It took a key partnership and long-standing connections for Monty Deel to beat out two competitors and land a coveted contract to offer the largest federal civilian purchaser of health IT a safer trek to the cloud.
The $43 million, five-year contract, which provides the Department of Veterans Affairs with artificial intelligence operations tools and the engineers to help ply them, was a nice coup for Deel’s McLean-based Swish Data Corp., which teamed with Reston software bigwig ScienceLogic Inc. to win the work. Together, the companies will automatically monitor the VA’s strands of software applications that need reorienting for the hybrid cloud, watching in real time for how those programs are performing and where they might fail.
But for the VA, and the scores of veterans connected to its network, it was another example of the soaring demand for new health tech tools to adjust to a rapidly modernizing IT landscape — and how the companies that wield them have become more prominent players.
“When you start looking at deploying all of these tools, there’s a point of no return,” said Deel, chairman and CEO of Swish. “Monitoring the tools and logging what’s going on in your network to gain the best performance to the end-user level, those are new applications going onto the network that weren’t prevalent even five years ago.”
Between the increasing use of electronic health records, the cybersecurity risk of smartphones and other devices, and the federal government’s slow voyage to the cloud, federal health IT had started to become a booming business even before Covid further escalated that trend. Now, interest in universally emerging technologies like AI and machine learning is growing even faster, fueled by the disruptions of the health crisis, the vulnerabilities it exposed across health care delivery and the upticks in adoption of telemedicine.
And that, in turn, means that large technology contractors are tuning in and taking out their wallets with plans to buy their way into the $8 billion-plus market. The swelling needs of health agencies, coupled with an advantageous market for consolidation, are sparking a wave of multimillion-dollar acquisitions of up-and-coming health software and IT firms by big names, from Booz Allen Hamilton Inc. and Peraton Inc. to Science Applications International Corp. — all hoping to cash in.
“The size of the deals in health care in the public sector are very large and lucrative, and I think what you are seeing is the investment world coming to grips with that and wanting to contribute in their portfolio to that,” Deel said. “The whole technology market is kind of shifting.”
Well beyond health IT, the entire federal realm is undergoing a digital transformation. And at the core of that effort to use more technology to improve business processes is cloud computing.
In the federal health universe, agency officials are often reshaping agencywide technology environments that have long run on legacy systems. It’s not simply moving data from one IT platform to another, but rather a paradigm shift in the way the government buys technology. Nowadays, agencies are shelling out more for software that can adapt in the cloud than for immutable hardware that sits on a desk.
“Capital purchases are starting to wane and, mostly, things are being bought as subscriptions,” Deel said.
That has led to a cottage industry of health software and services companies to address a new slate of requirements for federal IT managers overseeing cloud networks. Some of those services, such as cybersecurity, can be essential, and when you pair them with the needs of a massive health system like the VA, the business opportunities are extensive.
“The VA has about 650,000 endpoints when they did their cyber deal, the McAfee recompete,” said Deel, referring to the five-year,$281 million contract the agency awarded to McAfee Corp. and FCN Inc. in July for cybersecurity and cloud protection services. “There’s not a medical hospital system in the world that has anywhere near that.”
The shift to multiyear subscription services has also swelled contract backlogs, making smaller, emerging companies not only attractive for their offerings, but also their customer relationships. Swish, for one, put its own money on the table at the end of last year to buy Titania Solutions Group Inc., a Warrenton contractor known for its health IT niche and ties to the Department of Health and Human Services staff and contracts.
ICF International Inc. of Fairfax, meanwhile, picked up Arlington IT consulting and modernization firm Incentive Technology Group LLC for $225 million in January 2020, citing its slate of contracts with HHS, among others. Enterprise Resource Performance Inc., a Fairfax health care consulting and data analytics firm, sold for an undisclosed amount to Richmond’s ASGN Inc. in order to be combined with the latter’s federal contracting arm, ECS Federal, also based in Fairfax — the duo’s third buy since December. Another health tech company, Kreative Technologies LLC, announced in February its plans to expand its Fairfax headquarters with a $1.5 million investment and addition of nearly 300 new jobs to its 67-person headcount, in part through acquisitions.
