Over the past five years, electronic health records, or EHRs, have become the modern backbone of many medical facilities. EHRs store patients' health records digitally to be accessed over internal and external networks, dramatically improving the efficiency and accuracy of patient care.
Room to grow
According to a technology survey conducted by Physicians Practice, 57% of physicians stated that EHRs improved the overall workflow of their practices, and 57% reported a return on investment from their purchase of an EHR service.
63% of physicians currently use a fully implemented EHR system, which suggests that there is still room for companies in this field to grow. Therefore, the federal government has set up a "meaningful use" financial incentive program to expedite the adoption of EHR technology. To date, the government has paid practices $35 billion in EHR subsidies.
Of the top five EHR vendors in America, only two -- Allscripts Healthcare Solutions (NASDAQ:MDRX) and General Electric (NYSE:GE) -- are publicly traded. Privately owned Epic Systems currently holds patient records for 40% of the U.S. population, leaving second-place Allscripts trailing in a distant second. However, industry critics have warned that Epic's dominance of EHRs could stifle innovation and technology improvements in the field.
Struggling in second place
Over the past decade, Allscripts grew into a $2.7 billion company through a series of mergers, acquiring Misys, Eclipsys, dbMotion, and Jardogs LLC. Acquiring these health care IT companies enabled Allscripts to develop a range of EHR products that could be used by single physician practices as well as large hospitals.
Although shares of Allscripts have risen 46% over the past 12 months, its second quarter earnings disappointed Wall Street. The company reported an adjusted loss of $0.05 per share, down from the $0.16 it reported in the prior-year quarter. Analysts had expected Allscripts to earn $0.10 per share. That big drop was attributed to its crumbling operating margin, which declined from 11.2% in the prior year to 2.5% in the second quarter.
Revenue rose 6.8% to $344.8 million, but also missed the consensus estimate of $357 million. Allscripts' bookings (executed contracts), however, rose to $214.1 million, a 10% year-on-year gain and the company's highest quarterly level since the fourth quarter of 2011, and its contract revenue backlog increased 12.7%. This means that even though the company is struggling to return to profitability, demand for its EHR services remains high.
The allure of new technology
Although Epic and Allscripts are currently the dominant names in EHR, 23% of physician practices reported that they were dissatisfied with their current EHR systems and upgrading to a new brand altogether, according to a Black Book Rankings Report. The report found that physician practices were upgrading to newer EHR systems from GE Healthcare and athenahealth (NASDAQ:ATHN), among others. Epic, Allscripts, and other current market leaders failed to make the list.
GE Healthcare's Centricity EMR is designed for larger practices and integrates with other revenue cycle, patient, and practice management software. Centricity also complements GE Healthcare's other medical products and services. Last quarter, GE Healthcare accounted for 12.8% of GE's total revenue. Although the segment's revenue growth was flat from the previous year, it is often considered one of the company's most promising and stable business segments.
Athenahealth, on the other hand, offers billing services, an automated calling/emailing platform, and a cloud-based care coordination service. Athenahealth's EMR service (athenaClinicals) integrates with other services. Last quarter, athenahealth reported a 41.3% year-on-year jump in revenue, although the company reported a quarterly loss.
However, athenahealth has two big positive catalysts that could boost the company back to profitability. First, its deal with Ascension Health Alliance expands the company's service to 2,700 more doctors and increases the company's size by roughly 10%. The deal, signed in July, could generate an additional $42.5 million in revenue for the company. Second, its March acquisition of Epocrates -- the most popular point-of-care medical app in America -- will expand its current clinician user base of 40,000 to reach the 1 million who are in Epocrates' network. Epocrates' wide usage by physicians on both iOS and Android makes it a critical tool in a time when 72% of physicians in America currently use tablets.
A Foolish final thought
A market that is far from saturation, physicians that crave newer technologies, and a government intent on pushing physician practices to make use of EHRs -- these are the three key reasons to keep a close eye on the EHR industry. Although Allscripts is struggling in holding its margins together, GE and athenahealth could have a promising road ahead as physicians upgrade their systems and leave the older companies behind.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Athenahealth. The Motley Fool owns shares of General Electric Company. 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.