HIS firms struggle for profits despite $20 billion market projections

HIS firms struggle for profits despite $20 billion market projections

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 who’s 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 BBA—which was implemented two years ago in response to double-digit annual growth in Medicare spending—has 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 it’s 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 out—albeit 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 Internet’s 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 consumers—only 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 can’t live without, these vendors will continue to see only red.

• ADAC Laboratories (ADAC) reported revenue of $82.3 million for the third quarter (end July 2), a 15% increase over $75.6 million for the same quarter last year. Net income was $4.6 million, compared to a net loss of $5.4 million for the third quarter of 1999. The bulk of the revenue came from sales of the company’s PET and CT imaging products.

• Cerner (CERN) reported revenue of $93.5 million for the second quarter (end July 1), compared to $82.8 million for the same quarter in 1999. Net earnings were $4.1 million, compared to $300,000 for the second quarter a year ago.
  “While providers are still being impacted by the BBA, we are seeing a market shift that reflects an increasing demand for clinical systems, a long-time strength of Cerner,” said Neal Patterson, chairman and CEO.

• Dynamic Healthcare Technologies (DHTI) reported revenue of $6.5 million for the second quarter (end June), compared to revenue of $9.9 million for the second quarter a year ago. Net loss was $479,000, compared to net income of $549,000 for the same quarter last year. Operating results were lower than expected, but the company is encouraged by advances in its e-health initiatives.

• Eclipsys (ECLP) reported revenue of $47.1 million for the second quarter (end June), compared to revenue of $61.8 million for the same quarter of 1999. Net loss was $5.7 million, compared to net income of $5.1 million for the second quarter last year. CEO Harvey Wilson says the company is well-positioned moving forward through its investment, HealthVision, and its shift to subscription-based pricing models.

• e-MedSoft.com (MED) reported revenue of $39 million for the first quarter (end June), compared to revenue of $4.4 million for the same quarter a year ago. Net loss was $3.2 million, compared to a net loss of $1.8 million for the first quarter of 1999. The company continues to expand its multimedia product and service offerings and form strategic alliances with other e-health vendors, including Allscripts.

• Healthcare.com (HCDC) reported revenue of $13.3 million for the second quarter (end June), a 110% increase over revenue of $6.4 million in the same quarter a year ago. Net earnings were $865,000, compared to a net loss of $1.3 million for the second quarter of 1999.
  “As healthcare provider organizations and the software vendors that serve them gear up to take advantage of the Internet, our indexing and integration solutions have increased in demand,” said Robert Murrie, president and CEO.

• IDX Systems (IDXC) reported revenue of $79.6 million for the second quarter (end June), down from revenue of $91.3 million for the same quarter in 1999. Net loss was $9 million, compared to net income of $700,000 for the second quarter last year. The company is moving forward with several e-health initiatives, including an alliance with Healtheon/WebMD and potential ASP projects, that it believes will improve its financial position and support its core Internet strategy.

• McKesson/HBOC (MCK) reported revenue of $7.4 billion for the first quarter (end June), compared to $6.4 billion for the same quarter a year ago. Revenue from the company’s information technology segment was $199.4 million, down from $242.2 million for the first quarter of 1999. Net profit for the IT group was $8.2 million, down 79% from the same quarter last year. The new iMcKesson subsidiary (HNN 7/12/00) reported $68.5 million in revenue and a loss of $6 million for the quarter, compared to $75.2 million in revenue and a profit of $16.7 million for the first quarter of 1999.

• MedicaLogic (MDLI) reported revenue of $10.9 million for the second quarter (end June 30), compared to $4 million for the same quarter a year ago. Net loss for the quarter was $80.8 million, compared to a net loss of $4.5 million for the second quarter of 1999. The company anticipates continued strong growth in clinician users of its online health record applications and related Internet and ASP initiatives and expects to become cash-flow positive in the second half of 2001.

• Spacelabs (SLMD) reported revenue of $57.5 million for the second quarter (end July 1), compared to $73.8 million for the second quarter of 1999. Net loss was $3.2 million, compared to net income of $2.6 million for the same quarter last year. The company blames reductions in Medicare reimbursement and uncertainties about HIPAA for a soft sales cycle but is “cautiously optimistic” that the market may be poised for recovery.