August 13, 2007

1. QuadraMed's Earnings Disappoint, Sending Stock South

Facts and Background

Shares of hospital systems vendor QuadraMed of Reston, VA dropped to near their 52-week low after the company's Q2 report: revenue was up 7%, but earnings per share slipped to $0.02 compared to $0.06 the same quarter last year.

Opinion

QuadraMed just can't seem to stay out of its own way. Just a few months ago, the company seemed happy to retrench into selling mainly its health information management products, such as coding. It went out on a limb to announce the $33 million purchase of the Misys CPR inpatient clinical system on July 22. This isn't a great time to book so-so numbers - it took the steam out of the announcement. Once again, the company's share price is languishing, keeping analysts uninterested in following the stock. 

Musings

• Keith Hagen inherited several raging fires when he took over as CEO in late 2005. Most of the serious ones were financial. Hospitals weren't anxious to buy long-term, high-investment systems from a company whose stock struggled to keep its head above the $1 level.
• On the other hand, the Affinity product line is strong and its new marketing message ("care-based revenue cycle") should be effective.
• Some investors on the call reported an uneasiness with how Hagen described the due diligence performed before the CPR deal was struck. While it's unlikely that the acquisition will be scotched, it certainly would be devastating news given its prominent role in Hagen's stated go-forward strategy. We aren't concerned with that possibility: QuadraMed has to move ahead no matter what it finds because it's painted itself into a corner. Nothing was announced that suggests the offer was conditional.
• We still like the company's increasingly competitive position. Hagen has replaced a largely ineffective management team, articulated a clear strategy, and put QD back into the full-line systems market for mid-sized hospitals. It's a big roll of the dice to re-enter a competition-heavy clinical systems market with a 20-year-old product, but the company faced marginalization into a tiny niche vendor otherwise.
• The biggest obstacle to QuadraMed's success is that customers don't see the company as a viable, competitive brand. That won't change overnight, especially when the stock is stuck. Still, CPR gives them some big customers and one high profile sale could open it up.
• The company needs to work hard to keep high profile Affinity accounts like LA County and Orlando Regional. HIM sales don't boost their chances of landing full-line system sales.
   

2. EMRs Need Anti-Fraud Tools, Consultant Tells Government

Facts and Background

A government contractor has recommended that HHS's Office of the National Coordinator for Health IT make fraud control measures a key part of its work with electronic medical records and its development of the Nationwide Health Information Network.

Opinion

Providers won't be asking for these features (neither honest nor dishonest doctors have reason to want them), but it's a great idea to build them into EMR products. Fraud is not insignificant, and while it may be Big Brotherly to require fraud detection tools in independently sold software, we think it's a great idea. Who could complain about the quick win in reducing healthcare costs when patients don't have to sacrifice for it? RTI's list of 14 areas of focus could improve compliance and make auditing easier. Uncle Sam is paying and Uncle Sam should make the rules.

Musings

• It's interesting that vendors have had no reason to help identify fraud. It doesn't help sell systems, after all (like offering cars with speed governors to prohibit illegal speeding).
• The call for ONCHIT to employee fraud busters may be misplaced. That's OIG's job.
• HHS could make this happen with the simplest of actions: add fraud prevention to the popular CCHIT certification criteria. That will cover the major physician systems that include an electronic medical records component, although not necessarily those purely intended for billing and scheduling since those can't be certified.

3. Merge Healthcare Stumbles Again

Facts and Background

Medical imaging software vendor Merge Healthcare of Milwaukee, WI announced on Friday that its Q2 report will be delayed and prior results may require restatement. The company is working with its accountants to review the timing of revenue booking when customers signed contracts that bundled software licenses and maintenance fees.

Opinion

All of this sounds familiar. Just over a year ago, the company's annual report was delayed and most of the management team quit in a flurry of class action lawsuits. Nasdaq delisting was imminent, but ultimately avoided. Is any software company immune from revenue timing challenges? 

Musings

• Announcing the delay on the day the report was due certainly brings back unpleasant memories of the company's struggles last summer. If management knew about the problem in advance, it was a big mistake to let the market expect an earnings report until the last possible minute.
• The company says total revenue won't change with the restatement, but critics claim they're pulling 2004 revenue into current periods to prop up revenue.
• Shares were in the $8 range last summer when Merge seemed on the brink of destruction. They're at under $5 now. Shareholders aren't encouraged, to say the least.
• Decent products aside, it would be hard to recommend Merge products to hospitals given what seems to be a never-ending list of financial reporting problems.
   

4. Cerner Visit Leaves Stock Analysts Giddy

Facts and Background

Cerner shares took a leap on Wednesday with no announcements. The apparent reason was a rosy report of a company visit by merchant bankers Thomas Weisel Partners.

Opinion

We're surprised that investment folk were so easily impressed with a fancy data center and Cerner's Experience Theater. Sure, all that scripted glitz often impresses naive clients into signing without doing their homework or negotiating a favorable contract, but surely Wall Street types have learned to look beyond the trappings.

Musings

• Cerner always finds a way to meet - just meet - Wall Street's expectations. That's an art not to be minimized.
• The company's broad line of offerings is most cellar-dwellers in KLAS rankings, with a somewhat outdated reputation as being hard to install and not ready for prime time. Notoriously aggressive sales techniques (like the shock and awe of the Vision Center) make product deficiencies irrelevant to some prospects, however.
• Cerner's bread and butter is inpatient clinical systems. Most prospects have committed already, so can CERN keep the growth going given fewer customers looking to buy?
• We don't expect the UK business to be lucrative since it hasn't been for any vendor so far, although Richard Granger's resignation from NHS may end the vendor hard-balling that has kept vendors from raking it in.
• Big-system sales seem to have tapered now that Epic is eating Cerner's lunch in that area. On the other hand, growth must be preserved at all costs. That most likely means acquisitions, fierce protection of markets, and possibly an eventual milking of the current customer cash cow.
• Cerner has taken steps into genomics and medication dispensing automation, both areas that could be more lucrative than a maturing and commoditized information systems market.

5. Parkland Nabs Fake Charity Care Patients with Software Checks

Facts and Background

Parkland Hospital of Dallas, TX is profiled in the local newspaper as getting tough on outsiders who pose as Dallas County residents to get charity care there. The hospital is using unnamed software to check employment and residential records, leading to the investigation of 220 patients and prosecution of several dozen.

Opinion

Most hospitals aren't tax district supported, so Parkland's problem may not match theirs. However, there's plenty of fraud going around: patients giving false addresses, using someone else's insurance card, or running up self-pay bills and ignoring payment requests. Certainly it's easy to look villainous when someone's grandmother gets hit with a foreclosure notice, but hospitals have an obligation to follow the system that's in place. Failing to collect payment from patients who are able to pay means someone else picks up their tab.  

Musings

• Parkland is lucky. The patient's they're going after are clearly and intentionally breaking the law. Moral outrage will be limited, unlike when most hospitals try to collect payments due.
• The software wasn't named, but all it really has to do is verify employment and residence.
• Hospitals should be more aggressive about collecting balances before the patient leaves. Patients have gotten comfortable with walking out of the hospital with no intention of paying their bills and hospitals seem comfortable with just writing it off.
• If prices were realistic instead of ridiculously inflated to make-believe levels because of contracts, patients might actually be willing and able to pay for at least part of their care. Few would side with hospitals trying to strong-arm payment for $8 aspirin.
  
  

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