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Cerner Corp.’s Defense Department Contract Sets It Apart From the Competition

By Motley Fool Staff - Feb 19, 2016 at 10:01AM

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A look at how huge (and necessary) the Department of Defense's health records modernization deal was, and how that $9 billion contract is central to the Cerner investing thesis.

After the Veterans Administration made headlines a few years ago when one of its buildings nearly collapsed under the weight of too many paper benefits claims files, the Department of Defense sent out a request for proposals to modernize its health records system. That meant upgrading a mammoth system with aging infrastructure, and for the winning bidder, it would be a very big deal.

In this Industry Focus: Tech clip, Motley Fool analysts Sean O'Reilly and Kristine Harjes talk about just how gargantuan the deal was, and what winning it will probably mean for lead contractor Cerner (CERN) in the future.

A full transcript follows the video.

This podcast was recorded on Feb. 12, 2016. 

Sean O'Reilly: So, I understand that both of these companies, and a lot of these guys, they have big business not only with private hospital chains, but also the federal government and the Department of Defense and stuff.

Kristine Harjes: Yeah, the Department of Defense contract, that's a really interesting story. So, this was ...

O'Reilly: Not a small customer, obviously.

Harjes: Yeah (laughs). On the heels of a 2012 story where the VA made headlines ...

O'Reilly: Oh my gosh, that!

Harjes: Do you remember that?

O'Reilly: Yeah!

Harjes: So, for those who aren't familiar with the story: Basically, the Veteran's Benefits Administration office building in North Carolina nearly collapsed under the weight of all of its paper files.

O'Reilly: They still had computers from the 1980s or something. (laughs) 

Harjes: Yeah! According to these reports, one floor had totally overflowed, and you had stacks and stacks of paper going up to the cabinets, and falling out of boxes--

O'Reilly: You're talking about physical files!

Harjes: Yeah, yeah!

O'Reilly: Oh my gosh!

Harjes: You have actual paper files! And there was such a backlog, just, for people waiting to get more information, and they just weren't online at all. So, the floor almost collapsed.

O'Reilly: Wow!

Harjes: So, the Department of Defense decides, "OK ... "

O'Reilly: "Maybe we should use computers!" (laughs) 

Harjes: "Maybe we should modernize a little bit." So, there was a huge battle between a bunch of companies that are in this space, and it ultimately ended up being that Cerner, a combination of Cerner and Leidos and Accenture, they beat out a partnership between Epic and IBM, and they also beat out a couple of others competitors to win this $11 billion contract. Interestingly, it was originally anticipated to be $11 billion, but was whittled down to $9 billion, which is the effect of competition. But, going forward, these things, they don't get cheaper. These contracts only expand. So, this is a huge deal.

O'Reilly: Right, and once you're in on the federal government, you're in. (laughs) 

Harjes: Yeah, this is definitely a long term partnership.

Kristine Harjes has no position in any stocks mentioned. Sean O'Reilly has no position in any stocks mentioned. The Motley Fool recommends Accenture and Cerner. 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.

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