A new class of clinical information systems exceeded growth expectations in 1995, establishing the software sector as the up-and-coming revenue source for information systems vendors.
But a long-established class of financially oriented information systems had greater-than-expected shrinkage in revenues, more than offsetting the gains in clinical business.
Actual revenues reported by vendors of nearly 20 categories of information systems combined for a net increase of 7.5% in 1995, according to figures provided by R.L. Johnson & Associates, a Danville, Calif., healthcare software consulting firm.
But the fortunes of two of those categories will be critical to determining the pace of growth in healthcare information systems during a transition period of several years in the healthcare industry.
Both the clinical growth and the tail-off in financial system revenues identified in the 1995 report were predicted because of healthcare's shift from its traditional emphasis on volume-based reimbursement. The new strategy is based on managing a pre-determined level of revenues cost-effectively.
Financial- and patient-accounting systems were created to help turn healthcare services into provider reimbursement. Clinical systems seek to inform clinicians about tests and treatments in ways that keep them from overspending on unnecessary services while still delivering the appropriate medical response.
For Ronald L. Johnson, whose consulting firm published the report, the software business is profiting from that shift in business objectives-but not enough for him to be bullish about the level of revenues expected to be plunked down during the next several years.
As part of the yearly report, Johnson's consulting firm solicits and tallies vendor figures on sales and revenues in seven software categories, including an emerging-technology category split into 10 subgroups. In addition, the report offers five-year projections on business activity in each grouping.
Market measures. Based on reported contract revenues, the size of the hospital and healthcare-network software business stood at $3.36 billion in 1995, up 7.5% from about $3.1 billion tallied in the report for 1994 (June 19, 1995, p. 142). It's also 2% higher than the $3.28 billion projection of 1995 revenues made in the 1994 report.
Despite those upwardly mobile results, Johnson forecasts a rise of just 16% in annual vendor revenues by 2000, to $3.89 billion. Last year's report was rosier by comparison, predicting $4.2 billion in revenues by 1999.
Other consultants and market analysts who also compute the size of the healthcare information business opportunity use different assumptions and encompass wider definitions of what constitutes the market. As a result, their totals and projections are several times as high (See related story, p. 120).
The bottom drops out. Johnson's restrained enthusiasm stems from the volume of business represented by traditional healthcare systems that will have to be first equaled and then exceeded by emerging technologies before any net growth can occur.
Even though sales of financial and patient-accounting information systems have been stagnating for the past several years, they've still brought in more than $1 billion each in annual revenues. Last year's report predicted one more billion-dollar year for financial systems in 1995, gradually slipping to $943 million by 1999.
But according to Johnson's report, actual 1995 sales of financial systems were 17% short of projections at $840 million, already $100 million lower than last year's five-year projection (See chart, p. 118). Patient-care system revenues met projections at $962 million.
Those revenue figures may be buoyed somewhat by a temporary scramble to replace aging systems that are being phased out as a consequence of a spate of mergers and acquisitions during the past year or two, Johnson said. Once that "artificial" sales opportunity runs its course, business slippage will intensify, he said.
And while a sharp upward trend was documented this year for clinical data repositories and integrated computer workstations, the new activity may not only fall short of offsetting losses in financial and patient-care systems but also further erode those sales by including features that the traditional systems had been providing, Johnson added.
For example, a number of the new clinically oriented systems include capabilities to enter clinician orders and to report the results at computer workstations. "As a result, such systems will ultimately have a very heavy negative impact on future patient-care system sales," the report said.
Clinical systems advance. The size of the clinical information market, however, may defy current sources of measurement as healthcare providers tap into sectors now largely uncharted.
The 1996 MODERN HEALTHCARE/Coopers & Lybrand survey of information systems trends confirmed a dwindling interest in general accounting and patient-accounting systems, but it also uncovered an explosion of interest in a wide range of clinical software and enabling technology (See story, p. 97).
And the respondents to the survey have budgets to match their interest.
More than 1 in 5 survey respondents said their capital budgets for information systems would be more than 20% higher than current budget levels during each of the next three years.
Nearly half the respondents said total spending on information system initiatives would average more than $11 million annually for the next three years in response to healthcare's changing business environment.
Companies are coming out of the woodwork to respond to the changes, offering newly hatched products to extract and organize clinical data, merge it with financial information, and distribute findings and analysis to workstations.
Johnson acknowledged that his report will have to monitor emerging companies to get an accurate total of revenues for clinical data repositories.
