Annual Report

 

 

100 North Point Center East, Suite 200
Alpharetta, Georgia 30022
(Address of Principal Executive Offices)

 

(678) 323-2500
(Registrant’s telephone number)

 

 

Securities registered pursuant to Section 12(g) of the Act:
Not Applicable

 

Indicate by check mark if the registrant is a well-known seasoned issuer (as defined in Rule 405 of the Securities Act).  Yes  þ      No  o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.  Yes  o      No  þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ      No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ      No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o      No  þ

 

The aggregate market value of Common Stock held by non-affiliates of the registrant on June 30, 2010, the last business day of the registrant’s most recently completed second fiscal quarter, was $1,023,887,585 based on the closing sale price of the Common Shares on the Nasdaq Global Select Market on that date. For purposes of the foregoing calculation only, the registrant has assumed that all officers and directors of the registrant are affiliates.

 

The number of shares of Common Stock outstanding at February 18, 2011 was 58,509,130.

 

Documents incorporated by reference

 

Portions of the Registrant’s Proxy Statement (to be filed pursuant to Regulation 14A within 120 days after the Registrant’s fiscal year-end of December 31, 2010), for the annual meeting of shareholders, are incorporated by reference in Part III.

 

 

MEDASSETS, INC.

 

TABLE OF CONTENTS

 

 

Unless the context indicates otherwise, references in this Annual Report to “MedAssets,” the “Company,” “we,” “our” and “us” mean MedAssets, Inc., and its subsidiaries and predecessor entities.

 

NOTE ON FORWARD-LOOKING STATEMENTS

 

This Annual Report on Form 10-K contains certain “forward-looking statements” (as defined in Section 27A of the U.S. Securities Act of 1933, as amended, or the “Securities Act,” and Section 21E of the U.S. Securities Exchange Act of 1934, as amended, or the “Exchange Act”) that reflect our expectations regarding our future growth, results of operations, performance and business prospects and opportunities. Words such as “anticipates,” “believes,” “plans,” “expects,” “intends,” “aims,” “estimates,” “projects,” “targets,” “can,” “could,” “may,” “should,” “will,” “would,” and similar expressions have been used to identify these forward-looking statements, but are not the exclusive means of identifying these statements. For purposes of this Annual Report on Form 10-K, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. These statements reflect our current beliefs and expectations and are based on information currently available to us. As such, no assurance can be given that our future growth, results of operations, performance and business prospects and opportunities covered by such forward-looking statements will be achieved. We have no intention or obligation to update or revise these forward-looking statements to reflect new events, information or circumstances.

 

Such forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

 

A number of important factors could cause our actual results to differ materially from those indicated by such forward-looking statements, including those described under the heading “Risk Factors” in Part I, Item 1A. herein and elsewhere in this Annual Report on Form 10-K.

 

scale product management and development resources through dynamic data access without depending on a system’s physical location and configuration. We employ an integrated, customer-centric approach to delivering our solutions which, when combined with the ability to deliver measurable financial improvement, has resulted in high retention of our large health system customers, and, in turn, a predictable base of stable, recurring revenue. Our ability to expand the breadth and value of our solutions over time has allowed us to develop strong relationships with our customers’ senior management teams.

 

Our success in improving our customers’ ability to increase revenue and manage supply expense has driven substantial growth in our customer base and has allowed us to expand sales of our products and services to existing customers. These factors have contributed to our compounded annual net revenue growth rate of approximately 27.9% over our last five fiscal years. Our customer base currently includes more than 180 health systems and, including those that are part of our health system customers, over 4,000 acute care hospitals and more than 90,000 ancillary or non-acute provider locations. Beginning January 1, 2011, our Spend Management segment was renamed Spend and Clinical Resource Management (“SCM”) to reflect the broader clinical resource utilization and performance management capabilities of the organization. Our SCM segment manages more than $41 billion of annual supply spend by healthcare providers, including over $24 billion of annual spend through our group purchasing organization (“GPO”), on behalf of more than 2,500 hospital customers. Our Revenue Cycle Management segment (“RCM”) currently has more than 2,200 hospital customers, which makes us one of the largest providers of revenue cycle management solutions to hospitals.

 

We deliver our solutions through our two business segments, Spend and Clinical Resource Management and Revenue Cycle Management:

 

 

We believe that we are well positioned to deliver customer-specific solutions to the market as hospitals, health systems and non-acute providers continue to face the financial pressures that are endemic and long-term to the healthcare industry and particularly acute in today’s economic climate. We have leveraged the scale and scope of our Revenue Cycle Management and Spend and Clinical Resource Management businesses to develop a strong understanding and unique base of content regarding the environment in which hospitals and health systems operate. With the benefit of this insight, we develop solutions that are designed to strengthen the discrete financial and operational weaknesses across our customers’ revenue cycle, supply chain and clinical resource management operations.

Industry

 

According to the U.S. Centers for Medicare & Medicaid Services, or CMS, spending on healthcare in the United States was estimated to be $2.5 trillion in 2009, or 17.3% of United States Gross Domestic Product, or GDP. Healthcare spending is projected to reach almost $4.5 trillion by 2019, or 19.3% of GDP. In 2009, spending on hospital care was estimated to be $760.6 billion, representing the single largest component. According to the American Hospital Association, the U.S. healthcare market has approximately 5,800 acute care hospitals, of which nearly 2,900 are part of health systems. A health system is a healthcare provider with a range of facilities and services designed to deliver care more efficiently and to compete more effectively to increase market share. The non-acute care market consists of nearly 550,000 healthcare facilities and providers, including outpatient medical centers and surgery centers, medical and diagnostic laboratories, imaging and diagnostic centers, home healthcare service providers, long term care providers, and physician practices.

 

We believe that ongoing strains on government agencies’ ability to pay for healthcare will have the effect of limiting available reimbursement for hospitals. Reimbursement by federal programs often does not cover a hospital’s cost of providing care. In 2008, community hospitals had a shortfall of more than $36 billion relative to the cost of providing care to Medicare and Medicaid beneficiaries, up from $3.9 billion in 2000, according to the American Hospital Association. The growing Medicare eligible population, combined with a declining number of workers per Medicare beneficiary, is expected to result in significant Medicare budgetary pressures leading to increasing reimbursement shortfalls for hospitals relative to the cost of providing care.

 

We believe ongoing efforts by employers to manage healthcare costs will also have the effect of limiting available reimbursement for hospitals. In order to address rising healthcare costs, employers have pressured managed care companies to contain healthcare insurance premium increases, and reduced the healthcare benefits offered to employees.

 

The introduction of consumer-directed or high-deductible health plans by managed care companies, as well as the overall decline in healthcare coverage by employers, has forced private individuals to assume greater financial responsibility for their healthcare expenditures. Consumer-directed health plans, and their associated high deductibles, increase the complexity and change the nature of billing procedures for hospitals and health systems. In cases where individuals cannot pay or hospitals are unable to get an individual to pay for care, hospitals forego reimbursement and classify the associated care expenses as uncompensated care.

 

Hospitals in particular continue to deal with intense financial pressures that are creating even greater cash flow challenges and bad debt risk. The slowdown in the U.S. economy has resulted in, and may continue to result in, increased costs of capital and decreased liquidity for hospitals. The macroeconomic environment is also forcing higher unemployment rates and adding to the rolls of the uninsured, which could lead to lower levels of reimbursement and a greater percentage of uncompensated care. In addition, supply cost increases forced by rising raw material costs in food production and the manufacture of medical products over the long term may result in hospital supply costs increasing at a faster rate than net revenue.

 

Hospital and Health System Reimbursement Complexity

 

Hospitals typically submit multiple invoices to a large number of different payors, including government agencies, commercial insurance companies and private individuals, in order to collect payment for the care they provide. The delivery of an individual patient’s care depends on the provision of a large number and wide range of different products and services, which are tracked through numerous clinical and financial information systems across various hospital departments, resulting in invoices that are usually highly detailed and complex. For example, a hospital invoice for a common surgical procedure can reflect over 200 unique charges or supply items and other expenses. A fundamental component of a hospital’s ability to bill for these items is the maintenance of an up-to-date, accurate chargemaster file, which can consist of over 40,000 individual charge items.

 

In addition to requiring intricate operational processes to compile appropriate charges and claims for reimbursement, hospitals must also submit these claims in a manner that adheres to numerous payor claim

formats and properly reflects individually contracted payor reimbursement rates. For example, some hospitals rely on accurate billing adjudication and payment from over 50 contracted payors that are linked to thousands of independent insurance plans, inclusive of private individuals, in order to be compensated for the patient care they provide. Upon receipt of the claim from a hospital, a payor proceeds to verify the accuracy and completeness of, or adjudicate, the claim to determine the appropriateness and accuracy of the corresponding payment to the hospital. If a payor denies payment for any or all of the amount of the claim, the hospital must determine the reason for the denial and then amend and/or resubmit the claim to the payor.

 

Unsustainable Hospital and Health System Costs and Supply Expenses

 

We estimate that the supplies and non-labor services used in conjunction with the delivery of hospital care account for approximately 30% of overall hospital costs. These costs include commodity-type medical-surgical supplies, medical devices, branded and generic pharmaceuticals, laboratory supplies, food and nutritional products and purchased services. Hospitals are required to purchase many different types of supplies and services as a result of the wide range of medical care that they administer to patients. For example, it is common for hospitals to maintain supply cost and pricing information on over 35,000 different product types and models in their internal supply record-keeping systems, or master item files.

 

Hospitals often rely on GPOs, which aggregate hospitals’ purchasing volumes, to help manage supply and service costs. The Health Industry Group Purchasing Association, (“HIGPA”), estimates that GPOs save hospitals and health systems between 10 and 15% on these purchases by negotiating discounted prices with manufacturers, distributors and other vendors. These discounts have driven widespread adoption of the group-purchasing model. GPOs contract with suppliers directly for the benefit of their customers, but they do not take title or possession of the products for which they contract; nor do GPOs make any payments to the vendors for the products purchased by their customers. GPOs primarily derive their revenues from administrative fees earned from vendors based on a percentage of dollars spent by their hospital and health system customers. Vendors discount prices and pay administrative fees to GPOs because GPOs provide access to a large customer base, thus reducing sales and marketing costs and overhead associated with managing contract terms with a highly fragmented provider market.

 

Market Opportunity

 

We believe that the endemic, persistent and growing healthcare industry pressures provide us substantial opportunities to assist hospitals and health systems to increase net revenue and reduce supply expense. We estimate the total addressable market for our RCM and SCM solutions in the United States to be more than $12 billion.

 

Reimbursement Complexities and Pressures

 

Hospitals and health systems are faced with complex and changing reimbursement rules across the government agency and managed care payor categories, as well as the challenge of collecting an increasing percentage of revenue directly from individual patients. Key reimbursement complexities and pressures include:

 

 

While coverage of uninsured may mean fewer unpaid hospital bills, the care provided to the newly insured is expected to be reimbursed at below-current Medicare/Medicaid rates. Any short-term benefit for healthcare providers may also be offset by a decrease in funding for uncompensated care, reductions in Medicare and Medicaid payments, penalties for adverse outcomes, and the challenges of supporting increased utilization of healthcare services.

