Trending Towards Healthcare
As we approach halfway through the government fiscal year (“GFY”) 2014, a significant portion of the year’s funding is yet to be obligated. However, the recently approved budget and appropriations bill may result in contractors seeing increased funding from customer agencies. This trend may be especially true for contractors within the healthcare space, as funding for healthcare agencies grew approximately 4% between GFY2013 and GFY2014. Of these funds, approximately $6 billion is expected to be spent on Federal IT solutions in GFY2014 by healthcare agencies, with an expected $1 billion increase between now and GFY2018.
Contractors have increasingly taken notice of these strong funding trends and are considering Federal healthcare as a long-term growth market with vast opportunity, albeit particularly difficult to access from the outside. Healthcare agencies have been particularly focused on implementing and integrating information technology practices into day to day activities, which is especially difficult due to the magnitude of such projects, security concerns, and previous funding constraints. Initiatives and procurement activity to narrow this adoption gap is expected to create significant opportunity, as technologies become more efficient, security concerns are addressed, and funding solidifies.
Focus on this market opportunity has been referenced several times during the recent kick off of earnings season for government technology solutions companies. During Leidos’ earnings call in December, the Company highlighted growth within the Federal Healthcare market, citing new opportunities, such as its recent win of a prime contract for the Defense Health Agency. Both CACI International (“CACI”) and Booz Allen Hamilton (“Booz”) also discussed their respective views on the industry sector during their releases. CACI’s healthcare IT (“HIT”) acquisitions of IDL and Emergint, both of which closed in its second quarter FY2013 (and were KippsDeSanto clients), contributed approximately $10-15 million of revenue during CACI’s second quarter FY2014, helping to drive organic growth. Booz also announced it is looking to invest further into the healthcare market because of the significant future growth potential for the business.
Over the coming weeks, several other government technology solutions companies (e.g., NCI, ManTech, ICF, Engility) are slated to announce earnings. Will they too emphasize focus on HIT as a strategy for future growth? In any case, we expect to see continued M&A activity in this area as large Federal contractors look to access and expand their presence within the sector through acquisition of pure play HIT companies with strong customer relationships and coveted contract vehicles.