Saturday, May 18, 2013

Epic Systems' Tough Billionaire

More than 6,500 guests gathered in an overflowing auditorium at the Intergalactic Headquarters of Epic Systems this past September. The campus, nestled on 800 acres of farmland in tiny Verona Wis., was the site of an annual event for customers. The theme: “Once Upon A Time.” To loud applause, a dark-haired woman dressed in leather chaps with a bandana tied around her head strode on stage, where a Harley-Davidson a.k.a. gooseneck awaited. The modern-day Mother Goose in this fairy tale was Judith Faulkner–simply known as Judy in the health care galaxy, living up to her motto: “Do good, have fun, make money.”



She 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 an internal presentation, marketing folks once flashed a PowerPoint in jest that said “Marketing Sucks…Epic Systems.” 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. “They don’t need salespeople, customers come to them; they’re like kids showing up at the door asking for Oreo cookies,” says Leo Carpio, a health IT analyst at Caris & Co. At rival Cerner, sales and marketing make up 4% of total expenses.
In the process, Epic has become something of a status symbol. Its list of well-heeled clients is made up of the upper echelons of health care: Cleveland Clinic, Johns Hopkins, and almost the entire University of California system are among its 260 customers. Faulkner is also the only head of a company to sit on a government-appointed policy committee that makes recommendations on standards for the exchange of patient information.
But in an era pushing for openness, Epic has accomplished this in a decidedly old-fashioned way. Its electronic health record is based on a 44-year-old programming language called MUMPS (Massachusetts General Hospital Utility Multi-Programming System). 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. “The health care industry likes tried and tested systems,” says Richard Garnick, chief executive of Anthelio Healthcare Solutions, which helps hospitals implement digital records.
Beneath the rock star antics on view strictly for customers, Faulkner is not eager to telegraph her newfound wealth and power. She turned down our request for an interview. “She doesn’t want the spotlight on her,” explains her spokesperson. Interviews with people who know Faulkner paint a picture of a forceful, yet modest woman. Leonard Mattioli, an Epic board member, recalls chiding Faulkner for driving an old Volvo. “I told her next time you buy a car, take a man with you,” says Mattioli, the founder of American, a midwestern retailer of appliances and electronics. A few years later, Mattioli introduced his fiancĂ©e to Faulkner. She proceeded to pepper her with questions Epic typically asks prospective employees: “How many square yards of astroturf are there in the U.S.? Which person, dead or alive, would you most like to have lunch with?” Turning to a bewildered Mattioli, she said “next time you take a wife, take a woman with you [for advice].”
Faulkner got her start in the psychiatry department at the University of Wisconsin in Madison. She already had an undergraduate degree in math from Dickinson College in Pennsylvania, and was completing her master’s in computer science in Madison in 1976, when a professor recommended her to faculty members who wanted to develop a program that centralizes and tracks patient information. Faulkner wrote the code, using the computer language MUMPS. The founder of Meditech, an electronic health record company, had developed it in 1968 at Mass General Hospital. Faulkner’s program became the kernel of the Epic electronic health record. “We felt that the program held a great deal of promise in improving the usefulness of medical records,” says Marjorie Klein, one of the faculty members who gave Faulkner the job, and now sits on Epic’s board.
Faulkner started getting requests for her patient database through word of mouth, and sold to places such as hospital departments and community health centers. She formed in 1979 what was then Human Services Computing with $6,000, partly from her parents. Faulkner and a dozen individuals made up of colleagues and their family members invested a total $70,000. She never raised money from venture or private equity investors, and self-funded Epic’s slow expansion. Cerner, also founded in 1979 by three Arthur Andersen consultants raised venture capital before going public less than ten years later with $17 million in revenues.
By 2000, Epic had 69 customers, and had yet to figure in a top 20 list of EHR vendors for hospitals. Its hospital customers were negligible, but two had quietly garnered awards, notably the northwest branch of Kaiser Permanente in Portland, Ore. So, when the Oakland, Calif.-based 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. The Kansas City-based company had over $500 million in revenues in 2003, more than three times Epic’s.
