Cerner and Interoperability
Interoperability's impact on EMR vendors like Cerner in healthcare.
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
Student comments on Cerner and Interoperability
Great post! Your point about Cerner improving statistical software in order for providers to actually use data to the benefit of patients and to identify cost savings. It looks like they are teaming up with Amazon Web Services to work on predicting patient outcomes based on previous patient data . I agree that interoperability may not deliver as much value to providers as expected in the short term. However, longitudinal data collection and analysis of patient outcomes, if done well, represents a huge opportunity to create value in the health care system by understanding which procedures and products work and which patients they work for. At the moment, we rely on very small (mostly industry sponsored) studies to determine the suitability of devices and procedures for use in huge and diverse patient populations. I think it’s a matter of when we start using EMR data, not if. Cerner is in a great position to capitalize on this opportunity.
Very interesting post! To add to your point about educating customers about the merits of intraoperability: as a provider, this would actually be immensely useful functionality as there is nothing more frustrating than not having a complete picture of the patient’s medical history because it is fragmented across EMRs. I worked at a hospital that used a Cerner EMR in addition to several others for different purposes (clinic notes, OR notes, labor and delivery, etc) and not being able to cross-access information on a patient meant I spent a lot more time finding out simple information (poor labor utilization) as well as often didn’t end up having all the information I would want to provide the best care. Massachusetts is attempting to address this problem through a “Health Information Highway” (https://www.mass.gov/orgs/the-massachusetts-health-information-highway) that would be a mechanism for providers at different hospitals/clinics to share information about a patient (with their consent of course).
One risk to Cerner’s overall plan is the possibility that one EMR will come on the market that is superior to others in functionality (and affordable) and will gain wide enough adoption that most providers will no longer feel the need to interface with Cerner. We have begun to see this to an extent with Epic, and I would not be surprised if Epic continues to take market share from Cerner. If this is the case, Cerner may better allocate its investment in adding to its inherent functionality relating to documenting and billing in order to compete with Epic rather than the focus on communicating with other EMRs.
It’s interesting that interoperability has been treated as ‘neutral ground’ or as a vendor-agnostic information highway as Marla mentions. My sense is that EMR vendors now see interoperability requirements as creating a regulatory impetus for a new market – to extend the metaphor, who will own the toll roads on that highway?
In this vein, I was interested by Epic’s decision to release their Share Everywhere product, which is available to providers at no cost as an add-on to their patient portal module . With Share Everywhere, providers who do not use Epic can both access (at the patient’s request) patient records and send back progress notes, which presumably will be integrated into the Epic EMR. Over time, one can imagine that consolidating even the records of non-Epic providers will drive more control of the data overall to Epic. Their strategy seems to be to start with core EMR data and graft additional care notes and outside sources onto that record over time, which will centralize the EMR data as THE patient record.
For Cerner, these types of moves only seem to heighten the requirement to act quickly on interoperability.
Very interesting post! I’ve done a fair amount of work relating to EMRs and healthcare focused software in my prior role in technology investing. I believe your concerns about Cerner’s potential for disruption are well-warranted. As others have mentioned, Epic Systems has already begun to take market share from Cerner and the more established players, and should continue to do so. One area my investing firm spent a good amount of time was the post-acute EMR space. We bought both Mediware Information Systems as well as Kinnser Software, which are companies focused on the Home IV and Home Health sub-markets markets respectively within Post-Acute.
Post-acute is another area Cerner needs to think about going forward. Essentially, Cerner focuses on EMR software for actual hospitals, but there are a number of demographic factors driving more patient volumes to providers that focus on patient care outside of the hospital (Home Medical Equipment, Home Care, etc.). Most of the white space / greenfield inherent in EMR software can be attributed to the Post-Acute market. Going forward, in addition to Ali’s suggestions, I believe Cerner should invest heavily in their Post-Acute solutions.