HIMSS pomp & pageantry run rampant as vendors confront unstable market

Each year, the annual HIMSS meeting sets the stage for customer (and vendor) expectations in the healthcare information technology (HIT) market. At HIMSS 2001, the fancy booths and hyperbolic press releases seemed out of synch with what has been a less-than-profitable year for much of the HIT market. Indeed, 2000 was a year of flat sales at best, reflected in poor financial returns and rapidly plummeting stock prices (HNN 4/19/00). Even larger companies have been affected by investors eager to cash out before prices drop further.

The landscape is not likely to change any time soon, according to analyst Ronald Johnson in his annual review of the HIT market. Vendors are experiencing—and will continue to experience—static sales in the near term, due in large part to market saturation. In many cases, systems manufacturers are preaching to the choir, selling replacement systems rather than meeting new demand from an expanding customer base. And while many companies are looking to tap into the burgeoning physician market, carrying out this strategy may prove easier said than done, especially given the growing demand among CIOs for more definitive return-on-investment data.

“The healthcare technology industry is in a major depression,” Johnson said. “The last year of good sales was 1998. Vendors have not created value for CIOs and hospitals. They have to provide documentation of savings.”

Consulting firm Dorenfest & Associates predicts that the annual growth rate for the HIT market will drop to 5.2% in 2001, compared with 17.6% in 1998 and 15.6% in 1999. While founder Sheldon Dorenfest sees market growth increasing slightly to 9% in 2003, he believes the key to vendor success lies in better defining the implementation process and revising customer expectations.

“The industry continues to move in the wrong direction,” Dorenfest said. “The technology (to solve many healthcare issues) has existed for many years. But the path to the computerized patient record is more complicated now than it was in the mid-70s because every conversion to a new system adds another layer of duplication and complexity.”

Customers need concrete region-of-interest data, Johnson said. In order to beat out the competition, vendors need to show how they have saved customers money and how those savings are transferable to other client sites. At the same time, however, Johnson sees promise in the application service provider model, which has yet to produce much ROI data.

“The ASP model is going to be the hope and salvation of the HIT industry,” he said. “Vendors will be able to tap into that recurring revenue source. Transaction pricing is also more advantageous for companies because they are less likely to discount per transaction, and for customers because the expense will come out of operating funds instead of the capital budget.”

Just because sales are flat, however, does not mean there is no market opportunity, Johnson said. He claims that this year will (finally) be the year of the paperless medical record but declined to comment further, citing nondisclosure agreements. He also sees HIPAA consulting as a developing niche, along with medical error reduction, disease management, and physician/hospital integration. And while PACS can offer potential revenue, it is not for the faint of heart.

“PACS used to be very expensive, but costs have dropped down to $150,000 per system,” Johnson said. “I like the potential of PACS vendors developing RIS capability, or of PACS vendors getting into bed with RIS vendors.”

On the other hand, Dorenfest believes that the best opportunities for vendors lie in systems integration and workflow consulting. The challenge is to develop products and services that help customers better integrate and assimilate technology.

“The models of the ’90s don’t work,” Dorenfest said. “We have to search for a better way to reach our goals.”

Johnson points to Cerner as an industry role model. Cerner’s record sales and earnings in 2000—$20.4 million in earnings on revenue of $404.5 million—show that profitability in today’s market is more than possible. And there is room for start-ups, if they can produce hard ROI data.

“Customers are going to give up functionality for integration,” Johnson said. “Start-ups can’t market in the traditional way. They need to spend their money not on ads, but on articles that show the results and prove the benefits of using their systems.”