Vendor viability should be a top concern in EHR selection

With the government now working on Stage 2 and Stage 3 requirements, EHR "meaningful use" and certification remain confusing but important issues when planning EHR deployments. But if an EHR is like any other business application, matching application capabilities to the business problem and making sure the vendor has the vision and staying power to meet future business requirements should be your primary concern.

In other words, if you treat EHR like any other business application, then vendor viability becomes the most critical decision criterion. Consequently, the big question has to be: will the EHR product you are using or evaluating today be around in three to five years?

At Crosstree Capital, we count about 200 EHR products from more than 100 vendors. It is inconceivable that this is sustainable. A dozen or so vendors should be plenty; therefore continued market consolidation is inevitable.

Besides the normal competitive market forces that tend to reduce the number of products in any market, there are two major catalysts that we believe will precipitate consolidation of the EHR market: current capital market conditions and the enormous technological changes for EHR applications that are just over the horizon.

The hype over EHR--some pundits and analysts predict a near-term doubling of the market--has driven up valuations for HIT companies that are very profitable or are aggressively making acquisitions. Companies that are barely profitable and looking for funds to expand organic growth have had a much harder time of it.

This is because investors in publicly traded companies are very oriented toward yield--the rate of positive cash flow on their investments. This is different from venture capital, which tends to look for hyper-topline growth and does not care, at least in the short term, about profits. But with the decade-long slump in initial public offerings, VCs are much less active in software than in the past.

Investors looking for yield are attracted to companies that consolidate markets by acquiring established businesses with dependable revenue and the potential to reduce costs through operational synergies. Frequently, large software companies act like these investors. Companies that are active in the M&A market today often have twice the valuation as those seeking growth capital, since growth investors are less likely to bet on an unproven business plan than they would have been 10 years ago.

The second big incentive to engage in M&A for EHR companies is the obvious and daunting future R&D requirement. Virtually all EHR products need major upgrades to their user interfaces to work with all the new mobile devices. They all need to implement much better security and privacy management (not the same thing).

EHR integration with other applications and devices is grossly immature. And the next big challenge is how to use all the information captured in the EHR to improve the practice of medicine and provide better care. Only a small handful of EHR vendors have the skills and resources to deal with these challenges.

The bottom line is that savvy EHR executives and investors will take advantage of market conditions and dive into M&A since the timing is perfect. But healthcare CIOs and practice administrators need to move vendor viability to the top of their evaluation criteria.

Rob Tholemeier is principal of Crosstree Capital Partners, Tampa, Fla.