The $7 billion to $8 billion healthcare information systems marketplace is offering excellent economic opportunities for public and private investors. But this movement in the capital markets also has major implications for chief executive officers, chief information officers and other senior healthcare officials who make acquisition decisions.
It means prudent buyers need to assess the financial status of information systems companies as well as investigating the products they offer. The chart below describes some of the financial criteria that healthcare executives facing acquisition decisions should examine. The forces that have raised these issues require some exploration.
Even the most modest healthcare delivery systems are projecting millions of dollars of capital spending for information systems in the next few years. The Kennedy Group has conducted a capital spending survey among a group of its clients. The data from nearly 60 large healthcare organizations reflect a commitment of more than $2 billion for information systems spending within the next three years. Senior healthcare executives have clearly accepted that information is an essential part of the business infrastructure of a healthcare organization, as are the human resources and physical plant.
This spending commitment adds fuel to the investment community's interests in vendor companies. Investors logically foresee expanded markets for these products. The Kennedy Group has estimated that through replacement and new acquisitions, the healthcare information systems market can reasonably be expected to grow 15% annually to total $21 billion by the year 2002 (See chart, p. 132). That's a very attractive indicator for investors.
There is at least one drawback for investors, and that is the long period of time-often several years-required for some companies to earn a profit.
A number of healthcare information systems companies now are posting high valuations. These are driven by forecasts of price-to-earnings ratios reaching into the high 30s or above. To maintain such valuations will require companies to turn in sterling financial performances, yet many-especially the newer and smaller firms-will struggle to achieve the necessary levels of profitability and trends of sustained growth.
After taking off like a rocket in early 1996, healthcare information systems stocks as a group underperformed the booming overall stock markets by 50% or more for the year. There were notable exceptions among these companies, however, and confidence in the sector remains high. That is demonstrated by the impressive prices offered recently for stocks in companies during mergers, acquisitions and initial public offerings.
The infusion of millions of dollars of capital has provided assets for the development and upgrading of products and services, but it has put extra pressure on information systems companies for new sales and income growth. This pressure can
hurt purchasers because companies may be tempted to make excessive performance promises, limit maintenance of existing products or cut back on customer service.
Another factor of interest to both purchasers and investors is the tremendous fragmentation among suppliers. The healthcare information systems industry can, after more than 20 years, be considered mature, yet the two largest vendors each has only slightly more than a 5% to 6% market share. In most mature industries, several major companies will hold 25% to 30% of the market. The result is a wealth of opportunities and risks for buyers, investors and sellers of healthcare information systems companies and products.
The cliche about real estate is that three criteria determine value: location, location, location. In the healthcare information systems industry, there are many conflicting forces, resulting in less clear-cut, less rational, economic scenarios. Variations in segments of the market have to be considered by both investors and buyers. For example, ambulatory-care information systems products can be expected to grow 20% or more while acute-care products may grow at half that rate.
Given these market factors, it is important for healthcare executives to go beyond the traditional selection criteria for information systems, which are:
Features and functions as determined by users' perceptions.
References from vendor clients.
Contract pricing and terms.
The concerns listed in the accompanying buyer's checklist (p. 130) provide some questions purchasers should ask about information systems companies. An assessment of the financial position of a company is part of the prudent buyer's approach to determining the best information systems acquisition.
For now, investors are bullish on the healthcare information systems market, based on their rosy perceptions of the multibillion-dollar market's potential. But healthcare organizations ultimately will determine the winning companies by buying the products they need to run their businesses. When doing so, they should keep an eye on the financial picture of vendor companies.