This year's report showed a sharp difference between previous projections and actual revenues for 1995. The difference was attributed to a number of vendors that weren't identified last year as offering data-repository products but were included this year. More than 20 vendors are developing data-repository-type products, according to the Johnson report.
That category of information systems, first recognized last year in the Johnson survey, generated revenues of $84 million in 1994 and prompted a forecast of $142 million in 1995.
But actual revenues for 1995-$258 million-were nearly double the forecast.
Despite the rise in provider budgets for clinical systems and the corresponding rise in vendors clamoring for business, Johnson isn't revising earlier long-range projections for the data-repository category.
Those projections still show significant growth, predicting a billion-dollar business by the end of the decade. But the latest actual results showing a doubling of previous estimates weren't enough to prompt even a steeper increase in the 1995 report's five-year projection.
In fact, that projection postpones the billion-dollar milestone until the year 2000. In last year's report, the milestone was predicted for 1999.
Johnson said the signs of sales activity just aren't there yet to support any higher projections. "I don't see optimism in the next three or four years," he said. "Maybe in five years."
What's not measured. Johnson acknowledged other limitations to the market forecast, which focuses primarily on hospital-based application software.
The report doesn't track revenues of companies launching forays into healthcare software from their established base of business in other healthcare areas, such as patient-monitoring equipment and sales of computer hardware.
Hewlett-Packard Co., which is developing clinical management software to go with established hardware and monitoring products, is one example of the type of company left off the vendor charts.
Sophisticated new healthcare software also is more difficult to implement and integrate with other existing information systems, and healthcare provider networks are racking up expenses of hiring consulting firms for those tasks. But revenues earned by outside consultants also aren't included in the report.
Johnson downplayed the effect of those revenues on forecasts of market size, estimating that consultant revenues would amount to only about $500 million a year.
Other industry estimates, including one by the New York-based investment banking firm of Punk, Ziegel and Knoell, encompass businesses that analyze and add value to healthcare information, not just businesses that sell the means to capture and manage information.
Growth areas. Both types of information businesses are barreling toward the same destination: support for clinical decisions made under the cost and quality pressures of managed care.
Johnson said a mushrooming business need among providers for decision support and physician-office automation will offer the biggest potential for growth. But it's still "a question of how fast" the demand will be created and met, he said.
A key catalyst in that process may be the movement toward matching patient data with a common identification scheme called a master patient index, Johnson said. That emerging software need was the strongest among chief information officers responding to the MODERN HEALTHCARE/Coopers & Lybrand survey.
The master patient index, a new category this year in Johnson's list of "other systems," would give provider networks a way "to completely integrate medical records for the patient, which they don't have now. That will have a tremendous benefit on the healthcare industry," he said.
"Access to the computerized member
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record goes hand in hand with clinical decision support," resulting in "the use of computer systems to improve the practice of medicine," Johnson said. "And that's exciting. All the components to do that are available today."
For the healthcare software industry, clinical decision support is "one area where small companies are doing good work. Some of these small companies could end up being bought," he said. "There's a potential there for someone to make it big."
The report posts revenues and projections for the master patient index and nine other emerging technologies into the category of "other systems." The $420 million posted in that category in 1995 exceeded by 8% the projections made last year for the conglomeration of products (See chart on p. 118). And it was 30% higher than the $322 million in revenues posted in 1994.
Much of that difference stems from a boom in interface engines, which are sophisticated software hubs with formulas for translating data from multiple disparate information systems (May 8, 1995, p. 49).
Nearly $80 million in revenues were tallied in that category in the 1995 report, about 60% more than forecast and representing a level that last year's report said wouldn't be attained until 1997.
The rapid implementation of interface engines is fueling the expansion of data-sharing capability beyond acute-care hospitals, thus spurring demand for clinical data repositories and creating the need for master-patient-index schemes, Johnson said.
But the downside, according to the report's new projections, is that sales have suddenly peaked. Starting next year, Johnson predicts a downward trend to $42.6 million by 1998, after which revenues evaporate to $6.6 million by 2000.
The report also revised trends for radiology and laboratory systems, which performed better than projected in 1995.
Radiology system revenues of $138.6 million were 25% better than expected. Johnson forecast a modest increase to $143.2 million in 1996 and a gentle downward curve after that.
He said the current surge stems from demand for computerized diagnostic image transfer and management systems, which make images immediately available to multiple sites in a network.
Laboratory system revenues of $465 million were 29% higher than projected, but revised projections still mark the category for a slide to $400 million by 1999.