Life Sciences Group. Electronic Medical Records: 2011 Outlook

Transcription

1 Life Sciences Group Electronic Medical Records: 2011 Outlook

2 $ in Billions EMR: The Push for Implementation The global Electronic Medical Record (EMR) market is expected to grow to $9 billion by This space is also highly fragmented and crowded with very few dominant players- it is poised for dramatic changes. We project significant consolidation will occur over the next five years due to the fragmentation, growth opportunities, and strengthening adoption of EMR systems backed by Government influences. Consolidation is the thesis for the Headwaters inaugural quarterly report on the EMR industry. The past ten years have seen hundreds of small emerging companies, some with a big vision and some with a niche vision enter the marketplace, all looking to capture a significant piece of a very large target audience. However, early adopter physicians quickly learned that the software did not reduce their time of capturing patient information and thus spent additional time every day documenting the chart; the old paper-based systems were faster and just easier to use. The movement from paper-based to electronic-based health records over the past decade has been slow, but is showing signs of advancement. The percentage of officebased physicians using Electronic Medical Records (EMR)/Electronic Health Records (EHR) increased only 10% from , but increased 20% between ² Recent legislation and advances in technology have made EMR/EHRs not an issue of if but how quickly they will be implemented. A part of the $787 billion American Recovery & Reinvestment Act of 2009, the Health Information Technology for Economic and Clinical Health Act (HITECH Act), is set to allocate nearly $20 billion of stimulus funds for the implementation of EHRs nationwide. A study found that a 90% adoption rate of EMRs had the potential for annual savings of $77B for the entire healthcare system. 3 Decreased administrative costs, reduction in storage space for paper-records, Total EMR/EHR spending is projected to have a Compound Annual Growth Rate (CAGR) of 11.5% from 2011 to shorter billing-cycles, improved patient safety, federal grants, along with many other advantages are pushing healthcare providers to implement EMR/EHR systems. The report U.S. Electronic Health and Medical Records Meaningful Use Spending Forecast and Analysis, is predicting high growth in the EMR/EHR market. Total EMR/EHR software spending is expected to have a CAGR of 11.5% over the next five years, including a 14.2% and a 10% CAGR for inpatient and ambulatory practices, respectively. 4 Recent extensive research has proven the benefits of implementing EMRs for all stakeholders involved. Realizing the needed improvement in patient care and cost-cutting, the healthcare industry and government have started taking critical steps towards advances in health IT. Background An EMR (Electronic Medical Record) is a digital version of the medical and treatment history of an individual within one healthcare organization. This record usually includes, but is not limited to: demographics, SOAP notes, vital signs, immunizations, lab data and any other information related to their past health history. Projected EMR/EHR Spending $4 $3 $2 $1 $0 $3.8 $2.4 $2.0 $1.4 $1.4 $0.6 Ambulatory Inpatient Total IDC Insights

