Can IBM fix the health-care problem?

Fredrik Tunvall, a senior client engagement leader at IBM Watson, goes through a demonstration in the Immersion Room. IBM to acquire Truven Health Analytics for $2.6 billion.
Andrew Spear | The Washington Post | Getty Images

You thought IBM was now a software and consulting company.

But Big Blue just made its biggest acquisition in eight years, and it was for a health company.

IBM said Thursday it's buying Truven Health Analytics for $2.6 billion, bringing to $4 billion the amount it's spent on companies for its Watson Health business.

A sign marks the entrance to IBM Corporate Headquarters in Armonk, New York.
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IBM introduced Watson Health in April to bring software and data analytics to health care and ultimately save and improve lives. Truven marks IBM's boldest bet since the launch, adding technology that gives medical professionals, governments, insurers and employers data and insights to make better decisions.

Why IBM?

Think back to 2011, when Watson was introduced as a robot that could beat any human on quiz show "Jeopardy." Yes, it was a gimmick, but the point was to show the world the power of machine learning.

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IBM is now taking the power of Watson, a computer that processes natural language and gets smarter over time, to try to fix health care. That first means helping people live healthier and longer, but it also means creating a more efficient system.

In the U.S., health care accounts for about 17 percent of gross domestic product. The $3 trillion spent annually represents 40 percent of health costs globally, according to a Carlyle Group report.

"Watson, or a tool like Watson, will be a part of every major health-care decision," said Dr. Kyu Rhee, IBM's chief health officer. "We call it augmented intelligence — the ability to help the different stakeholders be at the top of their game."

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By stakeholders, Rhee is referring to doctors making smart, personalized diagnoses, employers having a better understanding of the medical needs of their workers and insurers more accurately pricing policies and analyzing risk.

Prior to Truven, the Watson Health unit acquired Phytel for population health, Explorys for cloud-based health intelligence and Merge Healthcare for medical imaging.

Overall, Truven marks IBM's biggest deal since the $4.9 billion purchase of business software maker Cognos in January 2008, according to FactSet.

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IBM has to chase big markets to grow. Sales have dropped for four straight years, including a 12 percent decline in 2015 to $81.7 billion, as the company has shifted away from traditional hardware and packaged software to the cloud. The stock has lost one-third of its value in the past three years.

It's early days for Watson Health, but IBM has made some splashy announcements. Late last year, the company introduced an Apple Watch app that helps consumers track health, exercise and nutrition. And in January, IBM partnered with Under Armour to power the company's fitness tracking app.

"In our view, the technology solutions that support data collection and analysis across the healthcare industry have major room for improvement, representing a big opportunity for IBM," wrote Brian White, an analyst at Drexel Hamilton who has a buy rating on the stock.