Quality of patient care drives medical IT market

Healthcare information technology vendors and consulting firms may find themselves running fast just to stay in place over the next few years. Core markets are saturated, hospitals have less money to spend, and CIOs are focused on compliance with the Health Insurance Portability and Accountability Act. Notwithstanding the bustle and excitement on the exhibit floor at the Healthcare Information and Management Systems Society meeting last month in Dallas, that was the somber picture painted by leading market analysts.

There are bright spots, however, primarily in systems that directly improve the quality of patient care, said Tracy, CA-based analyst Ronald L. Johnson in his annual HIMSS-meeting review of the healthcare IT market. Among the emerging opportunities are smart cards, clinical-alert systems, handheld devices, and the integration of radiology information systems and PACS.

Perhaps most important of all are technologies that reduce medical error, a problem that has been in the spotlight since the Institute of Medicine released a report last November detailing the consequences of medical error, including some 44,000 patient deaths each year in U.S. hospitals.

“Medical error represents the single biggest market opportunity out there for vendors,” Johnson said.

By comparison, there are few new customers for the core information systems used for laboratory, pharmacy, radiology, and finance. Instead, replacement systems and upgrades will dominate—and slow—sales growth. In 1999, Y2K remediation concerns spurred growth in healthcare IT spending to nearly 14%, Johnson said. In 2000, vendors can expect to face a buyer’s market as sales growth slows to below 10%.

Chicago-based IT research and consulting firm Dorenfest and Associates concurred, pegging revenue growth in 2000 at just over 10%, while predicting that it will fall below double digits by 2003. In the mid to late 1990s, by comparison, annual revenue growth ranged from 15.6% to 17.6%, according to data from Dorenfest.

Blame a saturated market, a backlash against Y2K spending, or HIPAA. But most certainly, point a finger at the federal Balanced Budget Act of 1997. The BBA has so sharply cut Medicare reimbursement that some hospitals are slashing IT budgets by as much as one-quarter, Johnson said.

“That’s going to have an impact on every hospital, every CIO out there,” he said. “For vendors to be successful over the next five to 10 years, they’re going to have to substantiate the economic benefits of their systems.”

It could be tough going. Only 30% of healthcare IT professionals who participated in the HIMSS Annual Leadership Survey expected their IT budgets to increase this year, compared to 46% last year. At the same time, 22% said support for IT projects has flagged because of the difficulty in proving a good financial return from IT investments.

Vendors are responding with a variety of strategies, Johnson said. In some cases, they are making steep price concessions: 25% to 30% for software is not unusual. In other cases, they are attempting to sell additional applications to existing clients, in part because there is less pressure to discount prices with a longtime customer than with a new client. Risk-sharing contracts are becoming more common as well. At the same time, support contracts are becoming far less generous, Johnson said.

Companies are also developing more open systems and harnessing the power of the Internet. Among laboratory information systems vendors, Johnson found that 21 are building systems based on Windows NT client-server technology, 23 have or are developing Web-based products, and 12 are pursuing opportunities as application service providers, which will enable them to host applications on a remote server and charge a fee each time users access the software over the Internet.

“Every vendor out there wants the recurring revenue,” Johnson said. “There’s a major effort by everybody to move applications to the Internet.”