HIStalk Interviews Justin Dearborn, CEO, Merge Healthcare

Justin Dearborn is CEO of Merge Healthcare of Chicago, IL.

Tell me about yourself and the company.

I’ve been in enterprise software for approximately 16 years, all at public companies. I joined Merge in June 2008.

Merge has been around since the late ‘80s to early ‘90s. I gave a range because it was a much smaller company that merged with another company a few years after it started and formed what Merge is today. It has been focused on the radiology solution space since its inception.

Imaging has become unbundled over the years, with modalities separate from the image storage and software separate from both. How will that play out?

It has. Part of what has driven that is corporate purchasing groups. On the GPO schedules we are on, everything gets line-itemed out and identified separately. The days of bundling an MRI with a PACS solution can still happen, but those are mostly in the past. Purchasing groups want to see what they’re being charged for — each line item. The software’s not free. If it is free, then it’s not worth much. So it has been unbundled.

We’ve integrated with 65 different PACS companies even though we’re a PACS company. We’ll be in multi-vendor situations as well. With the state of integration, that’s not much of a challenge. It used to be a little more challenging, but with standards and with the integration across the board where it is today, doesn’t pose much of a problem. 

We do see buyers looking for best-of-breed across the board. Most hospitals, even if they’re an Epic or a Cerner shop, so to speak, still have numerous, numerous other best-of-breed clinical applications they will plug in.

Describe a vendor-neutral archive and how Merge addresses that market demand.

It’s not a very creative name, but pretty descriptive. We would go into a situation and our ROI is to be an essential repository for all imaging. Not imaging data, but heavily the values in imaging data and DICOM data, DICOM being the format of medical imaging.

We would pull in DICOM data. If it wasn’t DICOM data, we’d wrap it in a format that stored it as such. We would be able to pull in from many different styles in a hospital — cardiology, radiology, dermatology, pathology. They can all be local PACS systems in that siloed environment from different vendors and we could pull in all that data, normalize it, and keep track of it. Make it available in a unified format to any other groups within or outside the four walls of the hospital.

That’s been accelerated a little bit. There have been stops and starts in the market, but interoperability and then being able to share information tying into some of the ACO payment models and some other new bundle payment models, and the overall pop health management buzz you hear — it’s all about sharing data and having a vendor-neutral archive that allows for that to happen much easier than if you’re pulling data from six or seven different siloed environments within a single hospital.

How important is interoperability to customers and what are the advancements that could be coming that now that it’s available?

It’s very important, but there have been other things in the last few years that have taken budgetary priority, ICD-10 being one of them right now. But putting that aside, there’s always a few speed bumps in healthcare, but interoperability is on every CIO’s road map. They’re being asked to share information with additional constituents. Early on, sometimes it was just to consolidate the data with any hospital or the hospital network. Now it’s making sure the data’s available in a secure, HIPAA-compliant manner to partners. Everybody in every hospital is partnering with outpatient groups and being required to share data and pull data in from other sources. 

Interoperability is extremely important through our vendors that of course just focus on the data flow. We focus on that, but shine in situations where there’s imaging involved. Your file format’s a little more sophisticated routing and that’s where a Merge solution would excel.

Part of that also is not only having the data, but making it available. We make it available in two formats. We can just make the image itself available in a hosted manner, so with any Web browser, a user could log in and access an image and they would just be accessing a piece of the image or the slice that they need to view at that time. Or we can make it available to download. There are different privacy concerns and security concerns. Every hospital has their own policies around that. But either format allows the referring physician or the patient to access a DICOM quality or a diagnosis quality image. 

It is becoming more relevant, absolutely. Where it started as just a way to make the hospital itself more efficient internally because it was fairly siloed, now it’s external or partner facing. Most hospitals and most large groups have these issues. Some of the vendors, the bigger EMR vendors, have solved it if you’re 100 percent on one solution, but we haven’t run across too many situations where it’s Epic everywhere. If it were, they have a nice solution for that. But any other partners you share or other data you’re pulling in, you need to be able to look at in a vendor-neutral manner.

Once people have moved their data and images that you described into a vendor-neutral archive, what patient care improvement opportunities are available?

Everyone would agree that having a full patient record, and by that I mean all the priors — and we would focus on the imaging priors, of course – but all the priors, all the radiology reports, all the special reports. We are involved in radiology, cardiology, ophthalmology, and orthopedics. Having all that information available for the next visit is incredibly important. 

