Federal contractors set sights on health care business.

• Author: Crank, Chad
• Position: VIEWPOINT

* Information technology spending on defense, intelligence and homeland security continues its upward trajectory, but contractors are setting their sights on potentially even more lucrative opportunities in health care information technology.

From 2005 to 2007, homeland security IT spending rose from $1.9 billion to $2.7 billion. Intelligence IT spending is expected to increase at a compound growth rate of 8.4 percent during the next five years, according to INPUT market research.

Government contractors, meanwhile, are adjusting their business models in anticipation of rising government IT spending on health care during the next five to 10 years.

Health care IT spending by the government is expected to increase from $5.3 billion in 2007 to $8.7 billion in 2012, for a compound annual growth rate of 10.7 percent, predicts INPUT.

To capitalize on this growth potential, federal contractors have engaged in a number of industry acquisitions. Corporate mergers and acquisitions will likely occur among middle-market players looking for "tuck-in" acquisitions to complement current IT structures, while building a presence in health care IT.

The lure of booming government IT spending, particularly after 9/11, attracted substantial attention among firms focused on defense, intelligence and homeland security. The U.S. government further fostered a fragmented market through its congressionally-mandated small business contracting target levels. Over time, this increased spending led to impressive revenue growth with tighter margins.

Many public companies have become accustomed to the substantial revenue growth in the industry, but as the industry matures, these growth expectations may become more difficult to meet over the long-term. As a result, managers are looking at their long term business mix and evaluating whether they can sustain the levels of growth to which they and their shareholders have become accustomed.

Many companies that led the security and defense IT boom are seeking complementary product lines to bolster their business models. Health care IT offers an ideal fit.

The U.S. government controls the nation's largest health care systems--Medicare and Medicaid. There appears to be broad bipartisan support for leveraging technology to reduce costs and improve the delivery of health care. Government officials are demanding technologies to build nationwide databases and to track medical outbreaks.

The decision to automate health care information...