Analysis Via Industrial Organization Model

Published Date: 02 Nov 2017

Due to meaningful use regulations, hospitals and other health care providers have gained great interest in fully integrated medical records. Epic is an integrated healthcare software company founded in 1979 by Judith Faulker. The company is still privately held; employee owned and is located in Verona Wisconsin, just outside of Madison. Faulker founded the company with a staff of 3 through working out of a basement and now oversees a multibillion dollar campus on over 800 acres with over 6,200 employees (up from 396 in 2000) (Kleinberg, Klein, Kilbridge, Hood, & Davis, 2012). Financial statements are difficult to obtain however the company achieved 1.2 billion in revenue in 2011 (Moukheiber, 2012).

Analysis via Industrial Organization Model (I/O Model)

The External Environment

The key external driver which truly changed the landscape for healthcare information technology occurred with the 2009 Healthcare Information Technology Economic and Clinical Health Act (HITECH). While Epic systems was founded in 1979 and doing fairly well up to this point, what has transformed them and the entire industry has been a direct result of governmental regulations placed upon providers of healthcare services. HITECH proposes the "meaningful use of interoperable electronic medical records throughout the United States health care delivery system as a critical national goal (Centers for Disease Control and Prevention, 2012)." Through a carrot/stick method, The Center for Medicare and Medicaid Services (CMS) incentivizes eligible providers to demonstrate compliance with meaningful use criteria with bonus payments through 2015 at which time those bonus payments turn into reductions in Medicare & Medicaid reimbursement (Centers for Disease Control and Prevention, 2012). Not all improvements are required at once but rather are broken up in three stages and scopes of improvements are based upon the practice arena (ambulatory, hospital, critical access hospital, and professional).

Epic sits at an advantage in that they are essentially the only main privately owned firm in the industry. The other competitors in this highly watched industry are publicly traded and are closely watched. Faulkner maintains that they wish to remain private in order to retain full control over their operations. Faulkner also holds a seat on the Health IT Policy Committee that advises the Office of the National Coordinator for Health IT and happens to be the only vendor that is represented on this committee. Publicly available information about other companies and her seat on this committee allows for strategic forecasting and assessment of the external environment.

The main competitor for Epic is currently Cerner with Siemens, GE, McKesson, Meditech, and Allscripts also segregating the market share. In 2009, ~ 70% of integrated healthcare medical record systems implemented by hospitals with over 200 beds were either Epic or Cerner based (Kleinberg et al., 2012). The Advisory Board reports that "Epic also has had significant success with academic medical centers as they are often amenable to discussing and testing innovative capabilities (Kleinberg et al., 2012)."

Any exposure to Epic quickly imparts the knowledge that this is a high capital outlay for any organization. As such it tends to be a better fit for larger institutions with the access to this level of assets. While competitors are also costly, the initial price tag may come in under that of Epic; however Epic’s long term expense is generally expected to be less after initial implementation. It is not likely in the current environment any new competitors will enter the industry as the barriers to entry are very high with the capital outlay, knowledge and relationship assets.

An Attractive Industry

While Epic does not grant access to company financials, the follow data has been shared with the media and is representative of the fiscal health of the firm.

Revenue: 1.196B in 2011

Number of employees 6,200 (up from 396 in 2000)

Number of direct clients: 270 organizations (1,100 hospitals/14,500 clinics/250,000 MDs)

20% employee growth in 2011

Number of patients with records in Epic system: 120M-152M (37-48% US population)

< 10% employee resources are administrative

Table 1: Available fiscal data Epic systems (Kleinberg et al., 2012)

It is important to note that less than 10 percent of employee resources are administrative. This is a very flat organization with 90% of employee resources being focused on implementation services, research & development, and technical services. Further, Epic employs just a handful of sales staff that operate only on a salary basis without commission (Kleinberg et al., 2012).

Across the industry, EHR companies have done well since 2009. Allscripts, Cerner, and Epic hit the lay press for the amount of benefit they have gained particularly due their role in lobbying for passage of the bill. Of course Epic is somewhat shielded from scrutiny since it is not public. Allscripts sent annual sales from $548 million in 2009 to $1.44 billion in 2012 and Cerner reported a 60% increase during that same time (Creswell, 2013). The governmental regulations and the state of paper medical records under which the majority of the industry existed is what allowed for this rapid growth of the larger firms that could afford to invest in innovation (Creswell, 2013).

