Tell me about the impact of the just-announced Better Health 2020 program on McKesson’s IT investments and portfolio.
I know you’re pretty conversant in this space, obviously, so I’ll tell you some things you probably know. If I was asked that question by a less-informed person, I think I’d give it some broader perspective.
There’s a huge amount of focus that a lot of people give to HIS/CIS, or what a lot of people call core hospital systems. A lot of what we announced in MPT was around products in those two areas. But more broadly, what McKesson has been attempting to do over a long period of time is to create an entire technology portfolio that’s second to nobody in the industry. We’re now very focused on trying to develop products and services that will best meet healthcare reform and all the various regulatory requirements that are hitting not only our hospital customers, but because of the blurring of settings of care, also for physicians, for long-term care, for home care.
We have a large payer business. We have a large connectivity business, both in clinicals and financials. We have a connectivity business in pharmacy, which a lot of people know, but a lot don’t. We handle about 90% of all the pharmacy transactions in the country on a daily basis, so it’s a huge volume business.
The announcements that you’re now familiar with and that some of your readers started to comment on yesterday wrapped underneath a broad McKesson Technology Solutions banner that we’re calling Better Health 2020. You can interpret the 2020 as either a decade from now, where we’re trying to help customers in a very uncertain environment navigate to the best financial and clinical endpoints they can, or you could also interpret as good vision, 20/20. We think we’ve got a good sense of where the market’s leading and progressing and what we need to do to help our customers get there.
The broad agenda, Better Health as a corporate communications platform, refers to better business, better care, and better connectivity. Those are the three broad planks. I’m sure you’ve undoubtedly seen either our employee letter or our customer letter, which are pretty similar. Underneath that, we went on in those letters to describe four areas that we believe are critical success factors.
The first one is the ability to improve patient safety and deliver better clinical and financial outcomes through fully integrated core clinical and revenue cycle IT systems with a highly competitive total cost of ownership.
The second one is a reduction cost of operations, which includes pharmacy automation, supply chain analytics, and performance management.
Third is better care coordination through connectivity across the healthcare ecosystem of diverse stakeholders and IT systems.
The fourth is the ability to manage increasing complexity and risk, bundled payments, and structural relationships, because our view is there’s a lot of experimentation that’s currently going on in payment solutions, but the risk is definitely shifting towards the provider and potentially hospitals. Our customers are going to have to survive on Medicare levels of reimbursement. There’s a shortage of personnel. They’re going to have to take costs out continually. We have to have a lot of assets helping them manage through that complexity and risk.
On Better Health 2020, the other major part of that announcement was a commitment that we have across our technology businesses. It’s not an investment in Paragon or Horizon or any particular application. It’s a commitment across all of our technology assets to invest a billion dollars in research and development over the next two years, which is a really big commitment in this area.
We are sunsetting no products. We have several products outside our core clinical suite. At one time, we had renamed a lot of our imaging products under the Horizon banner. We have several that now reside in a performance management business and in our analytics capability that are called Horizon. Over the next few months, which we already had underway before these decisions were made, we’re renaming them under the McKesson brand name, just so that there’s not confusion in the marketplace related to Horizon core clinicals.
The changes that we made in strategy were just around that core clinical suite, which we put into hospitals. It’s about 30 different products that we sell under that Horizon brand name. Those are the ones where we’re making a strategic shift away from Horizon to Paragon, but nothing is being sunsetted.
In fact, I’ve gotten several questions, including from my own employees, about the relative investment. We’re continuing next year to put more into the Horizon clinical suite than we are into Paragon. There’s still a big amount of money that’s being spent beyond Horizon. We want to leave our customers with options. If they want to stay on Horizon, they certainly can. If they want to switch to Paragon now, they can. If they want to wait and assess how that roadmap develops over the next 30-36 months, they can. That product will be around for a long time. We’ve made no firm decisions on end dates or sunsetting in any way, shape, or form.
You mentioned a reduction in total costs for customers. I got the impression that there might be some bundling of McKesson offerings under an umbrella that will collectively reduce costs.
