New Entrant to the Space

41 of the 50 states plus D.C. outsource the administration of the Medicaid program. This means that they hire a company to act as the system provider, the provider (doctors, dentists, pharmacists, hospitals) relations support, key claims, and perform other functions.

Of the 41 states that outsource, 18 are served by our main competitor, EDS. We (ACS) serve 16 states. The remaining 7 are split among 5 other companies.

EDS and ACS enjoy a very strong position in the market. And, we are very competitive with each other. Up until 10 years ago, our solutions were virtually interchangeable. It was not uncommon for us to take over one of their systems or they take over one of ours. Key staff in each organization, including me, have worked for both companies. There are very few secrets between the two firms.

About 10 years ago, we started to diverge some. EDS' strategy steered toward technical leadership and they became very contract focused. Meaning they established quite sophisticated approaches to manage their accounts very carefully by the contract. EDS also focused on doing the specific functions of the contract well. So, they started to occupy a certain space.

During that time, we focused more on value added functions. We added new clinical management tools, fraud detection tools, and pharmacy management systems. Our space was to put in less attractive technical solutions, but to add value through these other capabilities.

This went well for several years. And, we saw a very clear spacial model between the two types of offerings and the two types of customers.

Five years ago, a new entrant came in offering a technically advanced solution. It was a solution fully based on web technology, it showed extremely well, it had all of the right buzzwords, and it shook up the industry. This small company, that had never implemented a single system in our market, was able to convince the whole market that this new technology was required. This company won 3 states over those 5 years. They also convinced other states to change the requirements in their RFP's to include their type of technology. EDS and ACS had to react. We started developing new systems. Bid prices for states have risen from $20M to $40M. It was almost as if someone dropped a hammer in the middle of the spacial pricing model.

The result is this:
- That little company has been kicked out of 1 state that they won. They are 2 1/2 years late in another. They have yet to successfully implement this new technology.
- ACS and EDS are now offering better solutions. We still occupy our respective spaces, but our solutions are better.

This past 5 years has been quite disruptive. And the lesson is that even when companies occupy their space, that space needs to be maintained and protected, because the equilibrium of that space can be impacted by other vendors, even medicine men.