Big Year for Healthcare IT Contractors and Potential Impact on M&A
The Federal healthcare space is undergoing meaningful transition with both the award of the Veterans Affairs (“VA”) Transformation Twenty-One Total Technology Next Generation (“T4 NextGen”) and award of the Centers for Medicare & Medicaid Services (“CMS”) Strategic Partners Acquisition Readiness Contract (“SPARC”) contract vehicles. Combined, these two vehicles are anticipated to represent over $45 billion of total addressable contract ceiling over the next 10 years. Prime awardees will benefit from potential to maintain their existing task order recompetes (if they were on the predecessor vehicles) in addition to a significant pipeline for potential new growth in the Federal healthcare IT space.
The previous generations of these contracts had a meaningfully lower combined ceiling value (i.e., VA T4 – $12B, CMS ESD – $8B) and T4 had a much shorter duration. That said, these strategic awards still influenced considerable contractor consolidation with four awardees acquired under T4 (excluding CCSi; as Triple-I already held the vehicle) and nine awardees acquired under ESD (excluding the pending sale of Lockheed’s IS&GS business).
There is likely to be a shift in focus from an M&A strategy perspective on the new T4 contract as compared to the prior vehicle given VA’s election to make specific changes with regard to change-of-control for restricted awardees. Recently awarded to nine unrestricted and 12 restricted businesses (and currently under protest), the vehicle contains specific language that would only allow a large business to continue to bid for task orders if they acquire an unrestricted awardee. The predecessor contract was silent on this point, and allowed for a large to acquire a set-aside awardee, and then bid on unrestricted task orders thereafter (but not restricted task orders). As such, we would anticipate significant interest from large businesses left off the award for potentially acquiring the smaller of the unrestricted T4 NextGen awardees.
What remains to be seen is whether SPARC will contain similar restrictions with respect to the impact of change-of-control of restricted awardees by a large business. If it were to have similar limitations, we would anticipate cross-activity among the restricted pool awardees with suitors able to recertify. The number of awardees also enhances the value of past performance and contracted backlog, relative to the contract access itself, per the predecessor ESD.