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Some EHR Vendors Losing Out as Market Evolves

Electronic health record (EHR) software vendors aren’t churning out profits like you might expect. You’d think that the Federal subsidies for EHR implementation would create a rising tide that lifted all boats in the EHR software industry. In reality, some vendors are about to capsize.

Based on data points I’ve observed in the market over the past few months, I think some vendors are facing a cash flow crunch. They’re thrilled to have the wind at their backs for once, but the pace is proving hard to maintain as market evolution has accelerated under the unnatural effect of government subsidies.

Here’s the problem.

EHR Vendors Are Spending Money Like Crazy

Most software markets evolve over a twenty or thirty-year period. Consider the enterprise resource planning (ERP) market: the first ERP vendors were founded in the early 1970s, but rapid growth and innovation continued until about the year 2000. The EHR market, however, will mature in the next five years. This is because healthcare providers are buying EHR systems sooner than they otherwise would, to make the most of massive federal subsidies and avoid penalties. Consequently, EHR vendors are in a mad rush to gain market share.

Those that win will own a massive customer base paying recurring support fees. Those that lose will become irrelevant from a market share standpoint and will be ingested into a larger vendor (if they’re lucky; some will just go broke). As a result, EHR vendors are increasing their R&D budgets to develop new features and meet meaningful use criteria. Their marketing colleagues are spending heavily on demand generation and brand building. These vendors have no choice but to win today’s market share battle.

But Providers Are Gun Shy

Almost a year and a half passed between when the American Recovery & Reinvestment Act (ARRA) was signed in 2009, and the final definitions of “Meaningful Use” and “Certified EHR” were issued in July 2010. Certainly that process was no small task, but during that time, most providers took a wait-and-see approach to EHR adoption. There have been tens, maybe hundreds, of thousands of practices out kicking tires, but fewer than expected are writing checks to buy an EHR system. Furthermore, a disproportionate share of these deals – I’m estimating >60% – are going to the top ten market leaders, which is typical of enterprise software markets.

With meaningful use criteria now defined, I believe demand trends have improved. Providers now have the clarity necessary to make purchase decisions with confidence. That can’t happen soon enough, however. EHR spending has to catch up with the investments these vendors have been making over the past two years.

And Subscription Pricing Constrains Cash Flow

To complicate matters further, the software industry as a whole is shifting to cloud computing. Providers have not yet embraced the Cloud en masse, but they have embraced the subscription pricing model popularized by Cloud vendors. Why make a large, up-front investment in a perpetual license when you can just pay monthly for what you consume? Subscriptions are even more logical in light of a five-year subsidy payout.

To meet physician demands, the major EHR players are now offering low monthly pricing and publishing it right on their home pages. EHR vendors love this recurring subscription revenue, but their cash flow is spread out into the future as a result. It takes a healthy balance sheet to withstand this transition.

So what do we have so far?

  • EHR vendors are investing lots of money;
  • providers are writing fewer checks than expected; and,
  • checks that are written are smaller and spread out.

The result is a very difficult cash flow scenario for many, but not all, EHR vendors. Lately, I’ve seen some EHR vendors stretching their payables out 90 or even 120 days. Meanwhile, I’ve been surprised to hear that some leading vendors are operating between breakeven and just a few points of profit margin. Both practices represent good financial discipline considering the pace of market evolution. In reality, however, some vendors are struggling – “taking on water,” to stick with our nautical imagery.

Buyers Beware

The EHR and practice management markets have always been highly fragmented into hundreds of software vendors, largely as a result of the need to service small and demanding local practices. As a result, providers have seen plenty of vendors fail to reach critical mass, then close up shop or sell out. Anecdotally, I also know that some of the leading EHR vendors grew their top line 30% to 60% last year, while laggards foundered. Gaps between winners and losers are expanding quickly, so expect to see more consolidation.

Vendor size is important, but isn’t the deciding factor for success and viability. In this intense market, success will result from execution. The winners and losers will be determined by the competency and discipline of their management. EHR vendors must spend with discipline and generate a strong return on their investments. It wouldn’t hurt to raise capital, either, but not all vendors will need to take this step.

It’s tough for providers to assess the financial viability of private EHR vendors. Software Advice offers our Guide to Assessing Medical Software Vendor Viability, but the industry really needs a trusted third-party to evaluate the 400 plus vendors. Organizations like CCHIT, InfoGard and ICSA Labs are all certifying EHRs against functional criteria. However, buyers also need the equivalent of an A.M. Best or Moody’s to rate the financial health of EHR vendors. Okay, maybe without the negligence and bias the later demonstrated during the mortgage bubble.

In Conclusion
There will be some big EHR winners within the next five years and consolidation will be a net positive for the industry. However, buyers must be careful not to become collateral damage as the fierce battle for market share plays out. It’s important to determine which vendors are closing business, growing their revenue and building a sustainable, profitable business. Providers should keep in mind that their success is tied to the success of the software vendor that will enhance and support their EHR system in years to come.