3 Common features include CPOE (computerized physician order entry), e-prescribing, a list of diagnoses, along with features that are relevant to that particular practice. The EMR database stores and re-presents the data in an easyto-view presentation function, enabling one to examine data with a new perspective. Medical records are the property of the facility, not the patient, and are usually preserved for a minimum of two years under the Knox- Keene Act (records for Compensation cases up to 5 years), creating a burden for the provider in terms of storage space and organization. There are many advantages of adopting an EMR/EHR module within the organization. The first obvious benefit arises from the elimination of paper-based records requiring storage space. Paper records can be fragmented, while an EMR allows for multiple users to have access simultaneously. EMRs eliminate inefficiencies from duplicate testing and data entry, thereby reducing waiting times for patients. Physicians and hospitals can expect to see decreased costs associated with the removal of required storage space and ability to reduce administrative fees. EMRs enable physicians to customize data the way they see fit, making it especially important to find software that fits your practice. Finding a tailored EMR is essential to realize the full potential that it offers. Other advantages for consideration Integrated Workflow EMR Software is commonly combined with practice management software improving the provider s overall business process. Shorter Billing Cycles Electronically submitted claims will allow healthcare providers to receive payment faster and is also more convenient for the patient. Quality of Care Clinicians can track data over time, see when patients are due for preventive checkups, and will know more about the patient s past health issues before they even see the patient. 5 The benefits of an integrated EHR system for patients are numerous. Electronic health records offer many advantages, including the ability to track the health of family members online, decreased patient costs, easier access to lab test results, x-rays in cloud space instead of hard copies, more efficient results, and improved overall quality of care, just to name a few. An often overlooked benefit of an electronic record system is the potential ability it provides researchers to analyze trends and data from patients records. An EMR can provide medical alerts for patients by recognizing abnormal lab results. 6 Medicare is giving physicians a 2% bonus if they utilize e-prescribing, which can reduce errors involving drug interactions and dosage. 5 E- prescribing also finds cheaper generic drugs for patients, as well as being able to place the order electronically while the patient is still in the office. Why the Lack of Implementation in the Past? While no one will argue against the longterm benefits of implementing an EMR module, barriers to implementation still exist. Even though advancement in technology continues at an accelerated pace, adoption of the EMR has been sluggish, with the majority of blame due to non-technical concerns. The lack of standardization in the industry and organizational issues are two of the main hurdles that are keeping the progress of EMRs somewhat idle. One of the main themes of EMRs/EHRs is the ability to share information with other parties, which is difficult to do without standardized terminology. Technical matters, including functionality and integration issues with other providers remains problematic. 6 Even though the overwhelming majority of practices would be expected to generate a positive NPV from implementation in the long-run, upfront costs remain an issue. Initial costs for hardware and software, maintenance, upgrades, replacement and training are quite substantial even with the federal subsidies. This is especially true for small practices (close to 75% of practices have 10 doctors or fewer). 3 The costs are easily recognizable, but many of the benefits are not easily quantifiable. Patient safety, advances in research, and efficiency might not be tangible, but will come with implementation.

4 Paving the Way to Meaningful Use The Office of the National Coordinator (ONC) has certified six companies that are accredited as an Authorized Testing and Certification ONC-ATCBs Body (ATCB). These companies will test Complete EHRs and EHR modules to ensure the EHR meets the criteria to support Stage 1 Surescripts LLC meaningful use as required by the U.S. Department of Health and Human Services. The ONC estimates that the 6 ATCB s will certify at most 205 ISCA Labs complete EHRs and or/ehr modules. 5 SLI Global Solutions Stage 1 meaningful use, set on July 28 th, 2010 by the Department of HHS, set objectives for hospitals and eligible professionals to meet to InfoGard Laboratories qualify for funding. The timeline for these objectives is quite ambitious. Only 11.9% of hospitals had adopted basic EMRs by 2009, and only a CCHIT measly 2% of hospitals could meet the criteria for Stage 1 compliance. 7 Drummond Group 70% of hospitals reported that the initial cost was the constraint to achieve the standards, as well as saying the timeline was too aggressive. 8 ONC for HIT HHS lowered the standards for healthcare providers to be able to meet the requirements for Stage 1 meaningful use, as many rural healthcare providers would not have been able to meet the objectives and therefore would miss the opportunity to participate in the incentive program. The final rule requires eligible professionals and hospitals to meet about half of the original proposed core objectives. The primary goals for Stage 1 is to standardize the electronic capture of information, improve quality at the point of care, and to use clinical decision support to improve quality. 3 Stage 2 meaningful use criteria is currently being debated, which will begin in For physicians and other care providers looking to purchase an EMR system, it is important to check whether the software meets the requirements to be qualified as Stage 1 meaningful use. Medicare Eligible professionals (EPs) can receive up to $44,000 over 5 years Additional incentive available for professionals offering services in a Health Professional Shortage Area Medicare EP must begin participation by 2012 Incentive payments for hospitals and CAHS as early as 2011, starting with a $2 million base payment Payment adjustment in Medicare reimbursement for those who do not demonstrate meaningful use by 2015 The EHR Incentive Program Medicaid Voluntarily offered by individual states and territories EPs can receive up to $63,750 over the 6 years that they choose to participate in the program Medicare EPs must begin participation by 2012 Incentive payments for hospitals and CAHS as early as 2011, starting with a $2 million base payment There are no payment adjustments under the Medicaid EHR Incentive Program Centers for Medicare & Medicaid Services