 

 

CMS has multiple initiatives to prevent improper payments before a claim is paid, and to identify and recover improper payments after a claim has been paid. For example, in 2006 CMS awarded contracts to Recovery Audit Contractors (RACs) designed to guard the Medicare Trust Fund by reviewing healthcare provider actions, auditing provider claims, and identifying and working to recoup overpayments made by Medicare to hospitals. This Medicare RAC program was expanded to all 50 states in 2010. In addition, with the passage of the Deficit Reduction Act of 2005, the Department of Health and Human Services established a Medicaid Integrity Program to provide CMS with the resources necessary to combat fraud, waste and abuse in Medicaid. Under the proposed Medicaid rule, states were to establish Medicaid RAC programs by the end of 2010, and timing of a requirement for full program implementation is pending.

 

 

Provider Cost Complexities and Pressures

 

Hospitals and health systems face increasing cost pressures caused by the continued increase of supply prices, technological innovation and complexities inherent in procuring the vast number and quantity of supplies and medical devices required for the delivery of care, as well as the anticipated impact of health insurance reform initiatives. Key cost complexities and pressures include:

 

 

MedAssets’ Solutions

 

Our technology-enabled solutions enable healthcare providers, primarily hospitals and health systems, to reverse the trend of expenses increasing at a greater rate than revenue. Our RCM solutions increase revenue capture and collection rates for healthcare providers by analyzing complex information sets, such as chargemasters and payor rules, to facilitate compliance with regulatory and payor requirements and the

accurate and timely submission and tracking of invoices or claims. Our SCM solutions reduce expenses through focused or comprehensive supply chain and clinical resource utilization services that use data and analytics, such as master item files and hospital purchasing data, to identify opportunities for savings and process improvement. This enables us to assist our customers in negotiating discounts on specific high-cost physician preference items and pharmaceuticals and allows our customers to optimize purchasing of supplies and services as well as to engage physicians in the total cost management reduction process.

 

Our Competitive Strengths

 

Key elements of our competitive strengths include:

 

 

 

Since completion of the acquisition of Broadlane in mid-November, 2010, we have implemented an integration plan to realize cost savings in 2011 through the business combination, and position our business for revenue growth opportunities over the next few years. We expect the operating plan being implemented for our SCM segment following the Broadlane Acquisition to set the stage for future revenue growth opportunities over the next few years as we create an enhanced value proposition to win more customers, cross-sell additional products and services into our current customer base, and realize the benefits of combining two complementary group purchasing contract portfolios.

 

Our Strategy

 

Our mission is to partner primarily with healthcare providers to enhance their financial strength through improved operating margins and cash flows. Key elements of our strategy include:

 

 

 

Business Segments

 

We deliver our solutions through two business segments, Revenue Cycle Management and Spend and Clinical Resource Management (which we previously referred to as our Spend Management Segment). Information about our business segments should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

 

Revenue Cycle Management Segment

 

Our RCM segment provides a comprehensive suite of products and services that span what has traditionally been viewed as the hospital revenue cycle. Progressing from a traditional revenue cycle solution, we have expanded the scope of revenue cycle to include products and services that may help to enhance the effectiveness of certain clinical and administrative functions performed within a hospital. We combine our revenue cycle workflow solutions with sophisticated decision support and business intelligence tools to increase financial improvement opportunities and regulatory compliance for our customers. Our suite of solutions provides us with significant flexibility in meeting customer needs. Some customers choose to actively manage their revenue cycle using internal resources that are supplemented with our solutions. Other customers have chosen a more comprehensive solution set that utilizes our full suite of products and services spanning

the entire revenue cycle workflow. Regardless of the customer approach, we create timely, actionable information from the vast amount of data that exists in underlying customer information systems. In so doing, we enable financial improvement through successful process improvement, informed decision making, and implementation.

 

Revenue Cycle Technology and Services

 

Hospitals face unique content, data management, business process and claims processing challenges and can utilize our solutions to address these issues in the following stages of the revenue cycle workflow:

 

 

Revenue Cycle Services

 

We employ our services and consulting expertise to help customers pinpoint the greatest areas to achieve operational improvements, and implement capabilities to deliver measurable and sustainable financial improvements in the following areas:

 

 

Decision Support and Performance Analytics

 

Our decision support software provides customers with an integrated suite of business intelligence tools designed to facilitate hospital decision-making by integrating clinical, financial and operational information into a common data set for accuracy and ease of use across the organization. Key components include budgeting, cost accounting, cost management, contract analytics, clinical analytics and customer-defined key performance indicators such as profitability per referring physician and per procedure.

 

Beginning, January 1, 2011, our decision support services (“DSS”) and performance analytics business operations will become part of our Spend and Clinical Resource Management segment. This move will help us capitalize on the integration of our products and services, and to focus on offering data-driven tools and services to help bridge our customers’ clinical and financial gaps so they can produce the highest quality patient outcomes at the lowest cost. We will include DSS within our SCM performance analytics offerings going forward.

 

Spend and Clinical Resource Management Segment

 

Our SCM segment helps our customers manage a substantial portion of their high expense categories through a combination of group purchasing, medical device and clinical resource consulting (which includes implantable physician preference items, (“PPI”), utilization management and service line consulting), supply chain outsourcing and procurement services, capital equipment lifecycle management, lean process and workforce optimization solutions and business intelligence tools.

 

Strategic Sourcing

 

We focus on optimizing supply chain performance by identifying and delivering cost savings opportunities through a combination of technology and strategic contracting services to help build customized solutions encompassing the procurement of medical supplies, pharmaceuticals, food and nutrition items and capital equipment. Our strategic sourcing services help customers reduce total supply expense in their major spend areas as well as perform more efficiently and effectively.

 

 

Our contract portfolio is designed to offer our healthcare provider customers with both a flexible solution comprised of multi-sourced supplier contracts, as well as a core group of sole-sourced contracts that offer the best discounts. Our multi-sourced contracts include pricing tiers based on purchase volume and multiple sources for many products and services. Our sole-source supplier contracts require that our customers commit to a high percentage of purchase volume from the specified supplier contracts to access greater savings. We constantly evaluate the depth, breadth and competitiveness of our contract portfolio, and adopted this evolving, driven strategy because of the varying needs of our customers and the significant number of factors, including overall size, service mix, for-profit versus not-for-profit status, and the degree of integration between hospitals in a health system, that influence and dictate their needs.

 

 

Spend and Clinical Resource Management Services

 

Our SCM services use a combination of demonstrated best practices, leading-edge technology and experienced consultants to reduce clinical costs and increase operational efficiency. Our focus is on delivering significant and sustainable financial and operational improvement in the following areas:

 

 

 

Performance Analytics and Data Management

 

Our performance analytics and data management tools are an integral part of our SCM solutions. These tools provide transparency into expenses, identify performance deficiencies and areas for operational improvement, and allow for monitoring and measuring results. Key components include:

 

 

Other Information About the Business

 

Customers

 

As of December 31, 2010, our customer base included over 180 health systems and, including those that are part of our health system customers, more than 4,000 acute care hospitals and approximately 90,000 ancillary or non-acute provider locations. Our group purchasing organization has contracts with more than 1,150 manufacturers, distributors and other vendors that pay us administrative fees based on purchase volume

by our healthcare provider customers. The diversity of our large customer base ensures that our success is not tied to a single healthcare provider or GPO vendor. Our customers are located primarily throughout the United States and, to a lesser extent, Canada.

 

Strategic Business Alliances

 

We complement our existing products and services and R&D activities by entering into strategic business relationships with companies whose products and services complement our solutions. We also have co-marketing arrangements with entities whose products and services complement our solutions, such as financial eligibility qualification and registration quality as patients are being admitted into the hospital.

 

In addition to our employed sales force, we maintain business relationships with a number of other group purchasing and marketing affiliates that market or support our products or services. We refer to these individuals and organizations as affiliates or affiliate partners. These affiliate partners, who typically provide a limited number of services on a regional basis, are responsible for the recruitment and direct management of healthcare providers in both the acute care and alternate site markets. Through our relationship with these affiliate partners, we are able to offer a range of solutions to these providers, including both spend management and revenue cycle management products and services, with minimal investment in additional time and resources. Our affiliate relationships provide a cost-effective way to serve certain markets, such as non-acute healthcare providers.

 

Competition

 

The market for our products and services is fragmented, intensely competitive and characterized by the frequent introduction of new products and services, and by rapidly evolving industry standards, technology and customer needs. We have experienced and expect to continue to experience intense competition from a number of companies.

 

Our revenue cycle management solutions compete with products and services provided by large, well-financed and technologically-sophisticated entities, including: healthcare information technology providers such as Allscripts Corporation, Epic Systems Corporation, McKesson Corporation and Siemens AG; consulting and outsourcing firms such as Accenture Ltd., Accretive Health, Inc., Deloitte & Touche LLP, Ernst & Young LLP, Huron Consulting, Inc., Navigant Consulting, Inc. and The Advisory Board Company; and providers of competitive products and services such as Craneware Inc., Ingenix (a subsidiary of UnitedHealth Group, Inc.), Emdeon Inc., Passport Health Communications, Inc. and The SSI Group, Inc. We also compete with hundreds of smaller niche companies.

 

Within our SCM segment, in addition to a number of the consulting firms listed above, our primary competitors are GPOs. There are more than 600 GPOs in the United States, of which approximately 30 negotiate sizeable contracts for their customers, while the remaining GPOs negotiate minor agreements with regional vendors for services. Five GPOs, including us, account for approximately 85 percent of the market. We primarily compete with Amerinet Inc., HealthTrust LLC, Novation LLC and Premier, Inc.

 

We compete on the basis of several factors, including:

 

 

 

We believe that our ability to deliver measurable financial improvement and the breadth of our full suite of solutions give us a competitive advantage in the marketplace.

 

Employees

 

As of December 31, 2010, we had approximately 3,100 full time employees.

 

Government Regulation

 

The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory and other influences. Existing and new federal and state laws and regulations affecting the healthcare industry could create unexpected liabilities for us, could cause us or our customers to incur additional costs and could restrict our or our customer’s operations. Many healthcare laws are complex and their application to us, our customers or the specific services and relationships we have with our customers are not always clear. In particular, many existing healthcare laws and regulations, when enacted, did not anticipate the comprehensive products and revenue cycle management and spend management solutions that we provide, and these laws and regulations may be applied to our products and services in ways that we do not anticipate. Our failure to accurately anticipate the application of these laws and regulations, or our other failure to comply, could create liability for us, result in adverse publicity and negatively affect our business. See the “Risk Factors” section herein for more information regarding the impact of government regulation on our Company.

 

Intellectual Property

 

Our success as a company depends upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, trade secrets, copyrights and trademarks, as well as customary contractual protections.

 

We generally control access to, and the use of, our proprietary software and other confidential information. This protection is accomplished through a combination of internal and external controls, including contractual protections with employees, contractors, customers, and partners, and through a combination of U.S. and international copyright laws. We license some of our software pursuant to agreements that impose restrictions on our customers’ ability to use such software, such as prohibiting reverse engineering and limiting the use of copies. We also seek to avoid disclosure of our intellectual property by relying on non-disclosure and assignment of intellectual property agreements with our employees and consultants that acknowledge our exclusive ownership of all intellectual property developed by the individual during the course of his or her work with us. The agreements also require that each person maintain the confidentiality of all proprietary information disclosed to them.

 

We incorporate a number of third party software programs into certain of our software and information technology platforms pursuant to license agreements. Some of this software is proprietary and some is open source. We use third-party software to, among other things, maintain and enhance content generation and delivery, and support our technology infrastructure.

 

We have registered, or have pending applications for the registration of, certain of our trademarks. We actively manage our trademark portfolio, maintain long standing trademarks that are in use and file applications for trademark registrations for new brands in all relevant jurisdictions.

