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John Gomez 12/23/11

December 23, 2011 News 12 Comments

Since establishing JGo Labs, I have had the opportunity to speak with many of the key decision makers in the world of HIT. It has been a rather eye-opening experience, one that has created a new understanding and appreciation for the challenges this industry faces long term. My discussions have involved hospital leadership, physicians, nurses, employees, leaders of HIT companies, and industry analysts.

One of the consistent things I hear from everyone I speak to is, "You know John, we just aren’t sure about this market. When we talk to the vendors and industry analysts, they all paint this awesome picture of their companies with strong financial performance and huge upside. Yet when we talk to the clients and ask about their future plans, they don’t match up with the vendors’ and analysts’ views. What do you think?"

This polar view of HIT, specifically in the EMR sector, may seem typical of the client / vendor perspective. But when you dig deeper, you find that it is all but typical. Vendors will paint rosy pictures and clients are going to be cautious of vendor claims. That is normal.

What isn’t normal is that when you probe clients (IDN, academics, community and physician groups) you quickly learn that their hope is to get through Meaningful Use certification as fast as possible and then get back to what they know best. That often means not investing in EMR products.

Most clients I speak with state that the biggest issue they have with HIT products is that they don’t deliver on the promises. They may improve patient safety to some extent and help streamline some processes, but clients aren’t seeing those products as a means to cut their operating costs or improve their revenue. Why this is the case would make great content for another article, but what is important here is that there is a general feeling among clients that the EMR is a distraction, not something they want to continue evolving over time. Simply stated, they want to meet the guidelines and focus on the things in their business which drive real revenue and change.

In speaking with the vendor leadership side of the HIT world, what I typically find is a world of fear, with many leaders confidentially stating that, “I am not sure how we survive the long term.” Keep in mind that my discussions are with middle and senior managers, not the executives. My experience is that speaking to those on the ground gives you a much more realistic view of what is happening in a company than what you learn from executives, boards of directors, and financial filings.

The last area of input is the sector analysts. Although they typically focus on public companies in the HIT sector, many of them will evaluate all companies as means to gauge opportunity and test the claims of those companies in which they are considering investing. More and more analysts are finding that over the long term, the return on investment for HIT companies is not as promising as hoped. There are some shining stars and if you use diligent tactics you will make a return, but if you compare HIT ROI for public companies versus other industries, the return is not glowing.

As you can see, this doesn’t paint a really exciting picture of the market. Although I believe we are seeing a mini financial bubble, I do think there is hope, and I’ll address that shortly. Right now, I want to continue to flush out why a bubble may exist and provide some insight into the dynamics of this market and how it affects vendors, which ultimately affects healthcare institutions and their decisions.

Most healthcare vendors operate in a US market, or at least their portfolio is dominated by US clients. The US healthcare market, from an HIT perspective, does not grow each year as do other industry sectors. There are more patients every year, but unless the vendor’s licensing model increases their payment for each patient visit or transaction, the majority of HIT vendors don’t see this upside.  

The market size for the vendors is typically the number of beds in the US.  If we want to translate this to a math formula, it would be

Total US Hospital Beds – Already Committed Beds

That is your market. Committed beds are those where the institution has already selected an HIT vendor for that line of business offering.

Most hospitals have made a commitment to, say, an EMR vendor (with Epic and Meditech having the lion’s share) and are facing sheer difficulty in successfully implementing the systems. This is not a very transient market — clients will stick with their choices for years or decades. This makes vendor growth difficult and impedes new vendors from entering the market.  

Secondly, not many new hospitals are being added each year. Not only is it a limited market opportunity, it is also a limited market in terms of its organic expansion.

Those two points alone are cause for concern. We have companies struggling to make their way in a rather limited market. Just like in the real world, if you put a few predators in a pond that exhaust the food supply, they either turn on each other (merger) or they die off (stalled growth, no innovation, go on life support.) These foundational characteristics  establish the foundation for our bubble. Lots of excitement, sudden infusion of growth, tons of market hype, very limited market.

The next challenge is that many of the companies in HIT are experiencing extremely rapid growth. You might be thinking, “Wait, John. Isn’t rapid growth a good thing?” It is if the growth is balanced.  

If a company is growing its top side (new profitable sales) while slowly expanding its costs (people, infrastructure) then growth is great. But if you pay attention to the vendors in HIT, they are growing their costs at a rate that outpaces their top line.They are adding tons of people for services and support, yet you don’t see a tremendous number of net new sales. They are offering this expanded capacity as proof that they are in demand, but without net new sales, it is probably because they misjudged their products’ quality and capabilities, not because the company is gaining market share.

Secondly, if you aren’t seeing a company hire an incremental number of engineers and product people, then they aren’t adding new products to fuel the future. Healthy companies have a long-term focus, which is critical for surviving a bubble — growing and investing in their future products.

The concern here is that eventually, given a limited market (pond), vendors will eventually need to slash costs to continue operations ( the first pin prick in the bubble).

Slashing costs can be termed many different things: optimization, efficiencies, consolidation, synergy, and reorganization. Fancy terms aside, it is simply good old fashioned cost-cutting in hopes of making a financial plan  People lose their jobs and the company is in the first throes of trouble.  

