June 21, 2010

The Effects of the MedQuist/Spheris Merger
By David Yeager
For The Record
Vol. 22 No. 12 P. 6

On April 15, MedQuist Inc and its majority shareholder, CBay Inc, received court approval to purchase Spheris for $116 million. The purchase price was agreed on as a result of a bankruptcy auction set in motion in February after Spheris filed for Chapter 11 protection and MedQuist made an initial offer, known as a stalking horse bid. The auction included MedQuist, Transcend Services, and Nuance, which was disqualified due to a conflict of interest. Although the auction process had captured the attention of the entire medical transcription industry, to say that the outcome was unexpected would be an overstatement.

“It was not surprising that MedQuist and CBay would make a big play for [Spheris]. They’ve invested in the industry before, successfully, and it was just logical that they would go after them,” says Dale Kivi, MBA, director of business development for transcription service and technology provider FutureNet Technologies.

“Typically, the stalking horse packaged auctions end up going to the stalking horse,” says Sean Carroll, CEO of Webmedx, now the third largest medical transcription provider, “largely because they have a significant advantage during the process but also because they become so vested in winning the outcome that they get to a point where they really have to make sure they win the business.”

At first glance, this appears to be a case of the rich getting richer. MedQuist was already the largest medical transcription provider, and its acquisition of Spheris, the second largest, makes it four times larger than its nearest competitor, Transcend Services. But while this may seem like bad news for the companies competing with this new giant, many in the industry believe the merger will do more good than harm.

“[Medical transcription providers are] now competing with MedQuist, which is a bigger company, but they’re not competing against MedQuist and Spheris, which in most cases I think is a positive for other companies in the industry,” says Carroll.

“Because the two were the largest, there were some buyers that chose Spheris as much because they didn’t like Medquist, for whatever reason, versus what Spheris had to offer,” adds Kivi. “Those Spheris customers that felt that they needed a large transcription service company but did not want to do business with MedQuist will now look to other stable, next-tier vendors as their new non-MedQuist alternatives. Consequently, vendors such as Transcend, FutureNet, Webmedx, and others will all certainly see strong growth before the dust finally settles.”

The transaction also brings some stability to the marketplace. “[Spheris customers] can now breathe a sigh of relief knowing that there’s a strong support infrastructure behind that company; they’re not going to shrivel up and blow away and stop producing documents any time soon,” says Scott Faulkner, principal and CEO of Interfix, LLC, a provider of HIM and medical transcription technology solutions. “And, of course, the employees of Spheris were facing an uncertain future, and now they’re feeling a little bit better about that, I would imagine.”

Aside from that, the merger highlighted that there is plenty of room for growth in medical transcription. “I think it established to outsiders that there is real value in this industry,” says Larry Gerdes, CEO of Transcend Services. “And I think it also showed that this industry still has a consolidation effort going on to consolidate things like technology and customer bases, etc. So I think those are the positives that can come out of this for the industry as a whole.”

However, MedQuist didn’t make this acquisition to help out everyone else. Its large footprint is now considerably larger and it added facets, such as outpatient and clinic accounts, to its portfolio that were previously lacking. “The international team of transcriptionists is probably in excess of 20,000 … so their ability to handle peaks and valleys and to distribute work across a much larger group of workers is enhanced through this acquisition,” says Faulkner. “I think that any time you have a very major player with an enormous footprint, the competitive pressure is on. Typically, because of economies of scale, they can deliver product at a lower price so there’s going to be downward pricing pressure quite often in the marketplace, and that makes it harder for smaller players to compete.”

But size has its disadvantages as well. “The size of this new entity will certainly be perceived as a disadvantage to some buyers of transcription service buyers who don’t feel that they get enough personalized attention,” says Kivi. “Although that doesn’t necessarily mean that this large group will not be able to provide that, that certainly will be the concern of some buyers, especially smaller to medium-sized customers who have experienced such perceived lack of attention in the past.”

And it’s the ability to provide personal attention and high-quality customer service that many vendors see as an area for strong competition. “When hospitals make their decisions, they are not going to change their criteria, and they put a high degree of their decision on the level of service and quality that a vendor can provide,” says Gerdes. “So I don’t think that it makes the market tougher for us to compete. But it is a market that will be a little unique in having one vendor that is much larger than anyone else.”

What’s Next?
Although MedQuist stands to reap big rewards from this transaction, it is also facing significant challenges. “I think it’s been very evident that MedQuist, in recent years, has been unable to grow the top line,” says Jay Cannon, president and chief operating officer (COO) of Webmedx. “And with that I believe there has to be consideration on their part that the added critical mass must, in some way, benefit them in further solidifying that No. 1 position in size and having a platform both in technology … [and] upon which they can grow the company.”

Additionally, Spheris customers must move to a MedQuist technology platform. “How do you take a company the size of Spheris and bring it into the same technological realm that MedQuist/CBay is? How do you take the accounts that they have, move them onto the new platform, and keep your MTs [medical transcriptionists] and the customers happy?” asks Faulkner. “And, of course, you’ve got the cultural challenges of merging one of the bigger players into another one. You can only afford so many vice presidents in any given company and, typically, whoever writes the checks writes the rules. And so I’m certain that they’ll see some consolidation in the white-collar areas of Spheris and so on as the companies merge together and try to build their business together.”

But because they do have a large, experienced management team, MedQuist may be able to meet all of those challenges. “I think that they are in a better position to manage through this acquisition and get the current Spheris customers moved under the new company umbrella faster, quicker, and more efficiently than anybody else would have been able to,” says Kivi.

For its part, MedQuist believes that it’s on solid footing. “At this time, both MedQuist and Spheris are excited about the future and working diligently to pull the organizations together in order to continue to deliver the superior service levels to which our customers have become accustomed,” says COO Michael Clark. “Additionally, our plans, efforts, and activities are focused toward creating a new standard of performance, functionality, interoperability, and value in the creation of clinical documentation.”

How well they’re able to accomplish that will have a lot to do with what the medical transcription industry looks like in a few years.

— David Yeager is a freelance writer and editor based in Royersford, Pa.