Research and Development

 

Our research and development, (“R&D”), expenditures primarily consist of our investment in internally developed software. We incurred $38.0 million, $35.4 million and $27.5 million for R&D activities in 2010, 2009 and 2008, respectively, and we capitalized 47.3%, 46.3% and 40.4% of these expenses, respectively. As of December 31, 2010, our software development, product management and quality assurance activities involved approximately 380 employees. We expect to incur significant research and development costs in the future due to our continuing investment in internally developed software as we intend to release new features and functionality, expand our content offerings, upgrade and extend our service offerings, and develop new technologies.

 

Information Availability

 

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, are available free of charge on our website (www.medassets.com under the “Investor Relations” caption) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission (the “SEC”). The content on any website referred to in this Annual Report on Form 10-K is not incorporated by reference into this report, unless expressly noted otherwise.

 

competitors are more established, benefit from greater name recognition, have larger customer bases and have substantially greater financial, technical and marketing resources. Other of our competitors have proprietary technology that differentiates their product and service offerings from ours. As a result of these competitive advantages, our competitors and potential competitors may be able to respond more quickly to market forces, undertake more extensive marketing campaigns for their brands, products and services and make more attractive offers to customers. In addition, many GPOs are owned by the provider-customers of the GPO, which enables our competitors to distinguish themselves on that basis.

 

We cannot be certain that we will be able to retain our current customers or expand our customer base in this competitive environment. If we do not retain current customers or expand our customer base, our business and results of operations will be harmed. Additionally, as a result of larger agreements that we have entered into in the recent past with certain of our customers, a larger portion of our revenue is now attributable to a smaller group of customers. Although no single customer accounts for more than ten percent of our total net revenue as of December 31, 2010, any significant loss of business from these large customers could have a material adverse effect on our business, results of operations and financial condition. Moreover, we expect that competition will continue to increase as a result of consolidation in both the information technology and healthcare industries. If one or more of our competitors or potential competitors were to merge or partner with another of our competitors, the change in the competitive landscape could also adversely affect our ability to compete effectively and could harm our business. Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power and economic conditions may force additional consolidation. As the healthcare industry consolidates, competition to provide services to industry participants will become more intense and the importance of existing relationships with industry participants will become greater.

 

We may face pricing pressures that could limit our ability to maintain or increase prices for our products and services.

 

We may be subject to pricing pressures with respect to our future sales arising from various sources, including, without limitation, competition within the industry, consolidation of healthcare industry participants, practices of managed care organizations, government action affecting reimbursement and certain of our customers who experience significant financial stress. If our competitors are able to offer products and services that result, or that are perceived to result, in customer financial improvement that is substantially similar to or better than the financial improvement generated by our products and services, we may be forced to compete on the basis of additional attributes, such as price, to remain competitive. In addition, as healthcare providers consolidate to create integrated healthcare delivery systems with greater market power, these providers may try to use their market power to negotiate fee reductions for our products and services. Our customers and the other entities with which we have a business relationship are affected by changes in regulations and limitations in governmental spending for Medicare and Medicaid programs. Government actions could limit government spending for the Medicare and Medicaid programs, limit payments to healthcare providers, and increase emphasis on competition and other programs that could have an adverse effect on our customers and the other entities with which we have a business relationship. Additionally, if our current and prospective customers do not benefit from any broader economic recovery, this may exacerbate pricing pressure.

 

If our pricing experiences significant downward pressure, our business will be less profitable and our results of operations will be adversely affected. In addition, because cash flow from operations funds our working capital requirements, reduced profitability could require us to raise additional capital sooner than we would otherwise need.

 

If we are not able to offer new and valuable products and services, we may not remain competitive and our revenue and results of operations may suffer.

 

Our success depends on providing products and services that healthcare providers use to improve financial performance. Our competitors are constantly developing products and services that may become more efficient or appealing to our customers. In addition, certain of our existing products may become obsolete in light of rapidly evolving industry standards, technology and customer needs, including changing regulations and

provider reimbursement policies. As a result, we must continue to invest significant resources in research and development in order to enhance our existing products and services and introduce new high-quality products and services that customers and potential customers will want. Many of our customer relationships are nonexclusive or terminable on short notice, or otherwise terminable after a specified term. If our new or modified product and service innovations are not responsive to user preferences or industry or regulatory changes, are not appropriately timed with market opportunity, or are not effectively brought to market, we may lose existing customers and be unable to obtain new customers and our results of operations may suffer.

 

We may experience significant delays in generating, or an inability to generate, revenues if potential customers take a long time to evaluate our products and services.

 

A key element of our strategy is to market our products and services directly to large healthcare providers, such as health systems and acute care hospitals and to increase the number of our products and services utilized by existing health system and acute care hospital customers. The evaluation process is often lengthy and involves significant technical evaluation and commitment of personnel by these organizations. The use of our products and services may also be delayed due to an inability or reluctance to change or modify existing procedures. If we are unable to sell additional products and services to existing health system and hospital customers, or enter into and maintain favorable relationships with other large healthcare providers, our revenue could grow at a slower rate or even decrease.

 

Unsuccessful implementation of our products and services with our customers may harm our future financial success.

 

Some of our new-customer projects are complex and require lengthy and significant work to implement our products and services. Each customer’s situation may be different, and unanticipated difficulties and delays may arise as a result of failure by us or by the customer to meet respective implementation responsibilities. If the customer implementation process is not executed successfully or if execution is delayed, our relationships with some of our customers may be adversely impacted and our results of operations will be impacted negatively. In addition, cancellation of any implementation of our products and services after it has begun may involve loss to us of time, effort and resources invested in the cancelled implementation as well as lost opportunity for acquiring other customers over that same period of time. These factors may contribute to substantial fluctuations in our quarterly operating results, particularly in the near term and during any period in which our sales volume is relatively low.

 

If we are unable to maintain our third party providers, strategic alliances or enter into new alliances, we may be unable to grow our current base business.

 

Our business strategy includes entering into strategic alliances and affiliations with leading healthcare service providers. We work closely with our strategic partners to either expand our penetration in certain areas or classes of trade, or expand our market capabilities. We may not achieve our objectives through these alliances. Many of these companies have multiple relationships and they may not regard us as significant to their business. These companies may pursue relationships with our competitors or develop or acquire products and services that compete with our products and services. In addition, in many cases, these companies may terminate their relationships with us with little or no notice. If existing alliances are terminated or we are unable to enter into alliances with leading healthcare service providers, we may be unable to maintain or increase our market presence.

 

If the protection of our intellectual property is inadequate, our competitors may gain access to our technology or confidential information and we may lose our competitive advantage.

 

Our success as a company depends in part upon our ability to protect our core technology and intellectual property. To accomplish this, we rely on a combination of intellectual property rights, including trade secrets, copyrights and trademarks, as well as customary contractual protections.

We utilize a combination of internal and external measures to protect our proprietary software and confidential information. Such measures include contractual protections with employees, contractors, customers, and partners, as well as U.S. copyright laws.

 

We protect the intellectual property in our software pursuant to customary contractual protections in our agreements that impose restrictions on our customers’ ability to use such software, such as prohibiting reverse engineering and limiting the use of copies. We also seek to avoid disclosure of our intellectual property by relying on non-disclosure and intellectual property assignment agreements with our employees and consultants that acknowledge our ownership of all intellectual property developed by the individual during the course of his or her work with us. The agreements also require each person to maintain the confidentiality of all proprietary information disclosed to them. Other parties may not comply with the terms of their agreements with us, and we may not be able to enforce our rights adequately against these parties. The disclosure to, or independent development by, a competitor of any trade secret, know-how or other technology not protected by a patent could materially adversely affect any competitive advantage we may have over any such competitor.

 

We cannot assure you that the steps we have taken to protect our intellectual property rights will be adequate to deter misappropriation of our rights or that we will be able to detect unauthorized uses and take timely and effective steps to enforce our rights. If unauthorized uses of our proprietary products and services were to occur, we might be required to engage in costly and time-consuming litigation to enforce our rights. We cannot assure you that we would prevail in any such litigation. If others were able to use our intellectual property, our business could be subject to greater pricing pressure.

 

If we are alleged to have infringed on the rights of others, we could incur unanticipated costs and be prevented from providing our products and services.

 

We could be subject to intellectual property infringement claims as the number of our competitors grows and our applications’ functionality overlaps with competitor products. While we do not believe that we have infringed or are infringing on any proprietary rights of third parties, we cannot assure you that infringement claims will not be asserted against us or that those claims will be unsuccessful. Any intellectual property rights claim against us or our customers, with or without merit, could be expensive to litigate, cause us to incur substantial costs and divert management resources and attention in defending the claim. Furthermore, a party making a claim against us could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief that could effectively block our ability to provide products or services. In addition, we cannot assure you that licenses for any intellectual property of third parties that might be required for our products or services will be available on commercially reasonable terms, or at all. As a result, we may also be required to develop alternative non-infringing technology, which could require significant effort and expense.

 

In addition, a number of our contracts with our customers contain indemnity provisions whereby we indemnify them against certain losses that may arise from third-party claims that are brought in connection with the use of our products.

 

Our exposure to risks associated with the use of intellectual property may be increased as a result of acquisitions, as we have a lower level of visibility into the development process with respect to such technology or the care taken to safeguard against infringement risks. In addition, third parties may make infringement and similar or related claims after we have acquired technology that had not been asserted prior to our acquisition.

 

Our sources of data might restrict our use of or refuse to license data, which could adversely impact our ability to provide certain products or services.

 

A portion of the data that we use is either purchased or licensed from third parties or is obtained from our customers for specific customer engagements. We also obtain a portion of the data that we use from public records. We believe that we have all rights necessary to use the data that is incorporated into our products and services. However, in the future, data providers could withdraw their data from us if there is a competitive reason to do so; if legislation is passed restricting the use of the data; or if judicial interpretations are issued restricting use of the data that we currently use in our products and services. Further, we cannot assure you

that our licenses for information will allow us to use that information for all potential or contemplated applications and products. If a substantial number of data providers were to withdraw their data, our ability to provide products and services to our customers could be materially adversely impacted.

 

Our use of “open source” software could adversely affect our ability to sell our products and subject us to possible litigation.

 

A significant portion of the products or technologies acquired, licensed or developed by us may incorporate so-called “open source” software, and we may incorporate open source software into other products in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses, including, for example, the GNU General Public License, the GNU Lesser General Public License, “Apache-style” licenses, “Berkeley Software Distribution,” “BSD-style” licenses and other open source licenses. We attempt to monitor our use of open source software in an effort to avoid subjecting our products to conditions we do not intend; however, there can be no assurance that our efforts have been or will be successful. There is little or no legal precedent governing the interpretation of many of the terms of certain of these licenses, and therefore the potential impact of these terms on our business is somewhat unknown and may result in unanticipated obligations regarding our products and technologies. For example, we may be subjected to certain conditions, including requirements that we offer our products that use particular open source software at no cost to the user; that we make available the source code for modifications or derivative works we create based upon, incorporating or using the open source software; and/or that we license such modifications or derivative works under the terms of the particular open source license.

 

If an author or other party that distributes such open source software were to allege that we had not complied with the conditions of one or more of these licenses, we could be required to incur significant legal costs defending ourselves against such allegations. If our defenses were not successful, we could be subject to significant damages; be enjoined from the distribution of our products that contained the open source software; and be required to comply with the foregoing conditions, which could disrupt the distribution and sale of some of our products. In addition, if we combine our proprietary software with open source software in a certain manner, under some open source licenses we could be required to release the source code of our proprietary software, which could substantially help our competitors develop products that are similar to or better than ours.

 

Our failure to license and integrate third-party technologies could harm our business.

