Time Capsule: Economics 101 and the Healthcare IT Market

I wrote weekly editorials for a boutique industry newsletter for several years, anxious for both audience and income. I learned a lot about coming up with ideas for the weekly grind, trying to be simultaneously opinionated and entertaining in a few hundred words, and not sleeping much because I was working all the time. They’re fun to read as a look back at what was important then (and often still important now).

I wrote this piece in October 2006.

Economics 101 and the Healthcare IT Market
By Mr. HIStalk

You’ll remember this example from your MBA economics class. If sports tickets are priced perfectly, the venue will sell out precisely, leaving neither disappointed fans nor empty seats. Since the tickets aren’t priced perfectly, scalpers provide a valid economic function by ensuring that seats are available to those who value them more than others. The intersection of supply and demand is the correct price, which as scalpers know, is sometimes higher than the face value of tickets. That arbitrage goes right into their pockets.

Software isn’t a perfect model for supply and demand. Its incremental cost to the seller is nearly zero and those sellers work hard to dispel the “commodity’ notion that all products are equally acceptable.

Still, signs seem to point at some rationalization of supply and demand in the PM and EMR business in physician offices. Pricey vendors are getting squeezed hard by new entrants with cheaper products. Doctors aren’t as easily enamored with “Cadillac” offerings as hospitals seem to be. Another economic principle is working there, too – when companies make excess profits, newcomers will come in and undercut them, thereby shaking out inefficient players.

Hospital system vendors haven’t felt that pressure yet. The choice of enterprise systems is limited. Marketing-issued smoke and mirrors have kept hospital prospects thinking that Product A is far superior and/or acceptable than Product B, thereby keeping prices high. The cheapest vendor doesn’t always win and neither does the most expensive one. Neither does the “best” one, for that matter.

One explanation is that maybe hospitals aren’t a price-sensitive market. There’s some evidence of that: expensive drugs and medical equipment sell just fine even when cheaper alternatives are available. Hospitals can be convinced by questionable claims of product superiority or patient risk, and even more so by seeking vendors just as prestigious as they fancy themselves (no Walmart shopping for big academic medical centers, even though patients are the ones paying.) CIOs trying to keep their jobs and to develop a marketable resume are suckers for the “bigger is better” approach, even when the bigger vendor has a horrendous failure rate in hospitals just like theirs.

Hardware and services costs also skew the market. Even free software comes with a high price tag because hardware costs are similar for all products and hospitals demand lots of fixed-cost, on-site help. A vendor that can develop a turnkey product with low hardware costs should theoretically do very well, at least if they can overcome the marketing spin of the big boys.

Yet another anomaly is that the HIT market isn’t perfect. Hospitals don’t necessarily know what everyone else is buying, how it worked for them, and what they paid.

I’ve advanced my “Big Three” theory of broad-line systems vendors. Could the also-rans move more product if they cut software prices? Should they give their systems away just to start earning maintenance fees? Hospitals area always starved for capital, so maybe a monthly fee paid out of operational funds would be appealing.

We’ll learn by watching companies like Medsphere, which has a heavy R&D product that costs them nothing since Uncle Sam already paid for it. They can succeed only if they can find price-sensitive hospitals who believe that information systems are a commodity. They’ll also have to compete with Meditech, whose products are already relatively low in cost and whose huge customer base throws off recurring revenue that will let it meet any price threat.

It’s interesting to review the healthcare IT market using what you learned in economics and marketing. Vendors and upstart competitors should be doing that. HIT 2.0, anyone?