Strategy Formulation

The strategy surrounding the industry of HER systems target the core concepts of meaningful use. The five focus areas for meaningful use include:

Improving quality, safety, efficiency, and reducing health disparities

Engage patients and families in their health

Improve care coordination

Improve population and public health

Ensure adequate privacy and security protection for personal health information (Centers for Disease Control and Prevention, 2012)

Therefore every regulation and requirement is somehow linked backed to one of these targeted areas. As mentioned previously, part of the meaningful use criteria involves interoperability between systems to allow for medical record portability. This requires all of the systems to operate on an open platform. Epic has been criticized for operating on the MUMPS (Massachusetts General Hospital Utility Multiprogramming System) platform suggesting it is outdated and a closed system. This criticism has been found to be without merit (Kleinberg et al., 2012). Perhaps to further segregate themselves, Cerner, McKesson, and others recently (March 4, 2013) formed the CommonWell Health Alliance to support interoperability; Epic was not invited to join (Moukheiber, 2013). With national standards in place to regulate interoperability, the purpose of the alliance comes into question and perhaps may be foreshadowing to a different strategy and worth monitoring.

Assets and Skills

Some of the key strengths of Epic Systems that will navigate them through a strategic framework are:

"Single, fully-integrated, highly scalable, multi-entity database that embraces the information requirements of the ambulatory, ED and inpatient EMRs, practice management, enterprise RCM [revenue cycle management], and health plan management. Is able to connect Epic sites to other Epic sites and to support heterogeneous environments such as clinically integrated networks using interoperability standards (Kleinberg et al., 2012)."

"Remains private and profitable: is not subject to stockholder demands or quarterly earnings focus. Uses its revenue to make investments in infrastructure and people to continue to grow and expand (Kleinberg et al., 2012)."

"Strong Leadership: Judy Faulkner at helm since beginning (Kleinberg et al., 2012)."

"Chooses its clients carefully; picks clients it believes will succeed with the proper determination and resources. Is not encumbered with dissatisfied clients; has a strong user community (Kleinberg et al., 2012)."

"Sticks to its pricing: has maintained a premium price that many clients…consider money well spent…(Kleinberg et al., 2012)."

Strategy Implementation

As Epic continues to expand their client base and strengthen its product capabilities, the firm will continue to innovate and outpace the major competitors in the industry. The campus of Epic has been likened to that of Google in respect to a focus on creativity, elimination of barriers, and support for innovation. Even the energy support for the campus is innovative in that they are almost completely self-sufficient via geothermal systems, solar power, and wind turbine energy (Kleinberg et al., 2012) further demonstrating the culture of the organization. The founder and president of the company maintains a firm philosophy related to corporate culture that has led to the current prominent position of Epic. "Hire people with high aptitude and create a campus where they can thrive and keep the business model independent and focused exclusively on health care IT (Kleinberg et al., 2012)."

Analysis based on Resource-Based Model

Resources

As mentioned above, key strengths of Epic Systems are based upon the single, fully-integrated, multi-entity database that transcends practice environments, revenue cycle management, and health plan management. Due to being privately held and a "smaller" company, their success has not been stunted by acquisitions and mergers, stockholder and board demands and expectations. Epic continues to be led by the company founder who maintains her vision all the way through to who they choose as their client base. They are known for being non-negotiable on their pricing and hold firm to this yet do not lose the clients they choose.

The biggest challenge faced by Epic systems is cost and not just actual cost, but perceived cost. In comparison to competitors, Epic seemingly has a higher price tag at implementation. When total cost of ownership is compared over time, the cost equalizes as the add-ons and maintenance/upgrade fees required of other systems are already incorporated into the Epic package (Kleinberg et al., 2012). Epic systems have several different clinical specialty modules which are targeted for specific areas of care such as cardiac, transplant, oncology, obstetrics, and so forth. While they cover many aspects of care, there are some that are not yet supported including long term care (Kleinberg et al., 2012). This is a similar challenge to competitors although Cerner and others may have specialization in different modules than Epic such that some organizations may prefer one vendor’s product over another if they are a high volume center for a specific specialty. Finally, while Epic assures customers they have a succession plan for their leadership, they have not disclosed that plan publicly. Because the company is private and all of its information is secure, it creates a certain level of uncertainty not knowing what to expect for the company should there be a change in leadership. Would the company remain private? Would they offer an IPO? Would the corporate culture and vision remain the same without Faulkner (Kleinberg et al., 2012)?

Capability

Capability

Comparison of Epic and Cerner as one of their main competitor

Valuable

Epic is seen as the newer, "fresher" company while Cerner is big business and top heavy. Epic is focused on innovation and R&D, Cerner is focused on corporate earnings.

