The Electronic Medical Record (EMR) is an essential component of the healthcare information value chain. Over the past 10 years, the EMR has developed into the primary method that healthcare providers (physicians, hospitals, pharmacists, etc.) store and share information about patients. The EMR also facilitates reimbursement in healthcare by linking clinical and billing information between payers (health insurers, employers, government, etc.) and providers. The overall EMR market is a ~$30B industry and is expected to grow at an ~6% CAGR to ~$37B by 2021.(1) Much of the recent growth was driven by the American Recovery and Reinvestment Act of 2009 which included $19.2B in incentives to support hospitals and physician offices adoption of EMR.(2) Cerner, disproportionately benefited from this growth and grown to be the largest EMR, with 17.1% market share, followed by McKesson and Epic.(1) This legislation asked providers to attest to meaningful use of EMRs to capture data; however, the legislation did not stipulate specific requirements for exchange of healthcare information between EMRs at different providers.
As a result, Cerner designed their software to operate on a closed system that does not communicate well with other EMR or other healthcare software. This strategy allowed Cerner to create high barriers to trial of competitors’ solutions and switching costs leading to above market revenue growth of 8%.(3) However, the healthcare community and regulatory bodies (HHS, CMS, etc.) are placing pressure on Cerner and its competitors to develop technology that supports more frictionless flow of information through the 21st Century Cures Act (CURES Act). Specifically, the CURES Act is the first legislation to define interoperability and discourage information blocking by EMR vendors.(4) The law defines interoperability as functionality that “enables the secure exchange of electronic health information with, and use of electronic health information from, other health information technology without special effort on the part of the user and allows for complete access, exchange, and use of all electronically accessible health information for authorized use”. Frictionless flow of information is critical to enabling value-based reimbursement and effective population health management; which are both seen as critical components of our nation’s solution to unsustainable growth in healthcare costs. Thus, if Cerner doesn’t adapt quickly to change their software and business model, they face high likelihood of disruption by a nimbler competitor who develops a solution that has software interoperable and facilitates value-based care rather than stifles it.
Cerner’s management team has made only minor investments to address the market and regulatory demand to make their products more interoperable to date. Specifically, Cerner co-founded the CommonWell Health Alliance, a non-profit focused on interoperability, that serves 5,000 doctor’s offices in the US.(3) However, connections between the CommonWell Health Alliance and Cerner’s core product portfolio are informal. Moreover, CommonWell Health Alliance’s penetration of 5,000 doctor’s offices only represents ~2% of the 294,000+ physician offices in the United States.(5) Cerner’s leadership acknowledges their lack of investment in interoperability to date presents risk for their business. In the business risks section of the 2016 annual report, the management team cites, “We [Cerner] may incur increased software development and administrative expense and delays in delivering solutions if we need to update our software, devices or health care devices to conform to these varying and evolving requirements [for interoperability]. In addition, delays in interpreting these standards may result in postponement or cancellation of our clients’ decisions to purchase our solutions or health care devices”.(3)
To address the need for interoperability proactively, I would suggest Cerner focus on three strategies. First, I would encourage Cerner to work directly with regulators to agree on a finite set of definitions for interoperability technical and functional standards. This would allow Cerner to eliminate some of uncertainty around timing and requirements its future products will adhere to. Moreover, Cerner will have insight ahead of its competitors into technology requirements that should allow it to go to market more quickly with an interoperable EMR. Next, Cerner should educate its installed base of customers on the benefits and differentiation points of Cerner’s interoperability strategy. By proactively having a conversation with customers, Cerner can control the narrative and highlight points of differentiation that will lead to higher customer retention and potential higher customer acquisition of provider groups switching away from competitors. Longer term, I think Cerner should consider its role in the healthcare value chain and how it can focus on the most value-added steps in a market where interoperability is standard. Cerner should explore ways that it can build advanced statistical functionality that leverages broader access to information across products due to interoperability. This advanced statistical functionality has the potential to power both clinician decision support and cost savings identification that may deliver more value to provider organizations than simple data storage. This could position Cerner to offer higher value-added services that will be high growth and higher margin relative to the their legacy data storage EMR business.
As I reflect on the challenges facing Cerner and the EMR industry to address market demand for interoperability, I think it is important to consider that improved interoperability may not deliver as much value for healthcare providers and patients as market participants expect. If this is the case, then providers and patients may relax their demand for interoperable EMRs and in turn regulators may relax requirements for interoperable software. Although this may be a best case scenario for Cerner’s management if they don’t want to invest in building out interoperable functionality, I think ignoring the risk and hoping it doesn’t matter would be short sighted.
- “EMR Market 2017: Electronic Medical Records in an Era of Disruption”, Kalorama Information, April 2017
- “EMR & The American Recovery and Reinvestment Act of 2009”, https://medcitynews.com/2014/03/emr-ehr_arra-2009/
- Cerner Corporation 10-K
- “With Passage of the 21st Century Cures Act, Interoperability Moves to the Front Lines”, December 2016, https://www.healthcare-informatics.com/article/interoperability/passage-21st-century-cures-act-interoperability-moves-front-lines
- “50 Largest Medical Groups in the US”, http://www.skainfo.com/downloads/newsletters/SKA-50-largest-medical-groups-report.pdf