While the healthcare industry is reeling over the massive size of the Department of Defense’s (DoD) US$9 billion EHR contract just awarded to Cerner, Leidos, and Accenture, less attention is being paid to the fact that this team won the deal over the hot favourite joint bid of Epic Systems and IBM. Those who know the EHR landscape know there is scant anything that Epic loses (of course, the same used to be said about IBM, and that is where irony can probably find solace). Hence, the focus of this blog is on the fact that the invincible Epic Systems lost the mother of all deals in the EHR space.
Why are we hung up on Epic Systems? For the uninitiated, here is some context:
Predominant market leader: With over 40 percent market share, Epic has precipitated a large ecosystem of providers that are on its EHR platform. Epic has intelligently used its dominant market position to work with its customers in defining the roadmap for the evolution of EMR systems, and to make its competitors react to the steps it is taking to innovate across various care practices. Epic has focused primarily on large hospital systems, with minimal attention on the mid- to low-sized segment of the market. With its hold on the market, one is led to believe that Epic chooses its clients, rather than the other way around
Highly relationship-driven: Clients have traditionally loved Epic for being proactive in evolving its products, responding to suggestions, and quickly fixing issues. This is what set it apart from the biggies, such as Allscripts and Cerner, in its initial days. Epic has strong consultative sales teams that work closely with administrators, CMOs, and physicians. For large pursuits, it deploys dedicated product customization teams that can deliver POCs, manage change, and implement Epic in record time with partners. And most of Epic’s key product people, who can actually understand and address issues, are just a phone call away.
The “Epic” standard EMR? In an era where healthcare is actively pursuing consumer-focused and highly flexible technological innovation, Epic is facing flak – outside of its existing customer base – because of its highly standardized and rigid architecture. Key areas of question include lack of interoperability, lack of efficient APIs for consumer/end-user application development, and foreseen inability to innovate in a digital world due to its MUMPS-based legacy platform. This is what came out starkly when you read between the lines of Frank Kendall, Under Secretary, Department of Defense’s statement: “Market share was not a consideration, we wanted minimum modifications.”
High upfront capital investment: The upfront cost of Epic adoption is increasingly being mentioned as one of the hindrances. Cost is a major factor, and EMR implementations are hospitals’ biggest IT spend and budget areas. More importantly, some of the highly cited large EHR implementations (such as the US$700 million Duke University and Boston Partners deal) create an impression of a highly rigid commercials image for Epic. The case on cost versus benefit of having EHR has not been settled yet. Epic’s high premium positioning put it in a tight corner, despite the US$35 billion subsidies riding the EMR industry, and the general customer preference for Epic. The irony here is that the US$9 billion size of the deal is the reason Epic was such a natural choice for this DoD deal, but it probably lost it because the government needed a more flexible arrangement
Declining quality of services: Epic is facing the classical quality versus quantity challenge when it comes to managing its growing list of clients. The increasing shortfall in expert support staff is impacting its ability to maintain and support its products across many new and old clients. In the last 18-24 months, an increasing number of client executives have raised flags about outstanding and unresolved issues
Training has become a major area of concern, as more and more hospital systems are complaining of lost revenues due to their staffs’ below par or behind the curve Epic readiness. Epic’s inability to provide efficient training modules, and its tendency to keep things close to its chest, is driving wariness among new clients
Vendor-neutral storage: Given dependency concerns, customers are increasingly demanding vendors be aligned to some sort of vendor-neutral storage or archiving architecture. This is likely to lead to more thought leadership on vendor-neutral technologies, which will be directed at Epic’s predominant control regime.
There may be other commercial reasons for this massive DoD EHR deal not going Epic’s way. However, organizations already had a strong sense of circumspection while evaluating Epic’s EHR in terms of interoperability, next generation technology, digital enablement, and control. While before these reasons were less salient because of Epic’s trailblazing success, this lost deal will spur prospects to question them with a far more discerning eye.
