Medical Executive Post … Insider News Network

Electronic Health Records (EHRs)

By Don Fornes

[Founder & CEO, Software Advice]

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 Medical 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 orMoody’s to rate the financial health of EHR vendors. Okay, maybe without the negligence and bias the later demonstrated during the mortgage bubble.

Assessment

Link:  http://www.softwareadvice.com/medical/electronic-medical-record-software-comparison/

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 businesses, 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.

Conclusion

And so, your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com and http://www.springerpub.com/Search/marcinko

Our Other Print Books and Related Information Sources:

Health Dictionary Series: http://www.springerpub.com/Search/marcinko

Practice Management: http://www.springerpub.com/product/9780826105752

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Physician Advisors: www.CertifiedMedicalPlanner.com

Subscribe Now: Did you like this Medical Executive-Post, or find it helpful, interesting and informative? Want to get the latest ME-Ps delivered to your email box each morning? Just subscribe using the link below. You can unsubscribe at any time. Security is assured.

Link: http://feeds.feedburner.com/HealthcareFinancialsthePostForcxos

Sponsors Welcomed: And, credible sponsors and like-minded advertisers are always welcomed.

Link: http://healthcarefinancials.wordpress.com/2007/11/11/advertise

Filed under: "Doctors Only", Information Technology Tagged: | AM Best, ARRA, Certified EHR, Don Fornes, EHRs, electronic health records, EMRs, HITECH, Software Advice