February 21, 2017 - 8:46am EST by
2017 2018
Price: 40.15 EPS 3.00 3.20
Shares Out. (in M): 4 P/E 13.2 12.55
Market Cap (in $M): 144 P/FCF 13.2 12.5
Net Debt (in $M): -30 EBIT 17 18
TEV (in $M): 113 TEV/EBIT 6.8 6.5

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Founded in Lincoln, Nebraska in 1981 by the current CEO, Michael Hays, National Research Corporation is a provider of ongoing survey-based performance measurement, analysis, tracking, improvement services and governance education to the healthcare industry in the United States and Canada.  The Company provides market research services to hospitals and insurance companies and develops tools that enable healthcare organizations to obtain performance measurement information necessary to comply with industry and regulatory standards, and to improve their business practices.




The company helps perform roughly 500,000 patient surveys per year to help medical practices understand how they can improve patient care. These services are subscription based and annually renewed by more than 8,100 facilities across the United States with some client relationships lasting several decades. The strong recurring revenue has allowed the company to post several decades of solid sales and profit growth.




They serve more than 22,000 health care facilities and their 10 largest clients only make up 15% of total revenue. The majority of revenue, more than 82%, is generated through subscription services that are paid for monthly or annually by medical practices across the United States (mainly hospitals and other healthcare providers). All of the company’s services are aimed at providing hospitals the data and tools necessary to understand their customer, employee, and physicians to improve patient care.




Sales and margins are much like a software company.  The majority of revenue, more than 82%, is generated through subscription services that are paid for monthly or annually by medical practices across the United States.  The retention rate for these subscription services are high (90%+) which adds stability to the company’s business model and seems to validate the value proposition for clients.  Gross margins are high (55-60%).  The biggest line items are sales and marketing (business development).  ROE tends to be high due to the low fixed cost base (not a capex heavy industry; averages only $2-3mm per year).




The company is split into four business divisions: Growth Solutions, Retention Solutions, Engagement Solutions, and Thought Leadership Solutions.




Growth solutions provide hospitals the IT solutions necessary to measure community perception, brand tracking, advertising ROI, and physician reputation. These solutions allow the hospital to properly advertise and position itself, both online and in the community, to gain additional market share and capture revenue.




    • Market insights: Operates the largest U.S. healthcare survey, which measures consumer opinion across the 250 top markets.

    • Brand Arc: enables clients to evaluate brand value and efficiency.

    • AdVoice: allows for the evaluation of advertising and consumer recall.

    • Research Bureau: facilitates custom research by connecting clients with real time customer feedback.


Informing solutions gathers data on health risks associated populations, assists in reputation monitoring, and addresses readmission risks by engaging customers after leaving the healthcare provider.




Engagement solutions focus on patient and employee experience and assist clients in complying with regulatory requirements. This is carried out through outreach and discharge calls.




Thought leadership solutions organizes national conferences, publications, and informing solutions, along with “The Governance Institute” which tracks industry trends and showcases emerging healthcare trend at conferences and other events.




Are the company’s products and services essential?


The surveys conducted by the company appear to be extremely valuable to hospitals and other medical practices. A small portion of the surveys performed are required by law and impact the reimbursement rates on Medicare and Medicaid. In addition to the small portion of mandated surveys medical practices pay the company to conduct market research on patient outcomes across the entire healthcare continuum. These survey results are typically reviewed bi-weekly or monthly by the decision makers at the organization and are deeply ingrained in the workflow of the medical practice. The surveys are a vital source of best practices and continued improvement in operational excellence. The price of the surveys is relatively small compared to the huge value added (about $45k per service, or less than the cost of one nurse). Many clients have been utilizing NRCI’s services for multiple decades.




Does the company really have the Network Effect?


As the largest patient survey company in the United States, the company believes it has more data on patient outcomes than any other firm. This allows the company to compile the data and create educational seminars based on industry trends. The company also sells subscriptions to “The Governance Institute” that provides seminars and classes on best practices in the industry. Due to the breadth of the company’s database, many medical practices subscribe to The Institute to stay current on the latest developments in the industry.




