Fiserv Health looks ahead for growth

It faces tough competition in an area dominated by large firms

By GUY BOULTON
gboulton@journalsentinel.com

Posted: Dec. 25, 2006

In five years' time, Fiserv Inc. built a billion-dollar business providing services to health plans.

Fiserv Health

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Now the question is whether Fiserv Health can produce the bottom-line growth that the Brookfield-based company expects from its businesses. And the question is likely to be answered within the next few years.

Fiserv Health, based in Minneapolis, is overshadowed by the fast-growing company's core business of providing services to financial institutions. But the business, which Fiserv didn't enter until 2001, is expected to generate $1.2 billion in revenue this year.

It now accounts for about a quarter of the company's revenue. But it also is coming to the end of a lackluster year - and it faces tough competition in a market increasingly dominated by a few large companies.

"We are a niche in an oligopoly market," said Bill Howard, executive vice president of marketing for Fiserv Health.

Operating profits, which exclude interest expense and taxes, are projected to be down 10% this year. And some Wall Street analysts have expected Fiserv to get out of the business.

Fiserv Health provides services largely to self-funded health plans - those in which an employer pays most of the medical bills of its employees and their family members. Most employers with 250 employees, and some with as few as 50, self-insure.

The business group's services include overseeing health plans and processing claims, administering prescription drug plans and providing disease management programs. The group also provides services for technology and transaction processing.

Fiserv saw the business as a nice fit, given its strength in processing financial transactions. The business also provided some additional diversification. And Fiserv saw an opportunity to bring scale in a highly fragmented business that increasingly relied on technology.

"Smaller businesses tend to have a harder time making those technology investments," Howard said.

The company expanded the business rapidly through a string of acquisitions, starting with Benefit Planners in Boerne, Texas, in 2001. That's not surprising for a company that has made about 140 acquisitions since 1984.

"They've done a tremendous job in integrating acquisitions," said David Koning, an analyst with Robert W. Baird & Co.

Fiserv Health's key operations are in Minneapolis; Wausau; San Antonio; Columbus, Ohio; Phoenix; and Dallas.

The acquisitions included the former health benefits business of Wausau Insurance Cos., which was spun off and then acquired by Fiserv in 2003.

Most of the acquisitions were small, regional companies, and the various shops that now make up the health group face increased competition from much larger companies.

Koning expects Fiserv Health to post operating profits of $72 million this year. That's down from $80.4 million last year and below the $75.4 million generated in 2004.

But Koning also noted that the unit's operating profits are down partly because Fiserv has been investing in the business, primarily in technology. Further, he expects growth to accelerate next year.

The technology investments and integration of its acquisitions to eliminate duplicative functions, for example, are expected to take $6 million to $12 million a year in operational costs out of the business.

"Some of it is just bread-and-butter management," Howard, of Fiserv Health, said.

Competing with larger firms

Still, growth won't come effortlessly.

Fiserv Health lost some large clients last year. It also faces stiff competition from traditional insurers, such as UnitedHealthcare, Cigna, Humana and Aetna. Those companies now are as likely to administer health plans for employers who self-insure as they are to sell insurance.

In addition, the business of managing prescription drug plans is dominated by three large companies - and that number may soon drop to two.

Franco Turrinelli, an analyst with William Blair & Co., said a market exists for smaller players to provide services to small businesses. But he also said the large insurers and companies that administer prescription drug plans are doing a better job focusing on that market.

That is unlikely to change, given that the health insurance market is shrinking as more employers stop providing health benefits.

The large insurance companies, such as UnitedHealthcare, also can typically negotiate better contracts with hospitals and doctors because of their size.

Fiserv Health can compete by being flexible, offering employers customized solutions, Howard said.

"That's the biggest thing that comes with us," he said.

The goal is to move more quickly than its larger competitors and to find niche markets.

Fiserv Health does business with 1,700 employers. About 4 million people use its services.

"That's a fairly sizable market for us to work with," Howard said. "We still see plenty of opportunity for growth for us."

The business group sees potential growth in cross-selling its services, such as providing disease management to a health plan that it administers.

"That offers us some significant opportunity," Howard said.

Fiserv Health hopes to do the same for its business that manages prescription drug plans.

It also sees an opportunity in so-called consumer-directed health plans - high-deductible plans typically paired with a health savings or health reimbursement account. Earlier this year, it bought CareGain, a company with software designed for administering those accounts.

Competitors have similar software. But Howard said Fiserv Health believes that CareGain's technology offers more flexibility than most and that Fiserv understands complex process transactions and the customization of software.

"It's a mind-set," he said.

Despite those opportunities, Howard is straightforward about the challenges facing Fiserv Health. But the business has a large customer base, and future acquisitions could bring more opportunities. He also expects the market to provide future opportunities and niches.

Howard remains optimistic despite the recent string of lackluster quarters.

"It's a transitional period," he said.