I think that the contract that Kaiser originally signed with Epic will go down in history as one of the greatest gambles ever made by a health system. Understand that healthcare executives are not known for risky behavior. Simply breathtaking! A large health system places an "all-in" IT bet on relatively small, privately-held IT company in Wisconsin. It seems to have been based on confidence in the founder of the company, Judith Faulkner, and also a corresponding lack of confidence in competing companies in the EMR space, notably Cerner. A recent profile of Faulkner in Forbes provides some fascinating details about the deal (see: Epic Systems' Tough Billionaire). It was an expanded version of a piece that was published in the May 7, 2012, issue of the magazine. By the way, the Wisconsin State Journal, published Epic's official reaction to the Forbes piece (see: Tech and Biotech: Epic's Faulkner lands Forbes magazine profile). Below is an excerpt from it:
"If you publish that [Faulkner] is a billionaire, it will be factually incorrect," an Epic spokeswoman emailed the article's writer before publication. The spokeswoman said there are numerous errors in the Forbes article, though she would not specify what they are. She also said the reporter did not speak to Faulkner.
Below is a truncated excerpt from the Forbes article. Read the whole thing for more interesting details.
[Judith Faulker] has made a fistful. From her remote midwestern outpost, Faulkner, 68, has quietly built Epic, which sells electronic health records into a $1.2 billion (2011 revenues) business—double four years ago. She has done it without outside capital, and no marketing. She remains the company’s single largest shareholder, rebuffing an attempt by her biggest client health care giant Kaiser Permanente to get a piece of equity, when Epic was much smaller. The company won’t disclose earnings, but says it’s profitable, and proudly proclaims to have zero debt. By next year, 127 million patients or nearly 40% of the U.S. population will have its medical information stored in an Epic digital record. Helping enrich Faulkner is also a piece of government legislation that subsidizes the adoption of electronic medical records, by paying millions to qualifying hospitals....Forbes estimates her net worth at $1.7 billion. She has amassed her wealth by carefully choosing her customers, and eschewing the sales pitch in a community distrustful of salesmen—1% of its 5,200 employees are in sales and marketing. It has exactly five senior salespeople, and no one is paid a commission....
At the beginning of each year, Faulkner commands her tiny salesforce to select customers based on whether they are fit to work with Epic—making it a privilege....Its electronic health record is based on a 44-year-old programming language called MUMPS ....It is essentially a closed platform, which makes it challenging and costly for hospitals to interface Epic with clinical or billing software from other companies for the purpose of merging patient information. In addition to the software, customers pay dearly for hardware, and for the army of Epic-certified technicians that needs to be deployed to get the system up and running. But this is the stodgy world of health care....
[Faulkner] never raised money from venture or private equity investors, and self-funded Epic’s slow expansion.....[W]hen the Oakland, Calif.-based [Kaiser] HMO, began a search in 2003 to replace its old IBM system, Epic found itself on a short list that quickly became a face-off between Epic and Cerner....Kaiser Permanente had set out to fully digitize its hospitals and affiliated physicians on a scale no other hospital had accomplished. The HMO has 36 hospitals, 533 medical offices and 9 million members. No EHR company had implemented that kind of grand project either. “The question was not ‘if you can do it, but how can you do it,’” says John Mattison, Kaiser Permanente’s Chief Medical Information Officer for southern California....[D]octors and nurses [from Kaiser] voted overwhelmingly for Epic [when the system was being considered in competition with Cerner]. Cost: $4 billion. Because of the staggering amount, and Epic’s inexperience, [Kaiser] asked that Epic cede equity to [it]....[Faulkner] fired off a two-letter response, and the answer was no....The health care giant remains Epic’s biggest customer, bestowing prestige and value. The company turns down customers, and it doesn’t negotiate on price—or price snafus.
So, the Kaiser executives worst nightmare, that the whole health system would grind to a halt when the Epic software was being installed, is only a distant memory (see: Kaiser & Epic Respond to Justen Deal's E-Criticism). However and in the Fall of 2006, they were trying to cope with a lot of rumors swirling about that the install was going poorly. These problems were accentuated by a lower-level IT insider, Justen Deal, who was reporting on the web about the rough patches. All of the previous angst about the Epic roll-out now seems to have been left behind.
Unfortunately, Kaiser now has, in my opinion, something else to worry about -- succession planning at Epic and the eventual replacement of the 68-year-old founder and CEO Judith Faulkner (see: Comments About Mergers and Acquisitions by Healthcare Software Companies) I have my doubts that this is a subject that a hard-driving, micro-managing entrepreneur like Faulkner spends much time thinking about. Epic has been created by her from scratch and she has outsmarted some of the most aggressive executives in the healthcare IT industry. Put another way, Kaiser is now making another big bet on the adequacy of Epic succession planning. But wait, you may tell me, the Kaiser executives have surely anticipated this problem and protected themselves against the possibility of post-Faulkner instability in the company. Perhaps this is true. What type of plan would you suggest that Kaiser put in place without an equity position in the company?