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by Cerner Corporation
Published on May 22, 2017

Note: This letter was originally published in Cerner's 2015 Annual Report on April 21, 2016. Access the full Annual Report.

2015 was a year of increase for Cerner as we experienced strong financial growth along with record numbers of new clients and new associates. It was a year in which we completed our largest strategic acquisition ever with the purchase of Siemens Health Services while also enjoying a competitive position in a strong replacement market for electronic health records (EHRs). It was also a year in which we saw increased appetite for new types of health IT solutions and services.

Some highlights:

  • We had record bookings of $5.4 billion, reflecting 28 percent growth over 2014.
  • Our revenue increased 30 percent to $4.4 billion, including over $900 million from the acquisition of the Health Services business.
  • Our adjusted operating earnings 1 increased 28 percent, and our adjusted diluted EPS1 of $2.11 also reflects 28 percent growth.
  • We ended 2015 with a strong cash and investment balance of $686 million and debt of only $605 million, even after funding our $1.4 billion acquisition of the Health Services business, $345 million of stock repurchases, $685 million in R&D investments, and $362 million in capital expenditures to support our growth.
  • Our bookings included nearly $2 billion from new client relationships, representing more than 200 new client sites. Quite simply, it was the best year in our 36-year history from a new business standpoint.
  • In what we believe was the most rigorous and competitive procurement of the decade, Cerner solutions were selected to modernize the U.S. Department of Defense's 55 hospitals, 352 clinics and other care venues.
  • All in all, we added over 230 new acute care facilities and 30,000 new hospital beds across more than 35 states and six countries in 2015.
  • Most significantly for our future, our HealtheIntentSM platform for population health management had a breakout year, including new clients from inside our biggest competitor's client base.

Paradoxically, although it was a great year for growth and new business, it was a disappointing year for Cerner shareholders as the price of CERN shares decreased 7 percent for the year, the first annual decline since 2008. We took the opportunity to buy back more than 5 million shares. It's important here to note to Cerner shareholders that, even after the 2015 decline, Cerner's stock price has grown at a compound annual growth rate of 21 percent over the past five years, beating both the S&P 500 Index (10 percent) and the NASDAQ Composite Index (14 percent) over the same period.

For the second year in a row, we are simultaneously recognized by Forbes as one of the "World's Most Innovative Companies" and by Fortune as one of the "World's Most Admired Companies." In November, I was included in Harvard Business Review's "100 Best-Performing CEOs in the World" list. Most of these lists are based on formulas that include some measures of long-term performance. External recognitions come and go, but it's nice for Cerner to be acknowledged in this way.

A note on the management team. Growing a company requires a great deal of trust. If as a leader you insist on putting yourself at the center of everything, then you had better get used to liking how much you can physically and mentally do alone, which isn't much, no matter how energetic, smart and organized you may be. Working with other people is hard, but I have always had a philosophy and a discipline of surrounding myself with people smarter and more capable than myself. I think it was Steve

Jobs who said, "A players hire A players, B players hire C players." I am glad to get to work with what I believe to be the best management team in health IT.

In the rest of this letter, I want to spend some time talking about our health IT environment, changes in the broader environment of health care, and some of the things we're doing to create value for clients, both now and in the future. I'll also give a personal update.

OUR HEALTH IT ENVIRONMENT — PLENTY OF COMPLEXITY, MOVING TARGETS

Compared to many industries, health care has had a very long journey to automation — perhaps the longest. The evolution from a handful of health care pioneers using computers for medical processes in the 1950s to something approaching nationwide levels of adoption of EHRs in the 2010s has taken six long decades. Cerner has been an active part of that journey since 1979.

In 2003, we were part of an industry coalition that contracted RAND Corporation (RAND) to research health IT. The researchers went away for two years and built an econometric model to simulate the impact of widespread adoption and interconnection of health IT in the U.S. When their results were published in Health Affairs in 2005, RAND concluded that nationwide adoption and interconnection of health IT could save the U.S. up to $162 billion a year, prevent up to 2.2 million adverse drug events (ADEs) and improve the management of chronic conditions.2 At the time, only a quarter of U.S. hospitals had adopted some version of an EHR. Today, that number is closer to 97 percent, with 31 percent recognized for having the most advanced levels of adoption.3,4 Just a few months ago, the U.S. Department of Health and Human Services reported a "dramatic downturn" in hospital-acquired conditions had occurred over a four-year period from 2010 to 2014. Twenty-four fewer people per 1,000 discharges were getting hospital-acquired conditions, and ADEs were the biggest part of the reduction. The lives of 87,000 real people were saved. Using words like "heartwarming," the officials hypothesized that EHR adoption was responsible in part for the reduction in ADEs. 5 As someone who believes in the original RAND research, I am excited to see it begin to prove out. Here I must add that, although adoption has increased significantly, many EHR owners still have inferior platforms, and factors like poor usability and a lack of patient-centeredness can hinder full acceptance and use. What's more, we are nowhere near the point of having full nationwide interconnection (that is to say, interoperability) of EHRs. The lack of interoperability was a subject in my letter last year. In June 2015, I delivered testimony to the Senate HELP Committee about how to achieve interoperability. If interested, you can read it online. 6

Why has the automation journey taken so long? I believe it's because everything in health care is hard, complex and ambiguous — and that's on the good days. Unlike banking, where the tasks and objectives are well-defined and rarely vague, health care is a constantly evolving science and art whose practitioners are dedicated to making the best of bad situations — like trauma and sickness — and doing so against the backdrop of extreme biologic diversity and complexity. The U.S. health care system, too, with its multiple independent parts, is recognized as a complex adaptive system, where no one is "in charge", [and] no one has the authority or resources to design the system. 7 Consequently, the system perpetually changes itself, although the U.S. government exerts some influence through policy, regulation and its role as the single largest payer for health care services in the nation.

