Epic EHR Systems: The Role of Network Effects

Epic’s use of perverse network effects to lock in users may be its downfall…

As one of the leading electronic health record (EHR) systems of choice for large health systems and academic medical centers (AMCs), Epic has enjoyed nation-wide success in its enterprise-wide solutions for collection and storage of patient data. This blog post will cover the impact of network effects on the success of the EHR system industry and discuss how Epic’s choice to limit broad-reaching network effects without significant cost may ultimately lead to its downturn.

Suboptimal adoption rates plagued the EHR system industry for many years – basic EHR adoption rates for U.S. doctors and hospitals hovered around 17% and 10% respectively in 2008, largely due to the high expense associated with large-scale IT implementations, lack of technical expertise to maintain and upgrade these systems, and concerns about privacy and security of patient data. Network effects also played a large role in this lack of adoption. Many smaller hospital systems or private hospitals had little incentive to adopt these systems because very few other players were also implementing them. The financial benefits of EHR systems are perceived to happen only when other hospitals also have compatible EHR systems because then the costs are diminished when a patient goes to a different hospital (such as printing and transporting files for patients, converting the paper files to electronic files, error costs, etc). If you are the only health system to invest in electronic technology for patient files, you don’t get cost reduction benefits of seamless file transfer, interoperability of systems, and expanded communication between providers. This is a prime example of how investing in an EHR system to create value doesn’t necessarily allow the hospital to capture the value unless other players also adopt the system.

Adoption of EHR systems shot up when the Department of Health & Human Services signed into effect the Health Information Technology for Economic and Clinical Health (HITECH) Act in February of 2009 to promote the adoption and meaningful use of health information technology through financial incentives and provide structure for privacy and security laws around EHR adoption. EHR adoption rates are as high as 95% for large health systems now. However, network effects are still in play and serve to keep smaller health systems wary of implementing even basic EHR modules. Epic’s implementation cost (~20M for medium sized teaching hospitals) is so high that smaller hospitals don’t consider it, especially because it requires such a deep level of customization for each health system. Smaller hospitals are likely worried that a cheaper EHR partner may go out of business because of the importance of scale in this business.

After the HITECH legislature was passed, Epic capitalized on this trend towards greater adoption and sought to lock in its customer base by making it very challenging to communicate and transfer data to non-Epic systems. Epic was able to compete with this strategy because the HITECH legislation did not specify a standard or protocol for EHR use and data-sharing – it just specified that companies should use health information exchange technology. Although Epic preaches vast interoperability through its “Care Everywhere” network, which claims that its systems are compatible with 44 other leading EHR vendor systems, in reality, this is not entirely true. Epic charges thousands of dollars for each separate interface with another vendor, and claims that hospitals will make this money back through cost savings they get from general EHR efficiencies. Medsphere elaborates on the problems with Care Anywhere:

“EpicCare (Care Everywhere) specifically breaks the standard CCD form, and makes it incompatible with the rest of the 400+ EMRs in the USA by adding their proprietary extensions. This is consistent with Epic’s proprietary, one-vendor-shop, non-interoperability stance. The statement that “any hospital can interoperate with Epic’s Care Everywhere—just so long as they are an Epic institution” aptly summarizes this.”

Given the fragmentation of the EHR market, it is very challenging for anyone other than large health systems to afford the cost of these multiple interfaces, and this has created a perverse network effect which pushes most large health systems and teaching hospitals into using the Epic system. Epic knows switching costs are too high to move to another vendor, as there are large-scale losses in productivity, time spent, and resources in changing behavior and moving to a computerized EHR system in the first place. Epic furthered their trend of perverse network effects by requiring specialty practices associated with any primary care or generalist practices to use the same EHR system in order to adequately transfer files on patient data from a patient’s primary health physician to a specialist, even if they practice in the same network. Epic has been criticized widely for having a “disproportionate negative effect on interoperability” (Forbes) in the EHR market and for rendering it difficult for smaller hospitals to adopt their systems. This effect also makes it difficult for larger hospitals to reap the benefits of costly Epic implementations. In order to gain more financial benefits of data sharing and transparency, large hospital networks might consider sharing costs for Epic or EHR implementations in smaller hospitals in their region.

Although Epic’s approach to leveraging network effects to lock in customers by building proprietary models with little compatibility and complementarity is not exactly admirable in my opinion, it has worked. They are essentially the leading EHR vendor and only continue to grow their user base. This has helped them branch out into other platform-centered products such as their own app store and comprehensive systems with decision-making support, order entry, and results management and tracking. Additionally, Epic offers their own PHR (personal health record) which allows patients to access their own medical record and check the status of their lab results, etc. Most crucially, Apple has recently named Epic as their EHR partner for the storage and transmission of its HealthKit remote patient monitoring program.

Epic’s downfall will likely arise if the government decides to promote stronger EHR standardization laws and implements specific protocols for data sharing and extension naming of EHR systems in America. Given the criticism Epic has received lately, this might happen fairly soon. Additionally, depending on how far America moves towards national health insurance, the government itself might adopt a health information exchange and mandate the use of its own EHR. Anything is possible. In the meantime, Epic should make sure it leverages its control on the EHR market and its wide network effects for some good – such as national biosurveillance to catch outbreaks before they spread, better population health management systems, and improved process benchmarking.


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Student comments on Epic EHR Systems: The Role of Network Effects

  1. Thank you for the post. Your point about perverse network effects are particularly interesting – as they shut off small hospitals from Epic, they open the path for other competitors to sweep in, such as Meditech. Meditech’s focuses on smaller practices that have tight budgets and only need a comprehensive, “good enough” service. With a low cost, low price strategy, Meditech can afford to monetize this market that Epic has so far not focused on. Should Meditech or other similar competitors get government funding to provide their service, or should EHR systems standardize more as you suggest, the competitive dynamics can push to have Epic compete directly with these companies as well.

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