On July 27, Israel-based Teva Pharmaceutical announced the acquisition of Allergan’s generics business unit for US$40.5 billion in cash and stock, consolidating its position as the leader in off-brand drugs. The deal which becomes the latest in a wave of high-profile consolidation in the pharmaceutical industry, combines Teva, the world’s largest generics drug company with its third largest competitor. The acquisition gives Teva enhanced scale in the intensely competitive generics market (over 20% market share) with cost savings potential due to product overlaps and economies of scale (through operating synergies of nearly US$1.4 billion) as it looks to cope with end of patent expirations. The deals comes at a time when the entire healthcare and life sciences continuum is witnessing rapid consolidation moves including large payers teaming up.
The deal is another indication in a long line of recent transactions as life sciences firms undergo a realignment of strategic focus and choose to concentrate on business of core competence. Following the big bang “acquire all” days of Big Pharma, pharmaceutical firms have realized that they need to reorient strategic goals and narrow down their focus to specific service lines and markets. This was the principal driving factor in the seminal Novartis-GSK asset swap announced in April 2014, which typified the new normal.
For Teva, this wraps up an increasingly messy four-month long pursuit of another generics rival, Mylan. The company withdrew its latest US$40.1 billion hostile offer to acquire Mylan as the deal prospects became bleak. Mylan itself is busy chasing rival OTC drugs company, Perrigo, which has so far snubbed Mylan’s attempts. The deal also has interesting implications for Allergan. The company has been at the center of major M&A activity in the last two years. This sale allows it to pay off debt from the US$70.5 billion integration with Actavis in 2014. That deal also signaled the end of one of the intense takeover struggles as Actavis beat Valeant Pharmaceuticals for Allergan. The sale to Teva allows Allergan to focus on building its branded drugs business. It could also mount an effort to purchase large peers such as Amgen or AbbVie.
As with any major consolidation exercise, the primary beneficiaries will be service providers with exposure to both merging entities and account-level relationships as they help with the integration initiatives. A natural consequence of such an exercise is the tendency to go for vendor rationalization as enterprises look to trim the sourcing pie. Demonstrating value across the life sciences value chain will emerge as a crucial differentiator in retaining presence across accounts. Given the diversified operational footprint of pharma firms, global presence becomes an important qualifying criteria for large scale deals, especially when it comes to areas such as infrastructure management. As the spotlight shifts on pockets of core competence, mapping enterprise-specific business outcomes and challenges to technology/process solutions will be key in getting management buy-in for forthcoming sourcing initiatives. The following image illustrates the current exposure of key service providers across major life sciences firms. As you can see, these mergers will lead to overlapping accounts for several services providers.
Life sciences buyers stand at interesting crossroads right now. They seek technological preparedness to tackle multi-faceted challenges arising out of stifling R&D efficiency, dwindling margins, increasing M&A/restructuring, and evolving customer profile. Blockbuster-drugs-led growth has paved way for more pragmatic business models in this new reality. While the digital Kool-Aid continues to sweep the landscape, life sciences firms tend to struggle with digital enablement due to factors such as fragmented service provider landscape and non-standardized internal structures. How they navigate this challenge while digitizing operations will be crucial. Our recent report on IT Outsourcing in the Life Sciences Industry focuses on how global life sciences organizations need to enable their systems for digital enablement through a well-thought out services integration strategy. Pharma is in a continually evolving state of flux and these changes are only going to intensify. Service providers need to up their game to ride this wave.
The Healthcare and Life Sciences (HLS) ITO market has been buzzing with activity in 2015. At just seven months into the year, Everest Group’s projected market size for the HLS ITO market size is US$39 billion.
Here are some of the standout messages from our 2015 research to date that address some of the contributors to this enormous market size.
While robust in their coverage, these already published 2015 research reports paint only a portion of the picture enterprises need to view to address cost-cutting imperatives and deliver metrics-driven business outcomes through alignment of their technology strategy with their lines of business.
For example, an increasing number of life sciences clients, especially large pharmaceutical firms, have been reaching out to Everest Group for assistance in evaluating technology partners not only to drive digitization of their critical operational components, but also higher R&D productivity through next-generation analytics and high-tech systems. Similarly, while payer and provider organizations are starting to view technology from an entirely new prism, they are uncertain how to leverage technological solutions and platform to address concerns and initiatives including growing consumerization (patient engagement), population health initiatives, and care-risk convergence.