 

We depend upon licenses from third-party vendors for some of the technology and data used in our applications, and for some of the technology platforms upon which these applications are built and operate, including Microsoft and Oracle. We also integrate into our proprietary applications and use third-party software to maintain and enhance, among other things, content generation and delivery, and to support our technology infrastructure. Some of this software is proprietary and some is open source. These technologies might not continue to be available to us on commercially reasonable terms or at all and could be difficult to replace once integrated into our own proprietary applications. Most of these licenses can be renewed only by mutual consent and may be terminated if we breach the terms of the license and fail to cure the breach within a specified period of time. Our inability to obtain any of these licenses could delay development until equivalent technology can be identified, licensed and integrated, which will harm our business, financial condition and results of operations.

 

Most of our third-party licenses are non-exclusive and our competitors may obtain the right to use any of the technology covered by these licenses to compete directly with us. Our use of third-party technologies exposes us to increased risks, including, but not limited to, risks associated with the integration of new technology into our solutions, the diversion of our resources from development of our own proprietary technology and our inability to generate revenue from licensed technology sufficient to offset associated acquisition and maintenance costs. In addition, if our vendors choose to discontinue support of the licensed technology in the future, we might not be able to modify or adapt our own solutions.

We may experience difficulties in integrating Broadlane’s business and the anticipated benefits of the Broadlane Acquisition may not be realized fully (or at all) and may take longer to realize than expected.

 

Our future performance will depend in large part on whether we can successfully integrate the Broadlane business, which is our largest acquisition to date, in an effective and efficient manner. Integrating our business with the Broadlane business is a complex, time-consuming and expensive process and involves a number of risks, including:

 

 

Delays or unexpected difficulties or additional costs in the integration process could have a material adverse effect on our business, financial condition and results of operations. Even if we are able to integrate the Broadlane business successfully, this integration may not result in the realization of the full benefits of synergies, cost savings, revenue enhancements, growth, operational efficiencies and other benefits that we expect. We cannot assure you that we will successfully integrate the Broadlane business with our business or achieve the desired benefits from the Broadlane Acquisition within a reasonable period of time or at all.

 

Uncertainty regarding the Broadlane Acquisition may cause actual or potential customers, suppliers, distributors and others to delay or defer decisions concerning us, which may have a material adverse effect on our business, financial condition or results of operation.

 

In response to the completion of the Broadlane Acquisition, actual or potential customers, suppliers, distributors, resellers and others may delay or defer purchasing, supply or distribution decisions or otherwise alter existing relationships with us. Prospective customers could be reluctant to purchase our products and services due to uncertainty about the direction of the combined company and willingness to support and service existing products and services, given the differences between our service offerings and those historically at Broadlane. Existing customers, suppliers and distributors may seek to terminate and/or renegotiate their relationships with the combined company as a result of the Broadlane Acquisition. Existing customers may not accept new products or continue as customers of the combined company, and the combined company may fail to compete effectively against companies already serving the broader market opportunities expected to be available to the combined company. These and other actions by customers, suppliers, distributors, resellers or others could negatively affect the business of the combined company.

 

We intend to continue to pursue acquisition opportunities, which may subject us to considerable business and financial risk.

 

We have grown through, and anticipate that we will continue to grow through, acquisitions of competitive and complementary businesses. We evaluate potential acquisitions on an ongoing basis and regularly pursue acquisition opportunities. We may not be successful in identifying acquisition opportunities, assessing the value, strengths and weaknesses of these opportunities and consummating acquisitions on acceptable terms. Furthermore, suitable acquisition opportunities may not even be made available or known to us. In addition, we may compete for certain acquisition targets with companies having greater financial resources than we do and may expend significant resources in acquisition attempts that prove unsuccessful. We anticipate that we may finance acquisitions through cash provided by operating activities, borrowings under our existing credit facility and other indebtedness. Borrowings necessary to finance acquisitions may not be available on terms

acceptable to us, or at all. Future acquisitions may also result in potentially dilutive issuances of equity securities. Acquisitions may expose us to particular business and financial risks that include, but are not limited to:

 

 

If we are unable to successfully implement our acquisition strategy or address the risks associated with acquisitions, or if we encounter unforeseen expenses, difficulties, complications or delays frequently encountered in connection with the integration of acquired entities and the expansion of operations, our growth and ability to compete may be impaired, we may fail to achieve acquisition synergies and we may be required to focus resources on integration of operations rather than on our primary product and service offerings.

 

Our indebtedness could adversely affect our financial health and reduce the funds available to us for other purposes.

 

We have and may continue to have a significant amount of indebtedness. On November 16, 2010, to help finance the Broadlane Acquisition, we entered into a new credit agreement consisting of a six-year $635 million senior secured term loan facility and a five-year $150 million senior secured revolving credit facility, including a letter of credit sub-facility of $25 million and a swing line sub-facility of $25 million. In addition, we closed the offering of an aggregate principal amount of up to $325 million of senior notes due 2018 in a private placement pursuant to an indenture. At December 31, 2010, we had total indebtedness of $960.0 million, excluding the deferred payment of $123.1 million.

 

Our substantial indebtedness could adversely affect our financial health in the following ways:

 

 

In addition, our credit facilities and indenture contain, and future indebtedness may contain, financial and other restrictive covenants, ratios and tests that limit our ability to incur additional debt and engage in other activities that may be in our long-term best interests. For example, our credit facilities and indenture include covenants restricting, among other things, our ability to incur indebtedness, create liens on assets, engage in

certain lines of business, engage in certain mergers or consolidations, dispose of assets, make certain investments or acquisitions, engage in transactions with affiliates, enter into sale leaseback transactions, enter into negative pledges or pay dividends or make other restricted payments. Our credit facilities also include financial covenants, including requirements that we maintain compliance with a total leverage ratio and an interest coverage ratio.

 

Our ability to comply with the covenants and ratios contained in our credit facilities and indenture or in the agreements governing our future indebtedness may be affected by events beyond our control, including prevailing economic, financial and industry conditions. Our credit facilities prohibit us from making dividend payments on our common stock if we are not in compliance with each of our financial covenants and our existing credit facilities and indenture prohibit us from making dividend payments on our common stock if we are not in compliance with our restricted payment covenants. Our first financial covenant compliance report under our credit facility will begin for the period ending March 31, 2011. If we were to experience any future event of default, if not waived or cured, it could result in the acceleration of the maturity of our indebtedness under our credit facilities and indenture. If we were unable to repay those amounts, the lenders under our credit facilities could proceed against the security granted to them to secure that indebtedness. If the lenders accelerate the payment of our indebtedness, our assets may not be sufficient to repay in full such indebtedness.

 

We may need to obtain additional financing which may not be available or, if it is available, may result in a reduction in the percentage ownership of our existing stockholders.

 

We may need to raise additional funds in order to:

 

 

Additional financing may not be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our expansion, take advantage of unanticipated opportunities, develop or enhance technology or services or otherwise respond to competitive pressures would be significantly limited. If we raise additional funds by issuing equity or convertible debt securities, the percentage ownership of our then-existing stockholders will be reduced, and these securities may have rights, preferences or privileges senior to those of our existing stockholders.

 

If we are required to collect sales and use taxes on the solutions we sell in certain jurisdictions, we may be subject to tax liability for past sales and our future sales may decrease.

 

Rules and regulations applicable to sales and use tax vary significantly from state to state. In addition, the applicability of these rules given the nature of our products and services, is subject to change.

 

We may lose sales or incur significant costs should various tax jurisdictions be successful in imposing sales and use taxes on a broader range of products and services. A successful assertion by one or more tax jurisdictions that we should collect sales or other taxes on the sale of our solutions could result in substantial tax liabilities for past sales, decrease our ability to compete and otherwise harm our business.

 

If one or more taxing authorities determines that taxes should have, but have not, been paid with respect to our services, we may be liable for past taxes in addition to taxes going forward. Liability for past taxes may also include very substantial interest and penalty charges. If we are required to collect and pay back taxes and the associated interest and penalties and if our customers fail or refuse to reimburse us for all or a portion of these amounts, we will have incurred unplanned costs that may be substantial. Moreover, imposition of such taxes on our services going forward will effectively increase the cost of such services to our customers and

may adversely affect our ability to retain existing customers or to gain new customers in the areas in which such taxes are imposed.

 

Any significant increase in bad debt in excess of recorded estimates would have a negative impact on our business, financial condition and results of operations.

 

We initially evaluate the collectability of our accounts receivable based on a number of factors, including a specific customer’s ability to meet its financial obligations to us, the length of time the receivables are past due and historical collections experience. Based on these assessments, we record a reserve for specific account balances as well as a general reserve based on our historical experience for bad debt to reduce the related receivables to the amount we expect to collect from customers. Many of our customers are under intense financial pressure and their operations are characterized by declining or negative margins. If circumstances related to specific customers change, especially those of our larger customers, as a result of economic conditions or otherwise, such as a limited ability to meet financial obligations due to bankruptcy, or if conditions deteriorate such that our past collection experience is no longer relevant, the amount of accounts receivable that we are able to collect may be less than our previous estimates as we experience bad debt in excess of reserves previously recorded.

 

Our quarterly results of operations have fluctuated in the past and may continue to fluctuate in the future as a result of certain factors, some of which may be outside of our control.

 

Certain of our customer contracts contain terms that result in revenue that is deferred and cannot be recognized until the occurrence of certain events. For example, accounting principles do not allow us to recognize revenue associated with the implementation of products and services until the implementation has been completed, at which time we begin to recognize revenue over the life of the contract or the estimated customer relationship period, whichever is longer. In addition, subscription-based fees generally commence only upon completion of implementation. As a result, the period of time between contract signing and recognition of associated revenue may be lengthy, and we are not able to predict with certainty the period in which implementation will be completed.

 

Certain of our contracts provide that some portion or all of our fees are at risk and refundable if our products and services do not result in the achievement of certain financial performance targets. To the extent that any revenue is subject to contingency for the non-achievement of a performance target, we only recognize revenue upon customer confirmation that the financial performance targets have been achieved. If a customer fails to provide such confirmation in a timely manner, our ability to recognize revenue will be delayed.

 

Our SCM segment relies on participating vendors to provide periodic reports of their sales volumes to our customers and resulting administrative fees to us. If a vendor fails to provide such reporting in a timely and accurate manner, our ability to recognize administrative fee revenue will be delayed or prevented.

 

Certain of our fees are based on timing and volume of customer invoices processed and payments received, which are often dependent upon factors outside of our control.

 

Other fluctuations in our quarterly results of operations may be due to a number of other factors, some of which are not within our control, including:

 

 

 

We base our expense levels in part upon our expectations concerning future revenue, and these expense levels are relatively fixed in the short term. If we have lower revenue than expected, we may not be able to reduce our spending in the short term in response. Any significant shortfall in revenue would have a direct and material adverse impact on our results of operations. We believe that our quarterly results of operations may vary significantly in the future and that period-to-period comparisons of our results of operations may not be meaningful. You should not rely on the results of one quarter as an indication of future performance. If our quarterly results of operations fall below the expectations of securities analysts or investors, the price of our common stock could decline substantially.

 

If we lose key personnel or if we are unable to attract, hire, integrate and retain key personnel, our business would be harmed.

 

Our future success depends in part on our ability to attract, hire, integrate and retain key personnel. Our future success also depends on the continued contributions of our executive officers and other key personnel, each of whom may be difficult to replace. In particular, John A. Bardis, our chairman, president and chief executive officer and Rand A. Ballard, our chief operating officer and chief customer officer, are critical to the management of our business and operations and the development of our strategic direction. The loss of services of Messrs. Bardis or Ballard or any of our other executive officers or key personnel could have a material adverse effect on our business. The replacement of any of these key individuals would involve significant time and expense and may significantly delay or prevent the achievement of our business objectives.