As an industry, we have seen a few companies begin to take this tack and go into maintenance mode. Others will not cut costs so as not to signal the market that they are having challenges, but their margins will dwindle or their stocks will stagnate. No matter how you slice it, these are the outcomes of a limited market and companies with limited innovation.

So what does this mean to you? What should you be thinking or asking?

As a client, investor, or employee of an HIT vendor, you need to make long-term bets and evaluate whether a particular vendor is truly positioned for the long term. Now more then ever, you need to verify that your vendor is transparent about their finances, operating plans, and roadmaps.  

A vendor shouldn’t just talk about their history. It’s more important to know how they are financed and structured for the future. Be careful of fancy talk regarding reorganization, the use of external consultants, or restructuring. This is often the first sign that a company is in flux, either poorly positioned for growth or unable to understand their own market.

(Also, as important as cash reserves are to any company, if any company continues to point to their cash reserves as part of their long-term survival strategy, I would be concerned, but that’s just me.)

If the company is publicly traded, look at how Wall Street has rewarded their stock over several years. A stock that doesn’t have a history of long-term incremental and sustained growth reflects a company that hasn’t earned Wall Street confidence, but rather is a company that most analysts use to do short sales. This is not a company whose products you want to own for the next decade. 

Consider also that many companies put a lot of time and thought into their analyst calls — to the point of scripting them, hiring PR firms, and using other tactics to paint a glowing picture of poor performance. Don’t get fooled by fancy words and great presentations. Look at the long-term stock performance and discount what you hear on analysts calls. They are like first dates — everyone is on their best behavior and most analysts don’t ask hard questions. Your time is better spent elsewhere.

Simple math can give you clues to your vendor’s position for the future. Ask how many new new sales they have made in the past three years. 

I am defining net new sales as those that bring completely new clients to the table — clients with which the vendor has no preexisting relationship. Many vendors will classify a new sale as any new item bought by an existing client. If you listen to the analyst calls or sit in a vendor presentation, you might hear them say, “We had 50 new sales last year.” You think, “Wow, these guys and gals are on fire. Let me get some of that!” 

In actuality, they may not mean “net new sales,” they mean, “We sold stuff to the clients we already have.” This is important. You want existing clients to buy from their vendors. But if a vendor isn’t breaking out sales between net new clients and existing clients, it’s sleight of hand, often used to hide that the vendor isn’t expanding their market. That isn’t good.

Vendors love to talk about their sales pipeline and product roadmaps. This is good, but in a market with limited number of clients, a vendor needs to really talk in detail about their product pipeline. What products are they bringing to market? Who will buy them? If they are just offering the same products they have for the past several years or decades, be wary. If they are talking about new products in the pipeline but aren’t hiring tons of engineers and domain experts, be wary.

Look for details about when, how and why. Does their pipeline make sense? How much are they investing? Is it a committed investment? What do they need to do keep investing in the pipeline?  I bet it is linked to net new sales. If new sales stop rolling in, the company will either cut their costs or cut the product. Neither is good for you.

Why do cuts matter to you? If a vendor is cutting people, you may be in for a bumpy ride when it comes to service levels, which affect you the client directly. It also may mean that the vendor couldn’t predict accurately how to manage their business through the economic challenges of the industry.  

Look behind the marketing and get a clear understanding of why the vendor is cutting costs. Cost-cutting because of a new process may make sense. Adding robots to an assembly line would provide the same level of service with a need for less humans and less costs over time, but just cutting people or taking a quarterly write-off are not signs of a healthy company.

Listen closely to your vendor for signs of cannibalization. Be wary if they plan to grow their business by going after the business of stagnant companies that are closing, downsizing, or freezing their products. What the vendor is saying is, "Thank God those other guys screwed up, because without that, we would be in trouble."

Again, look for the totally net new sale. If clients are buying the vendor’s products without a sentient event — such as other companies going into maintenance mode — chances are the vendor is doing great. If a vendor is relying on the failure of others to keep growing, that’s a big warning signal.

Look over there and ignore the man behind the curtain. The industry relies on KLAS, Gartner, and others to evaluate vendor performance, client satisfaction, and overall product quality. I don’t believe any of these organizations is perfect. They should not be the ultimate voice of your decision. Still, when any vendor asks you to ignore these reports, you should have serious concerns.

No consumer or vendor reporting agency is perfect, but you can make it close to perfect. Take the report cards offered by these agencies and do your own analysis. Ask your vendor to answer the questions in the report. Randomly sample their client base, employees, and partners. It’s just like buying an appliance or car — if you bring the Consumer Reports article with you and ask about the report on your own, you will get better facts to help you make a decision.

So what’s the net?

I believe that we are in the early formation of a bubble. Whether it bursts or not, I don’t know. As an industry, we need to be wary and proactive. At the end of the day, the companies with strong product pipelines, net new clients being added to the roster, and growing conservatively will be the ones left standing. 

We will see consolidation, experimental business models, and some vendors fading away as the market settles and government funding levels. Don’t get taken in by mergers and consolidations. Most vendors don’t have the ability to successfully pull them off, although some have succeeded.

