Leidos, Cerner Win Pentagon’s $9 Billion Health-Records Deal

A team led by Leidos Holdings Inc. won a competition to create an electronic health-records system for the Pentagon valued at as much as $9 billion through 2033.

Cerner Corp. and Accenture Plc are also part of the winning group, announced by the Defense Department on Wednesday in an e-mailed statement. An initial 10-year contract with a $4.3 billion ceiling covers the first decade of services, according to defense officials.

The competition pitted the eventual winner against two other teams that also included some of the biggest names in technology, defense contracting and health-care administration. IBM Corp. and Epic Systems Corp. led a group including Lockheed Martin Corp. CSC, previously known as Computer Sciences Corp., was in an alliance with Allscripts Healthcare Solutions Inc. and Hewlett-Packard Co.

While losing bidders can file a protest, Frank Kendall, the Pentagon’s top weapons buyer, told reporters, “There’s a clear ‘best-value’ solution here for us and I think that will be clear to the people who were not selected.”

Biggest in Decade

The project may be the federal government’s biggest single information technology project of the decade, and the winner can expect funding of $528 million in fiscal 2016, rising to as much as $1.1 billion in fiscal 2020, according to Nick Taborek, an analyst with Bloomberg Intelligence.

“While those figures are Pentagon estimates that require congressional approval, health-care modernization for troops enjoys bipartisan support, and the funding is unlikely to be significantly altered,” Taborek said in a note before the award.

The new electronic health records program will replace the military’s aging custom system at 1,230 Defense Department sites worldwide with commercially available software like that used to track patient information at civilian hospitals.

As the system is installed starting in late 2016, active-duty and retired military personnel “will have access to their records and be able to download what they want,” Jonathan Woodson, the Pentagon’s top health affairs official, told reporters in a briefing earlier Wednesday.

Testing, Cybersecurity

The Defense Department’s current plan calls for software to undergo operational testing and cybersecurity evaluation over the next year, followed by the installation at eight locations in the northwest U.S. starting in 2016. Full installation would be phased in over as long as seven years.

But “that’s one of the things we want to revisit” after the contract award, Kendall said. “We’re hoping we can go more quickly,” he said.

Kendall said the Pentagon refined what was previously a $11 billion, 18-year program to the revised “life-cycle” estimate of $9 billion.

Leidos currently serves as the military’s health information technology manager, and losing the competition would have hurt its sales.

Leidos rose 5 percent to $40.40 in New York trading, the most since Dec. 3, 2014, after the Nextgov website reported the contest’s outcome in advance of the announcement. Cerner rose 7.2 percent to $73.40, the most since Sept. 27, 2013.

Electronic health records generated about $25 billion in revenue globally in 2014, from software sales to consulting, training and upgrade fees, according to research from Kalorama Information, a division of MarketResearch.com in Rockville, Maryland.

Biggest Companies

President Barack Obama has been an advocate for e-health records. The 2009 federal economic stimulus package provided about $27 billion to help take medicine digital, including incentives for doctors and hospitals to adopt electronic records and penalties for those who don’t.

Two of the biggest players are Cerner, based in Kansas City, Missouri, and Epic, a closely held company based in Verona, Wisconsin. While Chicago-based Allscripts has lesser sales to hospitals, it’s a leader in systems for doctors in the fragmented market.

For CSC, being among the winners would have boosted its public-sector business, after the unit has seen five fiscal years of declining sales. The company is in the midst of a breakup into two companies: one that will focus on its U.S. public-sector division and the other on commercial and foreign governments.

IBM’s Loss

For IBM, the loss is another blow for Chairman and Chief Executive Officer Ginni Rometty, who has been struggling to transform the tech giant into a competitive provider of cloud-based software and services. IBM lost out to Amazon.com Inc. in 2013 over a $600 million cloud-computing contract for the Central Intelligence Agency.

In May 2013, the Pentagon and the Department of Veterans Affairs abandoned plans for a single system for the health records of current and former troops, in part due to cost concerns.

The decision brought protests from veterans’ groups that said a single system would help end a backlog in veterans’ disability claims. Then-Defense Secretary Chuck Hagel promised to work closely with the VA to create a “seamless system.”

Michael Cherny, an analyst at Evercore ISI in New York, said in advance of the award that the Pentagon contract would be a “keynote” win for the successful bidders, allowing executives to say they are able to handle the most complicated installations in the market.

On other hand, Cherny said, the Defense Department contract will probably have lower profit margins than typical new business.

A team that included Google Inc., PricewaterhouseCoopers LLP and General Dynamics Corp. was excluded from the competition earlier.

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