Change Healthcare CEO says firm planning for 'successful integration' with Optum despite increased DOJ scrutiny

Stethoscope with doctor's health report clipboard on table. Medical examination and doctor analyzing medical report on laptop screen
The American Hospital Association recently voiced new concerns that Optum and Change Healthcare's plan to divest assets that generate hundreds of millions of dollars in revenue as a way to gain Department of Justice approval doesn't go far enough to resolve substantial competitive challenges. (ipopba/GettyImages)

Change Healthcare President and CEO Neil de Crescenzo said Thursday he's pleased with the company's progress on regulatory review of its pending deal with Optum and is moving forward with plans for a successful integration.

"We look forward to continuing to work diligently in coordination with UHG (UnitedHealth Group) to provide the necessary information requested by the DOJ (Department of Justice) and completing the transaction," he said during the company's fiscal-year, first-quarter earnings call Wednesday morning.

In early January, UHG's Optum unit announced plans to buy Change Healthcare for $13 billion, or $7.84 billion in cash plus about $5 billion in debt. That transaction was initially expected to be completed in the second half of 2021, executives said.

Change Healthcare has been mum on the regulatory review process, and de Crescenzo's comments come as the deal has drawn increased scrutiny from the DOJ and criticism from hospital groups and healthcare advocates.

That the DOJ was probing the massive deal was first revealed in March. The agency is now mulling a lawsuit to intervene in UHG's acquisition of Change Healthcare, according to media reports. The potential for a lawsuit was first reported by The Information. Sources familiar with the matter told the outlet the DOJ has been reaching out to private attorneys who could lead litigation against the deal.

RELATED: Change Healthcare betting on accelerated use of AI in hospitals with Optum acquisition

Critics of the merger, such as the American Hospital Association (AHA), have warned that the deal could lead to a "massive consolidation" in healthcare data.

The AHA recently voiced new concerns that Optum and Change Healthcare's plan to divest assets that generate hundreds of millions of dollars in revenue as a way to gain DOJ approval doesn't go far enough to resolve substantial competitive challenges.

"We respectively maintain that the massive divestiture provision to which the parties have agreed does not provide the pathway needed to remedy the transaction’s likely substantial illegalities; rather, it strongly indicates that the deal cannot be fixed," Melinda Reid Hatton, general counsel at the AHA, wrote in a letter to Richard Powers, acting assistant attorney general in the antitrust division at the DOJ.

"Given the integrated nature of Change’s large set of offerings, its substantial scale, and UHG’s ability to misuse Change’s datasets to favor its own lines of business, it is highly unlikely that any 'extracted' partial divestiture of Change’s business could reliably replace the substantial competitive pressure that Change places on UHG today," the AHA wrote.

Q1 revenue up 25% as healthcare business picks up

Change Healthcare provides revenue cycle management, data analytics, imaging solutions, artificial intelligence capabilities and patient engagement solutions for providers and payers.

The Nashville, Tennessee-based healthcare technology company reported fiscal year 2022 first-quarter revenue climbed 25% to $868 million compared to $694 million in the same period in 2020.

The top line outpaced the Zacks Consensus Estimate by 2.3%.

Solutions revenue was up 26% to $817 million from $648 million a year ago. First-quarter revenue includes the impact of fair value adjustments to deferred revenue resulting from the McKesson exit, which reduced revenue recognized by $4.5 million and $55 million in the first quarter of fiscal 2022 and 2021, respectively, said Fredrik Eliasson, executive vice president and chief financial officer, during the earnings call.

Solutions revenue for the current period reflects the $6.5 million net favorable impact of acquisitions and divestitures, including the negative $15.3 million impact during the quarter from the divestitures of the Connected Analytics and Capacity Management businesses that closed in fiscal year 2021. Revenue for that segment during the quarter also was positively impacted by volume recovery from COVID-19-related volume declines in the prior period and new sales, Eliasson said.

RELATED: UnitedHealth Group's Optum to buy Change Healthcare for $13B

The company posted a net loss of $4 million, resulting in net loss of one cent per diluted share, much narrower than the year-ago quarter's net loss of $59 million and 18 cents per diluted share.

Change Healthcare's first-quarter fiscal 2022 adjusted earnings per share of 41 cents lagged Wall Street estimates and missed Zacks Consensus Estimate forecast earnings of 46 cents by 10.9%.

Nonetheless, the bottom line improved 64% on a year-over-year basis. Adjusted net income was $133 million compared with adjusted net income of $81 million for the first quarter of fiscal 2021. 

The company reported adjusted EBITDA was $283 million, up 43% from $197 million for the first quarter of fiscal 2021. The results in the current quarter reflect optimization of the company's cost structure, Eliasson said.

Change Healthcare also reported operating income of $44 million, against the year-ago quarter’s operating loss of $8 million.

The company ended the quarter with approximately $109 million of cash and cash equivalents and approximately $4.8 million of total debt.

"This strong performance reflects improved healthcare market utilization and continued positive momentum with customers expanding their business with the company," de Crescenzo said.

Change Healthcare saw its software and analytics revenue grow 7% year over year from $392 million to $420 million during its first-quarter ending June 30.

Network solutions revenue was up 47% to $209 million from $143 million a year ago, and revenue for technology-enabled services totaled $226 million, up 20% year over year.

RELATED: Change Healthcare see potential growth as IT budgets increase during COVID-19

“The solid performance in the first quarter, combined with the momentum in our sales pipeline, establishes a strong foundation for growth as we move through fiscal 2022,” de Crescenzo said in a statement. “We will continue to make investments throughout the year to advance innovation and optimize our cost structure, enabling us to deliver better experiences and outcomes for our customers, partners and consumers.”

Underlying market trends for the business remain positive on multiple fronts, executives said, including federal rules being implemented surrounding interoperability and price transparency as well as continued advances in value-based care initiatives.

The company has launched new products spanning medical network, decision support, data solutions and interoperability solutions to help payers comply with the Centers for Medicare & Medicaid Services' patient access and interoperability rule, de Crescenzo said.

"We now offer 82 API and marketplace products, providing solutions to power revenue cycle management, payments and medical network workflows. We processed about 250 million API transactions in the first quarter and are now processing over 80 million API transactions per month," he said.

Change Healthcare also made two deals in 2020 to expand its business in the pharmacy network, which positions the company well for future vaccine distribution across its pharmacy segment, de Crescenzo said.

In the enterprise imaging space, Change Healthcare signed several multimillion-dollar contracts during the previous quarter, including one of the largest in the company’s history, in excess of $10 million in annual revenue, executives said. The company won this new customer by beating out the largest vendors in the industry, they said.

Due to the proposed transaction with OptumInsight, Change Healthcare is no longer providing financial guidance