 

Risks Related to Our Product and Service Offerings

 

If our products fail to perform properly due to undetected errors or similar problems, our business could suffer.

 

Because of the large amount of data that we collect and manage, it is possible that hardware failures or errors in our systems could result in data loss or corruption or cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant. Complex software such as ours may contain errors or failures that are not detected until after the software is introduced or updates and new versions are released. We continually introduce new software and updates and enhancements to our software. Despite testing by us, from time to time we have discovered defects or errors in our software, and such defects or errors may appear in the future. Defects and errors that are not timely detected and remedied could expose us to risk of liability to customers and the government and could cause delays in the introduction of new products and services, result in increased costs and diversion of development resources, require design modifications, decrease market acceptance or customer satisfaction with our products and services or cause harm to our reputation. If any of these events occur, it could materially adversely affect our business, financial condition or results of operations.

 

Furthermore, our customers might use our software together with products from other companies. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does not cause these problems, the existence of these errors might cause us to incur significant costs,

divert the attention of our technical personnel from our product development efforts, impact our reputation and lead to significant customer relations problems.

 

If our products or services fail to provide accurate information, or if our content or any other element of our products or services is associated with incorrect, inaccurate or faulty coding, billing, or claims submissions to Medicare or any other third-party payor, we could be liable to customers or the government which could adversely affect our business.

 

Our products and content were developed based on the laws, regulations and third-party payor rules in existence at the time such software and content was developed. If we interpret those laws, regulations or rules incorrectly; the laws, regulations or rules materially change at any point after the software and content was developed; we fail to provide up-to-date, accurate information; or our products, or services are otherwise associated with incorrect, inaccurate or faulty coding, billing or claims submissions, then customers could assert claims against us or the government or qui tam relators on behalf of the government could assert claims against us under the Federal False Claims Act or similar state laws. The assertion of such claims and ensuing litigation, regardless of its outcome, could result in substantial costs to us, divert management’s attention from operations, damage our reputation and decrease market acceptance of our services. We attempt to limit by contract our liability to customers for damages. We cannot, however, limit liability the government could seek to impose on us under the False Claims Act. Further, the allocations of responsibility and limitations of liability set forth in our contracts may not be enforceable or otherwise protect us from liability for damages.

 

Factors beyond our control could cause interruptions in our operations, which may adversely affect our reputation in the marketplace and our business, financial condition and results of operations.

 

The timely development, implementation and continuous and uninterrupted performance of our hardware, network, applications, the Internet and other systems, including those which may be provided by third parties, are important facets in our delivery of products and services to our customers. Our ability to protect these processes and systems against unexpected adverse events is a key factor in continuing to offer our customers our full complement of products and services on time in an uninterrupted manner.

 

Our operations are vulnerable to interruption by damage from a variety of sources, many of which are not within our control, including without limitation: (1) power loss and telecommunications failures; (2) software and hardware errors, failures or crashes; (3) computer viruses and similar disruptive problems; (4) fire, flood and other natural disasters; and (5) attacks on our network or damage to our software and systems carried out by hackers or Internet criminals.

 

System failures that interrupt our ability to develop applications or provide our products and services could affect our customers’ perception of the value of our products and services. Delays or interruptions in the delivery of our products and services could result from unknown hardware defects, insufficient capacity or the failure of our website hosting and telecommunications providers to provide continuous and uninterrupted service. Additionally, we host some of our services and serve our customers through third-party data center hosting facilities. We do not control the operation of these facilities. From time to time, we may need to relocate our data or our customers’ data to alternative locations. Despite precautions taken during such moves, any difficulties experienced may impair the delivery of our services. We also depend on service providers that provide customers with access to our products and services. In addition, computer viruses may harm our systems causing us to lose data, and the transmission of computer viruses could expose us to litigation. In addition to potential liability, if we supply inaccurate information or experience interruptions in our ability to capture, store and supply information, our reputation could be harmed and we could lose customers. Any significant interruptions in our products and services could damage our reputation in the marketplace and have a negative impact on our business, financial condition and results of operations.

Unauthorized disclosure of confidential information provided to us by our customers or third parties, whether through breach of our secure network by an unauthorized party, employee theft or misuse, or otherwise, could harm our business.

 

The difficulty of securely transmitting confidential information has been a significant issue when engaging in sensitive communications over the Internet. Our business relies on using the Internet to transmit confidential information. We believe that any well-publicized compromise of Internet security may deter companies from using the Internet for these purposes.

 

Our services present the potential for embezzlement, identity theft, or other similar illegal behavior by our employees or subcontractors with respect to third parties. If there was a disclosure of confidential information, or if a third party were to gain unauthorized access to the confidential information we possess, our operations could be seriously disrupted, our reputation could be harmed and we could be subject to claims pursuant to our agreements with our customers or other liabilities. In addition, if this were to occur, we could be perceived to have facilitated or participated in illegal misappropriation of funds, documents, or data and therefore be subject to civil or criminal liability or regulatory action. While we maintain professional liability insurance coverage in an amount that we believe is sufficient for our business, we cannot assure you that this coverage will prove to be adequate or will continue to be available on acceptable terms, if at all. A claim that is brought against us that is uninsured or under-insured could harm our business, financial conditions and results of operations. Even unsuccessful claims could result in substantial costs and diversion of management resources.

 

Risks Related to Government Regulation

 

The healthcare industry is highly regulated. Any material changes in the political, economic or regulatory healthcare environment that affect the group purchasing business or the purchasing practices and operations of healthcare organizations, or that lead to consolidation in the healthcare industry, could require us to modify our services or reduce the funds available to providers to purchase our products and services.

 

Our business, financial condition and results of operations depend upon conditions affecting the healthcare industry generally and hospitals and health systems particularly. Our ability to grow will depend upon the economic environment of the healthcare industry generally as well as our ability to increase the number of programs and services that we sell to our customers. The healthcare industry is highly regulated and is subject to changing political, economic and regulatory influences. Factors such as changes in reimbursement policies for healthcare expenses, consolidation in the healthcare industry, regulation, litigation, and general economic conditions affect the purchasing practices, operation and, ultimately, the operating funds of healthcare organizations. In particular, changes in regulations affecting the healthcare industry, such as any increased regulation by governmental agencies of the purchase and sale of medical products, or restrictions on permissible discounts and other financial arrangements, could require us to make unplanned modifications of our products and services, or result in delays or cancellations of orders or reduce funds and demand for our products and services.

 

Because of the lingering effect of the weakened economy, cash flow and access to credit continues to be problematic for many healthcare delivery organizations. While we believe we are well positioned through our product and service offerings to assist hospitals and health systems who are dealing with increasing and intense financial pressures, it is unclear what long-term effects these conditions will have on the healthcare industry and in turn on our business, financial condition and results of operations.

 

In addition, in February 2009 the United States Congress enacted the HITECH Act, as part of the American Recovery and Reinvestment Act of 2009. The HITECH Act requires that hospitals and health systems make investments in their clinical information systems, including the adoption of electronic medical records. While we believe that increased emphasis on electronic medical records by hospitals and health systems will also drive demand for SaaS-based tools, such as ours, to help rationalize and standardize patient and clinical data for efficient and accurate use, we cannot be certain whether or when such demand will materialize nor can we be certain that we will be benefit from it.

In March 2010, President Obama signed into law the Patient Protection and Affordable Care Act (“PPACA”), amended by the Health Care and Education and Reconciliation Act of 2010 (collectively, the “Affordable Care Act”). The Affordable Care Act is a sweeping measure designed to expand access to affordable health insurance, control health care spending, and improve health care quality. The law includes provisions to tie Medicare provider reimbursement to health care quality and incentives; mandatory compliance programs; enhanced transparency disclosure requirements; increased funding and initiatives to address fraud and abuse; and incentives to state Medicaid programs to promote community-based care as an alternative to institutional long-term care services, among many others. In addition, the law provides for the establishment of a national voluntary pilot program to bundle Medicare payments for hospital and post-acute services, which could lead to changes in the delivery of health care services. Likewise, many states have adopted or are considering changes in health care policies as a result of state budgetary shortfalls. The timetable for implementing many provisions of the Affordable Care Act remains unsettled, and we do not know what effect the federal Affordable Care Act or state law proposals may have on our business.

 

If current or future government regulations are interpreted or enforced in a manner adverse to us or our business, we may be subject to enforcement actions, penalties, and other material limitations on our business.

 

Most of the products offered through our group purchasing contracts are subject to direct regulation by federal and state governmental agencies. We rely upon vendors who use our services to meet all quality control, packaging, distribution, labeling, hazard and health information notice, record keeping and licensing requirements. In addition, we rely upon the carriers retained by our vendors to comply with regulations regarding the shipment of any hazardous materials.

 

We cannot guarantee that the vendors are in compliance with applicable laws and regulations. If vendors or the providers with whom we do business have failed, or fail in the future, to adequately comply with any relevant laws or regulations, we could become involved in governmental investigations or private lawsuits concerning these regulations. If we were found to be legally responsible in any way for such failure we could be subject to injunctions, penalties or fines which could harm our business. Furthermore, any such investigation or lawsuit could cause us to expend significant resources and divert the attention of our management team, regardless of the outcome, and thus could harm our business.

 

In recent years, the group purchasing industry and some of its largest purchasing customers have been reviewed by the Senate Judiciary Subcommittee on Antitrust, Competition Policy and Consumer Rights for possible conflict of interest and restraint of trade violations. As a response to the Senate Subcommittee inquiry, our company joined other GPOs to develop a set of voluntary principles of ethics and business conduct designed to address the Senate’s concerns regarding anti-competitive practices. The voluntary code was presented to the Senate Subcommittee in March 2006. In addition, we maintain our own Standards of Business Conduct that provide guidelines for conducting our business practices in a manner that is consistent with antitrust and restraint of trade laws and regulations. There has not been any further inquiry by the Senate Subcommittee since March 2006. On August 11, 2009, we, and several other GPOs, received a letter from Senators Charles Grassley, Herb Kohl and Bill Nelson requesting information concerning the different relationships between and among our GPO and its customers, distributors, manufacturers and other vendors and suppliers, and requesting certain information about the services the GPO performs and the payments it receives. On September 25, 2009, we and several other GPOs received a request for information from the Government Accountability Office (GAO), also concerning our GPO’s services and relationships with our customers. Subsequently, we, and other GPOs, received follow-up requests for additional information. We fully complied with all of these requests. On September 27, 2010, the GAO released a report titled “Group Purchasing Organizations — Services Provided to Customers and Initiatives Regarding Their Business Practices”. On that same day, the Minority Staff of the Senate Finance Committee released a report titled “Empirical Data Lacking to Support Claims of Savings with Group Purchasing Organizations”.

 

Congress, the Department of Justice, the Federal Trade Commission or other state or federal governing entity could at any time open a new investigation of the group purchasing industry, or develop new rules, regulations or laws governing the industry, that could adversely impact our ability to negotiate pricing

arrangements with vendors, increase reporting and documentation requirements, or otherwise require us to modify our arrangements in a manner that adversely impacts our business and financial results. We may also face private or government lawsuits alleging violations arising from the concerns articulated by these governmental actors. We are involved on an ongoing basis in litigation, arising in the ordinary course of business or otherwise, which from time to time may include class actions involving consumers, shareholders, employees or injured persons, and claims relating to commercial, labor, employment, antitrust, securities or environmental matters. The outcome of litigation cannot be predicted with certainty and adverse litigation outcomes could adversely affect our financial results.

