EMR Direction Changes in the Post-Growth Era
By John Kelly
John Kelly is principal business advisor for Edifecs of Bellevue, WA.
Healthcare acquisitions and mergers tend to give the industry an indication of where investors will go in pursuit of new revenue streams to secure growth in future business. The $5.7 billion sale of Athenahealth is no different. This EMR vendor consolidation represents a significant milestone in what might be a segue toward an end state for the major electronic medical record (EMR) vendor market.
What does this mean for the rest of the EMR market? At the highest level, we may anticipate EMR technology to evolve as a commodity, while the services revenue enabled by the technology will emerge as the primary source of long-term sustainability for EMR vendors. The Athenahealth and Veritas Capital move is an indication that venture investors are thinking just that. This will have long-lasting implications for healthcare technology vendors industry-wide.
The Athenahealth acquisition specifically highlights the fact that the path for growth in software sales in the EMR market continues to narrow, as the vast majority of providers with meaningful spending power have already made the transition to electronic records. The rip-and-replace phase by providers dissatisfied by their first-generation EMRs will continue steadily, but will not compensate for the major decline in new sales opportunities for the industry at large.
With the GE / Athenahealth consolidation of assets, the growth outlook for the five major EMR vendors left in the space (Epic, Allscripts, Athenahealth, Meditech, and Cerner) looks a little different.
Though Athenahealth’s high profile as an EMR vendor provides the primary brand recognition, the revenues associated with its revenue cycle management (RCM) line of business still represents the major portion of its value. The future for EMR vendors will mirror other industries, wherein technology is provided at a small margin in order to capture the high value and healthy profits generated by the information and business processing services tied to the use of that technology.
Early evidence of an emerging trend was seen in the $2.7 billion 2016 acquisition of MedAssets by Pamplona Capital Management. There we witnessed how strategic investors are keenly aware that administrative inefficiencies in healthcare still present big opportunities for gain-sharing on significant cost elimination initiatives. Veritas Capital has doubled down on this opportunity by recognizing the value in merging the RCM book of business at Athenahealth with the clinical software footprint from its GE assets acquisition. Further signaling this industry shift to garner new revenue by the top EHR vendors are the recent announcements by Meditech and Allscripts of their intention to implement consolidated managed services across their EMR and practice management software and services stacks.
The fact is, providers are paying billions of dollars to third-party vendors in outsourcing their RCM activities. Bill-and-chase is costing the providers between 6 percent and 13 percent of receivables (varies by practice setting and size). If the industry can bring those costs closer to the 2-3 percent spread, seen in industries like retail, both vendors and providers would be extremely happy. Outside investors see substantial opportunity here. As a result, EMR vendors left scrambling from the sharp decline in new system sales are beginning to consider a very different view of the future.
While there are many business decisions and regulatory changes that will impact revenue streams for payers, providers, and technology vendors alike, success and growth for EMR vendors in particular will be limited if they don’t embrace creative consolidation. The combination of Athenahealth’s medical records and revenue cycle technology with the existing Virence Health assets is not just a venture firm buying a major revenue cycle company with a great brand, but rather an intentional strategic move to change the nature of the EMR market, one that fosters continued growth and furthers technology stability across the industry.