Riding the wave

As federal EHR incentives recede, the next surge in health IT spending begins to take shape

Presbyterian Intercommunity Hospital in Whittier, Calif., is laying the groundwork for its next big advances in information technology. The 409-bed hospital, which is part of PIH Health, already has about half its ambulatory-care physicians—58 providers in 16 offices—meeting government requirements for electronic health records, a job it plans to complete next year. The hospital has met meaningful use, too. Now it’s turning its attention to implementing a bar-code medication administration system and setting up a data warehouse for patient records, which should enable it to track patients as they move through the system, manage the overall health of its patient population and learn from its experiences.

The hospital also plans to add a patient portal, which it sees as key to involving patients in their own care and a crucial part of improving population health while lowering overall healthcare costs. “It’s really about patient engagement,” said Dr. Davis Lee, a pediatric hospitalist who serves as the system’s chief medical information officer. “There are benefits to get the patients to go online and communicate with providers. We want to be able to do that. With our organization growing as big as it is, we want them to go to one place to look up their records and information, whether they’re in ambulatory, inpatient or home health.”

Hospitals like Presbyterian Intercommunity are on the front edge of the next wave of healthcare information technology spending. The $22.5 billion federal EHR incentive program still has several years to run. But as it ebbs, some analysts are now predicting that a new wave of health IT spending on other IT systems will rush in to take its place.

Rather than EHRs dominating health IT spending, the next round of investment is likely to address other IT needs. New payment models and pay-for-performance plans in the Patient Protection and Affordable Care Act will require healthcare organizations to revamp or replace a lot of aging financial management systems. Demand for those sys- tems in recent years has been artificially depressed by providers’ need to focus on adopting clinical support systems that would qualify them for federal EHR subsidies.

Next year’s switch to the ICD-10 family of diagnostic and procedural codes will also be giving a major boost to IT firms that offer computerized coding and documentation support tools. ICD-10 should also generate lots of consulting contracts for firms offering advice, training and implementation support. Last week, a study group from the American Medical Association, the last major organization objecting to the federally mandated switch to ICD-10, dropped its demand the healthcare system await development of ICD-11 codes. By standing down, the AMA removed a cloud over the Oct. 1, 2014 conversion.

And then there’s simply the need to finish the job begun by federal support for EHR implementation. “The ARRA never contained sufficient funding to provide incentive payments to all hospitals and physician practices that did not have an EHR system at the beginning of 2013 to implement one by 2015,” Andrew McWilliams, an analyst for BCC Research of Wellesley, Mass., said in an e-mail.

The research group recently predicted total spending on clinical health IT would soar to $26.1 billion a year in five years, up from $9.5 billion in 2011 and $11.2 billion last year. “The continued high growth rate beyond 2015 reflects the existence of considerable unsatisfied demand,” he said.

Optimism about ongoing, robust spending on health IT is reflected in soaring stock prices for the developers of several of the industry’s more popular EHR brands. North Kansas City, Mo.-based Cerner Corp., one of the leading developers of EHR and financial systems for hospitals, late last month reported a 25% jump in quarterly earnings to $110 million from $88 million a year ago after posting sales of $680 million, up 6% from $641 million in the first quarter of 2012. In projections for this year, Cerner expects a 13% rate of revenue growth and 17% rate of growth for earn-

ings per share for 2013 compared with 2012.

Jeffrey Loo, an analyst with S&P Capital IQ in New York, gives Cerner a “strong buy” recommendation, projecting a 23% compounded annual growth rate for the company over the next few years despite the falloff in federal EHR incentive payments.

“Everybody assumes that when meaningful use is over, the bubble will pop, but there are a lot of other things driving growth,” Loo said. “Accountable care organizations, there are about 200 right now (and) that’s going to grow. Value-based purchasing. The ICD-10 conversion, that’s another growth rate,” he said.

And even the firm’s core health IT systems should continue to see good business as the federal incentives wind down. “It’s not just the implementation, it’s the ongoing maintenance” that generates revenue for an IT company.

ValuEngine, a Melbourne, Fla., stock analytics firm, collectively rates its heath IT marketbasket of 12 publicly traded medical information systems companies as a sell. Those companies include Cerner and Athenahealth. “We wouldn’t recommend to our investors to go into this industry,” said Paul Henneman, an analyst with the firm. “By all measures, these stocks appear to be run up.”

