HIS firms struggle for profits despite $20 billion market projectionsSome blame the BBA, others point finger at industry itselfWhat is ailing the health information systems (HIS) industry? Midyear financials are in, and despite
Some blame the BBA, others point finger at industry itself
What is ailing the health information systems (HIS) industry? Midyear financials are in, and despite projections of a $20.4 billion healthcare IT market this year, all but a handful of HIS vendors are reporting lower sales than expected and losses instead of profits (see p. 6). Is it e-health/dot-com backlash? Y2K revisited? Legislative fallout?
The answer is a little of each, and the emphasis depends on whos talking. A recent study by Ernst & Young and HCIA-Sachs notes that the Balanced Budget Act (BBA) of 1996 and subsequent Balanced Budget Refinement Act (BBRA) of 1999 have failed to resolve many of the financial problems facing U.S. hospitals. The study found that total hospital profit margins fell from 5.5% prior to implementation of the BBA to 2.9% in 1999. In addition, the implementation of the BBRA has provided minimal relief, with hospitals expecting their lowest margins this year since 1984.
In fact, the BBAwhich was implemented two years ago in response to double-digit annual growth in Medicare spendinghas so sharply cut Medicare reimbursement that some hospitals are slashing IT budgets by as much as one-quarter, according to Ronald Johnson, a healthcare IT analyst in Tracy, CA.
But the BBA is not the only culprit; believe it or not, Y2K continues to have a residual effect as well, he said.
Y2K forced the focus on information systems to make sure they were ready and compliant. Now capital funds (within hospitals) are down, and because they were spent last year on IS, other departments are saying hey, this year its our turn, Johnson said.
Other contributing factors include market saturation (with the exception of PACS), concerns about how to prepare for HIPAA, and a reluctance on the part of many HIS vendors to recognize the need to invest in next-generation products and technologies that facilitate enterprise-wide systems integration.
So far, HIS vendors have responded primarily by lowering prices on existing product lines and adding Internet-based services to their more standard product offerings. The result has been less money coming in and more going outalbeit to internal R&D and new market development. While this strategy is initially wreaking havoc on many bottom lines, in the long run it should pay off. Cerner spent $60 million over the last few years to develop new products and platforms, according to Johnson; today they are one of the few HIS companies showing a profit. And investors are taking note (see Stock Report, p. 8).
There are a lot of systems out there, but most of the choices are systems whose designs are 20 years old, said Johnson, adding that the current market conditions will likely continue at least until mid-2001. A number of vendors are beginning to focus on identifying the benefits that result from IS, but a number of new products still have to come on the market.
The application service provider model should help. The Ernst & Young study found that smaller rural hospitals are currently in the greatest financial jeopardy, and that by next year hospitals with fewer than 100 beds are expected to report profit margins of less than 1%. Such facilities are prime candidates for thin-client data management services. Even their larger, less financially-strapped cousins are being drawn to the ASP model of transaction pricing vs. capital equipment expenditures (HNN 6/14/00).
In fact, using online applications and tools to facilitate the acquisition and sharing of patient data is likely to become one of the Internets primary roles in healthcare. But it is not clear whether this will help the struggling e-health/dot-com companies, many of which initially focused on bringing informational content to consumersonly to see this model fail, for the most part, as a revenue generator.
Many have now turned their attention to the physician market, although again most seem to be positioning their portals as information providers rather than data-transfer and transaction facilitators. Until they can find a way to make their sites more compelling and the services they offer something healthcare providers believe they cant live without, these vendors will continue to see only red.