Health law may boost tech firms' revenue

• HP data management "backbone" of Tennessee's Medicaid program
• Medicaid contracts "big and foundational" for Xerox
• States don't have expertise, technology to run expansion of Medicaid

When Tennessee Medicaid Director Darin Gordon walks around his department in an office park building north of downtown Nashville, he sees dozens of workers from Hewlett-Packard.

HP's employees help operate the massive computer systems that run Tennessee's Medicaid program. When Gordon wants a report on how much the government's health-insurance program is spending, or the quality of the care for its 1.3 million enrollees, he relies on HP-generated data — "the backbone of everything we do," he says.

Growth in the health-care program for the poor has created boom times for data management companies such as HP (HP) and Xerox (XRX). Even before passage of the federal health-care law, states were farming out the operations of the safety-net program.

Now, with Medicaid poised for broad expansion under the law and with online insurance marketplaces being built in most states, those companies are well positioned to profit.

"There is near-term growth and wind at your back if you can deliver," said Paul Keckley, executive director of the Deloitte Center for Health Solutions, a consulting firm.

HP runs Medicaid data systems for 21 states, processing millions of claims from hospitals and doctors, enrolling providers, verifying patients' eligibility and authorizing some services.

Xerox runs the data systems for a dozen states and the District of Columbia, and has contracts with 24 more to handle duties such as determining Medicaid eligibility or managing the program's pharmacy costs.

Medicaid contracts are "big and foundational" for Xerox as it evolves into a service company looking for higher profit margins than it gets from selling copiers, Xerox Chairman and CEO Ursula Burns told Wall Street analysts earlier this year.

Those contracts are now a $900 million-a-year business for Xerox, says Mary Scanlon, senior vice president for government health care solutions. That's still a small part of its nearly $23 billion in 2011 revenue.

HP, which had $127 billion in revenue last year, does not break out revenue from its Medicaid business.

A number of smaller companies, including CNSI in Gaithersburg, Md., and Molina Healthcare in Long Beach, Calif., have several state Medicaid contracts each, most of which are worth more than $100 million each over several years.

Expanding portfolio

Most states hire companies to crunch the data because they lack technology or expertise, said Peter Bendor-Samuel, CEO of consulting firm Everest Group. "As Medicaid expands, it means a strengthened business climate for these Medicaid vendors."

Already the nation's largest health insurance program, with about 60 million enrollees, Medicaid is expected to add as many as 17 million more if every state extended eligibility under the health law, according to the Congressional Budget Office. The Supreme Court decision last June made state participation effectively optional, and state officials are expected to decide the issue in 2013.

The technology companies are often invisible to Medicaid recipients, but they are "the brains behind a properly functioning program," says Alan Levine, former Medicaid director in Florida and Louisiana.

Xerox and HP alone process nearly $200 billion in Medicaid claims to doctors, hospitals and other providers. Their systems help determine eligibility and detect fraud and abuse.

Their call centers also handle questions from recipients about their benefits or finding a doctor — often working in conjunction with private health insurers, such as UnitedHealthcare (UNH) and Aetna (AET), which manage Medicaid for many states.

Xerox sees another avenue of potential growth. It is trying to leverage its Medicaid experience to win contracts to develop the infrastructure of the new online insurance marketplaces, called exchanges, the health law requires be set up by October.

"It's a natural fit for us," Xerox Group President Will Saunders said of the exchanges.

Xerox has won a $72 million exchange contract in Nevada, and one for $68 million to run an insurance exchange for small businesses in Florida, which is not part of the federal law. "Exchanges are a small piece of our business now, but we have made the investment and think it will grow," Scanlon said.

HP officials said they do not plan to pursue the exchange market.

Federal reimbursement key

Xerox and HP entered the Medicaid business about the same time. Xerox bought Affiliated Computer Services for $6.4 billion in 2010, and HP bought Electronic Data Systems for $13.9 billion in 2008. The Medicaid contracts represented a small, but growing part of ACS and EDS business for more than two decades.

Xerox bought ACS as it was expanding from selling products such as printers into the more profitable technology services field, consultant Bendor-Samuel said. HP bought EDS to increase its tech services business and help it compete with IBM (IBM).

One reason for their burgeoning Medicaid business is that many states have been updating data systems originally built in the 1980s.

The federal government reimburses states that modernize or replace systems for as much as 90% of the costs. It covers as much as 75% of the costs of operating a new system if it meets federal requirements.

That has resulted in hefty contracts — often the single largest contracts that states award.

In 2010, Xerox outbid HP to win a 10-year, $1.6 billion contract to develop and operate California's Medicaid billing system. David Maxwell-Jolly, director of California's Department of Health Care Services, says Xerox will make billing easier for providers and pay claims quicker and more accurately.

Other states that have recently signed contracts include:

• Florida, which signed a three-year, $172 million deal with HP last year.

• Louisiana, which signed a three-year, $185 million deal with CNSI in February.

• Maryland, which earlier this year awarded Computer Sciences Corp. of Falls Church, Va., a contract worth as much as $297 million over 11 years.

Sue Arthur, vice president of health and life sciences at HP, said when states outsource Medicaid jobs to her company, most of those jobs remain in state capitals.

"The Medicaid expansion gives us an opportunity to bring a broader set of technology to states, no matter what they do," she said.

Kaiser Health News is an editorially independent program of the Henry J. Kaiser Family Foundation, a non-profit, non-partisan health policy research and communication organization not affiliated with Kaiser Permanente.