Despite congressional wrangling over healthcare, stimulus funding could have unintended but positive consequences sooner than expected
As the healthcare lobbying machine cranks up the noise during the August congressional recess, many of the healthcare players have already figured out their strategy – and that is to merge with one another.
We recently ran a strategic war game that played out the competitive strategies among leading players in the burgeoning market for electronic medical records (EMRs). EMRs serve as the backbone for collecting and communicating information about patients and related data within hospitals to the doctors treating the patients. One of the war game’s predictions was that, through mergers, the array of competitors now offering these services will begin to shrink rapidly in the next few years. Someone must have fired a starting gun, because the merger dance has begun.
Sometimes deals just happen, seemingly overnight. Most of the time, however, rivals signal each other. They hop onto the dance floor to strut their stuff and see who is interested, or they pick up a dance partner and take that partner out for a spin. Both scenarios appear to be happening in the EMR world.
During the war game (April 3), the team representing Allscripts, one of this nascent industry’s leaders, discovered that it needed a partner if it were to expand rapidly. The Allscripts team chose to partner with a large pharmaceutical company. The team believed that a pharmaceutical firm, with its large sales force, would offer the perfect extension to Allscripts’ relatively small sales organization. The judges found the logic of a pharmaceutical company as a partner flawed, but applauded the idea as a way to extend Allscripts’ market penetration.
Just one month before the war game, eClinicalWorks, an Allscripts rival, had announced a deal to sell its EMR product to medical practices through Wal-Mart’s Sam’s Club stores – at a relatively low price. The war game team sensed Allscripts’ need to partner if it were to succeed long term. Within a month of the game Allscripts announced a partnership with Cardinal, the country’s second largest healthcare products distribution company. Cardinal has a broad and deep reach into America’s hospital network – a perfect partner to extend Allscripts’ presence. Does this mean that Cardinal will buy Allscripts? Perhaps not, but it does give Cardinal something its rival McKesson already has – an EMR product to sell. This is just the first dance among these two partners.
In June, a sign appeared that various corporate behemoths were beginning an EMR market share land grab. General Electric Healthcare, producer of its Centricity EMR product, announced an aggressive zero-percent financing plan (financed by GE Capital) for hospitals considering installing computerized health records. This is a smart, aggressive move to capture share in this young, untouched market.
Here is the industry challenge: There is no blockbuster standard technology for electronic medical records similar to other industrial technology products that could be offered by an Oracle, a Microsoft or an Apple. Instead, there are dozens of incompatible systems installed in lots of medical centers and doctors’ offices. The vendors may prefer this lack of interoperability, because it locks institutions into their systems, but the doctors and the greater good of the healthcare system do not benefit from many systems that cannot easily exchange information with each other. Standards means the systems become transparent. Hospitals and doctors (fewer than 10% use EMRs today) will share information, which means that the system becomes less expensive to use, helping to drive down the cost of treating patients. Mergers will inevitably force standardization.
What the war game exhibited and what we see taking place today is an EMR land grab – for institutions and patients. If GE Healthcare can effectively finance its way into hospitals and providers, it will capture medical institutions and their patients in one swift move. Build enough of a “network effect”, and you have a strategic stickiness that will attract other institutions. A critical mass will develop that may become so overpowering that other rivals will have to merge with GE Healthcare – at least that appears to be the intent with GE’s aggressive financing scheme.
The electronic medical records market is one that hungers for consolidation and the standardization that comes with it. Government stimulus money or further regulation will not solely do the trick. What the $19 billion in EMR seed money is doing – intentional or not – is to stimulate corporate M&A. With a vast majority of the hospital and physician market not yet embracing this non-standardized technology, merging platforms through acquisition is inevitable as well as being good for our entire healthcare system.