The market for healthcare information systems software is a potential gold mine, but for now the market isn't living up to its potential, according to an annual report on industry trends.
In theory, healthcare organizations sorely need solutions to their data integration problems as they become more diverse and geographically dispersed.
But in practice, as measured by sales rung up by information systems companies, the market is proceeding with caution while vendors scramble for attention-and retention-of customers.
Vendors are caught in a transition. Sales of traditional hospital-oriented systems for financial and patient-accounting purposes are a harder sell, but new clinical and integrative systems aren't catching on enough to compensate, according to the report by R.L. Johnson & Associates.
That's not immediately apparent from the report's totals. Judging by sales results compiled for 1996, the fortunes of financial and patient-accounting systems didn't register a decline-rather, the two categories each grew at about a 10% pace.
Last gasp. But that growth amounts to a last gasp of sales momentum caused by forced replacement of obsolete software, says Ronald L. Johnson, whose Danville, Calif.-based firm published the report. The days of $1 billion-plus annual sales in those categories are over, he says.
Instead, the report predicts skidding sales through the year 2000 and beyond, while technical obstacles prevent a new class of complex clinical databases from picking up the slack.
A varied menu of emerging software aimed at integrated healthcare delivery networks shows promise of sales growth, according to figures compiled by Johnson on 10 types of emerging systems. That collective category promises to be the successor to financial and patient-accounting systems as a billion-dollar engine of annual industry revenues, but not until 2001, Johnson predicts.
Revenues reported by vendors of nearly 20 categories of information systems showed an increase of 8% to $3.64 billion in 1996.
The actual performance in 1996 exceeded the forecast made in last year's report by 11%. But rather than adjust this year's forecasts upward in response, Johnson predicts it will take another five years for the software industry to muster the percentage growth recorded in 1996.
Two years ago, the report predicted total revenues of $4.2 billion by 1999. This year, the forecast is for $3.95 billion by 2001.
The conservative forecasts and restrained revenue totals make Johnson a lone wolf in a crowd of analysts that generally floats predictions of 20% or more in annual growth and $20 billion in total revenues within five years for the healthcare information sector.
Johnson says that while there are significant growth opportunities in healthcare information services, investment analysts are "doing a disservice to the industry by forecasting $20 billion by the year 2000. . . . My comments to them are, `Show me the numbers."'
Talk vs. action. Other consultants and market analysts who compute the size of the healthcare information business opportunity use different assumptions and encompass wider definitions of what constitutes the market.
For example, much of today's expense in creating integrated delivery networks involves investments in cabling and telecommunications to connect software systems across a region. Some analysts also include businesses that analyze and add value to healthcare information, not just those that sell the means to capture and manage the information.
The combined opportunity from all information-related activity may approach the size and growth estimates of analysts, but investors are unreasonably expecting those huge numbers from the narrower niche of healthcare information systems software, Johnson says.
"There's unbelievable pressure being applied to public corporations to perform," he says, adding that the pressures to produce sales may be backfiring on Wall Street. Many healthcare information company share prices have fallen recently, registering steeper declines than the overall market.
During 1996 vendors slashed prices on their existing lines of software to generate sales, offering discounts averaging 15% to 25% and going as high as 35%, Johnson says.
The software business is high-margin, typically above 50%, but the deep discounts rob vendors of capital for research and development of new features aimed more squarely at healthcare networks, he says.
Instead of building innovation from within and retooling their software to reach beyond traditional hospital boundaries, publicly traded companies are acquiring other vendors to fill gaps in their network-building roster. "It's easier to buy somebody and gain revenue than it is to spend $6 million on a new product," Johnson says.
But that creates new challenges to pull together products that complement each other but may have big differences in their technical building blocks and in how they present their information to users, he says.
Meanwhile, the old bread-and-butter markets for financial and patient-care systems are ripe for a tumble because vendors are making fewer first-time sales and many more sales of replacements for existing systems.
"With replacement systems, you've got competition all over the place," and contenders are under significant pressure to retain their current customers while trying to take sales away from a competitor, Johnson says. The result is lower profit margins.
Clinical progress. A prime candidate to plug the industry's revenue gap is a software invention called a clinical data repository, which includes an on-line computerized warehouse of clinical data as well as the computer workstations to relay and display information.
Repository sales reached $459 million in 1996, 43% more than the $320 million projected in Johnson's previous report. And the total was an increase of 78% over actual 1995 revenues of $258 million.
But again, instead of revising projections upward, Johnson pulls back from last year's $1 billion forecast for the year 2000, substituting flatter growth to $703.5 million.
Part of the jump in 1996 sales was the result of adding six vendors that weren't captured in last year's figures. Those vendors accounted for 41 of the year's 212 sales. On a same-vendor basis, year-to-year sales increased 15%.
More repository vendors may emerge next year, and their sales would add to the run-up, but that wouldn't change some deeper problems affecting growth in data repositories, Johnson says.
For one, the systems are getting a reputation for being time-consuming and difficult to implement. In addition, integrated networks are finding that they have to first make sense of the disparate sources of data they're trying to combine in a repository.
The need for a master patient index to tackle that problem has had the effect of slowing the clinical-repository effort, Johnson says.
But it's also creating greater demand for the indexing software. Still a fledgling computer niche, it produced $24 million in 1996 sales, double last year's projections and quadruple the $6 million in actual 1995 sales.
The report has projected a climb to $48 million in 2000 and $62 million in 2001.
Another emerging technology, interface engines, showed a decline of 42% in 1996 sales compared with 1995, but Johnson still reversed forecasts of a five-year free-fall he had projected last year.
This year's projections call for a 54% increase in sales to $71 million by 2000 from $46 million in 1996. Last year's projections had the software niche hitting a peak of $77 million in 1996 before tailing off to less than $7 million in 2000.
Interface engines are software-driven hubs with formulas for translating data from multiple information systems.
Besides predicting more demand for system integration from healthcare networks, Johnson says the category will benefit from a change in the report's accounting.
A significant number of interface engines are sold as part of clinical data repositories and were reflected in that category, but Johnson is now separating those sales out of the repository totals and adding them to the count for interface engines.
Another accounting note: The report's tallies don't include sales to Columbia/HCA Healthcare Corp. by Meditech, a Westwood, Mass.-based information systems and services company.
Meditech is supplying the standard computer foundation for hospitals operated by Columbia. The investor-owned giant runs 344 hospitals.