Cerner is part of team that wins huge contract to revamp military’s health records

The victory is a huge boost for Cerner, headquartered in North Kansas City and the area’s fastest-growing company.
The victory is a huge boost for Cerner, headquartered in North Kansas City and the area’s fastest-growing company. McClatchy

Cerner Corp. is part of a team of health information companies that has snagged a coveted multibillion-dollar contract to overhaul the U.S. military’s electronic health records, the Pentagon announced Wednesday.

The victory is a win for Cerner, Kansas City’s fastest-growing large company and one of the top health information technology firms in the country.

Cerner partnered with defense technology contractor Leidos, Accenture Federal Services and Intermountain Healthcare in the bid for the $4.3 billion, 10-year defense contract. The Leidos-led team beat out two other partnerships, one of them including Cerner’s major rival, Epic, a Wisconsin-based health IT firm that also is a leading provider of electronic health records technology.

Cerner and its partners now will be responsible for upgrading the disparate digital medical records of 9.5 million active-duty service members and their families, as well as some veterans, retirees, survivors and members of the National Guard and reserve forces and their dependents. The overhaul will affect 56 hospitals and hundreds of medical and dental clinics in 16 countries.

Cerner declined to comment on Wednesday about winning the contract or whether it would have to increase the size of its already robust workforce in Kansas City. It has 21,000 total employees, and its Kansas City area workforce passed 10,000 employees last year.

Cerner instead referred reporters to a statement by Leidos.

“Our team stands ready to lean forward with the DoD to implement a world class electronic health records system,” the statement said.

The highly prized Defense Healthcare Management System Modernization contract is known as “dim sum” to industry insiders from its acronym, DHMSM.

About $11 billion is budgeted for the project over the next 18 years, but the military predicts the total will end up closer to $9 billion.

Cerner’s annual revenues are about $5 billion, and it would receive only a part of the total contract’s proceeds.

The modernization project, which will rely mainly on Cerner software, is a massive undertaking that carries big rewards but also big risks.

The Government Accountability Office, the congressional watchdog, has put the Pentagon’s health records modernization project on its list of high-risk government initiatives, noting that federal agencies have wasted billions on failed IT investments over the years.

“This is a really big deal in its size and its complexity, and so I can imagine that there’s a giant celebration going on over at Cerner, but I also think it’s an extremely challenging implementation with a lot of visibility,” said Jeff Smith, vice president of public policy at the American Medical Informatics Association. “Everybody wants to do right by service men and women, and that’s an added level of scrutiny that this project and this contract are going to face.”

Some analysts were skeptical that any of the bidders was up to the task.

In the end, the Pentagon had a choice among three finalists who offered fairly mediocre systems for the price, said Ross Koppel, a professor of sociology at the University of Pennsylvania who studies health information technology.

“All the systems are stunningly clunky, the interfaces are state of the art 15 years ago, the usability is far inferior to every other system of the modern era, and the lack of interoperability makes a hash of the data,” Koppel said.

However, Sean Wieland, a research analyst at PiperJaffray, said that perhaps Cerner’s reputation for developing systems that connect well with others’ systems boosted its bid.

“Cerner has a better track record and a better technology base for achieving interoperability,” Wieland said.

Cerner had been seen as less likely than Epic to win because its rival had teamed with IBM, which has a long relationship with the Department of Defense, Wieland said.

He added that a better price may have also helped Cerner’s effort.

“This is a very visible beat versus Epic,” Wieland said.

Pentagon officials say they’re confident in their choice.

Frank Kendall, the Defense Department’s undersecretary for acquisition and technology, said that in making their decision, he and his staff spoke with health care providers who had acquired electronic records systems and with many vendors of software and other related products.

A key criterion for choosing the winning bid was ensuring that Cerner’s software could interact seamlessly with the separate systems at medical centers run by the Department of Veterans Affairs. The software also had to be able to mesh with outside programs used by private doctors.

He added that overseeing the selection process had been a top priority of his for two years.

“I have spent more time on this program than on any other DoD program, including the F-35 fighter,” Kendall told reporters at a Pentagon briefing Wednesday. “We have taken the time to do it right.”

Still, the choice of Cerner was unexpected by many.

“It’s surprising. Most of us expected IBM and Epic were the favorites,” said Matthew Gillmor, a stock analyst who covers Cerner for Robert W. Baird & Co.

Gillmor called the Department of Defense deal a “marquee contract” that could accelerate growth in Cerner’s traditional business in the United States.

Wieland and Gillmor both estimate that Cerner’s share of the project will come to about 20 percent of the $9 billion to $11 billion involved. It would be enough to accelerate Cerner’s growth rate somewhat, which is rare for a single contract to do, Wieland said.

Gillmor also cautioned that the government job is likely to come with a lower profit margin and carry other risks not found in its traditional work with hospitals. For example, its large size and Cerner’s multiple partners add complexity to getting the job done. The nature of the government work also may cause Cerner to spend more on research and development, Gillmor said.

Speculation that Cerner had won leaked into the stock market late Wednesday. Shares surged near the end and finished the day at $73.40, up $4.91 or 7.2 percent.

In awarding the contract, the Pentagon said that robust cybersecurity also was a priority, as was software that could be easily updated as technology evolves.

“We are not going to be building a system that is immediately out of date,” said Chris Miller, the new program’s executive officer at the Pentagon.

The recent massive data breach at the Office of Personnel Management, in which hackers stole sensitive identification and classification information of 25 million current and retired federal employees, drove home the need for powerful cybersecurity protections in the new health care software.

To ensure adequate cybersecurity, the three finalists were required to take the unusual step of divulging their systems’ weaknesses.

“We were asking for things they normally don’t provide (and) actually tell us where their vulnerabilities are,” Miller said.

The Pentagon plans to install the new system in three stages: internal testing; placement in eight Pacific Northwest locations by the end of 2016; and use at all 1,230 of its worldwide hospitals, clinics and expeditionary units over the course of seven years.

When the system is fully in place, the agency’s military and civilian employees will no longer have to carry folders and computer discs around the country and across the globe as they deploy to different bases.

About 205,000 Defense Department employees eventually will participate in training for running and using the electronics records system.

After the Pentagon put the contract out to bid last summer, six teams submitted proposals in October. The winning Cerner group was one of three finalists. The others were Epic, which teamed up with IBM, and Allscripts, which submitted a joint bid with with Computer Sciences Corp. and Hewlett-Packard.

“Competition has worked for us,” Kendall said. “We’re very happy with the result we’ve gotten. We ended up with three very vibrant and competitive offers.”

The three finalists’ market shares — the amount of other business they do — weren’t factors in selecting the winner, Kendall said.

Miller said a broad array of doctors, dentists, administrators, software experts, computer technicians and other advisers were consulted in choosing the Cerner team.

“We are global,” Miller said. “We have to operate in lots of different environments, so we will be making sure that this works in places like Afghanistan and Iraq, which are not the kinds of places these systems normally operate in.”

Miller said there will be an enormous amount of work to scan the tens of thousands of bills, records and other documents still used at Pentagon medical centers into the new system and make them interoperable with existing and future electronic documents.

But the eventual outcome, Miller said, will be a much more efficient military health care system.

“This is a unique opportunity for the Department of Defense to save money, to save time and most importantly to save lives,” he said.

The Star’s Mark Davis and Diane Stafford contributed to this report.

About the contract

Contract size: $4.3 billion, 10 years.

For what: Upgrading and unifying digital medical records of 9.5 million service members.

Number of facilities: 56 hospitals and hundreds of clinics in 16 countries.

The main loser: Epic, a Wisconsin-based health IT firm.

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