 

Our customers are highly dependent on payments from third-party healthcare payors, including Medicare, Medicaid and other government-sponsored programs, and reductions or changes in third-party reimbursement could adversely affect our customers and consequently our business.

 

Our customers derive a substantial portion of their revenue from third-party private and governmental payors, including Medicare, Medicaid and other government sponsored programs. Our sales and profitability depend, in part, on the extent to which coverage of and reimbursement for the products our customers purchase or otherwise obtain through us is available from governmental health programs, private health insurers, managed care plans and other third-party payors. These third-party payors exercise significant control over, and increasingly use their enhanced bargaining power to secure, discounted reimbursement rates and impose other requirements that may adversely impact our customers’ ability to obtain adequate reimbursement for products and services they purchase or otherwise obtain through us as a group purchasing member.

 

If third-party payors do not approve products for reimbursement or fail to reimburse for them adequately, our customers may suffer adverse financial consequences which, in turn, may reduce the demand for and ability to purchase our products or services. In addition CMS, which administers the Medicare and federal aspects of state Medicaid programs, has issued complex rules requiring pharmaceutical manufacturers to calculate and report drug pricing for multiple purposes, including the limiting of reimbursement for certain drugs. These rules generally exclude from the pricing calculation administrative fees paid by drug manufacturers to GPOs such as the company if the fees meet CMS’ “bona fide service fee” definition. There can be no assurance that CMS will continue to allow exclusion of GPO administrative fees from the pricing calculation, or that other efforts by payors to limit reimbursement for certain drugs will not have an adverse impact on our business. Further, we do not know what effect, if any, the healthcare reform legislation currently under consideration by the U.S. Congress will have on third-party reimbursement.

 

If we fail to comply with federal and state laws governing submission of false or fraudulent claims to government healthcare programs and financial relationships among healthcare providers, we may be subject to civil and criminal penalties or loss of eligibility to participate in government healthcare programs.

 

We are subject to federal and state laws and regulations designed to protect patients, governmental healthcare programs, and private health plans from fraudulent and abusive activities. These laws include anti-kickback restrictions and laws prohibiting the submission of false or fraudulent claims. These laws are complex and their application to our specific products, services and relationships may not be clear and may be applied to our business in ways that we do not anticipate. Federal and state regulatory and law enforcement authorities have recently increased enforcement activities with respect to Medicare and Medicaid fraud and abuse regulations and other reimbursement laws and rules. From time to time we and others in the healthcare industry have received inquiries or subpoenas to produce documents in connection with such activities. We could be required to expend significant time and resources to comply with these requests, and the attention of our management team could be diverted to these efforts. Furthermore, if we are found to be in violation of any federal or state fraud and abuse laws, we could be subject to civil and criminal penalties, and we could be excluded from participating in federal and state healthcare programs such as Medicare and Medicaid. The occurrence of any of these events could significantly harm our business and financial condition.

 

Provisions in Title XI of the Social Security Act, commonly referred to as the federal Anti-Kickback Statute, prohibit the knowing and willful offer, payment, solicitation or receipt of remuneration, directly or indirectly, in return for the referral of patients or arranging for the referral of patients, or in return for the

recommendation, arrangement, purchase, lease or order of items or services that are covered, in whole or in part, by a federal healthcare program such as Medicare or Medicaid. The definition of “remuneration” has been broadly interpreted to include anything of value such as gifts, discounts, rebates, waiver of payments or providing anything at less than its fair market value. Many states have adopted similar prohibitions against kickbacks and other practices that are intended to induce referrals which are applicable to all patients regardless of whether the patient is covered under a governmental health program or private health plan. We attempt to scrutinize our business relationships and activities to comply with the federal anti-kickback statute and similar laws; and we attempt to structure our sales and group purchasing arrangements in a manner that is consistent with the requirements of applicable safe harbors to these laws. We cannot assure you, however, that our arrangements will be protected by such safe harbors or that such increased enforcement activities will not directly or indirectly have an adverse effect on our business financial condition or results of operations. Any determination by a state or federal agency that any of our activities or those of our vendors or customers violate any of these laws could subject us to civil or criminal penalties, could require us to change or terminate some portions of or operations or business, could disqualify us from providing services to healthcare providers doing business with government programs and, thus, could have an adverse effect on our business.

 

Our business, particularly our Revenue Cycle Management segment, is also subject to numerous federal and state laws that forbid the submission or “causing the submission” of false or fraudulent information or the failure to disclose information in connection with the submission and payment of claims for reimbursement to Medicare, Medicaid, federal healthcare programs or private health plans. These laws and regulations may change rapidly, and it is frequently unclear how they apply to our business. Errors created by our products or consulting services that relate to entry, formatting, preparation or transmission of claim or cost report information may be determined or alleged to be in violation of these laws and regulations. Any failure of our products or services to comply with these laws and regulations could result in substantial civil or criminal liability, could adversely affect demand for our services, could invalidate all or portions of some of our customer contracts, could require us to change or terminate some portions of our business, could require us to refund portions of our services fees, could cause us to be disqualified from serving customers doing business with government payors and could have an adverse effect on our business.

 

Federal and state privacy and security laws may increase the costs of operation and expose us to civil and criminal sanctions.

 

We must comply with extensive federal and state requirements regarding the use, retention and security of patient healthcare information. The Health Insurance Portability and Accountability Act of 1996, as amended, and the regulations that have been issued under it, which we refer to collectively as HIPAA, contain substantial restrictions and requirements with respect to the use and disclosure of individuals’ protected health information. These restrictions and requirements are set forth in the Privacy Rule and Security Rule portions of HIPAA. The HIPAA Privacy Rule prohibits a covered entity from using or disclosing an individual’s protected health information unless the use or disclosure is authorized by the individual or is specifically required or permitted under the Privacy Rule. The Privacy Rule imposes a complex system of requirements on covered entities for complying with this basic standard. Under the HIPAA Security Rule, covered entities must establish administrative, physical and technical safeguards to protect the confidentiality, integrity and availability of electronic protected health information maintained or transmitted by them or by others on their behalf.

 

Our healthcare provider customers that engage in HIPAA-defined standard electronic transactions, and our own business operations as a healthcare clearinghouse, are directly subject to the HIPAA Privacy and Security Rules involving “covered entities”. Additionally, because some of our customers disclose protected health information to us so that we may use that information to provide certain consulting or other services to those customers, we are a “business associate” of those customers. In these cases, in order to provide customers with services that involve the use or disclosure of protected health information, the HIPAA Privacy and Security Rules require us to enter into business associate agreements with our customers. Such agreements must, among other things, provide adequate written assurances:

 

 

 

With the enactment of the HITECH Act, the privacy and security requirements of HIPAA have been modified and expanded. The HITECH Act applies certain of the HIPAA privacy and security requirements directly to business associates of covered entities. As such, and upon the enforcement date of a forthcoming final regulation implementing the HITECH Act’s privacy and security provisions, we will be required to directly comply with certain aspects of the Privacy and Security Rules in our capacity as a business associate, and will also be subject to enforcement for a violation of HIPAA standards. Significantly, the HITECH Act also establishes new mandatory federal requirements for both covered entities and business associates regarding notification of breaches of unsecured protected health information. These breach notification requirements are currently effective and being enforced.

 

Any failure or perception of failure of our products or services to meet HIPAA standards and related regulatory requirements could expose us to certain notification, penalty and/or enforcement risks and could adversely affect demand for our products and services, and force us to expend significant capital, research and development and other resources to modify our products or services to address the privacy and security requirements of our customers and HIPAA.

 

In addition to our obligations under HIPAA, most states have enacted patient confidentiality laws that protect against the disclosure of confidential medical information, and many states have adopted or are considering adopting further legislation in this area, including privacy safeguards, security standards, and data security breach notification requirements. These state laws, if more stringent than HIPAA requirements, are not preempted by the federal requirements, and we are required to comply with them as well.

 

We are unable to predict what changes to HIPAA or other federal or state laws or regulations might be made in the future or how those changes could affect our business or the associated costs of compliance. For example, the federal Office of the National Coordinator for Health Information Technology, or ONCHIT, is coordinating the development of national standards for creating an interoperable health information technology infrastructure based on the widespread adoption of electronic health records (EHRs) in the healthcare sector. In October 2010, the Certification Commission for Health Information Technology (CCHIT) announced it has tested and certified 33 electronic health record products under the Commission’s ONC-ATCB program, which certifies that the EHRs are capable of meeting the 2011/2012 criteria supporting Stage 1 meaningful use as approved by the Secretary of Health and Human Services. The certifications include 19 Complete EHRs, which meet all of the 2011/2012 criteria for either eligible provider or hospital technology, and 14 EHR Modules, which meet one or more — but not all — of the criteria. We are yet unable to predict what, if any, impact the creation of such standards will have on our products, services or compliance costs.

 

Failure by us to comply with any of the federal and state standards regarding patient privacy, identity theft prevention and detection, and data security may subject us to penalties, including civil monetary penalties and in some circumstances, criminal penalties. In addition, such failure may injure our reputation and adversely affect our ability to retain customers and attract new customers.

 

HIPAA and its implementing regulations also mandate format, data content and provider identifier standards that must be used in certain electronic transactions, such as claims, payment advice and eligibility inquiries. Although our systems are fully capable of transmitting transactions that comply with these requirements, some payers and healthcare clearinghouses with which we conduct business may interpret HIPAA transaction requirements differently than we do or may require us to use legacy formats or include legacy identifiers as they make the transition to full compliance. In cases where payers or healthcare clearinghouses require conformity with their interpretations or require us to accommodate legacy transactions

or identifiers as a condition of successful transactions, we attempt to comply with their requirements, but may be subject to enforcement actions as a result. In January 2009, CMS published a final rule adopting updated standard code sets for diagnoses and procedures known as ICD-10 code sets. A separate final rule also published by CMS in January 2009 resulted in changes to the formats to be used for electronic transactions subject to the ICD-10 code sets, known as Version 5010. While use of the ICD-10 code sets is not mandated until October 1, 2013 and the use of Version 5010 is not mandated until January 1, 2012, we have initiated the process to modify our payment systems and processes in preparation of their implementation. We may not be successful in responding to these changes and any changes in response that we make to our transactions and software may result in errors or otherwise negatively impact our service levels. We may also experience complications in supporting customers that are not fully compliant with the revised requirements as of the applicable compliance date.

 

If our customers who operate as not-for profit entities lose their tax-exempt status, those customers would suffer significant adverse tax consequences which, in turn, could adversely impact their ability to purchase products or services from us.

 

There has been a trend across the United States among state tax authorities to challenge the tax exempt status of hospitals and other healthcare facilities claiming such status on the basis that they are operating as charitable and/or religious organizations. The outcome of these cases has been mixed with some facilities retaining their tax-exempt status while others have been denied the ability to continue operating under as not-for profit, tax-exempt entities under state law. In addition, many states have removed sales tax exemptions previously available to not-for-profit entities, and both the IRS and the United States Congress are investigating the practices of non-for profit hospitals. Those facilities denied tax exemptions could be subject to the imposition of tax penalties and assessments which could have a material adverse impact on their cash flow, financial strength and possibly ongoing viability. If the tax exempt status of any of our customers is revoked or compromised by new legislation or interpretation of existing legislation, that customer’s financial health could be adversely affected, which could adversely impact our sales and revenue.