I’m not sure what that reference is to. We would tell you that we believe with certainty that the total cost of ownership for Paragon as a hospital HIS will be less than Horizon and will be less than Cerner and will be less than Epic. There’s nothing that’s changed internally in terms of corporate structure or movement of products between or amongst divisions that would create any kind of bundling. The customer still has the ability to choose solutions that are right for either gaps in their current portfolio, or if they want more capability from one vendor, we would portray that we have the broadest selection. You can get connectivity, population management, risk management, care coordination, analytics, and your HIS from one place, which is McKesson Technology Solutions.
The billion dollars in R&D that you said was collective across all the platforms. How much more is that than you’re spending now?
The reason we positioned it that way is there’s a huge commitment that the corporation is making. It’s larger than what’s been spent in the past, but I want to draw the distinction that it’s not an incremental billion, it’s just larger than it’s been in the past. It encompasses McKesson Provider Technologies, RelayHealth, and our health solutions payer and physician business. It’s all the technology components.
That said, the majority of that expense will be in MPT. MPT includes six business units. The Paragon business unit. Health Systems Enterprise Solutions, which encompasses the legacy as well as Horizon Revenue Cycle and also the Horizon Clinicals business. It’s our enterprise imaging business, which is out of Vancouver. It’s pharmacy automation, which is out of Pittsburgh. It’s Health Systems Performance and Analytics, which is a separate business unit that we stood up at the end of last year to help customers get a cost efficiency and reduction. And then we have a managed services business, which includes hardware, outsourcing, and remote hosting that cuts across all of those offerings for MPT. It’s not a homogenous thing, it’s actually six business units that we put under the Provider Technologies banner.
Is the billion dollars double what it’s been, or something less? I’m trying to get a feel for the magnitude of increase.
It’s not double. It is an increase.
Sorry, I interrupted you there.
Within MPT, I would tell you that the five key messages that came out of the change from yesterday are the commitment in R&D underneath the Better Health 2020 banner . Within MPT, we’re planning to converge our revenue cycle core clinical solutions around Paragon’s Microsoft platform. We’ll significantly increase the investment in that platform. We’re finding it increasingly difficult and not in the best service of our customer needs to continue to develop two very complete clinical and revenue cycle systems. They’re on two very different platforms.
All the Horizon stuff is on Java and Oracle, so it has a higher total cost of ownership. The evolution of that product was around very fully functionally rich products in an environment where a lot of hospitals were making decisions on a best-of-breed basis. We’re finding today almost all customers are making combined decisions to get to an integrated clinical and revenue cycle platform. The decision was largely around how do we get more focus on our investment to reach product endpoints that will serve the needs of the customer better.
You know through a lot of the comments on your own blog that we have struggled with the Horizon upgrades and some of the product commitments over the past five years that we’ve made to the marketplace. We just believe we’re going to get to a fully integrated, lower total cost of ownership, fully functional solution for customers that’s completely competitive in the market with the Paragon solution as the basis rather than continue to invest in two completely functional HIS/CIS.
There’s been some question around when we say converge, are you really putting the platforms together? No. The convergence is really around taking the best capabilities from Paragon and the best capabilities from Horizon and creating one integrated system with a lower total cost of ownership than what we have today.
The third key message from yesterday was that based on that decision, we have stopped development on Horizon Enterprise Revenue Management, which was a separate R&D project that’s about seven years old, maybe eight. It’s been going on for a while. That was just based on we believe with the capabilities Paragon has today, plus some fairly minor enhancements, that we can get a capability that’s integrated with a lower total cost of ownership in a shorter period of time than we’d have gotten customers there under the Horizon architecture. We haven’t shifted away from next-generation revenue cycle, we’ve just shifted to putting it on Microsoft architecture. Most of the products under Technology Solutions, about 70% of capability today, is also on Microsoft architecture, so we’re just trying to get synergies and better integration points across all of our solution set and that will become a higher percentage in the future.
The fourth thing that we’re trying to make very clear, particularly to our Horizon customers, is that we remain fully committed to the Horizon base. There’s a huge amount of work to be done there, including getting those customers to be ICD-10 compliant and then getting them through the various stages of Meaningful Use, which we are continued to be committed to do. We’re not sunsetting anything. We will actually spend a huge amount of resource developing those capabilities and getting our customer base upgraded over the next three or four years.