To inform the marketplace on issues and exciting opportunities in ITO for the HLS industry, Everest Group is significantly expanding its portfolio of published PEAK Matrix evaluations in 2015. New reports we’ll be publishing through the end of the year are:
Everest Group’s goal is to help ensure enterprises and service providers achieve maximum success from their sourcing initiatives. Thus, we encourage you to reach out to us directly with your queries.
Abhishek Singh, Practice Director, [email protected]
Nitish Mittal, Senior Analyst, [email protected]
Mayank Maria, Analyst, [email protected]
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DevOps: Brave New World
The burgeoning adoption of DevOps among enterprises, and the role of service providers in enabling it, will require a new set of capabilities on both sides. Enterprises will need to form partnerships with service providers and create appropriate incentives, while service providers will need to develop DevOps solutions and “end-to-end” integrated services capabilities.
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Help wanted: Technology disruption drives increased demand for consulting support in application services
As much has already been written about Cognizant and its Trizetto acquisition – including Everest Group’s take: The New “Big Blue” of Healthcare IT? – it is time for us to do a post-facto check on Cognizant’s healthcare IT services business, and ruminate on the state of the healthcare IT market.
Let’s put Cognizant’s numbers into perspective with our growth estimates for the overall healthcare IT industry. With the healthcare industry set to grow at a CAGR of 12 percent through 2020, and given what we have seen since we published the following in 2013, the market size projections for healthcare appear well on track to humble the pessimists among analysts.
While services spending growth has been steady, especially for the payer and provider markets, the innovation side of healthcare IT has been sulking for a while. Yes, “sulky” is the word that comes to mind when you sit listening to a panel discussion on digital innovation at #AHIPInstitute2015 and not one panelist cites an example of innovation from the healthcare space. They either talk Uber or Airbnb. This is unfortunate.
Despite the huge numbers up for the taking, a big spike in the booming healthcare IT market will not come by unless there is a dawn of new and nimble technology start-ups that change the game of healthcare enterprises looking to move away from bespoke solutions to as-a-service models that reduce their time-to-value exponentially. For good or bad, the healthcare industry in the U.S. has always had an umbilical cord connection closer to Washington D.C. than to Silicon Valley. That is probably what curbs innovation in this industry from breaking out of its shackles to produce its own Ubers and Airbnbs. In my opinion, except for a few fitness/therapeutic/diagnostic wearable-focused investments, little causes titillation in the healthcare technology start-up space. Despite all the brouhaha on the B2C shift, consumer-focused investments are coming more from the enterprise IT side than from third-party innovation. Frankly, do we want to be in a world where Ford not only makes the cars but also drives the cabs? Hence, the question is – in a world dominated by technology vendors (Epic, GE, McKesson, and Philips) are we ready to declutch third-party innovation and let it bloom?
There was a reason we titled our blog about Cognizant’s acquisition of Trizetto, “The New Big Blue of Healthcare IT?” The simile was not to herald the dawn of a new behemoth, but to provoke the sort of nimbleness and courage in healthcare IT industry that IBM (the original Big Blue) has shown over the last many decades to stay relevant in the overall technology industry. In an industry with a muffled voice of innovation (few exciting start-ups), a few big bullies (large technology vendors, EMRs, etc.), and well-meaning presiding deities (government and legislatures), the push for change will have to come from outside.
Why did I harp on Cognizant while writing this blog? It was a rank outsider in the healthcare technology industry (well, almost, given its offshoring, pure play service legacy). Even if it becomes a US$4 billion healthcare enterprise, it will still be a fraction of the market. Via its investments, growth, and outlook, what it has given the industry is a peek into the kind of bravado that can make this market rock. We require more of this bravado. But, if it is going to be just once in a blue (pun unintended) moon, it will be rank boring. So, as the Joker would have said, let’s put a smile on that face!
This is the first in a series of blogs Everest Group is publishing on exciting opportunities and implications to watch out for in the healthcare IT services market.
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