Health Care's IT Revolution
In 2004, President Bush called for all Americans to have electronic health records (EHRs) by 2014. Since then, he has emphasized health-care information technology in some high-profile speeches, including the 2007 State of the Union address, as critical to making the U.S. health-care system more efficient, affordable, and safe. Other politicians and health care policy experts are also urging faster adoption of health-care IT, including EHRs.
EHRs are electronic accounts of individuals' health history and treatments, which can be transmitted digitally among doctors, patients, and facilities. While not a new concept, EHRs are at the core of a growing push to adopt a national strategy for implementing health-care IT. The urgency is escalating as an aging population threatens to overburden the enormous U.S. health care budget. Making information available easily and quickly via EHRs could help reduce medical errors, enable physicians to get a more accurate profile of a patient's medical history before treatment, and reduce administrative costs.
In the past, physicians have bought administrative IT for their offices, but have resisted EHR because of time constraints, cost, confusion, and lack of standards to enable different systems to communicate with each other. Hospitals have acted slightly faster, but they are still far behind other industries in installing state-of-the-art IT networking programs, such as digital medical records.
To drive adoption, the Bush Administration is pushing government-funded health-care programs (Medicare, Medicaid, the Veterans Administration, the Federal Employees Health Benefits Program) to initiate EHR demonstration projects, and has organized public-private collaborations to set industry-wide standards for interconnectivity and quality. The federal government is also funding state-run experimental programs that use innovative EHR applications.
These government efforts—and resulting revenue sources—haven't been lost on the corporate world. EHRs require hardware, software, databases, networks, and, at their most advanced, picture archives of radiology and pathology images. Specialized health-care IT vendors such as Cerner (CERN; not ranked by S&P), McKesson (MCK; S&P investment rank 3 STARS, hold), Eclipsys (ECLP; 2 STARS, sell), and Allscripts (MDRX; not ranked) previously sought to establish widespread EHR networks, with limited success. The new federal government initiatives are reinvigorating the field.
Even as these companies renew their efforts to tap the market, they face increasing competition from deep-pocketed first-time entrants. These include the world's top three diagnostic imaging companies, Siemens (SI; 3 STARS), General Electric (GE; 5 STARS, strong buy), and Philips Medical Systems, a unit of Philips Electronics (PHG; not ranked).
Technology companies are also getting into the act, including Oracle (ORCL; 5 STARS), IBM (IBM; 5 STARS) , and Intel (INTC; 4 STARS, buy). Even Microsoft (MSFT; 3 STARS) has signaled its interest. These companies participate in some unrelated areas of health-care IT, but haven't been active in digital medical records.
Because the private sector has been so tough to develop, companies are optimistic that new government efforts, and increasing peer pressure in the medical community to improve quality, reduce medical errors, and become more efficient, will change the paradigm.
Some recent key initiatives include the following:
In July, 2006, a nonprofit organization, the Certification Commission for Healthcare Information Technology (CCHIT), implemented the first national certification program for outpatient EHR software and networks (physicians' offices and clinics); as of January, 2007, some 55 products have CCHIT certification. Industry trade groups formed the CCHIT in 2004 with funding from federal grants, with the aim of clearing up physicians' confusion when they have to decide on programs from multitudes of vendors. A draft of certification standards for inpatient EHRs is in progress and expected to be finalized in mid-2007.
In August, 2006, the Centers for Medicare and Medicaid relaxed federal rules prohibiting hospitals and payers from donating IT equipment, services, and products to physicians, pharmacists, or others who might refer business to them. The restrictions remain in place for other products, but were enacted on the assumption that outside funding could help speed up physician adoption of IT, particularly for small practices. On the hospital side, profitability is improving. So health-care facilities may have more money to fund these systems. Meanwhile, pay-for-performance initiatives are expanding, which gives providers incentives to improve quality while lowering costs, and consensus is building around interconnectivity standards.
Striving for Efficiency
Also in August, 2006, President Bush issued an executive order requiring federal health-care programs such as Medicare, the Veterans Administration health system, and the federal employees health benefit program to lead the way in adopting health-care IT as part of the broader effort to reform the system. The aim: to get 60% of private industry to follow the federal lead by 2008.
In January, 2007, the Health and Human Services Dept. announced that transformation grants totaling $103 million were awarded to states to implement new ways to make Medicaid more efficient and improve quality, based largely on IT tools. While not all of these efforts involve EHR, most do.
The newly elected Democratic-controlled Congress is also eager to pass a health-care IT bill. Some proposals include tax incentives for physicians, particularly in small practices, who adopt EHR. Republicans see pay-for-performance initiatives as a possible driver of adoption, according to Health Care IT, a trade magazine.
These developments, while new and comparatively small, are already boosting demand. According to a new study from market research firm Kalorama Information, health-care organizations have budgeted money for EHR in 2007 and 2008, creating a robust market for existing and new entrants. The firm expects the U.S. market for EHRs to grow 13.5% a year through 2009.
The study further breaks down growth patterns: between 2009 and 2012, the pace of growth will accelerate to 15.5% a year, and then reach 19.5% through 2015, when total market size will reach nearly $5 billion. The top five EMR vendors currently hold 70% share of the market, but because penetration has reached only 23% of the total estimated customer base, new entrants have plenty of opportunity. The biggest demand will come from physician offices, although hospital IT services will also expand.
International opportunities for vendors also are opening up, particularly in Europe. Cerner, McKesson and Eclipsys have successfully bid on health-care IT contracts in Europe, where the European Union and its individual members are in the early stages of implementing EHRs. The European Union has asked members to submit proposals for converting to e-health, including adoption of "smart" cards, which incorporate physician notes, e-prescriptions, images, and patient histories on a piece of plastic the size of a credit card.
Still Some Risks
Meanwhile, both Germany and France have indicated plans to launch domestic e-health initiatives in mid-2007; Germany has a new national agency responsible for health-care IT infrastructure. Spending on health-care IT in Europe is expected to double by 2010, according to the market research firm Frost & Sullivan.
By far the most ambitious, well-funded program underway is in the United Kingdom, where, in June, 2002, the government initiated a $12 billion, 10-year effort to bring medical records and appointments on line by linking 30,000 general practitioners and 300 hospitals.
Despite the momentum, risks linger. Cerner and McKesson's U.K. contracts have yet to earn profits, indicating the complexity and uncertainty of the field. The U.S. initiatives, and the funding set aside to support them, are comparatively small; in the budget proposal for fiscal 2008 (ending September), President Bush is asking Congress for $118 million to fund the three-year-old Office of the National Coordinator for Health-Care IT. That's double the amount delegated to the office two years ago, but it's paltry compared to some of the efforts in Europe.