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.
A team of doctors, nurses and information technology specialists fanned out across the country to visit doctors and hospitals that used Epic and Cerner. Only one small Epic hospital in Waco, Texas was on the itinerary. Cerner minders selected who the Kaiser team could talk to, while Epic didn’t interfere. When the team tried to break away from the scripted presentation, Mattison and his colleagues heard less than flattering comments about Cerner–Mattison calls them “suits”, while customers praised Epic. “For me that was major, to be free to talk,” says Mattison.  “They treated you like a colleague, not a customer,” says Jack Cochran, who heads the Permanente Federation, which represents Kaiser’s physicians. “They don’t sell you.”
Kaiser’s then chief information officer Clifford Dodd was worried about the technical challenges, which required increasing the number of servers by a factor of 10, to ensure that a doctor can quickly retrieve a patient’s chart. Still, doctors and nurses voted overwhelmingly for Epic. Cost: $4 billion. Because of the staggering amount, and Epic’s inexperience, Dodd asked that Epic cede equity to Kaiser. “His view was, given that we’re going to be your market maker and you’re going to acquire tremendous value, we should have equity,” says Mattison. That request didn’t go far with Faulkner, who even refused to negotiate. She fired off a two-letter response, and the answer was no.
By 2005, Kaiser’s server infrastructure was buckling, and a Kaiser employee leaked a memo detailing breakdowns. Dodd resigned in 2006 for personal reasons, he says. Faulkner got a bit testy herself. At a meeting that same year with Cochran, she asked him to stop telling people that installing electronic health records is slowing doctors down. “I told her, ‘Judy, I’m providing reality, like you do, people have to learn how to embrace it,” recalls Cochran. Kaiser is now a showcase for digital hospitals.
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. When it made a $200,000 pricing error in its contract with Edward Hospital in Naperville, Ill., it asked the hospital to fork over the amount in full. “They told us ‘you don’t have to buy our software,’” says Bobbie Byrne, the hospital’s vice president of health information technology. “They said all our customers are special; we don’t give anybody special treatment.” Edward Hospital stuck with Epic. Susan Heichert, the chief information officer of Allina Hospitals & Clinics in Minnesota, gets requests from small hospitals in Minnesota who want Epic, but were turned down. Allina resells them a version of Epic’s EHR with the company’s permission.
When Epic heard three years ago that the University of California at San Francisco wanted to replace its General Electric electronic health records, it got in touch with UCSF which runs two hospitals and 150 clinics. Chief operating officer Ken Jones expected to be serenaded by salesmen. “They were very honest about what they had, and didn’t have. Their attitude was more like ‘you’re embarking on this big effort, and we want to make sure that you’re serious about this, because if you’re not successful, then it’s not good for us,’” recalls Jones. UCSF signed on for $150 million, and it expects to complete installation in September.
Jones was swayed in his decision by the fact that four of the five UC system hospitals had also picked Epic, including UCLA, and UC San Diego. Because of lack of interoperability between different EHR vendors, hospitals can’t easily exchange patient information electronically. Epic facilitates that exchange among its customers. In California, that includes the UC hospitals, Sutter Health, Stanford Hospital & Clinics, and Cedars-Sinai, among others. The company provides the tools to communicate with non-Epic customers (dubbed a bit dismissively Care Elsewhere), but only 43 hospital systems use it so far. “They [Epic] have made no bones about it,” says Heichert, who’s yet to install Care Elsewhere at Allina, which has 11 hospitals. Faulkner makes recommendations on interoperability standards as part of a government-appointed committee, but some view her role as a potential conflict. “She has her own agenda,” says Anthelio’s Garnick.
The gap between Cerner and Epic is slowly narrowing; Cerner reported $2.2 billion in revenues last year. But don’t expect Epic to go public any time soon. During her meeting with UCSF’s Jones, Faulkner made that point clear. Says Jones: “What struck me was her determination that the company would remain private, because she wanted to make sure to maintain control.”
forbes.com


No comments:

Post a Comment