5 2011 & Beyond Software in the health industry has changed substantially since the start of the 21 st century, where less than 5% of ambulatory care facilities were using EMRs. 8 In the past the thought of a fully implemented EHR system seemed idealistic. Now that there are tangible objectives with deadlines and initiative from the private-sector, the projection that EMR/EHR spending will reach $3.8 billion in five years seems like a reality. 4 Furthermore, government initiatives will help off-set some of the up-front costs of implementing these systems. The potential for large cost savings from adopting EMR/EHR technology in the future should provide those that invest in healthcare IT with a positive ROI. The CBO recently predicted that federal spending on healthcare will approximate $1.8 trillion in 2021, more than doubling in the next ten years. Hence, any developments that show promise in long-term savings (EMRs/EHRs) should be a high priority. The advancement in software, proven research and government initiatives mean that EMR/EHRs will significantly transform the healthcare industry. We believe that the EMR/EHR industry will undergo a significant consolidation in the next five years. The sector is fragmented and currently has too many companies with 1,000 or fewer physician customers. Size of companies will be a significant factor in the selection of vendors by both hospitals and provider groups. The table below points out some key valuation multiples for Healthcare Software in general. In a few cases, we expect to see EMR multiples that will approach up to 4x revenue. Companies that wish to get higher valuations will be required to demonstrate that their patient data is robust and includes end to end patient history. EBITDA multiples will likely approach 15x with a robust data set. Smaller EMR companies should strongly consider acquiring other EMR vendors to achieve scale or look to exit the space early while other EMR vendors are looking to consolidate. The Headwaters Life Science Practice is comprised of professionals with varied experience including early stage, venture backed companies to large national healthcare payors. The Healthcare IT specialists have significant experience in the EMR sector including founding, investing and developing an EMR company. With many years of hands on experience in EMRs coupled with a long track record of advisory services, the Headwaters team is well positioned to assist in emerging and established EMR companies with investment banking services. Healthcare Industry - Software EV/Total Revenue 1.2x 1.2x 1.5x 1.5x 1.6x EV/EBITDA 10.3x 9.9x 12.2x 12.0x 12.8x P/E 26.5x 29.8x 36.1x 36.4x 32.0x Source: Capital IQ Founded in 2001, Headwaters MB is an independent, middle-market banking firm headquartered in Denver, CO, with offices in Boise, ID, Boston MA, Burlington, VT, Chicago, IL, Orange County, CA, San Francisco, CA and West Palm Beach, FL. We provide strategic merger and acquisitions advisory and corporate finance services with specialty products in early stage financing and debt formation. Headwaters MB has completed over $5B of middle market deals and has over $55B of deal experience. References 1. Business Wire. Research and Markets: The Future of the Healthcare IT market to Healthcare Reform in the US to Boost Growth 2. Centers for Disease Control and Prevention: National Center for Health Statistics 3. American Hospital Association. Trendwatch 4. IDC Insights: U.S. Electronic Health and Medical Records Meaningful Use Spending Forecast and Analysis. 5. The Office of the National Coordinator for Health Information Technology 6. American Academy of Medical Administrators:. Advantages & Disadvantages of the of the EMR. 7. Health Affairs 8. Healthcare Information and Management Systems Society 9. U.S. Department of Health and Human Services: Centers for Medicare & Medicaid Services.

6 Contributors to this report have been: Don Warriner Managing Director Brad Rosborough Managing Director Matt Krier Analyst Other Life Sciences Team members include: Anant Vashi, Jeff Schottler and David Traylor One Tabor Center th St. Suite 900 Denver, CO Office: