SECA 1b: Five Forces Analysis of Health IT Market (Electronic Health Record)

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.

SECA 1A: Shared Health Operational Effectiveness and Strategic Positioning

Founded just over 7 years ago, Shared Health(SH) currently operates the largest public/private Health Information Exchange (HIE) in the United States with a vision to transform healthcare by securely connecting medical information across a patients' network of clinicians. Shared Health has the distinction of being the only comprehensive statewide HIE in the country to combine beneficiaries from Medicaid and commercial insurers, as well as self-insured employers into a single exchange available at the point of care.

Being at the cutting edge of technology SH achieves operational effectiveness by reducing costs of incremental product development cycles. The initial product design undergoes multiple rounds of review and recommendations to include as much flexibility and granularity into independent modules as possible. SH follows SCRUM methodology in which every new development project is allocated a predefined sprint cycle. At the end of a project sprint any budget or time overrun is documented and shared between the various stakeholders. This creates an environment of greater transparency where management is on top of key issues and roadblocks. Another key aspect is the use of technology to achieve quick turnaround time. Most of the systems and processes at SH are designed to handle the commonly used industry formats for data interchange such as HL7, NCPDP, 837p, etc. This allows SH to bring on board a new partner or client in as little as 90 days time, as compared to its peers who take significant amount of time to redesign their processes to accommodate a new data source.

SH uniquely positions itself in a niche market carved out of EMRs (Electronic Medical Record), EHRs(Electronic Healthcare Record) and HIEs. SH has a wide range of products and services that include tools for medical professionals to access patient data across multiple care settings in the healthcare environment. SH engages in systematic integration with other EMR companies such as eClinical Works and Allscripts to create a delivery model with a complete longitudinal view of the patient. For example SH encourages clinicians to use the ePrescribe system of AllScripts and in return AllScripts feeds the medication information back to SH repository. The strategy is to create effective partnerships where a patient's claim history, medication history, immunization and allergy information, lab results and radiology reports as well as discharge summaries and other clinical data are warehoused into a central repository. At the sametime SH very strategically distinguishes itself from other traditional HIEs by offering advanced clinical decision support tools such as Problem List, Clinical Insight and Condition Tracker. SH's business model is to encourage clinicians to adopt their clinical exchange system by providing incentives such as Pay-for-Performance, chronic care management and care opportunities. SH also acts a broker for Practice Management Systems and EMRs to provide an onramp to National Health Information Network (NHIN). Strategically SH wants to be omnipresent by enhancing capabilities of existing systems and building new ones where required.

Being a part of an evolving market, Shared Health does not operate under any existing pricing guidelines. As a part of The American Recovery and Reinvestment Act(ARRA) $19bn is intended to be used to increase the adoption of EHR by physicians and hospitals and so SH's pricing is dictated by the amount of money that is being invested into healthcare reforms. The pricing model in many ways can be compared to the automobile industry. SH provides different kinds of EHR systems - basic, meaningful use and decision support system. Customers only pay for the features that they opt for. This level of flexibility and customization provided by SH is unmatched in the industry. SH is also engaging its focus on improving system usage by providing better training kits and creating innovative feedback forums. The goal is to provide better products that can be customized to client requirements without hampering key deadlines.

Although there are many players in the Healthcare IT space, most of the traditional EMRs and EHRs are limited in their capabilities to expand and be certified as a Meaningful Use platform. In many ways SH is much ahead of the race by being on target to be 100% meaningful use certified by mid this year. SH's moto to build partnerships (as against rivalries) to promote exchange of information in a community based model has served it well as is evident from the number of Hospital Systems, physician organizations and IPAs that are on its network. Overall SH has built a great reputation on a national level by successfully implementing clinical exchange systems handling claims for over four million patients spread across 8 different states and most of its success so far can be attributed to its long term planning and operational excellence.