First, the raging worldwide economic recession has forced the new administration to ratchet up the stimulus spending initiated by the outgoing Bush regime. The immediate economic crisis, and continued intransigent partisanship has forced the Obama White House to re-prioritize programs and requisite spending. The impact is a more honed healthcare budget focused on Electronic Health Records (EHR), and related network infrastructure. The total bill for this initiative encapsulated in the $787 Billion U.S. Stimulus Package is $19 Billion, or 2.4% of the total package and 6.1% of new spending in the package. The U.S Government plans to spend $63.50 per U.S citizen, or $165 per household, to computerize all health records within 5 years. (Source for population data: US Census(2006))
The last 96 days has been pretty eventful in Canada, also. The deepening recession almost brought down the minority government and has resulted in a $64 Billion Canadian Government Stimulus Budget with $0.5 Billion or 4.1% of all immediate infrastructure spending allocated to Electronic Medical Records (EMR). For clarity EMR and EHR could be referred to interchangeably, so I will choose to use the Canadian definition for the rest of this post.
By comparison to the American package, the Canadian Government is budgeting $14.90 per capita in immediate spending towards EMR, or $40.20 per household.(Source for population data: Statscan Census (2006)).
Notwithstanding the per capita spending levels, the focus of spending has an impact on the list of potential winners among Canadian healthcare information technology vendors. Previously, small and mid-capped vendors with significant U.S market exposure were speculated to benefit mostly from spillover effects of U.S. healthcare spending on technology. Example Companies that I referenced on November 13th included Logibec (LGI-TSX), CGI (GIB.A-TSX), and Systems Xcellence (SXC-TSX). Although these vendors should still experience some spillover benefits in the U.S. market, another group of healthcare vendors engaged directly in the EMR space are likely to experience more direct benefit. With U.S. government spending focus on EMR, along with the unexpected and immediate Canadian budget allocation, smaller vendors with footholds in the sector should be positioned to capitalize. Again, capital is the operative term.
As stated in earlier posts, the Canadian technology sector is suffering from poor liquidity, and micro-cap public entities are struggling to fund growth, often with weak balance sheets. The EMR market may be indicative of this struggle. Several public micro-cap EMR vendors including Medworxx (MWX-TSXV), Nightingale (NGH-TSXV), and Healthscreen Solutions (MDU-TSXV) stand to benefit directly from Canadian federal spending on EMR. However, these entities may require future growth capital to take advantage of the federally accelerated domestic opportunities. As well, as stated in previous blog entries, this is a sector that could benefit from consolidation because, combined with small regional privately funded Companies, there may be as many as 50 healthcare software vendors vying for between $1.5 billion and $2.0 billion in potential annualized domestic EMR revenue. Clearly, the space is highly fragmented, and few would have the scale to compete effectively for U.S. market share. Consolidation would create scale, which could potentially create more liquidity (if the consolidators were to be public) and shareholder value. Essentially, the sector could benefit from fewer, stronger players competing in the domestic niche with more robust potential for U.S. expansion.
Business models matter. Investors interested in benefitting from focus on the sector should consider how vendors plan to scale. Investors should take heed of the Medcomsoft failure, a vendor with seemingly outstanding technology, but with a poor commercialization strategy. At risk of dating myself, I was involved in a plan (by the Canadian banks) to leverage smart health cards to help create central EMRs in the early 1990s. That concept failed, and since then and despite the nearly universally understood potential benefit to stakeholders, EMR has struggled to gain acceptance in the health care industry. It is easiest to blame a lack of political will, and professional arrogance among healthcare professionals for the collective lack of success in creating effective EMR. However, the main issue may be that previous business models have generally failed to align interests among stakeholders. The numbers seem to support this. Dr. Alan Brookstone and Greg Pothan issued a study in August 2008 with the following data:
Of 23, 292 Specialist and General Practice (GP) Doctors surveyed at the end of 2007, 70% still used paper-based medical records despite over a decade of effort by vendors to move Doctors towards electronic EMR. Even among those converting to EMR, most do not fully embrace the switchover because 16.7% use a combination of paper and electronic medical records. Only 13.7% of those surveyed have switched to fully electronic records (remember this is after more than a decade of effort). Those Doctors are benefitting from greater efficiencies which decrease wait-time by 38% compared to paper-based doctors, and by 62% compared to combo practices. Electronic EMR doctors can also benefit from servicing 41% more new patients annually than paper-based Doctors. With a well-documented Doctor shortage, which leaves between 4 million and 5 million Canadians without access to a family Doctor, the federal government recognizes the potential benefit of scale and through-put associated with electronic EMRs. Notwithstanding, based on these data, there is a lot of room for domestic market penetration.
Circling back to business models that matter, if Software-as-a-Service (SaaS) works for the enterprise, it should work for the GP. In general, Doctors do not want an IT professional on staff, nor do they want to be database managers. In general, the resistance to EMR has not been about professional arrogance, it has been about practice management. At this point, the likely winners in the space are those that make EMR adoption transparent, easy, and economically beneficial. Solutions with the least friction should win. This probably means that business models offering SaaS and outsourced EMR with minimal upfront investment, integration, training, and maintenance should win. Vendors with this model already deployed should be early consolidators. Vendors that can adopt this model quickly could be secondary consolidators. Investors need to recognize the models as they consider the space.
To summarize:
- Some small-cap and mid-cap healthcare software vendors should still benefit from the U.S. stimulus package, however the focus on EMR may limit some of the benefits compared to the original $100 million healthcare technology plan contemplated by the Obama Administration soon after the election.
- The Canadian stimulus budget should offer healthcare software vendors that are focused on EMR solutions more immediate domestic market opportunities than contemplated last fall prior to the budget.
- The current $1.5-$2.0 billion potential annual domestic EMR market is gaining momentum, although it is highly fragmented and under-capitalized, with possible consolidation required for scale.
- SaaS and/or outsourced EMR business models are likely best aligned to the remaining 86.6% of GPs yet to adopt EMR fully.
- Saas and/or outsourced EMR vendors with high margin recurring revenue are also possibly the best candidates as market consolidators.
- Domestic EMR vendors with scale and solid balance sheets could gain access to the U.S. EMH market directly, or through partnerships.
- Multinationals that may soon take notice in Canada include IBM (IBM-NYSE), and Microsoft (MSFT-Q) among others.
There is a lot of discussion regarding EMR, and a lot of blogs on the subject. I find Canadian EMR particularly informative.
I do not own shares of any of the public Companies mentioned in this post, nor do I receive compensation in any form from those Companies, or from Canadian EMR.
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