As you think about the ACO models and a provider willing to take on total financial and clinical responsibility for a patient, they’re going to want to know everything about that patient, have access to all the prior data, even down to the simple thing — if you had an MRI last year out of network or out of this particular payer’s network, that payer is going to want to grab that and not reimage you.

Part of it is around patient safety as well. If it’s a CT scan, you’re obviously exposed to radiation, so you can limit that. Limit the duplicate imaging that goes on. There’s no ill intent there right now, but there’s a lot of duplicate imaging that goes on in this country because there’s not access to the prior images. I’ve seen the number as high as 30 billion dollars and that’s not lost on the federal government. There are going to be some new restrictions around paying for duplicate imaging. I’m not sure if Medicare or Medicaid will be driving that or the payers themselves, but it’s a hot topic and it’s one that’s the most easily solved. There are solutions to help solve that. Technology will not be the barrier.

What technical steps can help prevent over-ordering of images and making sure that previous images are available at the time new ones are being considered?

A couple of items. There’s one self-serving comment. We have a solution called the iConnect network that we rolled out last month. This solution will store images in the cloud. Always assuming proper security and authorization, we will have an archive of all the images that go through our network in a cloud solution, easily accessible from a technology perspective. Once that gets populated, we think that will be pretty powerful. 

There will be constituents that want to query that before they approve the next MRI or the next CT scan. They’ll be going out and asking that question of multiple repositories. Merge iConnect network will be one. The state or local health information exchange. One of the goals of the HIE is to have all the patient data available. There’s different adoption levels there across states and regions, of course. But ultimately, that was one of the goals of the federal government handing out the money — to make patient data available to those authorized to receive it. Between an HIE once it gets up and running. 

There might be a local ACO that has put some tools in place from vendors like us or other vendors that just focus on HIE-like technology or the iConnect network. It will be easy to go and query those and pull in all the prior results because it’s better at clinical care, but also if you did have an MRI or a simple X-ray within a reasonable amount of recent history, grab that, look at that. It helps with the comparisons, as well as it might alleviate the need to have another image.

How do you see consolidation, both hospitals buying each other and buying medical practices, changing your business?

Positive and negative. The negative side would be when you’re working with a group and the communication goes silent. M&A is a sensitive topic, so nobody likes to speak about it. Of course they typically don’t share that with the vendor, so we’ll find out about it after the fact. There’s been some fairly significant, large IDN transactions. I’m sure there were a lot of things in the works a year before those big deals were announced and probably filled in a lot of gaps and blanks we had as to why communication ended in some of those. So it’s disruptive.

It’s impacting the hospitals, but it’s more impactful on the outpatient or the ambulatory side because you’re dealing with owner-operators of businesses and it’s very meaningful to their lives. With hospitals, there are incentives to do acquisitions with other hospitals, but it doesn’t hit home as much as when you own the practice. They’re all facing reimbursement constraints and figuring out how to operate more efficiently. Traditional M&A rules apply – synergy, bigger is better, and build better relationships with vendors, and in this case, with payers. It’s impacting sales cycles for sure.

On the positive side, when those do transpire, there are opportunities. There’s a lot of integration and interoperability opportunities, because rarely do the large groups go in and rip and replace the existing systems. They need to be able to connect to it and share information. It plays into the VNA strategy and our iConnect network strategy. But absolutely disruptive on the front end. Again, it’s usually something that they’re not at liberty to share with you for obvious confidentiality reasons. But it does create some opportunities for us. There’s always going to be M&A in this space.

What do you see as the market’s biggest opportunities and threats?

Opportunities … I don’t want to keep pointing to the iConnect network, but we think we’ve solved a real problem in report delivery and order delivery. It’s handled pretty rudimentarily right now. We think we’ve solved a real problem in the space. Anything that can help work flow. 

Our core business is around radiology, ophthalmology, and orthopedics. Those are practices that rely on referrals and need to focus on ease of doing business on top of the clinical care they provide. But in addition to that, they are reliant on primary care physicians for referrals right now. It is about ease of doing business and generating additional volume and then having the tools to be able to improve work flow, which we do with our solutions. I think we play into the work flow efficiency. 

