The paperwork logjam in the U.S. healthcare system has been obvious for a long time. So for two decades hundreds of companies, ranging from venture-backed startups to healthcare giants, have been creating and selling software and systems to automate various parts of the sector. Sometimes all this activity has actually seemed to compound the confusion -- especially when it comes to the problem of getting doctors to move to electronic health records, or EHRs, which replace paper documents with digitized clinical data.
These days, there's a wave of consolidation under way in the world of healthcare information technology and also within the EHR subsector. That presents both opportunities and risks for EHR vendors, whether they're medium, large or small. It's instructive to look at the market from all three perspectives -- specifically, those of Chicago-based Allscripts Healthcare Solutions Inc., the largest independent EHR vendor, with $282 million in sales last year; San Francisco-based McKesson Corp., the $90 billion health services and information technology giant; and privately owned, Beverly Hills, Calif.-based AssistMed Inc., established in 2000 by a repeat healthcare entrepreneur as an electronic transcription company.
But first, some background. The uptake of EHR systems depends largely on acceptance by doctors working in small, independent practices. Many doctors, intimidated by the number of options on the market and uncertain of the payoff, have held back.
This dynamic began to change in the past couple of years, however. The biggest reason: a push from Washington. In October 2005 the United States government contracted the Certification Commission for Healthcare Information Technology, or CCHIT, to develop standards for healthcare information technology vendors. The standards are not legally mandatory, but they have encouraged the adoption of healthcare information technologies, including electronic health records.
Market forces are at work too. Consumers already like to research health issues online; 5% to 10% of all Web searches are on health topics, according to one informed estimate. And numerous players think that, despite privacy concerns, consumers will increasingly want to manage their own health records electronically. One is Revolution Health Group LLC, led by Steve Case, the former America Online CEO. Another is Microsoft Corp., which in October of 2007 launched HealthVault, an online repository for patient health information. In February Google Inc. announced Google Health. Meanwhile, big employers, hospitals and insurance companies are pushing for efficiency via healthcare IT too.
The upshot is a kind of convergence. Starting from different points on the healthcare map, vendors are making electronic health records part of a broader array of offerings. Vendors of choice are gaining market traction and mind share. "There will be continued consolidation in the market," says Allscripts president Lee Shapiro.
Allscripts, which serves more than 30,000 physicians and 400 hospitals, divides its businesses into a clinical solutions group, a physicians interactive group and a medication services group. The company established its healthcare roots in medication management and electronic prescribing software, which enables doctors to send prescriptions directly to pharmacists over the Internet and through hand-held devices. Allscripts remained focused on its original core up through its IPO in 1999.
In 2000, the company acquired ChannelHealth Inc. for about $250 million in stock, giving it the ability to automate a wider variety of administrative and clinical functions for its customers. Shapiro says that the same motivation drove subsequent deals, for Allscripts as well as for much of the rest of the EHR industry. "We have broadened our offerings and have started to address more of our clients' needs," says Shapiro. "I think that you'll continue to see that being the case for the larger companies in the sector, and you'll see fewer niche players."
It isn't just the push for standards that's driving these firms to sell, according to Shapiro. "The other force," he says, "I think is the waning patience of the venture firms that are involved in some of these companies. Their dollars look for an exit in a certain point in time. With some of these companies having come into existence in the late 90s, early 2000s, many of them are looking for an exit, and that is forcing some of the consolidation."
Relationships help Allscripts to find deals in the first place. "We rely on our network," says Shapiro. "Because we have been acquisitive in the past, many companies who are thinking about a recapitalization, or thinking about a sale, will come to us."
And since integration is key, it helps to learn about a potential acquisition's technology by partnering first. That was what Allscripts did before buying Advanced Imaging Concepts Inc. for $18 million in 2003. "They had an industry-leading document management solution that we believed would allow practices to move more easily to using electronic health records if they were able to transition from paper charts to electronic charts," says Shapiro. "We partnered with them, we started doing integration of their products. We actually were able to demonstrate value to show that this worked."
