$11 Billion Windfall: DoD Deal An Epic Gamechanger?

Epic, IBM, Cerner, Allscripts, and athenahealth are all likely bidders for the Department of Defense massive $11 billion medical records upgrade.

Jun 15, 2014 at 1:15PM

Communication is key in any health-care setting, but for the U.S. military's health-care leaders it is becoming job No. 1. That's because the military's vast legacy health-care system has fallen short in its goal of serving over 10 million patients across 412 medical clinics and 65 military hospitals. 

As a result, the Department of Defense is launching a massive modernization plan to replace its existing electronic health records system. The contract could be worth $11 billion to the winning bidder, making it a potential revenue game changer for a host of EHR software providers.

Cerner (NASDAQ:CERN), Allscripts (NASDAQ:MDRX), and athenahealth (NASDAQ:ATHN) are all expected to compete for the business, but they may have a hard time outmaneuvering a recently announced partnership between IBM (NYSE:IBM) and privately held Epic Systems, the nation's largest EHR provider.


Source: Department of Defense Flickr.

Out with the old, in with the new
The Pentagon has struggled to enable its current EHR system communicate with the Department of Veterans Affairs and private EHR systems, but that effort has come up short.

Following the failed launch of the administration's Government.com health system, the pressure is high on the DOD to award the contract right the first time. That has the Pentagon considering options and inviting corporate EHR leaders to the table to discuss what the system will need to do today and years from now.

One company that will be at that table is Allscripts, which has a roughly 10% market share that makes it one of the largest EHR providers. Winning the contract would make a significant impact on Allscripts given that the company's annualized sales run at about $1.2 billion for 2014.

It would similarly be a windfall for athenahealth, a small cloud-based EHR company that has made a splash in providing records, practice management, and relationship management software to smaller health-care providers. Athenahealth's sales grew 41% to nearly $600 million in 2013, but it commands just 3% market share in EHR, according to research firm KLAS.

Cerner may be less of a long shot given that it's the second-largest provider of EHR systems for hospital systems and other large health-care providers in the U.S. and a top-five systems provider worldwide. Despite its leadership position, the military contract would still be a big boon for the company given that sales totaled a little less than $3 billion in 2013, up 9% from 2012.


Source: Secretary of Defense Flickr.

However, IBM and Epic may be best positioned to win the contract to connect the military's system with public and private health care providers and prevent unauthorized access to patient data. 

Epic is the market share leader in the U.S. and the third-biggest player overseas. Its customers include more than 250 of the nation's largest hospitals, and those large systems exchange more than 2 million records monthly with other vendor platforms, including the VA's. Epic's experience in deploying big, complex systems could give it an edge over smaller players such as athenahealth, which is led by former President George W. Bush's cousin Jonathan Bush.

Meanwhile, IBM's federal healthcare business is no rookie, either. IBM's global information research and health-care segments already work closely with the government through contracts covering hardware, software, and security. Even as Big Blue teams up with Epic, it has also announced the launch of a federal government-specific cloud infrastructure consisting of two data centers designed for high speed data transfer. Those data centers, which could conceivably help deliver cloud-based EHR services someday, will initially have 30,000 servers supporting 2,000 gigabytes per second of connectivity. Given that IBM systems already handle 90% of the globe's credit card transactions, and half of the Fortune 100 are clients, IBM knows a thing or two about large scale security that could be valued highly by the DOD.

Fool-worthy final thoughts
The $11 billion contract for replacing the military's aging health-care records system is truly mammoth in size, scope, and potential impact on industry revenue. To put the contract in perspective, Accenture estimates the total North American EHR market will be worth $10 billion in 2015. 

That means the winner of this contract will see a significant benefit to its top line. While Allscripts, athenahealth, and Cerner could similarly team up with another large technology provider like Amazon.com Web Services, it would seem that a combination of the nation's biggest EHR provider, Epic, and Goliath IBM positions them at the front of the pack.

If you think $11 billion is a lot of cash, wait until you hear about this huge small-cap opportunity!
This smart device –kept secret until now – could mark a new revolution in smart tech (with big implications for health care). It’s a gigantic market opportunity -- ABI Research predicts 485 million of its type will be sold per year. To learn about the small-cap stock making this device possible – the stock that could mint millionaires left and right when its full market potential is realized – click here.

Todd Campbell has no position in any stocks mentioned. The Motley Fool recommends Athenahealth and Amazon. The Motley Fool owns shares of International Business Machines and Amazon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers