Electronic Health Records: The Dark Side of Platform Durability

11 min readApr 11, 2021

Summary

Electronic Health Records (EHRs) were meant to facilitate an exchange of information across different doctors to improve patient health outcomes. However EHR companies have catered to the money side (hospital administrators) and by being driven by regulation rather than by end-users (i.e. patients), they have become a tool hated by doctors and irrelevant for patients.
The durability of EHR companies is remarkable (same vintage as Microsoft and Apple) — they have weathered the protection and expansion phase successfully while competing with giant companies like Google, Microsoft and Amazon; their strategies are worth studying.
Regulation, which enabled their growth, has also recently taken away a key advantage by forcing inter-operability. If patients are lucky it might force a rethink and make EHR companies focus on improving health outcomes as well.

Introduction: What are EHRs?

Initially the healthcare system was simple, patients went to doctors. Doctors gave advice and patients gave money (Figure 1). Doctors tended to have simple handwritten notes which described diagnosis and treatment.

As health insurance and government coverage (e.g. Medicare) became more prevalent, the system evolved. Doctors gave advice, patients paid payors (premiums in the case of private health insurance companies or taxes for Medicare) and payors paid the doctor (Figure 2). It became important for the doctor to communicate the diagnosis and the treatment to the payor in order to get paid.

Over time healthcare became further regulated. In addition, as the population aged and specialization increased, care was provided across multiple settings including hospitals (with multiple doctors), primary care clinics and other doctor practices. The humble handwritten note then evolved into an electronic document containing the notes of the doctor including exams conducted, clinical observations, and information of the severity of the case.

Hospital administration also became specialized in response to increasing complexity and administrators, not doctors, made key decisions including what to spend capital on. Hence their concerns were reflected in how EHRs were built and implemented (Figure 3).

The key concern of hospital administrators was to get paid by payors and to remain compliant with regulations and this received the majority of attention.
The exchange of information between a hospital and other doctors was severely hampered if the other doctor did not use the same system.
Patients rarely had access to their own data.
Doctors using the EHRs experienced burnout because of the disproportionate amount of time spent on updating the EHR vs. actually listening to and treating the patient.

Why are EHRs a platform?

EHRs have key platform characteristics including:

Create value outside — EHRs are meant to facilitate hospital/doctor payments and improve patient health outcomes.
Multiple participants — EHRs are the key enablers of information exchange across various participants — doctors, payors and patients.
Network effects — EHRs are critical for patient assessment and treatment. Hence as more hospitals implement a particular EHR (e.g. Epic), others are likely to also opt for the same one.

Who are the key players?

Cerner and Epic are the leading players in the EHR market and are the focus of this article.

Source: Cerner 2020 Annual Report (Page 5)

Epic was founded in 1979 by Judith R. Faulkner and is headquartered in Verona, Wisconsin¹. Epic has a large share of private sector hospitals and is often chosen for its usability and departmental functionality. Furthermore, a recent study showed Epic is associated with significantly higher performance in key regulation (e.g. Stage 2 Meaningful Use requirements) over competitors Cerner, Allscripts, and MEDITECH².

Many marquee institutions such as the Cleveland Clinic, Johns Hopkins and Boston Children’s Hospital have chosen Epic. The company’s 564 customers represent nearly 2,400 hospitals worldwide and 225 million patients in the U.S., or about two thirds of the country’s population³.

Revenue — 2007: $500mm, 2010: $1bn, 2020: $3.3bn

EBITDA margin: >30%

Debt: none

Cerner was founded in 1979 by Neal Patterson, Paul Gorup, and Cliff Illig, who were colleagues at Arthur Andersen. Today it is one of the largest health IT companies in the world.

Key stats:

Revenue — 2010: $1.9bn, 2020: $5.6bn
Operating earnings — 2010: $359mm (19.4%), 2020: $915mm (16.6%)
Market cap — 2010: $7.9bn, 2020: $24bn
>650k physician users, >2.2mm non-physician users

Why do EHRs suck?

Focus on billing not patient outcomes

EHRs have evolved to almost exclusively serve the needs of the money side i.e. hospital administrators. Administrators are focused on revenue (billing to payors) and regulatory compliance. Where the focus on billing is reduced (e.g. the Veterans Affairs medical system), the EHRs are more focused on doctor convenience and readability⁴.

