Avaya Solidifies Hold in Health Care With Acquisition

Avaya recently acquired Nortel's Enterprise Division through a bankruptcy process, and uncovered tremendous opportunities in the health care sector.

Sanjeev Gupta, general manager of Healthcare Solutions at Avaya, recently explained what is occurring and what Avaya is doing to help solve major problems.

Presently, there are over 5,000 health care providers, and they all face a common set of issues. Here's the trend: Operating margins are a huge issue, payments for services are decreasing, the number of patients is increasing, and costs are going up. They face the challenge of increasing revenue with the same amount of assets. There is a shortage of employees as well, specifically nurses.

Studies show that nurses spend one-third of their time on caring for patients while the other two-thirds is for administrative work, which is a clear example of a task that can be expedited with automation.

Sanjeev gave me a very specific problem -- long wait times in emergency facilities at an oncology facility with over 700 beds. Even with an EMR (Electronic Medical Record) System and a bed management system, a lot of the care in this oncology facility still required the coordination of discharge to be handled by nurses.

The actual discharge process can't begin without approval from a primary care physician, after which the nurse has to talk to a specialist to make sure they were okay with the discharge. After receiving that approval, the nurse has to talk to the pharmacy, the outpatient pharmacy, nutrition and dietetics. In addition, she has to call maintenance to wheel the patient out and finally inform the patient's family the time the patient will be discharged. The average discharge time is around 6 p.m.

Avaya has found that the process can be changed so that nurses go into a standard system, and an application handles the administrative processes for them. That's all they have to do -- initiate the process.

In the background, the software handles numerous phone calls, while the nurse continues working.

The result? four hours were shaved off of the discharge process, with every hour equating to about a $1 million net benefit, or $4 million saved in this specific application. You've also let the nurse focus on their work and not the administrative processes that support it.

Digging a little deeper into discharge processes, we learned about another situation where EMR systems are enabling lots of new technologies. Discharge is not always to the patient's home as illustrated in our example above. Another outcome is that the patient needs care at another place, and the hospital isn't the best place to do it because of the significant costs involved. This means that the patient might be moving to a medium/short term care facility, in the local area.

Authentidate ( ADAT) offers patient placement services for Avaya's discharge customers through a database of local providers. Linked into the hospital discharge system, it can coordinate all the manual work and send patients to the appropriate facility. Both systems work in coordination here, because the discharge process is the same. What Authentidate does is direct them to the next place the patient needs to go.

What else is Avaya working on? It is also working on patient admit processes, patient contact processes, follow-up processes, patient flow processes, and other solutions around mobility so that nurses can have all their information wherever they are.

Looking at the macro-economic environment, there has been a lot of talk about health care from the government. In the stimulus package, $19 billion was allocated for electronic medical record adoption.

The bill targets "meaningful use" areas, specifically, quality of care for patients. However, re-admissions are a critical part of it -- the more re-admissions you have, the lower the reimbursement amount. In other words, they want people to be healthy when they leave the hospital.

Hospitals are now adopting EMR systems, but finding that there is still a lot of care coordination that is done by the nurses. Avaya is able to interface with those EMR systems and Sanjeev is finding that as the EMR adoption rate increases, so is the willingness of hospitals to adopt technologies to improve processes like patient discharge.

Virtually every large hospital (200+ beds) can use patient discharge, while patient placement depends on the certain departments that utilize these functions.

With a clear understanding of their offering and the macroeconomic environment, let's take a look at the market potential here.

There are approximately 2,000 hospitals with 200+ beds in the U.S., and you can double that for the global market. If the average selling price of a discharge process is $200,000, which is a low number, you have a $500 million opportunity on your hands, or a solid billion globally. Combined with their other services, it's easily a $2 billion-to-$3 billion opportunity.

Avaya is currently implementing the technologies in a hospital in Orlando, where Sanjeev says they are perfecting these intense and involved processes. They're finding that this requires a change of culture and a shift from incubation to scale mode with a large pipeline. As it makes progress on these fronts, Avaya will be issuing press releases and we can expect that it will ramp up its customer base as quickly as it can. It already has clients in the pipeline.

Avaya's competitors include the traditional call server market for voice applications. This means that Cisco ( CSCO) and Siemens' Enterprise Network ( SI) are both competing, but they offer horizontal solutions marketed into health care, and neither really has a solution for these specific problems.

Although they have aspirations to be in health care, they haven't yet made the leaps necessary to take advantage of these coming changes. The advantage that Avaya offers is that they bring a whole suite of solutions together, not just the voice application to handle phone calls.

Partners. Avaya does not compete with EMR providers, but rather works with them to have their applications link together. These EMR providers might include McKesson ( MCK), Cerner ( CERN), Allscripts ( MDRX), AthenaHealth ( ATHN), Authentidate ( ADAT), etc.

Avaya and Nortel's healthcare division, combined, are able to expand the customer base and further their reach. The acquisition means that their customer base almost doubled in North America because of their top 500 companies, there was less than a 10% overlap in identical customers.

Some hospitals like John Hopkins were using two-thirds of Nortel's solutions and one-third of Avaya's solutions. Now they have a complete presence in hospitals like these.

Sanjeev ended our discussion by saying, "We are very excited with the coming together of the companies, and we have many more opportunities, thanks to this."

Avaya will be at the Healthcare Information and Management Systems Society (HIMSS) conference Monday through Thursday in Atlanta, Ga. It will have a booth there and be prepared to answer any questions.

At the time of publication, Gupta did not hold positions in any of the stocks mentioned. Ankit Gupta is a private investor who blogs about his stock picks at SelectedFinancials.com. Gupta focuses on undervalued companies, with a strong margin of safety, but also a strong case for why they will make a better investment than others. Ankit used to run his own business, later selling the client base, and is now on the board of Purdue?s Publishing Foundation while finishing his degree at Purdue University.

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