The management of Firstsource hosted a conference call to discuss their recent acquisition of MedAssist. Key takeaways were as follows  

• MedAssist is a US-based provider of end-to-end revenue cycle management services to various local healthcare providers (mainly hospitals) through its pan-US presence. It assists hospitals in collecting revenues from commercials players like insurance companies, federal/state government/agencies, etc. It has about 1,400 employees and 800 hospitals as clients.

• MedAssist has three main service offerings - eligibility services (60-65% of revenues), collections services (15-17% of revenues) and receivables management (20-25%). In eligibility services, it maximizes the eligibility of the private-pay patients (uninsured) for fed/state and other financial assistance programs and manages their application and re-imbursement process for hospitals.

• Firstsource will pay US$330mn (about 3.3x revenues and 15x EBIDTA of CY06) financed by US$275mn line of credit at 250-300 bps above LIBOR (five-year duration) and rest US$55mn from internal accruals. Company has sufficient cash balance as significant part of the recent IPO proceeds were earmarked for acquisitions. Firstsource did not opt for the earn-out model as in earlier acquisitions due to high performance visibility of MedAssist. The acquisition will create goodwill of US$325mn in company’s books.

Key rationale for the acquisition were

• The acquisition is complimentary in nature as it gives Firstsource significant presence on the provider side (hospitals) of healthcare back-office services market. Company already has presence on the payer side (insurance providers).

• As per the company there are significant cross-selling opportunities within Medassist clients for its existing services as most of its clients are using only one of them. Further, cross-selling opportunities exist in the form of offering transaction processing, customer services, etc of Firstsource to the large clientele (more than 1,000 clients) of MedAssist.

• Leveraging cost benefits and capabilities by offshoring significant part of operations in the long term. However, the extent of offshoring would not be as high as 85-90% like for other BPO services due to MedAssist’s presence at the local level in US.    

• Acquisition would be EPS accretive from current year.

Other positives about MedAssist include

• It has been a provider of revenue cylce management services from last 18+ years

• Experienced top management team

• Average client relationship of about 14 years

• Strong profitability (similar to Firstsource) with superior Revenue/FTE

• Pan-US presence with capability to deliver from multiple locations

• Strong competitive position

• Revenue/FTE is high for MedAssist at about US$6,500 per month due to 100% output based pricing which enables company to retain benefits from higher productivity and efficiencies.

• Other reasons for higher profitability of MedAssist include its capability to generate significant savings/benefits for its clients and high operating leverage and utilization.

• Top customer contributes 4.3% and Top 10 contributes 29% of revenues for MedAssist. Renewal rate has been 90-95% for top clients.

• Firstsource expects the top management of MedAssist to stay post integration as they are also excited about the resulting synergies.

• In FY08, post integration of MedAssist, Firstsource expects all three key verticals of Healthcare, Telecom and BFSI to contribute 33% each.

• Healthcare business in US amounts to about US$700bn with administrative costs estimated at 14% ie US$100bn, which translates into a huge opportunity for the BPO players. Revenue cycle management in specific has been one of the pain areas for hospitals as they have been losing significant money (about US$28bn in CY05) due to non-compensation of care provided by them.

• Competition faced by MedAssist is service specific. In eligibility services, competition is from a number of small local players and 3-4 large players having pan-US presence. One of the large competitors is MedAssets. In receivable and collections services, competition is higher than in eligibility services. Large competitors here include MCO, Perot Systems, etc.

• Management clarified that Firstsource has no presence in the US sub-prime mortgage market. It has exposure to UK mortgage market but the sub-prime exposure is less than 1% of revenues.

• Earlier, the management had guided for 50% rupee revenue growth (Rs12.4-12.5bn) and 11-13% NPM for FY08. Now, they expect an addition of US$50-55mn to the above revenue guidance with expected integration of MedAssist for six months in FY08. Profitability guidance is unchanged due to similar to Firstsource profitability of MedAssist.