Mining Data For Profits

With data available at the touch of a smart phone, today’s patients are more informed than ever. After discussing a condition or illness with their doctor, most folks these days immediately start their research, educating themselves about available drugs and treatment options and returning to their doctor able to take an active role in their care.

But patients aren’t the only ones enjoying an informational edge.

Thanks to electronic health insurance claims processing and the rise of electronic health records, millions of data points regarding treatment decisions and billing operations are collected each day. Much of that data can then be privatized—a process of removing personally identifiable details—and then analyzed to identify treatment decisions that can be improved or potential fraud that can be prevented.

Verisk Analytics (NSDQ: VRSK), a company in the risk assessment side of health care, capitalizes on that treasure trove of data.

Verisk provides information for risk management in all industries, a largely undifferentiated pool that accounts for about a third of revenue. The company specializes in the insurance (32 percent), health care (17 percent) and financial services industries (11 percent).

Americans spend $2.7 trillion on health care annually, a sum that amounts to 17 percent of US gross domestic product and is growing rapidly. All that spending creates huge amounts of electronic “paperwork,” much of which Verisk can access.

The company’s health care unit operates in two basic service areas: risk assessment and fraud prevention.

The company’s risk assessment unit offers web-based tools that help health care payers, providers and government entities evaluate their health care risks of both a financial and clinical nature. Its suite of products allows users to assess the illness burden posed by units as small as an ! individual or as large as an entire population, creating the ability to forecast spending rates and cost drivers. That information can then be used to create budgets and take interventional steps to control costs, such as steering patients towards care management programs.

The risk assessment industry also includes Health Care Effectiveness Data and Information Set (HEDIS) compliance services.

HEDIS comprises a collection of performance measures used by more than 90 percent of America’s health plans as a tool to evaluate effectiveness at both a clinical and financial level. Verisk’s HEDIS compliance and reporting software allows users to analyze claims and record data, calculate specific HEDIS metrics and submit them to the National Committee for Quality Assurance (which oversees the program).

The company’s fraud prevention services offer the ability to monitor claims activity at almost any level of the chain. Claims data can be aggregated at the system level, allowing payers to monitor all of their claims activity or drill down to specific physician or facility claims. The company also provides the ability to monitor dental and pharmaceutical claims activity.

Federal regulators estimate that inefficient health care spending costs the system as much as $900 billion annually, including $300 billion in unnecessary care, $230 billion in fraud and waste, and $210 billion in administrative red tape.

Verisk offers a total of 19 different products to its clients. As health care payers have become increasingly focused on cost containment for both profit maximization and compliance reasons, the company has been extremely successful at cross-selling its clients on additional products.

Last year, only 70 percent of the company’s clients bought just one product (down from 86 percent in 2011), with 19 percent buying at least two products (12 percent), 7 percent buying three products (2 percent) and 4 percent buying at least four products (none in 2011! ).
In addition to pure organic growth in terms of acquiring new clients, Verisk estimates it could grow its sales by as much as $400 million, based on historical demand trends from existing clients.

Verisk also enjoys an advantage in that most of its products across all business lines are sold primarily as subscription services and generate recurring revenue. In the third quarter of 2013, 68 percent of revenue was subscription based, with just 32 percent as one-time transactional revenue.

In the third quarter of this year, Verisk’s revenue grew by 10 percent on a year-over-year basis, reaching $438.6 million. Its fastest growing business segment was financial services, where revenue grew by 26.6 percent to $48 million, largely thanks to Dodd-Frank implementation, with health care revenue up 6.2 percent to $73.6 million. On an adjusted basis, earnings per share gained 14.8 percent year-over-year to reach $0.62.

Verisk commands a variety of channels through which to grow revenue and earnings.

In the health care sector, analysts estimate that the sector’s use of analytics will become an annual market of $21.3 billion by the end of this decade. That’s largely thanks to mandates to increase efficiencies at all levels of the sector, originating with both the government and private sectors.

The analytics space is highly fragmented, allowing Verisk to take advantage of acquisitions to grow. The company has spent an average of about $90 million annually on purchases of competitors.

Another interesting growth avenue is Verisk’s recently formed Climate division.

Although debate still exists as to whether climate change is caused by human activity, severe weather events such as Hurricane Sandy and Typhoon Haiyan, as well as a multitude of droughts and wildfires, are increasingly common. That’s costing the global insurance industry billions of additional dollars each year, prompting the industry to include those risks into its underwriting ! programs.!

Verisk’s Climate division provides new weather and environmental analytic capabilities to its clients, allowing them to develop strategies to minimize costs. The company is among only a handful of firms offering this type of data on a large-scale basis. Verisk Analytics is a buy up to 70.