$11 Billion Windfall: DoD Deal An Epic Gamechanger?

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 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 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.

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Read/Post Comments (3) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 15, 2014, at 9:24 PM, PharmTeam wrote:

    Between the IBM deal and the recent Apple partnership, it looks like Epic is more open to cloud or un'siloed' information exchange. That could be really bad for smaller EHR providers that were banking on the cloud as their competitive advantage.

  • Report this Comment On June 15, 2014, at 10:29 PM, putterboy wrote:

    Unfortunate for Allscripts. Back when the company was Medic they were IBMs largest IBM AIX vendor. They had the back ground to continue it to Linux. ( Epics Cloud and virtualization solution ). Medic/Misys/Allscripts managed to take the wrong path using MS windows solutions as their core products. Hard to see any "stimulus" out of the 11 Billion going in their direction. But it is congress. Corporate welfare is their MO.

  • Report this Comment On June 20, 2014, at 11:37 AM, medicalquack wrote:

    If you understand technology, this is the answer for connecting the VA and DOD with an EMR agnostic platform and it will save money, has a great user interface, common at both ends and is cost sustainable compared to what's out there. It's the new HIE and yeah this blog post has had a ton of reads from the VA and DOD as it can connect any system with another and offers security as well.

    The developer was long time BEA engineer and knows his stuff and was responsible for the build of a lot of past technologies that were sold to Oracle a few years ago that is now part of their integrated systems they sell. People don't quite understand using APIs in healthcare but this is it. Huge savings too.

    I started talking with the company as they told me I was the only one out there able to write about what they are doing as I am a former EMR programmer myself from the early days. This is also cost sustainable and work is being funded via NIH and it has some doctors using it and again this is the way to go and I have had the VA all over my post about it in looking at my web stats so that would kind of lend a little interest I would think.

    What ever they do at VA or DOD to include doing nothing as an example, this works with legacy system and also when are working on updates with their internal systems you have this interface, connecting the systems which can be used while they also work on internal software updates as change or no change that is a process that goes on all the time with any large system. This is were connectivity is at for the future with medical record systems and any private company can use this as well. This is going to be huge as it's rewriting the methodologies on connecting medical records to talk to each other everywhere.

    By the way at the end of last year the VA ran a $3 million dollar contest to design a new VA VistA Scheduler and had lot of participation and you can read my post about it here, so for spending that amount of money, did they get some good code?

    There's also a link there with my insight on what the FBI will be doing at the VA, a who dunnit with spreading the word on the "hole" in the current scheduler throughout the VA system. If I were a developer on the team I would have been mad that nobody told me about the flaw..augh...but users will be users and they do that. I have had it happen to me and I could not say that my talents would have not missed that "hole" either, but users will find it every time, this is why we have betas:)

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Todd Campbell

Todd has been helping buy side portfolio managers as an independent researcher for over a decade. In 2003, Todd founded E.B. Capital Markets, LLC, a research firm providing action oriented ideas to professional investors. Todd has provided insight to a variety of publications, including SmartMoney, Barron's, and CNN/fn.

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