Allscripts's biggest deal to date came in 2006: the purchase of A4 Health Systems for $272 million. That move brought some complementary technologies that Allscripts could sell to existing customers and also a position in the small-to-medium size independent physician practice market, where A4 was the leader. "What I think ultimately allowed us to go forward was that there was a great alignment between the vision of John McConnell, who is the CEO of A4, currently sits on our board and was the founder of A4 as well," Shapiro says.
And the deals continue: Early this year, Allscripts acquired Extended Care Information Network for $90 million, gaining that company's hospital-care management and discharge planning software.
Coming to the EHR market from a different point on the map is McKesson, the largest healthcare IT firm in North America. The company's strategy is based on providing interoperable solutions to entire regional healthcare systems. McKesson has a dominant position in pharmaceutical supply chain and sales support systems, and it wants to leverage those to grow in surgical supply chain and healthcare provider technologies, including EHRs. The same customers who use McKesson's products to record financials, manage supply chains and manage bed use also employ EHR systems to manage their clinical documents.
"As the market continues to look for an increasing amount of integration between care settings and financial clinical systems, we find organic development is really important for that," says Mikael Ohman, senior vice president of strategy and business development for McKesson Provider Technologies. "But M&A is also a real important complement for us, and we continue to do more and more deals every year."
The deals that complement McKesson's organic work have been both large and comparatively small. In November 2006, McKesson agreed to buy Per-Se Technologies Inc. -- one of the biggest providers of financial and administrative IT solutions to hospitals, physicians and retail pharmacies -- for $1.8 billion in cash and debt. Per-Se's electronic pharmacy network spans roughly 90% of U.S. retail pharmacies, but the company also cited "a rapidly emerging market for physician office software" in announcing the deal.
McKesson followed up at the other end of the scale in February 2007, buying an EHR vendor called Practice Partner for an undisclosed amount. More than 20 years old, the provider of EHR software for independent physician practices has about $40 million in annual sales. Ohman says it isn't just the push for standards that's boosting demand for such systems. "The technology has matured to the point where the systems can be installed in a couple of days, work very well and provide value right now," he says.
Not that all technology providers are equal. Ohman observes that one of the challenges in trying to consolidate a sector like this is all the sifting required. "To cut through the noise in the EHR market, there might be hundreds of companies out there, but there aren't hundreds of companies that are really, really strong. "
That's certainly the category that privately owned AssistMed considers itself to be in. Established in 2000 as an electronic transcription company, Assistmed has greatly broadened its offering since then. Its Web site says its suite of products "presents a unified, online view of all physicians' clinical encounters, enabling hospitals and physicians to function as an integrated healthcare system while optimizing clinical documentation."
AssistMed's co-founder and CEO, Leonardo Berezovsky, has a history of starting and selling healthcare technology companies. Originally a cardiologist, Berezovsky left his Los-Angeles based practice to co-found Mobil Diagnostics Inc., a mobile diagnostic imaging testing services vendor, in 1985. He went on to co-found a telecommunications fiber-optic component company and then AHI Healthcare Systems Inc, a healthcare network infrastructure company that he sold for $130 million in 1997.
Like many others, Berezovsky is betting that the integration of technology for the healthcare provider community will only continue. AssistMed is doing its part. It bought a Canadian EHR vendor in 2005, a nurse management technology vendor and a speech recognition company in 2006 and a patient adherence management software company in 2007. Berezovsky says he may make acquisitions to add customers, cash flow and geographic reach; to add technology; and sometimes for all those reasons. Some targets have as little as $500,000 in annual sales. Typically, he knows them well. "A lot of these acquisitions are relationship-driven," he says.
And although he sees it from a different vantage point, Berezovsky foresees the same kind of future for this evolving field as his counterparts at Allscripts and McKesson do. "I think five or 10 years from now, like every maturing industry, the numbers of players will be significantly reduced," says Berezovsky. "And we'll have much larger companies providing integrated solutions through single interfaces with the various stakeholders of the healthcare system." - Nokware Knight
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Good informative article and post. Thanks for sharing.