 

Risks Related to Ownership in Our Common Stock

 

The market price of our common stock may be volatile, and your investment in our common stock could suffer a decline in value.

 

There has been significant volatility in the market price and trading volume of equity securities, which is often unrelated or disproportionate to the financial performance of the companies issuing the securities. These broad market fluctuations may negatively affect the market price of our common stock. The market price of our common stock could fluctuate significantly in response to the factors described above and other factors, many of which are beyond our control, including:

 

 

You may not be able to resell your shares at or above the market price you paid to purchase your shares due to fluctuations in the market price of our common stock caused by changes in the market as a whole or our operating performance or prospects.

 

A limited number of stockholders have the ability to influence the outcome of director elections and other matters requiring stockholder approval.

 

Those affiliated with the Company beneficially own a substantial amount of our outstanding common stock. The interests of our executive officers, directors and their affiliated entities may differ from the interests of the other stockholders. These stockholders, if they act together, could exert substantial influence over matters requiring approval by our stockholders, including the election of directors, the amendment of our certificate of incorporation and by-laws and the approval of mergers or other business combination transactions. These transactions might include proxy contests, tender offers, mergers or other purchases of common stock that could give you the opportunity to realize a premium over the then-prevailing market price for shares of our common stock. As to these matters and in similar situations, you may disagree with these stockholders as to whether the action opposed or supported by them is in the best interest of our stockholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our stockholders of an opportunity to receive a premium for their stock as part of a sale of our company and may negatively affect the market price of our common stock.

 

Provisions in our certificate of incorporation and by-laws or Delaware law might discourage, delay or prevent a change of control of our company or changes in our management and, therefore, depress the trading price of our common stock.

 

Provisions of our certificate of incorporation and by-laws and Delaware law may discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider favorable, including transactions in which you might otherwise receive a premium for your shares of our common stock. These provisions may also prevent or frustrate attempts by our stockholders to replace or remove our management.

 

For example, our amended and restated certificate of incorporation provides for a staggered board of directors, whereby directors serve for three-year terms, with approximately a third of the directors coming up for re-election each year. Having a staggered board could make it more difficult for a third party to acquire us through a proxy contest. Other provisions that may discourage, delay or prevent a change in control or changes in management include:

 

 

In addition, Section 203 of the Delaware General Corporation Law prohibits a publicly-held Delaware corporation from engaging in a business combination with an interested stockholder, generally a person which together with its affiliates owns, or within the last three years has owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner.

 

A change of control may also impact employee benefit arrangements, which could make an acquisition more costly and could prevent it from going forward. For example, our equity compensation plans allow for all or a portion of the equity granted under these plans to vest upon a change of control. Finally, upon any change in control, the lenders under our credit facilities would have the right to require us to repay all of the outstanding obligations under our credit facilities and the noteholders under our indenture would have the right to require that we offer to redeem the notes thereunder at 101% of the principal amount plus accrued interest and all other amounts payable thereunder.

The existence of the foregoing provisions and anti-takeover measures could limit the price that investors might be willing to pay in the future for shares of our common stock. They could also deter potential acquirers of our company, thereby reducing the likelihood that you could receive a premium for your common stock in an acquisition.

 

We do not currently intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.

 

We do not intend to declare or pay any cash dividends on our common stock for the foreseeable future. We currently intend to invest our future earnings, if any, to fund our growth. Therefore, you are not likely to receive any dividends on your common stock for the foreseeable future and the success of an investment in shares of our common stock will depend upon any future appreciation in its value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.

 

 

 

 

 

In June 2009, we entered into a new lease agreement acquiring 100,528 square feet of office space in Plano, Texas. The lease agreement contains two phases of varying amounts of office space to be occupied commencing at different times during the term of the lease. Phase One commenced on September 1, 2009 and consisted of 49,606 square feet. Phase Two will commence on or around March 1, 2011 and will consist of 50,922 square feet. The term of the lease is twelve years and four months and expires on December 31, 2021. The lease contains an option to extend the lease term for two additional five year periods after the initial expiration date. The total rental commitment under the lease agreement is approximately $22.0 million.

 

As of December 31, 2010, we did not have any other off-balance sheet arrangements that have or are reasonably likely to have a current or future significant effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

 

PART II.

 

 

On February 18, 2011, the last reported sale price for our common stock was $20.90 per share. As of February 18, 2011, there were 172 holders of record of our common stock and approximately 8,788 beneficial holders.

 

Dividend Policy

 

We did not pay any dividends during the fiscal years ended December 31, 2010 and 2009, respectively. We currently anticipate that we will retain all of our future earnings, if any, for use in the expansion and operation of our business and do not anticipate paying any cash dividends for the foreseeable future. The payment of dividends, if any, is subject to the discretion of our board of directors and will depend on many factors, including our results of operations, financial condition and capital requirements, earnings, general business conditions, restrictions imposed by our current and any future financing arrangements, legal restrictions on the payment of dividends and other factors our board of directors deems relevant. Our current credit facilities and the Notes include restrictions on our ability to pay dividends.

 

 

 

 

Sales of Unregistered Securities

 

Set forth below is information regarding shares of common stock and warrants granted by us in the period covered by this Annual Report on Form 10-K that were not registered under the Securities Act. Also included is the consideration, if any, received by us for such shares and warrants and information relating to the section of the Securities Act, or rule of the SEC, under which exemption from registration was claimed.

 

Common stock

 

During the fiscal years ended December 31, 2010 and 2009, we issued approximately 67,000 and 227,000, respectively, of unregistered shares of our common stock in connection with stock option exercises related to options issued in connection with our acquisition of OSI Systems, Inc. in June 2003. We received approximately $0.1 million and $0.3 million in consideration in connection with these stock option exercises for the fiscal years ended December 31, 2010 and 2009, respectively.

 

In June 2008, we issued approximately 8,850,000 unregistered shares of our common stock to holders of Accuro securities as part of the purchase price paid for the Accuro acquisition, pursuant to the terms of the merger agreement.

 

Common Stock Warrants

 

In June 2008, we issued approximately 190,000 unregistered shares of our common stock in connection with the exercise of a warrant for shares of our common stock. Approximately 55,000 shares issuable under the terms of the warrant were surrendered as consideration for the cashless exercise of the warrant.

 

The sales of the above securities were deemed to be exempt from registration in reliance on Section 4(2) of the Securities Act or Regulation D promulgated thereunder as transactions by an issuer not involving any public offering or as transactions pursuant to a compensatory benefit plan or a written contract relating to compensation.

Stock Price Performance Graph

 

The following graph compares the cumulative total stockholder return on the Company’s common stock from December 13, 2007 to December 31, 2010 with the cumulative total return of (i) the companies traded on the NASDAQ Global Select Market (the “NASDAQ Composite Index”) and (ii) the NASDAQ Computer & Data Processing Index.

 

COMPARISON OF 3 YEAR CUMULATIVE TOTAL RETURN*
Among MedAssets Inc., the NASDAQ Composite Index
and the NASDAQ Computer & Data Processing Index

 

 

 

 

 

Our historical financial data as of and for the fiscal years ended December 31, 2010, 2009, and 2008 have been derived from the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K, and such data as of and for the fiscal year ended December 31, 2007 and 2006 has been derived from audited consolidated financial statements not included in this Annual Report on Form 10-K.

 

Historical results of operations are not necessarily indicative of results of operations or financial condition in the future or to be expected in the future. Refer to Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations for a summary of management’s primary metrics to measure the consolidated financial performance of our business, which includes non-GAAP gross fees, non-GAAP revenue share obligation, non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin and non-GAAP diluted cash EPS. The summary historical consolidated financial data and notes should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the notes to those financial statements included elsewhere in this Annual Report on Form 10-K.

 

 

 

 

 

 

 

 

Overview

 

We provide technology-enabled products and services which together deliver solutions designed to improve operating margin and cash flow for hospitals, health systems and other ancillary healthcare providers. Our solutions are designed to efficiently analyze detailed information across the spectrum of revenue cycle and spend management processes. Our solutions integrate with existing operations and enterprise software systems of our customers and provide financial improvement with minimal upfront costs or capital expenditures. Our operations and customers are primarily located throughout the United States and to a lesser extent, Canada.

 

MedAssets delivered solid financial performance in 2010. Our full-year results included total consolidated net revenue of $391.3 million, a 14.6% increase over 2009. These results were primarily driven by an increase in revenue cycle services, solid growth in revenue cycle technology tools, continued strong demand for medical device consulting and strategic sourcing services, and growth in net administrative fees from our GPO volume. We reported a net loss of $32.1 million, or a loss of $0.57 per diluted share due to a significant amount of acquisition and integration costs associated with our recent Broadlane Acquisition and the impairment charges recorded during the year. Our adjusted EBITDA amounted to $128.0 million and was up 14.9% over last year.

 

On November 16, 2010, we completed the acquisition of Broadlane, the largest transaction in our Company’s history. We believe MedAssets now has a much greater breadth of capabilities to help drive down total hospital costs by offering a leading group purchasing and supply chain cost management model that leverages data, analytics, consulting and outsourcing to drive clinical and operating effectiveness.

 

With the addition of Broadlane’s supply chain capabilities, we are confident that our business model and best-practice solutions will provide our customer base the direction and support to effectively optimize revenue, secure reimbursement, reduce waste, aggressively manage total costs, and increase cash flow for healthcare providers as the slow economic recovery and impact of health insurance reform continue to impact their provision of care.

 

Management’s primary metrics to measure the consolidated financial performance of the business are net revenue, non-GAAP gross fees, non-GAAP revenue share obligation, non-GAAP adjusted EBITDA, non-GAAP adjusted EBITDA margin and non-GAAP diluted cash EPS.

 

For the fiscal years ended December 31, 2010, 2009 and 2008, our primary results of operations included the following:

 

 

 

 

For the fiscal years ended December 31, 2010 and 2009, we generated non-GAAP gross fees of $454.3 million and $396.5 million, respectively, and total net revenue of $391.3 million and $341.3 million, respectively. The increases in non-GAAP gross fees and total net revenue in the fiscal year ended December 31, 2010 compared to the fiscal year ended December 31, 2009 were primarily attributable to:

 

 

 

For the fiscal year ended December 31, 2010, we generated an operating loss of $19.5 million compared to operating income of $50.5 million for the fiscal year ended December 31, 2009. The decrease in operating income compared to the prior year was primarily attributable to the net revenue increase discussed above offset by the following:

 

 

For the fiscal year ending December 31, 2010, increases in non-GAAP Adjusted EBITDA and non-GAAP Adjusted EBITDA margin compared to the fiscal year ended December 31, 2009 were primarily attributable to the net revenue increase discussed above, as well as lower expense growth due to certain management cost control initiatives and lower cash-based incentive compensation expense during the year, partially offset by increased cost of revenue from segment revenue and product mix, including a shift to more service-based revenue and increased corporate operating expenses.

 

For the fiscal years ended December 31, 2009 and 2008, we generated non-GAAP gross fees of $396.5 million and $332.5 million, respectively, and total net revenue of $341.3 million and $279.6 million, respectively. The increases in non-GAAP gross fees and total net revenue in the fiscal year ended December 31, 2009 compared to the fiscal year ended December 31, 2008 were primarily attributable to:

 

 

For the fiscal years ended December 31, 2009 and 2008, we generated operating income of $50.5 million and $41.5 million, respectively. The increase in operating income compared to the prior year was primarily attributable to the net revenue increase discussed above partially offset by the following:

 

 

 

For the fiscal year ending December 31, 2009, increases in non-GAAP Adjusted EBITDA and non-GAAP Adjusted EBITDA margin compared to the fiscal year ended December 31, 2008 were primarily attributable to the net revenue increase discussed above, as well as lower expense growth due to certain management cost control initiatives and lower cash-based incentive compensation expense during the year. In addition, we had a reduction in certain discretionary expenses within our operating infrastructure including advertising and marketing costs as well as a higher percentage of our product development being capitalized during the year. These factors contributing to an increase in non-GAAP Adjusted EBITDA and non-GAAP Adjusted EBITDA margin were offset primarily by increased cost of revenue from segment revenue and product mix including a shift to more service-based revenue and increased corporate operating expenses.

