We mostly write from the perspective of health care providers and users of health care I.T., but this one time let’s take a look at electronic health records from the perspective of vendors.
Without a doubt the American Recovery and Reinvestment Act of 2009 is an enormous boost to the EHR industry. The $20 billion or so promised from the feds is just about equivalent to entire annual health care I.T. spend (depending on whose market-size numbers you believe). But that does not mean all EHR vendors will thrive. There’s still a lot of competition.
At Crosstree Capital Partners, we identify five market strategies that successful EHR vendors will adopt. While no vendor uses only one of these approaches to the EHR market, most select a primary strategy and then mix in other techniques as they grow and adapt. See if you can identify your EHR vendor.
Leveraging Size – There is always something compelling about doing business with the leading vendors in any market. They have tremendous advantages in name recognition and selling resources that gives comfort to customers, especially large and bureaucratic customers. We fully expect the top five to 10 EHR vendors to focus on getting bigger, and mergers and acquisitions will continue to be a primary tool.
Specialization – In no market does one size fit all. For a short time there can be a single dominant vendor or an oligopoly, but eventually new players come into a market, typically by offering some form of specialization. We saw it in the computer industry. At one point IBM dominated the computer market because it dominated mainframes, which was the prevailing computing model at that time. But then DEC, HP, and others created a niche for departmental computers, which morphed into Unix servers and then Windows servers. Each of these changes happened as new vendors identified sub-markets that had different, specialized needs. We see the same thing in the EHR market. Not every EHR customer has the same business and technical requirements. EHR vendors that can identify and pursue sub-markets with specific features should do well.
Regional Focus – Despite national, and even global, marketing campaigns, some customers love to buy from local merchants. They’re comfortable with the proximity to support teams and the vendor’s executives. In some cases, there are even governmental promotions to “buy local.” The behavior is particularly pronounced when the purchase is for complicated and sophisticated gear. Health care providers, rightly or wrongly, view EHRs as complex and sophisticated technologies and consequently many prefer to buy from regional providers.
Suite Selling – EHRs will eventually become a feature of integrated health information systems (IHIS). Already, health care providers are recognizing standalone EHRs are sub-optimal and it’s much better if the technology is deeply integrated with patient scheduling and billing services, at a minimum. Users quickly figure out that systems “integration” is the second-most expensive endeavor in any I.T. environment (right behind “conversion”). As the health care I.T. industry matures these IHIS software packages will be analogous to ERP applications in manufacturing and retail industries. Because of the huge incentives, EHR adoption will lead I.T. purchasing, and consequently EHRs will likely evolve to being the core of the IHIS, just like accounting and inventory became core to ERP systems. Absent the ARRA legislation, we think revenue cycle management and billing services would have been the core of IHIS. In any case, EHR vendors that offer more and more complete suites of products should also do well.
Advanced Technology – The final potential strategy for EHR vendors trying to get market traction is to focus on advanced technology. The most significant way to drive innovation is by dramatically improving user interface technology. The other way is to lower costs by providing the software in a lower total cost of ownership format such as software-as-a-service (SaaS), or on-demand. We also see innovation in security and single-sign-on. Some EHR vendors are offering patient portals – essentially expanding the use of EHR into personal health records.
It’s a little hard to guess exactly what new ideas will come to differentiate products in the EHR market, but clearly a handful of current vendors continue to push the envelope.
Rob Tholemeier is a research analyst for Crosstree Capital Management in Tampa, Fla., covering the heath I.T. industry. He has over 25 years experience as an information technology investor, research analyst, investment banker and consultant, after beginning his career as a hardware engineer and designer.
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