Weapons makers try health care amid defense cuts

January 6, 2013

Top weapons makers Lockheed Martin and General Dynamics are pursuing and winning health-care projects as the Pentagon weighs hundreds of billions of dollars in cuts.

Lockheed Martin, the top federal contractor, won $472 million in awards from the Department of Veterans Affairs and the Department of Health and Human Services in the fiscal year ended Sept. 30, about five times more than in 2002. General Dynamics, the No. 3 U.S. vendor, won almost nine times as much work, or $398 million, from the two health-focused agencies last year compared with fiscal 2002.

“It’s where the money is,’’ said Bill Loomis, an analyst with Stifel Nicolaus & Co. in Baltimore. “We’re seeing defense spending and overall spending coming down, and companies are investing where there is growth.’’

Lockheed, maker of the F-35 jet, is now conducting disability exams for veterans. It is also developing software for the government’s Centers for Disease Control and Prevention that will transmit medical-supply information in public-health emergencies.

General Dynamics, producer of Abrams tanks, was chosen in April to provide engineering and support services for an electronic medical records program with the Indian Health Service, part of Health and Human Services. It also provided software development and training last year to the department’s Office of Child Care.

The Pentagon already was preparing for $487 billion in cuts over a decade before the added threat of as much as $500 billion in automatic reductions emerged.

With war spending winding down and cuts becoming more likely, military suppliers looked in the federal budget for growth areas such as health care, cybersecurity and foreign sales.

President Obama asked Congress to boost the budgets of both the VA and Health and Human Services by about 8 percent, including both mandatory and discretionary spending, for the fiscal year that began Oct. 1.

Both companies’ gains in VA and health work outpaced overall increases in federal contracting, which roughly doubled to an estimated $512.8 billion in fiscal 2012 from about $264 billion in fiscal 2002.

“Companies are putting their stakes in the ground,’’ analyst Loomis said in a phone interview.

Acquisition strategy

The biggest defense vendors are rarely displacing major health companies on government contract awards, he said. Instead, they’re acquiring smaller private companies with health expertise to increase opportunities to win federal projects.

General Dynamics bought its way onto a $4 billion, 10-year multiple-award contract for information technology with the Centers for Medicare and Medicaid Services by acquiring Baltimore-based ViPS for $225 million in 2008. It got its second slot on the agreement by buying Arlington-based Vangent Holding for $960 million in September 2011.

Weapons makers turn to health care

General Dynamics, based in Falls Church, received $131.9 million through the contract last year, according to federal procurement data.

The contractor’s health-related acquisitions aren’t defensive moves, said Rob Doolittle, a spokesman for the company.

“It is more about taking advantage of growth opportunities,’’ Doolittle said in a phone interview.

Lockheed acquired QTC Holdings, which administers medical exams for the government, in September 2011. Just two months earlier, QTC received a spot on a VA contract to provide veteran disability reviews, which are used to help determine benefit payments.

QTC received $162.2 million through the VA contract last year.

“Lockheed Martin’s acquisition of QTC was driven by the company’s strong alignment with our information technology expertise and adjacent market growth strategy,’’ Jack Robling, a spokesman for Bethesda-based Lockheed, said in an e-mail.

Lockheed’s and General Dynamics’ federal health work pales in comparison to the vendors’ defense contract revenue, said Rick Whittington, a New York-based analyst with Drexel Hamilton. Lockheed won more than $28 billion in Pentagon work last fiscal year, while General Dynamics landed more than $13 billion in military awards, according to data compiled by Bloomberg. The figures are incomplete because the Pentagon typically lags behind other agencies in reporting its awards.

The health work is “typically just 2 to 3 percent of the total company’s revenue,’’ Whittington said in a phone interview. “It doesn’t really move the needle on stock prices.’’

— Bloomberg Government

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