2. Increased load on physicians

Physicians in the United States may spend half their day filling out patient histories. A 2018 study in Family Medicine found that of 982 patient visits that each lasted on average for 35.8 min, 19.3 min were spent on the EHR⁵.

Or more evocatively, as Dr. Abraham Verghese writes:

“The despair I hear (from a doctor) comes from being the highest-paid clerical worker in the hospital: For every one hour we spend cumulatively with patients … we spend nearly two hours on our primitive Electronic Health Records, or “E.H.R.s,” and another hour or two during sacred personal time. But we are to blame. We let this happen to our trainees, to ourselves.” ⁶

3. No improvement in patient outcomes

It is estimated that the impact of EHR implementation has been a miniscule 0.09% lower mortality; in fact mortality was 11% higher mortality in the early days of implementation (2008) due to confusion and bad data entry⁷.

Dr. Abraham Verghese again:

“Our $3.4 trillion health care system is responsible for more than a quarter of a million deaths per year because of medical error, the rough equivalent of, say, a jumbo jet’s crashing every day… a result of poorly coordinated care, poor communication, patients falling through the cracks, knowledge not being transferred and so on, but some part of it is surely from failing to listen to the story and diminishing skill in reading the body as a text.” ⁶

What strategies have players adopted for platform protection?

Despite not serving two of the main constituents (patients and doctors), EHR companies have been extremely durable and grown well. Epic’s average customer has been using its software for ten years, and Epic’s founder claims the company has never lost an in-patient hospital client, except in the case of an acquisition³. In fact Epic and Cerner are examples of rare tech companies which have been around since the 1970s (and earlier) and are still market leaders today. Their esteemed peers include IBM, Intel, Microsoft and Apple, showing their durability. In fact Google, Microsoft and Amazon have tried to make inroads into various healthcare platforms but failed. Hence their strategies are worth understanding.

Focus on the money side

EHRs are extremely expensive. Epic commands a 10x price differential with potentially lower cost, more agile solutions⁵. E.g. Florida based Advent Health plans to deploy Epic’s EHR system across 37 hospitals at a cost of $650mm and ongoing annual maintenance cost in millions³. Boston based Partners Healthcare spent $1.2bn in 2015 implementing Epic. Given the high cost, EHR companies have focused on the money side i.e. the hospital administrators at the cost of the doctors and patients. This is the key reason why EHRs are focused on billing and regulation rather than doctor ease-of-use and patient transparency.

“The decision to implement Epic comes from administrators and non-clinicians who are most invested in revenue …major driver for the creation of EHRs was because billing is so complex due to the shitshow that is the U.S. healthcare insurance industry... Related to this, hospital administrators want different tools than doctors do. Admins are very interested in detailed documentation for reporting, quality improvement, etc. Unfortunately, this is often a pain in the ass for clinicians.” — Medicine Subreddit¹⁶

2. New tech is not the only thing that matters — focus on the human element

The adoption of new technology in healthcare is slower because the “moving fast and breaking things” approach doesn’t mean an app freezes, it means someone might die.

“It’s not okay to fail. That’s death.” — John Glaser, Harvard Medical School³

As a result EHR companies have focused on incremental innovation rather than breakthrough innovation. They also focus on the people aspect by deploying their own staff (sometimes hundreds or thousands) on site to get the platform deployed — this is a high touch platform more than a high tech platform.

3. Walled garden and lack of interoperability

Before 2020, EHRs were not interoperable i.e. one company’s EHR could be opened easily by another company’s software (e.g. Epic’s EHR could not be opened on Cerner’s software).

“I can’t reliably get a patient record from across town, let alone from a hospital in the same state, even if both places use the same brand of E.H.R. … too often the record comes by fax” — Dr. Abraham Verghese⁶

This was a key strategy to prevent easy migration from one system to another. It also meant that once the larger players in the healthcare system (i.e. hospitals) adopted a certain brand, other players (e.g. standalone doctors outside of the hospital) would need to invest in the same system in order to serve the same patients.

The lack of interoperability also means that new players cannot disintermediate the EHR incumbent because of the data stored in a proprietary format.

4. Lobbying

When regulation promoting interoperability was likely to be pushed through, Epic’s founder wrote a letter a letter urging executives of major hospitals to take a stand with the Epic and advocate against parts of the proposed rule. In response, roughly 60 hospitals pledged their loyalty to Epic⁸.