Brand Name


Over the last 3 decades the company has been recognized for outstanding customer service and operational excellence. The long track record of success and large client base has presumably created a brand name around the company as one of the leading providers of medical information nationwide. The company has several award ceremonies per year recognizing the best medical practices in the United States.




Customer Diversification


The company receives only 16% of its revenue from its top 10 clients and no client is greater than 5% of sales.  National Research works with 24 of the top 30 leading healthcare systems in the U.S., including HCA, Mayo Clinic, Cleveland Clinic, Kaiser Permanente. 






The company was founded in 1981 by CEO Michael Hays at the age of 27. Mr. Hays continues to operate the company today as CEO at the age of 61.






The players (Press Ganey, Advisory Board, Avatar, National Research) are well established and entrenched.  The most formidable competitor is Press Ganey, which was taken private by a Swedish private equity firm in August 2016.  Press Ganey is the leader in the space, serving more than 22,000 health care facilities, 62% of U.S. acute care hospitals and 73% of U.S. medical practices with more than 50 physicians. They have also been around for 30 years.  PGND claims to have the largest industry data asset on patient experience and is also a leader in health care employee engagement.




Why Do Clients Use National Research vs Peers?


  • Frustration with the existing companies like Press Ganey is common. While they measure customer service, they are surprisingly not good at it themselves. Hospitals often want to tailor the satisfaction surveys to their particular market, or find out regional competitors' results and Press Ganey is a hard ship to steer (too large).


  • Customer Satisfaction is not part of the Advisory Board's core business; they make their money on membership fees for consulting and research.  If it's not core business, it won't be their priority focus.


  • The local representative working with the hospital can be problematic, especially if scores are not satisfactory and the hospital needs assistance on developing actionable improvement plans.


  • Switching costs are a lot higher than the annual fees paid to either company. Hospitals don't switch often, usually only with consolidation. The retention rate for most players is 90%+.




Growth Opportunities


  • Enhance existing products (network effect through continued data gathering).

  • New products

  • Cross selling / market share gains.




Industry Overview


 The total addressable market for patient experience measurement and performance improvement solutions is roughly $3.7 billion. This market is expected to grow at a 12.4% rate, reaching nearly $6 billion in 2018.



The Affordable Care Act introduced a variety of reforms to Medicare (which accounts for roughly 20% of health care expenditures) that initiated a notable transition away from the traditional fee-for service payment model toward a value-based care delivery model in the U.S. In January 2015, the U.S. Department of Health and Human Services (HHS) outlined a plan to transition 30% (from the current 20% level) of Medicare fee-for-services payment models to alternate payment models focused on quality and value by the end of 2016. The HHS intends that percentage to increase to 50% by the end of 2018. We note that, in the same month, a group of leading U.S. private health systems and payers announced the formation of the Health Care Transformation Task Force, with a commitment to put 75% of their businesses into value-based payment arrangements within the next five years (end of 2020).




There are also hospital-specific initiatives to encourage value-based health care. The HHS aims for 85% of Medicare hospital fee-for-service payments to be tied to quality and value through programs like the Hospital Value-Based Purchasing Program by the end of 2016, which allocates payments based on a variety of quality measures; this percentage goal increases to 90% by the end of 2018.




New payment models, quality measures, and readmission penalties should create a need for both payers and care providers to better manage the health of their patient populations by engaging patients more actively in prevention and care management. To achieve and sustain cost reductions and encourage proper utilization of health care, providers are expected to engage patients and develop new frameworks that give patients a ‘voice” in their care. Quality measures, for example, tend to include patient satisfaction metrics. Likewise, high patient satisfaction metrics, as measured by Hospital Consumer Assessment of Healthcare Providers & Systems (HCAHPS) scores have been associated with lower hospital readmission rates and higher net margins. The shift to value-based care should drive demand for tools and services to measure and manage patient experiences.