 

Segment Structure and Revenue Streams

 

We deliver our solutions through two business segments, RCM and SCM. Management’s primary metrics to measure segment financial performance are net revenue, non-GAAP gross fees and Segment Adjusted EBITDA. All of our revenues are from external customers and inter-segment revenues have been eliminated. See Note 13 of the Notes to our Consolidated Financial Statements herein for discussion on Segment Adjusted EBITDA and certain items of our segment results of operations and financial position.

 

Revenue Cycle Management

 

Our RCM segment provides a comprehensive suite of products and services spanning the hospital revenue cycle workflow — from patient access and financial responsibility, charge capture and integrity, pricing analysis, claims processing and denials management, payor contract management, revenue recovery and accounts receivable services. Our workflow solutions, together with our data management, compliance and audit tools, increase revenue capture and cash collections, reduce accounts receivable balances and increase regulatory compliance. Our RCM segment revenue is listed under the caption “Other service fees” on our Consolidated Statements of Operations and consists of the following components, which are also discussed in Note 1 of our Consolidated Financial Statements:

 

 

We defer costs related to implementation services and expense these costs in proportion to the revenue earned over the subscription period or customer relationship period, as applicable. We are currently performing a study on our customer relationship period based on historical attrition rates. This may result in an increase to the customer relationship period from approximately five to six years. Once the study is complete, this may have an impact on the related useful life used to amortize the deferred costs relating to implementation services. This change would cause a decrease in the related amortization expense in future periods.

 

In addition, we defer upfront sales commissions related to subscription and implementation fees and expense these costs ratably over the related contract term.

 

 

 

Beginning, January 1, 2011, our decision support services (“DSS”) and performance analytics business operations will become part of our SCM segment. This move will help us capitalize on the integration of our products and services, and to focus on offering data-driven tools and services to help bridge our customers’ clinical and financial gaps so they can produce the highest quality patient outcomes at the lowest cost. We will include DSS within our SCM performance analytics offerings going forward.

 

Spend and Clinical Resource Management

 

On November 16, 2010, we completed the acquisition of Broadlane, a leading provider of group purchasing, supply chain outsourcing and centralized procurement services, capital equipment lifecycle management, clinical and lean process consulting, and clinical workforce optimization solutions. With the addition of Broadlane, our SCM segment provides a comprehensive suite of cost management services and supply chain analytics and data capabilities that help our customers manage many of their high and low expense categories. Our solutions lower supply and medical device costs and help to improve clinical resource utilization by managing the procurement process through our strategic sourcing of supplies and purchased services, discounted pricing through our group purchasing organization’s portfolio of contracts, consulting services and business analytics and intelligence tools. Our SCM segment revenue consists of the following components:

 

 

Our group purchasing organization customers make purchases, and receive shipments, directly from the vendors. Generally on a monthly or quarterly basis, vendors provide us with a report describing the purchases made by our customers through our group purchasing organization vendor contracts, including associated administrative fees. We recognize revenue upon the receipt of these reports from vendors.

 

Some customer contracts require that a portion of our administrative fees be contingent upon achieving certain financial improvements, such as lower supply costs, which we refer to as performance targets. Contingent administrative fees are not recognized as revenue until we receive customer acceptance on the achievement of those contractual performance targets. Prior to receiving customer acceptance of performance targets, we record contingent administrative fees as deferred revenue on our consolidated balance sheet. Often, recognition of this revenue occurs in periods subsequent to the recognition of the associated costs. Should we fail to meet a performance target, we may be contractually obligated to refund some or all of the contingent fees.

 

Additionally, in many cases, we are contractually obligated to pay a portion of the administrative fees to our hospital and health system customers. Typically this amount, which we refer to as our revenue share obligation, is calculated as a percentage of administrative fees earned on a particular customer’s purchases from our vendors. Our total net revenue on our Consolidated Statements of Operations is shown net of the revenue share obligation.

 

 

Operating Expenses

 

We classify our operating expenses as follows:

 

 

 

Key Considerations

 

Certain significant items or events must be considered to better understand differences in our results of operations from period to period. We believe that the following items or events have had a material impact on our results of operations for the periods discussed below or may have a material impact on our results of operations in future periods:

 

Broadlane Acquisition

 

On September 14, 2010, we entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Broadlane Holdings, LLC, a Delaware limited liability company (“Broadlane LLC”), and Broadlane Intermediate Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of Broadlane LLC (“Broadlane Holdings”), pursuant to which, among other things, the Company would acquire all of the outstanding shares of capital stock of Broadlane Holdings from Broadlane LLC. The Broadlane Group, Inc., a Delaware corporation and wholly-owned subsidiary of Broadlane Holdings, delivered supply chain management, strategic sourcing of supplies and services, capital equipment lifecycle management, advanced technology and analytics, clinical and lean process consulting and clinical workforce optimization.

 

The Broadlane Acquisition was consummated on November 16, 2010, and, in connection therewith, the Company paid to Broadlane LLC preliminary purchase consideration of approximately $725.0 million in cash plus working capital of $20.9 million for an aggregate purchase price of $745.9 million. The Company will make an additional payment of approximately $123.1 million in cash (which represents the face value at maturity), subject to certain fixed adjustments (e.g., payments made by the Company for working capital, inclusive of cash) and certain limitations, on or before January 4, 2012. The purchase consideration paid at closing is subject to final modified-working-capital adjustment as defined by the purchase agreement.

 

The results of operations of Broadlane are included in our consolidated results of operations from the date of acquisition. Refer to Note 5 of the Notes to Consolidated Financial Statements for additional information.

 

Purchase Accounting

 

In connection with the Broadlane Acquisition, we recorded the following adjustment, which was determined as part of purchase accounting and recorded as part of the purchase price allocation:

 

 

Credit Facility and Notes Offering

 

We were party to a credit agreement dated October 23, 2006, consisting of a senior secured term loan and a revolving line of credit that was administered by Bank of America. On November 16, 2010, in connection with the Broadlane Acquisition, we entered into a new credit agreement (the “Credit Agreement”) with Barclays Bank PLC and JP Morgan Securities LLC (collectively, the “Banks”) and closed a private placement offering of senior notes due 2018. The Company used the borrowings from the Credit Agreement and the net proceeds from the offering of senior notes to finance the purchase price of the Broadlane Acquisition and repay outstanding indebtedness of the Company and Broadlane Holdings.

 

Credit Facility

 

The Credit Agreement consists of a six-year $635 million senior secured term loan facility and a five-year $150 million senior secured revolving credit facility, including a letter of credit sub-facility of $25 million and a swing line sub-facility of $25 million. Both the senior secured term loan and revolving credit facility charge a variable interest rate of LIBOR or an alternate base rate plus and applicable margin.

 

The Credit Agreement also permits the Company to, subject to the satisfaction of certain conditions and obtaining commitments therefor, add one or more incremental term loan facilities, increase the aggregate commitments under the senior secured revolving credit facility or add one or more incremental revolving credit facility tranches in an aggregate amount of up to $200 million, which may have the same guarantees, and be secured equally in all respects by the same collateral, as the senior secured term loan loans and the senior secured revolving credit loans.

 

The Credit Agreement contains certain customary negative covenants, including limitations on: the incurrence of debt; liens; fundamental changes; asset sales and sale leasebacks; investments; dividends or distributions on, or redemptions of, equity interests; prepayments or redemptions of unsecured or subordinated debt; negative pledge clauses; transactions with affiliates and changes to the Company’s fiscal year. The Credit Agreement also includes maintenance covenants of maximum ratios of consolidated total indebtedness (subject to certain modifications) to consolidated EBITDA (subject to certain modifications) and minimum cash interest coverage ratios.

 

Refer to Note 7 of the Notes to Consolidated Financial Statements for additional information.

 

Notes Offering

 

Also in connection with the Broadlane Acquisition, the Company closed the offering of an aggregate principal amount of up to $325 million of senior notes due 2018 (the “Notes”) in a private placement. The Notes are jointly and severally guaranteed on a senior unsecured basis by each of the Company’s existing restricted subsidiaries and each of the Company’s future domestic restricted subsidiaries in each case that guarantees the Company’s obligations under the Credit Agreement. The Notes and the guarantees are senior unsecured obligations of the Company.

 

The Notes were issued pursuant to an indenture dated as of November 16, 2010 (the “Indenture”), among the Company, its subsidiary guarantors and Wells Fargo Bank, N.A., as trustee. Pursuant to the Indenture, the Notes will mature on November 15, 2018, and bear 8% annual interest. Interest on the Notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on May 15, 2011.

 

The Indenture contains certain customary negative covenants, including limitations on: the incurrence of debt; liens; consolidations or mergers; asset sales; certain restricted payments and transactions with affiliates. The Indenture also contains customary events of default.

 

Refer to Note 7 of the Notes to Consolidated Financial Statements for additional information.

Impairment of Assets

 

During 2010 and 2008, certain of our assets were deemed to be impaired as they no longer provided future economic benefit. Such assets primarily included goodwill associated with our decision support services operating unit, certain acquired trade names, developed technology, and internally developed software.

 

In connection with our 2010 annual impairment testing, we recognized an impairment charge related to the goodwill at our decision support services operating unit within our RCM reporting segment. We experienced a scheduled and planned step down in license fee revenue from a large business intelligence customer in our decision support services operating unit. As part of our quarterly and annual forecasting process we expected to recover the revenue reduction related to this large customer with new customer wins. However, given the economic environment and increased competition, conversion of new customer revenue has been lower than expected over the last six to eight quarters. Based on our lower sales conversion we revised our earnings forecast for future years for our decision support services operating unit. As a result, we recorded non-cash impairment charges totaling $46.4 million and $2.3 million during the fiscal years ended December 31, 2010 and 2008, respectively. Refer to Note 3 of the Notes to Consolidated Financial Statements for additional information.

 

Cash-based Incentive Compensation

 

During 2010 and 2009, we did not fund our discretionary bonus and incentive pool. This decrease in compensation expense provided for a favorable impact on our operating expenses, net income and Adjusted EBITDA for the fiscal year ended December 31, 2009 as compared to the fiscal year ended December 31, 2008.

 

Termination of Interest Rate Swaps

 

In November 2010, we terminated an interest rate swap as part of the Broadlane Acquisition that was originally set to terminate in March 2012. In consideration of the early termination, we paid the swap counterparty, and incurred an expense of, $1.6 million for the fiscal year ended December 31, 2010. Accordingly, the swap is no longer recorded on our Consolidated Balance Sheet as of December 31, 2010.

 

In June 2008, we terminated two floating-to-fixed rate LIBOR-based interest rate swaps that were originally set to terminate July 2010. In consideration of the early terminations, we paid to the swap counterparty, and incurred an expense of, $3.9 million for the fiscal year ended December 31, 2008. Accordingly, the swaps are no longer recorded on our Consolidated Balance Sheet as of December 31, 2008.

Results of Operations

 

 

 

 

 

The following table sets forth our consolidated results of operations as a percentage of total net revenue for the periods shown: