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Quality Systems Eyes ‘Bolt-On Deals,’ Additional Products

Plochocki: sees big opportunity in accountable care organizations

Irvine-based Quality Systems Inc. will be looking for a series of “bolt-on” deals this year, according to its chief executive.

“We’re looking to do acquisitions in the areas of revenue cycle management. … We’re looking for a prospect in the hospital [software] area. … We want to add analytics tools, patient management software and of course, regulatory and clinical reporting tools,” said Steven Plochocki, chief executive of the healthcare-software maker, during a presentation at the annual JPMorgan healthcare conference in New York earlier this month.

Quality makes software that doctors and dentists use to manage their practices. The company has also gotten into medical-record software for hospitals and into revenue-cycle management, which uses software and computers for coding and documenting insurance claims to help doctors manage payments and cash flow.

The company has about $430 million in annual sales, and a recent market value of $1.1 billion.

Its appetite for acquisitions is nothing new. It has made nine deals during the past four years.

Quality also plans to work on developing complementary products and services to its core business, according to Plochocki.

Quality has divided its business into four specific product areas—ambulatory solutions, dental, revenue cycle management and hospitals—in order to be compliant with government certification programs for digitizing healthcare.

“There’s a lot of money out there for the healthcare communities to become electronically based,” Plochocki said. “Dentists, hospitals and physicians are all eligible for the monies” from grants and the 2009 economic stimulus.

Plochocki noted that healthcare is entering the third of five years’ worth of incentives, followed by five years of penalties for providers that haven’t moved toward electronics.

“If you’re a healthcare provider and you’re not operating in a certified system by 2015, you’re going to start getting penalized by the government,” he said.

• Headquarters: Irvine

• Business: Software for healthcare industry

• Founded: 1974

• Ticker symbol: QSII (Nasdaq)

• Fiscal 2012 revenue: $430 million

• Recent earnings: $15.7 million for September quarter

• Market value: About $1.1 billion

• Notable: Plans several acquisitions this year amid Wall Street’s concerns about “operational risks”

Opportunities

Quality sees opportunities in what are known as “accountable care organizations,” which offer incentives for doctors, hospitals and insurers to work together to cut healthcare costs. Participants in such structures share clinical and case management infomration and coordinate comprehensive healthcare services.

The company’s products are used in about 25 accountable care organizations nationwide.

“One of the first four certified ACOs in the country is a full Quality-NextGen systems shop,” Plochocki said. “About 11% of healthcare is currently participating in the development of an accountable care organization, and 72% plan future participation.”

Consolidation

He predicted healthcare will see “an enormous consolidation of providers” into accountable care organizations over the next 24 to 36 months.

Plochocki also generally touched on healthcare reform and mentioned that he expects software to play a bigger role in the management of patients and care planning thanks to the Affordable Care Act.

The company also is looking to get more international business.

It started up operations in Bangalore, India, in 2011, and employs some 225 “technologists” and engineers over there and plans to expand that number to more than 500 over the next five years, according to Plochocki.

It’s also looking to expand back-office operations for its revenue cycle management business overseas, he said.

Concerns

His talk came against concerns expressed by some on Wall Street, which has driven Quality’s shares down by 54% in 2012, to a market value of $1 billion at year-end. The fall-off came after many years of gains.

The questions have continued into this year.

JPMorgan initiated coverage on Quality with an “underweight” rating and mentioned that it’s been trading at a 37% discount to competitors such as Kansas City, Mo.-based Cerner Corp. a few days before Plochocki’s presentation.

JPMorgan said that Quality “does have a solid customer base” in its core physician practice market and has invested to grow its presence in the inpatient and revenue cycle management markets.

“That said, new business trends have been negative in recent quarters, and until we see positive data points to indicate improvements in core operations … ,” Rahim wrote.

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