Consumers are bearing more financial responsibility for their health care costs under increasingly restricted networks and high-deductible health plans. With greater financial responsibility, consumers should have more control over their health care purchasing decisions. Data and metrics around cost, quality, and outcome metrics will therefore become increasingly important in the industry, in our view. To retain existing patients and grow market share, health care providers will need to collect, display and improve these metrics. Providers are also engaging in reputation management through greater transparency of performance data. The shift to a more engaged and informed consumer should drive demand for patient experience and performance improvement solutions.




Government regulation. The ACA should be a major catalyst for the transformation toward patient-centric, value-driven care across the U.S. health care industry. The following initiatives are particularly relevant to the patient experience measurement industry:




  • Consumer Assessment of Healthcare Providers and Systems (CAHPS). Under ACA rules, most health care providers are required—or will be required in the future—to participate in the CAHPS program. CAHPS programs were developed by CMS and produced the first nationally standardized instrument for collecting and reporting patients’ perspectives of care to enable comparisons within care settings. This measurement is used to publicly report hospital performance (e.g., quality of care as perceived by patients). Many health care providers use outside vendors to participate in CAHPS programs.


  • Since July 2007, participation in the Hospital CAHPS (HCAHPS) program has been mandatory for all hospitals subject to the inpatient prospective payment system (IPPS), which was established by the CMS. Hospitals risk losing a percentage of the annual payment update (APU) if they fail to report CAHPS data for any calendar quarter. There are also similar reporting mandates across other health care providers, including Accountable Care Organizations (ACO) and outpatient facilities.


  • Value-based purchasing initiatives. Beginning in 2013, Medicare began withholding 1% of Medicare payments to hospitals (under the Value-based Purchasing Program)—a figure that will increase to 2% in 2017. This pool of withheld funding is then reallocated to hospitals based on their relative performance on four domains that reflect hospital quality.




Share Class Split (this is a key component of owning this company)


Prior to May 2013 the company had one share class that had equal rights in terms of voting power and economic interest in the earnings of the company. In May 2013 the business announced a recapitalization plan that would create two classes of stock: Class A and Class B. For each share held prior to the recapitalization a shareholder would receive three shares of Class A stock and ½ of a share of Class B stock. One Class A share is entitled to 1/6th of the earning power and 1/100th of the voting rights when compared to one Class B share. There was strange caveat; in the event that the business was acquired both shares would receive identical proceeds per share (this is unfavorable to the B shares).



The table above shows that Class B shares are entitled to 50.1% of the overall earnings of the business, have 94.4% of the voting power, and would receive 14.3% of the purchase price in the event the business was acquired.




Financial Strength


The company has been debt free since 2011 and runs a sizable net cash balance.  Free cash flow has been running around 10% of sales since 2003, which implies $10mm+ of annual free cash flow in the future.  This liquidity profile will allow them to continue making strategic acquisitions or continue returning capital to shareholders by raising the dividend.






I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.



National Research is a leader in the healthcare data analytics space.  The company has posted revenue growth and 23-28% operating margins every year since 2002.  The subscription based and recurring revenue aspect to their business mutes cyclicality.  Demand for National Research’s services is benefitting from the U.S. Government's push towards a higher quality healthcare system and pay-for-performance initiatives.




The company’s moat comes from the network effect and their solid track record of 36 years in the industry. The reliability of the consumer data is paramount for the healthcare institutions as they try to navigate the new reimbursement landscape. There will also be an ever present need for fresh data as consumers and environments are constantly changing.




The shift to value-based care should continue drive demand for tools and services to measure and manage patient experiences.  To achieve and sustain cost reductions and encourage proper utilization of health care, providers are expected to engage patients and develop new frameworks that give patients a ‘voice” in their care. Quality measures, for example, tend to include patient satisfaction metrics. Likewise, high patient satisfaction metrics, as measured by Hospital Consumer Assessment of Healthcare Providers & Systems (HCAHPS) scores have been associated with lower hospital readmission rates and higher net margins.


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