one entity. (Optum, in this case) which is unprecedented in the healthcare industry.
If CHNG/UNH are indeed exploring these divestitures, it likely indicates the discussions are moving in the right direction in the analysts view. As Credit Suisse highlighted in their recent note post catching up with management, there are four scenarios as to how the deal with Optum/UNH will develop, one of which is for the merger to be approved, albeit with some requirement (e.g. divestitures).
The article reports that the divestiture could reportedly represent $1+bin in proceeds for a business that generates $130-$150 min of EBITDA, a multiple of ~7-8x. The analysts characterize the multiples as relatively low but not surprising given the sale would be part of a divestiture.
Assuming ~40% EBITDA margin (in-line with EBITDA margins reported by Cotiviti when the company was public), it would imply revenues in the range of $325-$375 min. This revenue range is not far off from the analyst’s revenue estimate of $350 min for CHNG’s Network & Financial Management business (part of S&A segment), majority of which is the Payment Integrity /accuracy business.
By way of background, the UNH/CHNG merger agreement has a “burdensome clause” of $750 min. with respect to potential buyers for ClaimsXten, some of the companies which might have an interest include Cotiviti/HMS Holding, MultiPlan, Zelis Healthcare, etc.
ClaimsXten—What is it and why sell it? ClaimsXten is part of CHNG’s end-to-end payment accuracy solution and is a rules-based claims payment solution for payers to improve payment accuracy, reduce appeals, and inevitably capture both medical and administrative savings. ClaimsXten came through CHNG’s merger with McKesson and is embedded into the actual claims adjudication. ClaimsXten was turned into a cloud service (leveraging AWS) to improve the implementation of the product as well as the updates thereto.
During the analyst’s conversation with HMS Holdings in June 2020, the company had noted that the TAM for PI is $5-$6 bin, with around $1,5-$2 bin currently being serviced by outside vendors.
While Optum has not disclosed any financial data around their PI business, the analysts believe the combined UNH/Optum could result in the combined company’s market share exceeding 40% (among the PI vendors) and thus a concern for the DOJ. Other market overlap areas include risk coding and medical networks, but PI has been the area where most of the industry experts have been expecting divestitures.
For more information on the note with Credit Suisse’s thoughts on the Bloomberg article concerning the CHNG Deal weighing sale of ClaimsXten, ask questions, provide feedback, or news, email Jailendra Singh at email@example.com or call 212-325-8121.