That may be due to optimistic projections about the future of health IT beyond the basic EHR. Multiple healthcare IT leaders and indicators point to increasing demand for a number of health IT systems during the next few years, while spending on EHRs, the focus of the Medicare and Medicaid incentive payment programs under the American Recovery and Reinvestment Act of 2009, may have topped out in 2012.

In recent reports, for example, Frost & Sullivan, a Mountain View, Calif.-based technology market research and consulting firm, predicted beefed-up spending for a wide range of electronic technologies aimed at healthcare providers over the next several years. The firm is forecasting a nearly 62% growth rate in sales of revenue-cycle-management systems between 2012 and 2017, from $1.9 billion to almost $3.1 billion; a 93% leap in electronic personal emergency response systems from $964 million in 2012 to $1.86 billion in 2017; and a 133% jump in remote in-home monitoring systems from $127 million in 2010 to $295 million in 2015.

On the other hand, the firm sees combined EHR sales for hospitals and ambulatory care falling about 34% from its high-water mark of $9.2 billion in 2012 to just over $6 billion in 2016. The reason for the projected slowdown is that with $13.2 billion of the federal EHR incentive money spent through March, according to the latest CMS data, $9.3 billion in stimulus money remains.

The results have been dramatic, of course. So far, 73% of hospitals and 48.5% of officebased physicians and “other professionals” have purchased, installed or upgraded to certified EHR systems and received initial— and their largest—payments under the programs. “The incentive payments were frontloaded,” said Arun Mathews, chief medical information officer at Medical Center Health System in Odessa, Texas. “The Stage 1 money is going to be the biggest checks anyone is going to get.”

“EHRs have peaked,” agreed Nancy Fabozzi, the principal healthcare analyst at Frost & Sullivan, but it doesn’t follow that overall healthcare IT sales will be dragged down. “There are thousands of companies selling thousands of products—hardware, software and services … (with) no really solid, definitive number for this (entire) market. The pricing is very opaque. It’s still very secretive. Vendors won’t tell you. Providers won’t tell you. … If somebody put a gun to my head, I’d say 6% per year (growth) for everything,” she said.

BCC Research is significantly more optimistic. Not only does the firm see spending on EHRs continuing to grow, but also spending on hardware, chiefly for telemedicine, will rise, too (See chart, p. 6).

One factor that could put a damper on the boom is a shortage of capital at provider organizations, which will continue to be under pressure from payers in the public and private sectors to cut costs. “What’s a counterweight to all this is decreasing reimbursement and hospitals and healthcare systems operating on thinner margins,” said Mitch Morris, vice chairman of Deloitte and national sector leader of the healthcare provider practice at the global consulting firm. Two years ago, Morris said, HIMSS Analytics, the data analysis arm of the Chicago-based Healthcare Information and Management Systems Society, surveyed chief information officers about their health IT priorities. “Seventy-one percent said they were going to do a major upgrade on their patient accounting system. Two years later, almost no one has replaced their patient accounting system. So, there’s a disconnect between what the CIOs want and plan for and what CFOs are going to write a check for,” he said.

But that doesn’t appear to be the problem at PIH Health in California, where Lee has watched the hospital computerization revolution unfold from the beginning. In 2006, the hospital began installing an EHR that eventually computerized physician-order entry, integrated the pharmacy system and included nursing and physician documentation.

After the hospital met the government’s Stage 1 meaningful-use criteria and was paid under the Medicare portion of the federal EHR incentive program, it moved on to expanding the system to all of its affiliated physicians’ offices. Expansion to its last 15 physician offices, which have a total of 80 providers, will be completed next year. And now, as it plans for new systems such as bar-code medication administration and data warehousing, PIH has set a loftier goal: achieving Stage 7, the highest level of the health IT certification process developed by HIMSS Analytics.

Only an elite 109 hospitals in the U.S. have achieved Stage 7, according to the HIMSS Analytics website.

For Lee, attaining Stage 7 “would further show our commitment of leveraging technology to improve quality of care and patient safety across our integrated delivery system.”