Healthcare providers are making cautious decisions about their information systems, slowing their purchases of expensive software. Investment analysts don't anticipate a pickup anytime soon.
The slowdown struck hard one month ago at IDX Systems Corp., a publicly traded healthcare systems and services company. The news that 14 big contracts would not be signed in the first quarter of 1999 as expected caused a precipitous drop in the Burlington, Vt.-based company's stock price. Looming in the background of most information technology decisions this year is the Y2K computer problem, which is affecting budget priorities and personnel, says Charles Trafton, a healthcare analyst at Adams, Harkness and Hill in Boston.
"We've seen a preponderance of evidence . . . that CEOs are migrating money from buying new applications to Y2K remediation services or just replacing old systems," Trafton says.
That trend was established in the annual information technology survey conducted by MODERN HEALTHCARE in conjunction with PricewaterhouseCoopers and Zinn Enterprises (Feb. 22, p. 52).
However, IDX executives blame the purchasing delays mostly on healthcare systems' difficulty in reaching consensus between physicians and hospitals.
Only one of the 14 customers specifically mentioned Y2K as the reason for the delay, says Jack Kane, IDX's chief financial officer. None said they were withdrawing from purchase decisions because of lost funding support.
But Kane adds, "I believe as a backdrop for everything else, Y2K is a significant event."
It complicates information systems selections by aggravating other problems such as Medicare reimbursement cutbacks, consolidation and merger issues, and the turnover of chief information officers, says Seth Frank, a Nashville-based healthcare analyst with SunTrust Equitable Securities Corp.
Kane says two companies blamed delays on reorganizations that involved a new CFO or CIO. In another case, a small merger intervened and became a higher priority than decisions about a new information system.
Whatever the reasons, there's an air of caution in the marketplace. "It's an industry issue here that all the vendors are going to have to deal with," Frank says. "Obviously strategic purchasing has dried up."
Information systems purchases were once unilateral departmental decisions, but now hospitals and physicians are affected significantly by a single decision to build clinical databases or automate scheduling of appointments and staff, Frank says.
That broad impact, plus price tags in the millions rather than the thousands, requires doctors, governing boards and all other stakeholders to help make the choice, he says.
CIO turnover in particular can delay a sale, Frank says. Chief executive officers generally are not trained in technology, and an information system purchase "is something they don't want to touch until they get someone on board."
Trafton says: "Clinical systems -- like clinical data repositories, electronic medical records and next-generation applications that aren't replacements but are nice-to-have applications rather than need-to-have applications -- are not being sold today. And IDX is feeling the brunt of that right now."
When IDX executives explained the company's woes, "they were hesitant to say it was all Y2K," Trafton says. "But obviously it's something systemic that we're seeing across-the-board in the whole industry."
IDX's stock price plummeted March 5 to as low as $13.88 from the previous day's close of $26. The company had predicted a first-quarter loss of as much as 28 cents per share based on an expected net loss of $5 million to $7 million. Analysts had expected a gain of 35 cents per share.
IDX is the first company to own up to the problem publicly, but analysts are finding hints of trouble beneath the performance results that information systems vendors have put in the best light.
Trafton says Atlanta-based HBO & Co. would have reported "mediocre to disappointing revenue growth" in its fourth quarter of 1998, but its results were folded into those of McKesson Corp., which acquired HBO to form McKesson HBOC.
The company extracted its HBO.-specific performance for analysts, which revealed a 20% increase in revenues for the quarter ended Dec. 31, 1998, compared with an expected 25%, Trafton says.
When the merger became final in January, McKesson's stock had been trading at about $85 per share, but the addition of HBO sent the price as low as $52 by mid-March. Since then the price has rebounded to the mid-$60 range.
Cerner Corp., a Kansas City, Mo.-based healthcare software vendor marketing sophisticated clinical systems, suffered a 40% decline in its stock price to $15 in early February after it released its 1998 results.
Things looked OK on the surface, with a 23% increase in revenues to $86 million in the fourth quarter compared with $70 million in the year-ago period.
But those results included a one-time gain of $70 million posted as the value of a 20% stake in the healthcare communications subsidiary of Synetic, an Elmwood Park, N.J.-based Internet commerce company. Synetic exchanged the equity stake for a "perpetual license" to the functions and features of Cerner's computer architecture.
Stripped of that unusual gain, Cerner would have reported declines in revenues for the quarter, Trafton says. The company's reported earnings per share of 24 cents for the quarter would have been 10 cents instead, compared with 16 cents in the year-ago quarter.