Health IT is an emerging and rapidly growing market. Recently there has been a lot of focus on this industry because of American Recovery and Reinvestment Act (ARRA) stimulus incentives for health care reforms. I would attempt to do a Five Forces analysis on a specific section of Health IT market, namely Electronic Health Record (EHR). Wikipedia defines electronic health record (EHR) (also electronic patient record (EPR) or computerised patient record) as a systematic collection of electronic health information about individual patients or populations. The U.S. ambulatory EHR market, which was at $1.3 billion in 2009, is forecast to reach $2.6 billion in 2012, according to new analysis from research firm Frost and Sullivan.
Rivalry among Existing Competitors
There is intense rivalry in the Health IT space. Although in its nascent stage, the EHR is expected to mature in the next five years. This is because health care providers (such as clinicians) are buying EHR systems sooner than they otherwise would, to make the most of massive federal subsidies and avoid penalties. Consequently, EHR vendors are in a mad rush to gain market share. Those that win will own a massive customer base paying recurring support fees. Those that lose will become irrelevant from a market share standpoint and will be ingested into a larger vendor or will just go broke. As a result, EHR vendors are increasing their R&D budgets to develop new features and meet meaningful use criteria. Their marketing colleagues are spending heavily on demand generation and brand building. These vendors have no choice but to win today’s market share battle.
Strategic partnering with a variety of stakeholders is important for survival in this market as consolidation on both the vendor and provider side increases. Innovative, provider-focused, and patient-centric technology companies that understand how to manage this industry's unique combination of risks and rewards will achieve business progression.
Vendors are becoming more and more aggressive and innovative to gain and keep their market share in the rapidly growing EHR market. Some of the big players like AllScript, eClinicalWorks, NextGen, Cerner, and McKesson already have certified some of their products as per MU requirements. An established company like eClinicalWorks also has an edge over startups, because it’s been around for 10 years and has made inroads into the small-practice market. Furthermore, a disproportionate share of deals (more than 60%) are going to the top ten market leaders, which is typical of enterprise software markets. Some of the leading EHR vendors grew their top line 30% to 60% last year. Gaps between winners and losers are expanding quickly, so market is moving towards more consolidation.
At the same time new players in the market are competing by providing better technology, reduced implementation costs and delivery time to attract health care providers who are still undecided and in the process of evaluating potential vendors. Oracle and Microsoft entering into the EHR arena is welcome competition to Cerner, McKesson, Eclypsis, Siemens and Phillips since it will lead to cheaper products with more powerful and efficient technology.
It will be interesting to see how the competition on dimensions other than price such as product features, support services, delivery time or brand image is going to create a healthy market and improve customer value.
Threat of Entry
Although Health IT is a rapidly growing market the barriers of entry into this sector are fairly high.
There is significant capital investment necessary for product research and design, marketing and branding. The subscription pricing model popularized by cloud computing vendors has resulted in recurring subscription revenue spread out into the future. In fact some of the leading vendors are operating between break-even and just a few points of profit margin.
Also the regulation under Health Information Technology for Economic and Clinical Health (HITECH) Act meant to define MU proves to be far too cumbersome and creates a barrier to entry for small companies based on the cost of certification of EHRs (Electronic Health Record). The regulation cites the cost of certification and compliance for developers to be in the hundreds of thousands to millions of dollars. Additionally, this regulation favors larger software development companies and preexisting software.
Capital requirements, regulatory compliance and incumbency advantages would form the three biggest entry barriers in the EHR market.
Bargaining Power of Suppliers
Health IT is predominantly a technology driven market. Most of the HIE and EHR service providers purchase software licensing contracts from big software vendors such as Oracle, Microsoft or Siemens who have a wide industry presence and who are not entirely dependent on Health IT market for profitability. These suppliers are mostly reluctant to succumb to downward pressures on their profit margin.
Also most vendors in this market have very little competition, for e.g. Initiate Systems and QuadraMed have clear monopoly of the EMPI market. Moreover most of the vendor contracts span over 3 to 5 years and there is significant cost involved in switching from one vendor to another. The cost of building these systems such as an Oracle RDBMS package in-house is astronomical and requires experience and expertise; this eliminates the possibility of backward integration. On the contrary most of these vendors are showing great interest in entering the EHR market with their own proprietary tools, like Oracle’s proprietary Health Transaction Base (HTB). Overall supplier power is a strong force to reckon with in the Health IT space.
Bargaining Power of Buyers
Buyers in the Health IT market have capital as well as multiple vendors to choose from, but in order to take advantage of Federal incentives they have to follow strict timelines to adopt the Meaningful Use (MU) certified EHR systems.
The HITECH Act, which was part of the ARRA of 2009, created new incentive payment programs to help health providers as they transition from paper-based medical records to EHRs. There are two facets of this incentive program “Increased Reimbursements Now or Penalties Later”.
Under the new law, individual physicians and other eligible professionals can receive up to $44,000 through Medicare and almost $64,000 through Medicaid whereas a hospital that adopts and appropriately uses certified EHR technology will be rewarded with increased Medicare reimbursement. So HITECH will indirectly stimulate the market by enticing additional stakeholders like commercial payers, professional medical societies, health care manufacturers, and various nonprofit organizations to help physicians and other health care providers successfully adopt information technology in their practices. At the same time professionals that do not adopt EHR technology by 2014 will not only forego incentive payments, but will also be penalized by a reduction in Medicare payments. Hospitals that are not meaningful users of certified EHR technology and do not submit the required quality data will be subject to a 25 percent reduction in their annual Market Basket update.
The penalty associated with late adoption of EHR somewhat neutralizes the bargaining power of buyers; health care providers have to adopt the EHR system within a stipulated time frame. Also providers have to take into account the long-term prospects of their potential choices. Some of them would take recommendations from their area’s regional extension center which maintains relationships with vendors. Others will a vendor with solid financials and that has a customer base of providers similar in size and practice. In sum, Health IT market hasn’t matured enough for the buyers to be able to exercise any significant bargaining power.
Threat of Substitutes
Under HITECH, eligible health care professionals and hospitals can qualify for Medicare and Medicaid incentive payments when they adopt certified EHR technology and use it to achieve specified objectives. The two important regulations under this act, one of which defines the MU objectives that health care providers must meet to qualify for the bonus payments, and the other which identifies the technical capabilities required for certified EHR technology, create a path to establishing national and system-wide standardized uses of the EHR. Given the federal incentives in favor of EHR adoption and significant reduction in health care expenses because of meaningful use, it would be highly improbable for clinicians and hospitals to look for substitutes or to attempt going in a different direction.
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