5. Legal pressure

In 2014 Epic sued Tata Consultancy Services which had been hired by Kaiser Foundation Hospitals to implement hospital software. Epic alleged that Tata had built another software which as a rip-off of Epic’s software. A Wisconsin jury awarded Epic $240 million in compensatory damages and $700 million in punitive damages⁹. While this amount was later revised downwards¹⁰, it was a warning shot fired at anyone who competed with Epic.

6. High switching costs and multihoming costs

Given the financial cost and deployment complexity of implementing an EHR system, hospitals are unlikely to switch EHR systems once implemented.

7. Being responsive to regulation

EHR companies continue to remain flexible. In March 2020 the Office of the National Coordinator (ONC) and the Centers for Medicare and Medicaid Services (CMS) published rules for the interoperability of EHRs. While Epic had initially lobbied against the rules, it later changed its stance and started supporting them.

In December 2020, Epic reported that its interoperability software, Care Everywhere, shared more than 221 million patient records in a month, an increase of 40 percent year over year¹². In fact Epic installations accelerated during the pandemic with more than 190 health systems going live¹².

What strategies have players adopted for platform expansion?

Strong emphasis on share of wallet

EHR companies have evolved to address many parts of the hospital workflow (continuing to focus on hospital administrators) including revenue cycle management, customer retention tools and data analytics³. This further increases switching cost and reduces multi-homing.

2. Capability expansion — using big data and AI for therapeutics development

Real-world data (RWD) are the data relating to patient health status and/or the delivery of health care routinely collected from a variety of sources including EHRs¹³. Real-world evidence (RWE) is the clinical evidence regarding the usage and potential benefits or risks of a medical product derived from analysis of RWD. After the 21st Century Cures Act was passed in 2016, pharmaceutical and medical device companies could use RWE to supplement or substitute (in rare cases) traditional clinical trials for drug and device approval.

Given their access to hospital data EHR companies could be at the forefront of the RWE revolution. E.g. Cerner has declared a goal of building a $1bn+ data business¹⁴. In December 2020 Cerner acquired Kantar Health for $375mm. Kantar Health is a leading data, analytics and real-world evidence and commercial research consultancy serving the life science industry¹⁴. Cerner has also tied up with Amazon to bring new technologies to healthcare (e.g. cloud delivery, Artificial Intelligence and Machine Learning)¹⁷.

Its important to note that the success of EHR companies in this space will be dependent on:

Ability to sell to a new set of clients — EHR companies are used to selling to hospitals, and specifically hospital administrators. It will be important for them to gain the skills and relationships to sell into pharmaceutical and medical device companies, likely through M&A.
Ability to work with other EHR companies’ data — the ability to access as much RWD as possible is critical to building a strong RWE business.
Ability to marry EHR data with other data sources — many startup companies are marrying non-EHR data (e.g. genomic data) with EHR data to provide a complete picture of the patient population. E.g. The Clinico-Genomic Database, codeveloped by Flatiron Health and Foundation Medicine, links the genomic data of 120,000 cancer patients to their longitudinal EMR data. That is creating an unprecedented opportunity to integrate data sources and generate deeper insights through advanced analytics¹⁵. It’s unclear if EHR companies will be able to do this.
Ability to compete on innovation — Covid-19 and the new interoperability rules have resulted in a huge investment by venture capital firms behind healthtech, health apps and digital health. This will certainly increase the competition and Epic’s and Cerner’s large scale expensive installations will look outdated unless they change quickly³. Even if they are able to pivot their software, their business model pivot (away from multi-billion dollar deployments) will be more difficult.

“We are right in the middle of this phenomenal transformational swirl…just as the Web and smartphones crushed Microsoft’s seemingly unassailable 1990s-era desktop monopoly, this new era may pose the same challenges for Faulkner (Epic’s founder)” — John Glaser, Harvard Medical School³

Conclusion

EHR companies represent extremely durable platforms (similar vintage as Microsoft and Apple) which have stayed relevant through relentless focus on the money side (i.e. hospital administrators) and a variety of other strategies.

Regulation, which enabled their growth, has also recently taken away a key advantage by forcing inter-operability. If patients are lucky it might force a rethink and make EHR companies focus on improving health outcomes as well.