This article originally appeared at EHR Vendor Viability: Rapid Market Evolution is Leaving Some Vendors Behind.”

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Dr. HenryWendyEHRRayAdderall effects Recent comment authors
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Dr. Henry
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Dr. Henry

We were reasonably satisfied with Medinotes when they were sold first to Eclipsys (support eneded and support payments skyrocketed) then to Allscrpts (product killed). We were able at some cost to convert our patient data to our new EMR (as data not PDR format). What about a vendor abandoning an engine to access data that is by law necessary to preserve (health care records) in the case of children for up to 21 years. It is a criminal and de-licensing offense for the Physician to abandon the medical record but no offense for the engine vendor to abandon the Physician.… Read more »

Ray
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Ray

This article is flawed. If the writer thinks vendor size guarentees stability in EHR market he is sadly mistaken. Eveyrone one knows what happen to Microsoft and IBM’ s Joint venture EHR ” Penchart”. What about Medinotes which had market share and now is so legacy it is being discontintued? Actually it was brought out by Allscripts and medinotes users are being force to migrate to Allscripts because of data lockin. Medinotes database has been locked up and Allscripts is charging a ransom for the”encryption key”..Whose records are they anyways. What really protects end users is really not size of… Read more »

Adderall effects
Guest

“actual passage of a bill in a single branch would represent little real movement, especially when the branch in question is dominated by a political party different than that of a veto-wielding President. HITECH is here to stay.”

It’s a sad truth, I must say.

Robert Rowley MD
Guest

Commentary on this subject from the perspective of a non-traditional business model, and how to assess vendor viability in this new context can be found here: http://www.ehrbloggers.com/2011/01/how-to-assess-ehr-vendor-viability.html

MG
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MG

The $2.5T cuts (which includes $900M in Obamacare cuts including the HIT spending) over 10 years in purely discretionary spending is political grandstanding and nonsense. It would cut discretionary spending overnight next year to 2006 level and then magically keeps them there until 2021. It also assumes that 15% of the federal workforce (again DOD-related personnel are not included) would be cut and that pays raises to federal personnel would be postponed for 5 years. This is a proposal. It is to score cheap talking points because it has zero chance of passing in current form in Congress and would… Read more »

Mike MD
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Mike MD

The comment was “not likely” and no I don’t know diddly about the legislative process, but I do know that EMRs do not currently benefit anybody (except emr vendors) in the way the legislators think they do.

MG
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MG

1. Yeah anecdotal evidence that EMR vendors have had to increase their R&D spending but is that really showing up in the numbers for publicly-traded firms including Allscripts (tricky finacial sheet), NextGen and athenahealth which are the only pure-play ambulatory EMR vendors? 2. There were only about a dozen (maybe 7-8) ambulatory EMR vendors that really mattered even before the HIT spending act and that really hasn’t changed. It has just further solidified from what I have heard/seen unless you start to get into some of the medical specialties which generally the major EMR vendors do a poor job of… Read more »

BobbyG
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@Mike –
Exactly. House passage means nothing. The the only way the Repu’ublicists can repeal any of these measures is via Senate poison pill amendments attached to “must-pass” appropriations bills.
Such could indeed happen, but HR 408 per se is “Meaningless Use” of congressional resources.

Mike
Guest

Take it from a former legislator: Those of you who think the mere filing of a bill in the House of Reps makes HITECH defunding “likely” don’t know diddly about the legislative process. Even actual passage of a bill in a single branch would represent little real movement, especially when the branch in question is dominated by a political party different than that of a veto-wielding President. HITECH is here to stay.

Mike MD
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Mike MD

I heard from some who participated in P4P that they worked very hard and never got a cent from the feds, and that is part of why I have never been salivating over the supposed $44,000 I was going to get. Now it appears possibly, even if not likely, that congress will pull the plug and my skepticism will have been justified. I doubt that I am the only one who feels this way. It is funny to me all this wondering why physicians have been so slow to buy into the EMR concept. I have used Practice Partner, Meditech,… Read more »

EHR
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EHR

your an idiot.

Wendy
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Wendy

EHR… your point might be taken more seriously if you spelled “you’re” correctly in your pointless remark. Does not make you look like a genius.

As for the doc above, Mike MD has a point. Having tried all of those solutions would suggest he has some experience with the medium. He is certainly entitled to his opinion.

As a consultant in the EHR industry I will tell you that electronic does not always mean efficient. Although I do believe some strides have been made and continue to improve the landscape. Hang in there Mike MD – it is getting better!

propensity
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propensity

How timely!
There is a bill in the House of Representatives, HR 408, entitled the Spending Reduction Act of 2011. Hallelujah, HITECH will likely be defunded.
The conversation about the meaningful ruse of said vendors and their trade groups is about to be heard, loud and clear.