The fifth message is that we’re more confident than ever that we’re in a position to get our customers through Meaningful Use and will better position them than we believe anyone else in in the market, in terms of capabilities from one company, to get our customers through Stage 3. We believe that with our R&D focus now shifting to what’s next, that we’ll be able to continue to invest and improve deployability and support for them today and much enhanced capabilities in the future.
The CIOs that I talk to say time and again when I ask them, “Why are you buying Epic?” — and cost doesn’t seem important to them — it’s because it’s the only vendor with a single patient record that not only crosses ambulatory and the inpatient sides of the house, but also has top-ranked modules on both sides. Can Paragon deliver that?
We believe so. There’s a detailed roadmap. Paragon today is probably a lot more capable than people realize. It’s been best in KLAS for the last five years. We suspect it will win shortly for the sixth year in a row. It has a really high customer acceptance and rating. It scales up, so they also have larger customers today.
We went through a lot of work over the last year to make sure that we had line of sight so that features and functions and just general capability, including technology, that was going to be necessary to be able to claim that this was competitive with Cerner and Epic’s capabilities in this space. We think we will get there. By the time anybody starting today would be able to convert to Paragon, even if they made an immediate decision, the emergency room and ambulatory features of Paragon will be completed. It’s very capable today.
If a customer wants imaging capability or automation capability or analytic capability or health information exchange capability, we can attach McKesson solutions directly to Paragon to do that. They have a very high attachment rate of our other solutions, and those will continue to be more integrated into Paragon as time progresses .
Is anything actually being created from scratch? It sounds like there’s some porting of functionality from Horizon to Paragon and adding some modules. The criticism of McKesson is that they never build anything, they just keep tweaking the same old stuff except for the example of HERM, which was a pretty expensive failure, at least other than the intellectual material from it that you can port to different technologies. Are you building brand new, from-scratch products?
Two different answers to that question. One is that a lot of the individual application modules inside of Horizon Clinicals were variations in products that had been purchased and put into the Horizon Clinicals suite. I think that’s where the perception comes from that we don’t build anything from scratch. Some of that stuff was built, but a lot of it was purchased and put into that suite.
The development of the current version of Paragon started 11 years ago and all those applications were natively created. That stuff was built. There’s been nothing that’s been purchased. It’s been built in a way so that it’s on one database. It is fully integrated. It’s what I’m sure you over and over have heard Horizon customers asking for — how do we get to true integration and how do we get lower total cost of ownership and how do we get to an easier upgrade path?
Our customers can download whatever upgrades they need from a capability that we have internally called Download Central. They put it into their test environment, they test it until they’re satisfied with it, it moves into production. It’s not an invasive process. It doesn’t require a lot of support people to be on site. You know the experience on the Horizon side is quite different from that.
I wanted to point to you too that when I was flying back from Colorado, I saw a comment, I don’t know if it was from you or one of your readers, but the HERM decision was not around the failure of that product. We actually believe we could have gotten to a successful solution, but with the capabilities and rev cycle that we already have inside of Paragon, we didn’t see a reason to continue to rewrite the Horizon version of that product.
For the people that were affected by that decision, there is a redeployment process inside the company that started with the announcement yesterday and goes through next week. There’s openings in many different parts of our technology businesses and we believe that we’ll be able to redeploy many of those people into other areas of the company.
Just like always happens, when jobs are open and an employee wants to move from Charlotte to Alpharetta or vice versa, or they want to relocate from Colorado to Alpharetta or vice versa, there’s a relocation policy that does that if they apply for an open position. We would consider them. The downsizing happened because of the strategic decision to just focus on the one platform, but that does not mean that the people that have good capabilities that want to stay with the company will be displaced.
Do you have a feeling for the specifics of how many people will be RIFed out and how the total headcount will change?
There was a public filing, which we’re required to make, that talked about how 174 people were displaced on that team. That’s how many were actioned that first day.
We have more than that many openings in our technology businesses. It’s going to be a matter of their level of interest, if they decide to stay, whether they’ve got requisite skills to fit into those areas. We have onsite hiring managers form the businesses with openings to talk to those people starting next Tuesday. We believe that we’ll be able to redeploy many of them.
From a timing perspective, it’s somewhat late in the Meaningful Use game and Epic pretty much owns the high-end market and seems to be quickly moving down the scale to the smaller bed ranges that most people thought they would never bother with. When do you think the results of these changes, both the product changes and the packaging changes to get them in front of additional prospects, how long will that take and what will the competitive landscape look like?