Everyone in healthcare’s trying to figure out how to do more with either the same or less. We have solutions that play to that. It’s a trend that’s unfortunately hit radiology probably earlier than a lot of other specialty areas. We started to see it in 2007-2008. Some of the cuts, the results from the Deficit Reduction Act, hit radiology a little harder than other practice areas. Unfortunately, the industry’s conditioned for further reimbursement cuts and I think those are coming. 

It is about doing more volume with the same team you have, and I don’t know of any other way but technology to do that. We have solutions that enable teleradiology in a positive manner. If you own 10 physical sites, you can have less than 10 physicians covering those by using teleradiology. It’s a simple example of how you can handle the volumes more efficiently with software solutions.

Merge has had challenges with financial results and share price. You’ve been on the job since last summer. What is the plan and the priority going forward?

Good question. I’ve been at Merge for about five and a half years in different roles. Our challenge over the last few years has been relying on large enterprise license transactions.

We have struggled to change our pricing model. We have per-transaction pricing model and we can deliver our solutions in a hosted manner, but hospitals are not buying that way right now and I don’t know when that will change, if it will change. I think it’s because of the capital budgets. All budgets are tight, but capital budgets are a little bit easier, I believe, so they’re still buying a perpetual license. Pay once, then pay annual maintenance. That leads to lumpy quarters if we have a miss. 

When we’ve had poor quarters, it’s been the result of three, four, five opportunities we thought were going to close in the quarter that pushed out a quarter or two. It looks dramatic because the last deals are usually heavy software, good margin. When you look back over three or four years when we’ve had really good quarters, I could point to three or four deals each quarter and say, those are the deals that really moved the top line and all that dropped to the bottom line.

We have been challenged. We went out with a per-study pricing and transaction model. It didn’t take at all. So with our new solution, iConnect network, we’re only going to price it in a transaction fashion. That has been well received. We’re going to continue to do that. That’s going to build recurring revenue. 

That’s been the issue for the company. We only have about 60 percent recurring revenue. That means every quarter we have to go find 40 percent. If there’s any pauses in the market driven by the sequester or some employer mandate pushed off or what have you that causes a pause in the market for a quarter, we’re left holding the bag. It’s tough to operate that way. The companies that are performing really well have high recurring revenue — and I point to athenahealth as probably the best at that right now — have done a great job and been very disciplined on how they go to market. They built a nice recurring revenue model. 

We’re to some degree emulating that. The market’s accepting of charging to deliver an order and to deliver a report. There’s small fees that will add up due to the size of our installed base. That’s what we talked about quite a bit on our earnings call. We’ve done a couple of great press releases around relationships with athena, Surescripts, and the largest imaging group in the country for the solutions. 

That’s where we need to get to as a company to increase performance. Once we start executing that, the stock price will follow. Obviously we’re cognizant of it, but doesn’t drive the decisions right now. We think we’ve really landed on a great white space opportunity for the company and we’re focused on executing on that.

What are your priorities for the next one to three years?

On top of continuing to improve upon on our enterprise solutions, I’ll say non-iConnect network, which we’ve done and we’ve actually overspent in the industry, I feel like sometimes we’re on the bleeding edge, so sometimes we’ve been ahead on MU for radiology and that didn’t really buy us much. But we were out there evangelizing, making sure radiology qualified, making sure our solution was MU1 certified. We were the first one for full certification. Then it quickly became table stakes. 

We’ll continue to do that, to take care of our installed base. We were just named by KLAS as number one in cardiology and number one in hemodynamics. We’re a few percentage points ahead of our competition, we think, in investment on the R&D side. We’ll continue to do that. To grow the business in a repeatable, scalable manner, the recurring revenue has to be there. 

The iConnect network leverages a lot of the technology we’ve built and leverages our installed base. It all plays hand in hand. Growing that recurring revenue stream is the future of the business. Number one product in cardiology according to KLAS, which we do think is a great, great report card. They beat us up when appropriate. They’re very objective, as you know. With the number one product, we didn’t grow that business that much last year. We’ve outgrown the market a few times and a few quarters, but you can’t do that consistently. 

What do you next? We think we’ve innovated a really, really interesting, compelling solution and we’ll continue to invest in those core solutions because they bring the customers and there’s the opportunities for those customers then to participate in the iConnect network. But it’s really driving the transaction revenue of the business. The next one to three years, seeing that 60 percent number I gave you approaching and then eclipsing 70 percent. That makes it a lot easier to run a business when you have a little more predictable revenue.