Cerner Corp. in running for huge military health care contract

Cerner headquarters in Kansas City, Mo.
Cerner headquarters in Kansas City, Mo. Kansas City Star

The Pentagon will announce the winner of a highly sought after contract to modernize the military’s electronic health records by the end of this month – a decision with big implications both for the military and for Kansas City-based Cerner Corp.

Cerner, a health information technology company and one of the largest and fastest-growing employers in the Kansas City region, is among three finalists for a 10-year, multibillion-dollar contract.

Cerner develops health information technology systems for hospitals and medical offices that allow the digital storage and sharing of patient records among facilities. The company also is working to analyze the accumulated data to help predict health outcomes and indicate best practices for care.

Winning the contract would be a huge coup for Cerner. The hotly contested Defense Healthcare Management System Modernization contract, known as DHMSM, has been nicknamed “dim sum” by industry insiders. The military estimates the project’s lifecycle costs at $10.5 billion over 16 years.

One health technology website called it “among the most coveted health IT contracts in history.”

But such a high-profile prize also carries risks.

If they do win it it’s also be careful what you wish for.

Sean Wieland, research analyst, Piper Jaffray

“It would be the biggest contract the company has ever signed from a revenue perspective,” said Sean Wieland, a research analyst with Piper Jaffray, a leading investment bank and asset management firm.

Certainly it would boost Cerner’s value on the stock market, where it closed Thursday at $71.30 per share.

The U.S. government is not a high-price payer of services, however, so the contract likely would not be the company’s most profitable, Wieland said.

“And a contract of that size,” he said, “could potentially change the culture of the company, as they would become a big government contractor.”

At the annual shareholders meeting at the company’s Kansas City headquarters in May, company CEO Neal Patterson said Cerner had decided to bid on the Department of Defense health IT system “somewhat against some sage advice.”

He went on to quote Jack Danforth, a Cerner board member and former U.S. senator from Missouri, saying, “His counsel is, always be careful dealing with an entity that actually makes the laws, has armies and runs the court system and has law enforcement, ’cause you may be outgunned and they’ll probably tell you you can’t own your own guns.”

Then he chuckled and called on the next question.

Despite Patterson’s levity, his words hint at the challenges facing the contract’s winner. The award winner 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 Guard and Reserve forces and their dependents. The overhaul will affect 56 hospitals and hundreds of medical and dental clinics in 16 countries.

It’s a mammoth task fraught with potential pitfalls. The project is sure to draw intense public scrutiny and will be subject to congressional oversight. Any cost overruns, delays or glitches could prompt inquires and hearings on Capitol Hill.

Already the watchdog Government Accountability Office has put the Pentagon’s health records modernization project on its list of high-risk government initiatives.

The federal government has spent billions on failed IT investments, the GAO warned, including the military’s beleaguered Expeditionary Combat Support System, a software project that was shelved in 2012 after wasting more than a billion dollars over five years.

$80 billion Amount the federal government invests annually in information technology.

A much more ambitious project, the Defense Department’s revamped health records system will have to be able to share patient data with the Department of Veterans Affairs, a goal that has been difficult to achieve for the past 15 years, the GAO pointed out.

Instead of coming up with one joint system, as originally proposed, the VA and the Pentagon decided in 2013 to create separate systems. Both systems nevertheless will have to be able to interact with each other and with doctors, hospitals and clinics in the private health sector.

The GAO concluded that the Pentagon’s “history of challenges in improving their health information systems heighten concern about whether this latest initiative will be successful.”

Some former military officials and industry watchers also have questioned whether the Pentagon should sign on to a 10-year deal with a single company in the fast-changing world of information technology.

Ten years is a very long time in the tech world, said Doug Fridsma, president and CEO of the American Medical Informatics Association, a trade group.

We owe it to the service men and women to get it right.

Doug Fridsma, American Medical Informatics Association

“Just think about your cellphone technology that you used 10 years ago and think about the kinds of computer systems that you interacted with 10 years ago,” Fridsma said. “With any acquisition of any technology that’s moving at the pace of health information technology, one of the challenges is trying to make sure that you don’t lock in a particular approach and then in 10 years the world has moved on.

“How do you make sure that any acquisition continues to be fresh, continues to innovate?” he said.

For its bid, Cerner has teamed up with defense technology contractor Leidos, Accenture Federal Services and Intermountain Healthcare. The group is touting the ability of Cerner’s open architecture technology to communicate with other electronic health systems as a selling point, as well as the company’s use of predictive analytics to improve patient outcomes.

“The men and women of the U.S. Armed Forces, their families and beneficiaries deserve the very best health care solutions,” Cerner said in a statement. “We are honored to be a part of a team that was purpose-built to meet the electronic health record requirements of our military today and for years to come.”

Cerner, Leidos and Accenture all declined to comment further for this article, referring questions to the Pentagon.

Also still in the running is Cerner’s major rival, Wisconsin-based Epic, in a joint bid with IBM and backed by a Kaiser Permanente and Geisinger Health advisory group.

Epic has been breaking through its normal cone of silence to do interviews and tout its bid. It thinks it has the edge because of its large hospital system experience.

The third finalist is a partnership between Computer Sciences Corp., Hewlett-Packard and AllScripts.

As the announcement draws near, some industry analysts are wondering if it was a good sign that Cerner won a $16.3 million Defense Health Agency contract earlier this month to replace the Defense Department’s pathology laboratory information system. They speculate that it could indicate the Cerner group bid is a favorite to snag the much bigger contract to overhaul the department’s health IT system.

But Wieland, the analyst with Piper Jaffray, dismissed the idea that the lab contract gives any indication of which way the Pentagon is leaning.

“If the military were busy procuring a fleet of aircraft carriers over a multi-year period and someone in the Coast Guard goes and buys a couple of dinghies, its not an indication,” he said. “It’s two different procurement orders, different orders of scale.”

And although Cerner does have a strong relationship with the U.S. military, so does Epic, Wieland said.

“So I don’t think it’s any indication one way or another.”

Lindsay Wise is a reporter in the McClatchy Washington Bureau. Diane Stafford is a reporter for The Kansas City Star.