Rare

Epic is owned and managed by the original founder of the company while still being privately held

Costly to imitate

Epic has MUMPS platform vs. intelsystems platform which is less unique

Campus work environment structure and focus towards innovation

Non-substitutable

Epic is owned and managed by the original founder of the company while still being privately held unlike publicly traded Cerner

Competitive Advantage

Data on hospitals certified for meaningful use by vendor after the first attestation reports have recently been made available. According to this data, released by Modern Healthcare on March 27, 2013, for those hospitals that used a complete system (as opposed to a modular system) Epic Systems was used in 17.9% facilities, Meditech is 15.6% of facilities, 15.1% Computer Programs and Systems, and 10% Cerner(Modern Healthcare, 2013). This demonstrates that currently has the advantage for assisting hospitals in achieving the requirements for meaningful use. Because of the federal regulations and fiscal implications to hospitals, this is very big advantage because hospitals need that assurance that the product will in the end be a return when the stimulus prevents the loss of millions in Medicare/Medicaid reimbursement. It will be important for Epic to continue to focus on innovation in order to solidify and increase that competitive advantage over others as the margin is fairly narrow at current.

Attractive Industry

As stated in the above section, Epic does not grant access to company financials but the follow data has been shared with the media and is representative of the fiscal health of the firm.

Revenue: 1.196B in 2011

Number of employees 6,200 (up from 396 in 2000)

Number of direct clients: 270 organizations (1,100 hospitals/14,500 clinics/250,000 MDs)

20% employee growth in 2011

Number of patients with records in Epic system: 120M-152M (37-48% US population)

< 10% employee resources are administrative

Table 2: Available fiscal data Epic systems (Kleinberg et al., 2012)

It is important to note that less than 10 percent of employee resources are administrative. This is a very flat organization with 90% of employee resources being focused on implementation services, research & development, and technical services. Further, Epic employs just a handful of sales staff that operate only on a salary basis without commission (Kleinberg et al., 2012). Please see above for further discussion.

Strategy Formulation and Implementation

Epic is in a pivotal leading position and it is critical that they maintain innovation and successful meaningful use performance in order to continue winning market share. Their strategic selection of clients also is working to their benefit as is the private nature of their firm. There may come a time when they need to share a succession plan to ease anxiety with consumers so it will be important for them to prepare for this. Otherwise, maintaining an enthusiastic, energetic, innovative workforce in a flat structure is a supported ongoing approach for this firm.

Changes to Industry

As mentioned above, on March 4, 2013, Cerner, McKesson, and others recently formed the CommonWell Health Alliance to support interoperability without invitation to Epic (Moukheiber, 2013). With national standards in place to regulate interoperability, the purpose of the alliance comes into question and perhaps may be foreshadowing to a different strategic position for Epic’s competitors. Additionally, within the state of North Carolina, several major academic medical centers have recently partnered with Epic systems which will essentially transform the state medical record systems. This becomes significant in primarily in the this state because NC is nationally recognized for the RACE (Reperfusion of Acute Myocardial Infarction in Carolina Emergency Departments) system which is the state-wide effort for emergency treatment of patients having heart attacks. With the potential of an inoperable EHR and a well-established state wide clinical care system already in place, great innovation could be on the horizon from this state and spearhead growth for both Epic and medical entrepreneurs. Further, ICD-10 (the new medical billing code system) is being launched in the fall of 2014. ICD-9 has 14,000 diagnosis codes and 4,000 procedure codes. ICD-10 has 68,000 diagnosis codes and 72,000 procedure codes. From a competitive advantage perspective, it will behoove Epic to handle that transition exceptionally well to maintain strength in market share.

Ethics and Corporate Social Responsibility

By nature of being involved in the implementation of an EHR, employees of these corporations not only come into contact with patient health information but they also observe practice patterns within organizations that provide them with institutional knowledge that may be detrimental if shared. For example, with electronic implementation, many times variations in practice are discovered that are easy to work around in a paper world but require standardization in an electronic system. Additionally, the basic tenets of meaningful use involve improving quality, safety, reducing health disparities, and improving population and public health (Centers for Disease Control and Prevention, 2012). The implementation teams have an ethical and social responsibility to handle this information professionally and in accordance with HIPAA standards. The implementation teams may be working at rival organizations just miles from each other where it may be faster or easier to see how the "other shade of blue" is doing something. However, this would not be within the best interest of their company and would threaten the entire implementation.

Analysis of Driving Forces

As mentioned above, the key external driver which truly changed the landscape all EHR systems was the 2009 HITECH Act. For full discussion please see above but note that this review is mainly focused on the regulations and implementation within hospital settings as opposed to ambulatory or critical access hospitals.

Future of Industry

EHR systems have a several opportunities going forward. As previously discussed there are niche innovation prospects in states like NC that have unique systems like RACE currently in place to test the true capacities of interoperability. ICD-10 is an additional breeding ground for innovation and growth that will either set apart or destroy companies. Current systems do not focus on shared identities or any type of single sign on which would be a very big advantage for end users. Additionally, end-users tend to focus on what data can be "pushed" as opposed to allowing for more meaningful "pulling" of data. Doing so would seemingly decrease the complexity of the systems. Finally as the government solidifies the regulations associated with future stages of meaningful use, EHR system companies such as Epic will be required to adapt to those changes and provide the necessary upgrades and adjustments their consumers.