I have been wrong about more things in my life then right. I hope I am wrong about the future of HIT and the landscape of companies. There are real people that walk the halls of those companies, with families and dreams. My hope is that the leadership of those companies think long term, put aside vanity and ego, and do the right things to weather the storms.

Is there hope?

Yes. I don’t believe that this industry is doomed. I do believe there are going to be some serious growing pains, some flushing out of the industry (which has already started – Google, Microsoft, etc.) and unfortunately, many people losing their jobs as Meaningful Use levels out.

Once the industry works through that, I think we will be left with a really strong base of companies that are highly innovative, financially stable, nimble, and led by really smart professional leaders who truly understand the needs of the client and have a long-term focus. There is tremendous opportunity in this industry. We just need to separate fact from fiction.

John Gomez is CEO of JGo Labs.

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Currently there are "12 comments" on this Article:

  1. Nice job John. The EHR has become a commodity. Next up…real time quality and case management.

    Most of your current HIT vendors are not real innovators, someone new will have to enter the market to provide disruptive products.

  2. Meaningful Use is no where near its end. Once a regulatory direction is established and the governmental mechanisms are enabled, it becomes self-perpetuating. The folks involved will never say, “Our work here is done.” Look for ARRA Stage 20.

    The core EHR itself–the part that is useful for clinicians to communicate and help execute care–has become insanely expensive and the large market is locked up by large vendors who have a stranglehold on customers who have overspent on little more than a rudimentary core when one considers all the niche specialty areas that need to be bolted on for a clinical EHR to be robust.

    In short, we’ve overspent on yesterday’s technology, are being regulated out of functionality and have no money left for innovation.

    About average for government replacing the free market.

  3. I’d like to think that the health systems in our country will somehow come to their senses and purchase and implement technology that makes them better able to manage risk and populations, coordinate care and reduce the overall cost of healthcare.

    But the same health systems have already spent their money on stuff that was designed last century and “upgraded” to included MU-specific requirements.

    So health systems will be saddled with systems (and debt) that will keep them firmly entrenched in the same 20th century care models that are bankrupting the country.

    And this – and the jobs attached to status-quo healthcare in the US – will keep broader health system reform from happening in our country.

    Sadly.

  4. There wasn’t a single new insight or actionable piece of information in this article. It is always easier to be a critic than an architect.

  5. Vendors need to get out of the way and let us do our job. They are the tail trying to wag the dog. Come walk a mile in our shoes. They should tie their fees and increases to Medicare reimbursement rates versus CPI or other indexes. If they are really in our industry we should all adjust accordingly. I doubt that their shareholders or parent companies will agree. Not really a growth strategy is it.

  6. Really? You wasted your value time for John’s insight?!?! He should have only practiced what he is now preaching when he was at Allscripts/Eclipsys.

  7. Easy to say “practice what you preach,” but those of us who work at a large company know that unless someone’s name is Judy, Neal, John or Glen, one person seldom moves the ship. The question posed is what future for the big EMR firms now that govt has started and will continue to commoditize enterprise EMRs? Can CIOs find a way that technology can be applied to give advantage in the increasingly competitive hospital market when EMRs lose their differentiation? Why do vendors think analytic offerings will make such an impact on the quality, cost and profitability of maintaining health care?

  8. There are a few good general points and observations on here but I did find it incredibly narrow with its focus on health IT stocks vs. healthcare with too much emphasis on just hospitals.

    There are only a handful of publicly-traded health IT companies that are pure-plays with only a small number of analysts who cover them. Not even enough to create an ETF really.

    John’s basic point does hold though that if you look at the publicly-traded health IT companies – they got a really huge bump from the stimulus money starting in 2008 and have crushed the market benchmarks since (e.g, S&P, DJIA, Nasdaq) but they are fast running out of run to continue outperforming because of several factors (e.g., lack of greenfield opportunity especially in hospital, heavy revenues tied to U.S. market, healthcare revenue challenges moving ahead forward, etc).

    Kicker is that most of them offer no-to-low dividend yield either (below 3%) without the piles of cash that other tech companies are sitting on to either boost their dividend yield or continue to buy back stock to give the stock a boost. In a ZIRP world where the hunt for yield is becoming ever more challenging, pure-play, publicly-traded health IT stocks as a whole are going to be a sector I would avoid dog the foreseeable future.

    Not worth the trouble to try to pick the 1-2 winners who will really stand out based on equity price over the next few years and if you aren’t paying me a 3-4% dividend yield I would rather just sit in cash keeping my powder drive for other opportunities.

  9. If it weren’t for ARRA, many of the HIT vendors would have bitten the dust already. Look for the Cerners and Allscripts of the world to hit a growth wall and look to sell to a larger company in the next 1-2 years once their purchase price deflates back from ARRA-induced artificial profit growth. Consolidation is inevitable, so expect more McKessons and GEs than athenahealths. The only growth in HIT stocks will be among small niche players who start to expand into the new wave of growth technologies.

  10. Same old drivel he’s been spouting for years. Can’t believe I wasted a few precious minutes hoping for something unique.







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