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A New Alliance to Improve Military Health Care

If the Department of Defense was worried that it wouldn't have any takers on its massive contract to modernize its health-care electronic records system, it shouldn't have been. So far, three teams of companies have announced that they'll make bids to cast aside the DoD's aging and inadequate system and launch a new system that plays nicely across all of the DoD's hospitals and clinics.

The latest companies to report that they'll team up to angle for the contract are Cerner (NASDAQ: CERN  ) , Leidos (NYSE: LDOS  ) , and Accenture (NYSE: ACN  ) .

Source: Secretary of Defense Flickr.

The sheer size of the DoD's contract is staggering
The DoD's contract to replace its disparate system is forecast at $11 billion. To put that into context, the total annual market for electronic health records currently stands at just $10 billion, according to Accenture. Today, hundreds of small niche companies compete to integrate health-care IT systems in practices, hospitals, and long-term care facilities, but a handful of companies, including Cerner, have established themselves as leaders.

Cerner is the second largest provider of EHR software systems to large hospital systems, for example, trailing only the privately held Epic. Even so, the DoD contract would be a boon for the company given that its sales totaled a bit less than $3 billion last year.

Secretary of Defense Flickr

Cerner has a tough battle on its hands.
Epic has teamed up with IBM to provide the system and security support necessary, and because each is a market leader in its industry; they may have an edge in swaying the deal their way.

Allscripts is also vying for the contract through a partnership with government contractor Computer Sciences, and hardware expert Hewlett-Packard. Allscripts is a bit smaller than Epic and Cerner, but it still boasts market share near 10%, and counts 1,500 hospitals as customers.

To outmaneuver those competitors, Cerner has lined up Leidos, which was a recent spinoff of government contractor Science Applications International Corporation, or SAIC, and consulting giant Accenture. Leidos built the DoD's composite health-care system back in 1988 under a $1 billion contract, and that system, known as CHCS, is still in use in some military hospitals. But Leidos' ties to Washington don't end there. The company got nearly 80% of its fiscal 2014 sales from U.S. Government contracts, and gets nearly 70% of its sales either directly or indirectly from the DoD already.

Source: Cerner

Cerner's and Leidos' other partner, Accenture's health and public service segment, is also an important player in Washington and among health-care policy leaders. That business generated more than $1.3 billion in revenue for Accenture in the first quarter, up 10% from last year. Some of that growth came thanks to winning the $90 million contract to repair the troubled Affordable Care Act marketplace in January, a win that may demonstrate its ability to tackle tough projects.

Fool-worthy final thoughts
The DoD is still fact-finding and hasn't officially issued a request for a proposal; however, that request should come soon and, if so, a contract is likely to be awarded next year. Because the contract will be for 10 years, it will represent more than $1 billion in new revenue per year to the winning team.

Even though that money will be split among winning teammates, it will still make a significant impact on Epic, Allscripts, or Cerner. While I'm not putting money into any of these companies yet, I'll be watching them closely during the coming months to see if there are any signals as to who may have an edge.

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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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