The technology roadmap that we’ve created is a 30-month development. The Paragon product has gotten progressively better continually over time, so a lot of the customers that made decisions made them at a time when we didn’t even have HEO or we didn’t have an order entry system for physicians. They bought it, it came out on time, it’s gone in, the adoption rate of the physicians is very high. Same thing with a lot of the other modules. The emergency room integrated module will be GA’ed around the end of our fiscal year, which is March-April of 2012. Ambulatory is about a year and a half out.
Logically, by the time customers could make decisions, either new customers or decisions to switch, when they got onto the full suite of products through the implementation cycle, those modules would be completed and ready. There’s a really solid track record of developing and delivering on that platform.
In terms of how the market’s going to evolve, I think most of the clinical decisions have been made. I certainly wouldn’t take anything away from Epic. We know what their success rate has been and they’re well respected in the market. We would also tell you, though, that we believe our analytics capabilities, especially as we head into Meaningful Use 3 — and we don’t know if there will be stages beyond that — our capability for health information exchange, our health management, population management, are some of the aspects that we think are going to be central to both later stages of Meaningful Use and health reform are capabilities that McKesson has that our competitors do not.
It’s a balance. There’s lots of Epic customers today that have our analytics. There’s lots of Epic customers that put in Epic and have Horizon Lab, because it’s a really robust system. They don’t offer imaging, so if you want radiology or cardiology, we’re going to be your best bet in this space. It’s a mixed bag. They clearly understood the dynamic of ambulatory and physician side of the market ahead of what other people did and did a really good job in capitalizing on that, no doubt about it.
You mentioned that lot of customers have already chosen their dance partner and spent a lot of money to be in an early stage stage of implementation. A strong selling point that you’re emphasizing is total cost of ownership, and people have questioned whether these hospitals can really afford Epic and Cerner long term. Do you think that to be successful you’ll need to take customers back from them based on price?
I think total cost of ownership is going to become an increasing issue as we go forward. You’ve got a lot of factors coming into play at the same time. We’ve got a really crappy macroeconomic environment, which in my view, whether you believe there’s going to be a double-dip recession or whether that’s already occurred, I don’t think anybody is optimistic about a strong recovery anytime soon. There will continue to be a lot of pressure on capital availability and deployment. You’ve got a shortage of personnel. You’ve got all of these health reform changes and regulatory changes coming at these hospitals. It will be difficult for them to navigate.
The modeling, the data collection that we’ve done shows that an ongoing clinical decision rate will continue in the market, if you look at all 5,000 hospitals, at around 3.5 – 4%. It will continue to be 150 to 200 decisions a year in clinicals. Financials are likely to accelerate once people get beyond Meaningful Use 3 and ICD-10. A lot of customers are continuing to use whatever financial systems or revenue cycle systems they have in place because they’re focused on clinical, but there will be a point coming soon where they’ll be making a different financials decision, a lot of times in convergence with whoever they’ve decided on for clinicals.
What goals do you have for MPT in the next five years?
It’s really goals for MTS. I wouldn’t answer for MPT. I think the big shift, a lot of which has been driven by the market, is five years ago or maybe even three years ago, if you were talking to one of my predecessors in MPT, they would have told you that MPT is a hospital software company. I don’t think anybody can be segment specific. The blurring of the settings of care, all of the vendors are going to have to be a lot more aware of what the patient and clinician experience is wherever it is that either the clinician is delivering care or the patient is receiving it.
There’s going to be some mixed models. Who would have thought that Walmart would be getting into direct care? Who would have thought that payors would be purchasing physician practices? I think there’s going to be that experimentation over time and some form of consolidation. Our goal across the technology businesses is to deliver the most capabilities that we can to support what all these customers are going to need as health reform evolves.
I couldn’t for a minute tell you that McKesson or I have the answers. We don’t have a better Ouija board than anybody. We’re just trying to stay as close as we can to the trend. Accountable care is another great example. Whether or not accountable care organizations in the legal entity sense actually end up developing or not, customers are going to need the capability of accountable care just to meet health reform. We believe we’ve got most of that capability that they’re going to need today and it’s just going to get stronger in the future.