Healthcare Technology Featured Article

October 16, 2014

What's Next for EHR Market Consolidation?

Conventional business wisdom holds that new segments are fragmented to start and consolidate as they mature. We’ve seen this pattern apply to electronic health record (EHR) vendors. The rapid emergence and evolution of “one size fits all" EHR products, hastily brought to market for meaningful use (MU), have resulted in a very large and fragmented market. Now that a few years have passed, the market is again ripe for consolidation—and we are seeing some movement toward this, such as the recent mergers of a few of the top 10 players (Greenway-Vitera and Cerner-Siemens). We are often asked about the specifics and timing for EHR market consolidation. Here’s our view of where the market’s been and where it is going.

Where we’ve been. The EHR landscape has undergone some interesting shifts in the past couple of years for both users and vendors. Let’s start with the users. According to recent data from the Centers for Medicare and Medicaid Services (CMS), there is nearly universal registration in the MU program. Nearly all hospitals are registered, with 92 percent receiving at least one incentive payment. Similarly, 89 percent of eligible professionals have signed up for the program, with 75 percent receiving at least one incentive payment.

However, registration is different than utilization, and 2014 is off to a slow start. According to the CMS data, more than 8,000 eligible professionals attested through August 25, 2014. Of those, 1,479 are new participants and 3,152 attested for MU stage 2. During the same period, 436 eligible hospitals attested, including 136 new participants and 143 attesting for MU stage 2. While this represents a considerable increase from previous months, there’s a long way to go during the final few months of 2014 to meet or beat 2013’s totals, in which 311,965 eligible professionals and hospitals attested. 

We understand there are many reasons why stage 2 is off to such a slow start. We continue to hear about providers who believe that the cost of adopting and using EHRs far outweighs the incentives available from the program and have dropped out. Many vendors have not yet qualified for stage 2 certification and may not intend to do so.

CMS claims it’s a matter of timing and regulation. Historically, most attestations occur toward the end of the year. In addition, CMS believes that providers have been waiting to see if they would get regulatory relief to allow more flexibility in how they use certified electronic health record technology to meet MU’s 2014 EHR requirements. CMS has enacted some relief by extending stage 2 through 2016 for certain providers as well as the stage 3 timeline, which begins in 2017 for providers who first became meaningful users in 2011 or 2012. The final rule was published August 29, 2014.

In terms of vendors, about 3,600 complete EHR vendors and modular products were certified at the end of MU stage 1. Only 1,600 have certified for MU stage 2 so far, according to CMS data.

Based on EHR attestation data, 10 hospital EHR vendors accounted for roughly 90 percent of the market at the end of 2013. They are Epic, MEDITECH, CPSI, Cerner, McKesson, Healthland, Siemens, Healthcare Management Systems, Allscripts and NextGen Healthcare. According to a recent KLAS report, just three of these vendors expanded their market share in 2013 — Epic, Cerner and MEDITECH — and together accounted for more than half of the acute care EHR market.

The ambulatory side is even more fragmented. According to one analysis, the top five ambulatory EHR vendors (Epic, Allscripts, eClinicalworks, NextGen and GE Health) account for about half of total market share. The remainder of the market’s top 10 vendors boast a market share of less than 3 percent each. 

Smaller vendors remained steady, representing slightly more than a third of total market share in both 2013 and 2014. Nearly 40 percent of the ambulatory market uses an EHR from a vendor that falls outside of the top 10. Another KLAS study indicates that nearly 40 percent of EHR users are actively seeking to replace their EHR. One reason for this replacement market is that the number of certified EHR systems has declined almost 60 percent from MU stage 1 (about 3,800) to MU stage 2 (about 1,600) and physicians are leaving these smaller vendors to go to larger, certified vendors.

Where we are going. It seems clear that because of the timing and the number of EHR market offerings, consolidation is in the cards sometime soon. Because of their size and market dominance, the top five companies will hang tough, despite the nibbling away at their installed base by the pack of smaller, hungry competitors. Now that they have amassed market share, it won’t be as easy to grow simply by selling more systems — the top five will continue to seek growth via consolidation. This means honing their merger and acquisition skills, which are critical to the success of any consolidated company. 

As for the rest, there is already significant churn as the myriad of smaller EHR vendors struggle to survive or consolidate. Important drivers going forward include:

  • Waning influence of MU. MU has been successful in driving the EHR market—both in terms of vendor offerings and attestations. However, MU-driven EHR sales are now in a downward spiral and the bloom is off the rose for physicians, in particular. In the near future, vendor solutions focusing solely on meeting MU requirements may be unable to attract and retain customers because they have not met the needs of users and cannot continue to satisfy their client base with a lack of user-friendly, customizable tools beyond those satisfying MU. Smaller vendors may not have the resources to create and maintain their products because they are unable to fund the complex, MU-required development needed to support interoperability, decision support and patient engagement.  
  • Changing physician needs. The ambulatory customer base has radically changed.  Nearly half of physicians are reportedly planning to replace their systems — either because of obsolescence or because they are dissatisfied with their current systems. Physicians are more sophisticated buyers who have learned from past buying mistakes, which means they will be tougher customers the second time around. Cost will continue to be a decision factor, especially as “free” solutions have become more mainstream. All of this creates a volatile dynamic that will create churning among the smaller vendors, who will need to be responsive to changing physician needs if they are to stay alive and gain market share. This also creates the opportunity for consolidation as the merger of smaller vendors may create synergistic entities that can more easily respond to the changing physician market.  
  • Consolidation in hospital/large group practice markets. The emergence of value-based reimbursement and other market forces have fostered consolidation in the hospital market and resulted in the acquisition of large group practices. The gamut of individual EHR systems represented by acquired practices will be abandoned or gradually swapped out as these merged entities focus on an enterprise solution. Not surprisingly, enterprise systems favor the large, well-established vendors. The opportunity does exist for small- or medium-sized firms to merge and offer customized, innovative and effective solutions to these new organizations.
  • Market differentiation. The key to success for smaller vendors is market differentiation.  A certain segment will continue to focus on the MU-dominated market, and they will need to find the expertise and capital to differentiate themselves from larger vendors.  On the other hand, a certain segment will focus on non-MU EHRs and differentiating strategies will be needed as the influence of MU wanes. Meeting specialists’ unmet clinical needs is a strong possibility — the work flow of pediatricians is far different than that of gastroenterologists.
  • Changing platforms. Locally hosted, server-based EHRs are becoming dinosaurs in favor of cloud-based solutions. In fact, about 75 percent of MU stage 2 attestations were made with cloud-based EHRs, demonstrating vendors’ claim that cloud-based products and companies are more nimble. Frequent updates and ubiquitous access from virtually anywhere are attractive features, although Internet outages and the threat of security breach remain real and significant concerns. Experience in cloud computing favors smaller firms, potentially facilitating their merger.

To be sure, this is only a capsule summary of the EHR market today and tomorrow.  

Edited by Maurice Nagle
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