Yet another reason companies may focus their digital transformation business on health care is to differentiate their portfolios for more government customers eager to modernize their infrastructure, said Jerry McGinn, executive director of the Center for Government Contracting in George Mason University’s School of Business. Peraton CEO Stu Shea has said its back-to-back combinations, costing a total $10.5 billion, of a Northrop IT services unit and Chantilly-based Perspecta Inc. was in part a bid to diversify and build up its civilian and health market muscle.
“I think companies are doing that to get into adjacent markets,” McGinn said, “and also a bit hedging in case defense spending kind of plateaus or goes downward from where it is right now.”
When he was HHS’ associate deputy assistant secretary for acquisition in 2018, Arrieta set about developing a pilot program to track spending practices across the agency and compare historical pricing trends for future contracts through a combination of artificial intelligence, blockchain, machine learning and data analytics. He’d long advocated for these technologies in his previous role leading a General Services Administration office that later helped oversee $18 billion in tech contracts in fiscal 2020 alone. The HHS pilot, dubbed HHS Accelerate, served as the underpinning of the health agency’s acquisition strategy.
Two years later and in the teeth of the coronavirus pandemic, Arrieta, then HHS’ chief information officer, was again tasked with standing up a massive data system. He had many of the same tools, but an unprecedented mission: to track the spread of Covid-19, and the response to it, from across the nation’s entire health care environment.
HHS Protect launched within five days, on April 10, 2020, and now funnels data from 200 disparate sources into a single platform, monitoring things like the number of cases nationally, the percentage of in-patient beds occupied by Covid patients, the occupancy of intensive care unit beds related to Covid, testing results and therapeutic distribution. It was the result of a range of technologies bound together, including supervised machine learning, AI, blockchain, modern encryption services, dataset indexing capabilities and geolocation mapping.
Arrieta, who stepped down as HHS CIO in September 2020 and since founded his own D.C.-area tech consulting company, Imagineer, said HHS Protect offered the agency insight into where pandemic hot spots were forming and who needed the most resources.
“We aggregated 3 billion data elements in three weeks,” he said. “By June, we started looking at supervised machine learning cases to move testing supplies. At that time, we only had 30 million tests in the United States available every month, and we started moving them into different cities within the United States based on the fact that we thought there was going to be an outbreak. You could not do that in the existing ecosystem. That added a ton of value for people.”
It also showed the capabilities, and value, of commercial technology in boosting federal IT networks. That includes functions like low-code or no-code software, where developers plug in functions to construct an application modularly rather than spending more time crafting custom code.
“It’s kind of opened up the aperture and shown the value that you can get out of data if you use it correctly,” Arrieta said. “I think the temperature is right. I think this is the time where health, globally, will fundamentally change.”
Such low-code software design was central to Booz Allen’s $725 million purchase of Liberty IT Solutions LLC in May. Executives of the larger contractor cited the speed in which the smaller company can deploy new software tools, as well as its contracting ties to the VA.
Combine those trends with pre-Covid efforts, such as the gradual deployment of electronic health records across the VA and Department of Defense, and another $6.5 billion in the fiscal 2022 budget request to establish the Advanced Research Projects Agency for Health (ARPA-H) within the National Institutes of Health (NIH) to focus on innovative research — and you’ve got multiple paths to a healthy federal spend and investment opportunities for contractors.
Deltek estimates that “a renewed federal focus on health and medical research, disease surveillance and public health security and innovation” will lead to a spike in federal health IT expenses, from $7.8 billion in fiscal 2020 to $9.2 billion in fiscal 2022, growing at a compound annual rate of 8.7%. That’s a hike from Deltek’s former projection, two years prior to the pandemic, that the federal health IT market would peak at $8.5 billion in 2022 before dipping.
“It is a ripe market for consolidation,” said Angie Petty, senior principal analyst for Deltek’s federal market analysis team. “We’ve seen the government try and attract smaller companies into government procurement. So we may see some of those smaller companies, once they get started, possibly snapped up by larger companies in the market.”