This is our playing field. Mix in the well-known complexity of information technology, and it is a very difficult environment to master. I believe that is why many companies enter health IT, but few stay. Our long-term commitment and sole focus on health care has allowed Cerner to thrive while many others have entered and exited.

Across four decades, we have executed against a vision for the future of health care and health IT.

We helped start a global movement to automate the paper-based medical record, with the U.S. leading the way. Today the U.S. is more automated than not, and much of health care worldwide is in some stage of implementing EHRs. The wave is going around the world — a good thing for Cerner, patients and the public. And in the U.S. where most organizations have some degree of automation, the replacement market for EHRs is also going strong.

I think we're at the beginning — not the end — of what health IT can do. What the U.S. did through Meaningful Use was the equivalent of getting the house wired. It was a start, but now we have things to plug in. Health IT is moving to a new phase where interoperability, openness and intelligence are coming into focus. The next 10 years will be an age of pluggable, high-value smart apps for health care — apps designed by clinicians and entrepreneurs — that will extend the core EHR capabilities and increase its benefits. As with the smartphone, the EHR will be an ecosystem for apps to run on. In February 2016, we launched Cerner Open Developer Experience for SMART on FHIR® applications. Our commitment to being the most open and interoperable platform in health care is already bringing us exciting new clients and partnerships.

The newly digitized health system is generating tons of data that can be studied for further insights. Later in this letter, I will give an update on how our population health platform uses this vast resource to improve health and care. Being wired is not enough. In the decade ahead, we will be going for the value — the big number in the RAND study.

THE BROADER HEALTH CARE ENVIRONMENT — PRESSURE ON THE PROVIDERS

Before I go further, I want to comment on the very big transition that is occurring in our clients' environments. Many of you are aware of health care's misaligned payment incentives; I have used this letter to write about it before. For a very long time, the dominant U.S. payment model for health care has been fee-for-service (FFS), a system that pays for every single service a provider furnishes to a patient. In the complex adaptive system of U.S. health care, the payment model was never something that was designed; it just evolved over time. The problem with FFS is that it pays for sick care but has no consideration or incentives for health. It rewards ordering possibly unnecessary tests and procedures and punishes coordinating care between providers. In the FFS world, providers get no reward for good outcomes and bear no risk for poor outcomes. Perversely, it actually costs providers dearly to engage in the kind of care coordination that keeps people healthy. The fact that there is no business model for health is not the providers' fault. They didn't design the payment model, and it actually is a source of dissatisfaction because it separates them from their missions.

Seeking to align payment models with health and not just care, the 2010 Affordable Care Act (ACA) set the expectation that the Centers for Medicare and Medicaid Services (CMS) would use its status as the largest payer to rapidly move the market toward outcomes-focused, risk-based payments. In 2015, Secretary Burwell laid out a plan to shift 50 percent of Medicare payments to so-called value-based payment models by the end of 2018, and to tie most remaining traditional FFS payments to quality measures. In March, the U.S. Department of Health & Human Services announced that it is nearly a year ahead of schedule in tying an increasing percentage of Medicare payments to quality. (I should add here that, although payment reform is occurring in the U.S., nearly every developed health care system is at some stage of dealing with the problem of how to align incentives for providers.)

The ACA also introduced the concept of accountable care organizations (ACOs) — groups of primary care physicians, specialists and hospitals working together to improve the health of a defined population. ACOs that provide care at a lower cost while meeting quality targets are eligible to receive a portion of the shared savings from Medicare. To anyone who has been in health care since at least the 1980s, the structure of an ACO may sound quite a bit like a managed care organization (MCO). The hope and expectation is that the rigorous quality measurements and outcome-based payments will create aligned accountability that prevents the gamesmanship and rationing that occurred due to payer pressures under managed care.

By now, anyone running a health system is certain that, over the next few years, their revenue will increasingly come from alternative payment models. Since 2010, that impending reality has created pressures toward provider consolidation. Driven by a need to better coordinate care for improved outcomes, hospitals are trying to align all of the resources that impact the health of the populations they manage under the same ownership and control. Provider organizations of all sizes must decide whether to merge or remain independent.

Those that aren't planning to merge must come up with plans to affiliate or partner with other organizations in their communities, creating networks for patients and consumers to navigate.

Interestingly, our data suggests that consolidation creates opportunities for Cerner. We have about 25 percent market share in acute care health IT, but our clients have accounted for almost 50 percent of the hospital buying activity in recent years.

Whether merging or not, a correlated thought is that, in this pressured environment, providers are looking to align at the business strategy level with companies that have a solid track record of producing innovations, optimizations and strategic collaborations that help improve performance and increase competitiveness. Our history of strong performance with partnerships is proving to be important in the marketplace.

Consumers in the communities where these decisions are playing out should benefit from the increased competition for "healthy lives." It's reasonable to expect to see increased pricing transparency, easier sharing of records, less self-navigation required of patients, and greater teamwork and collaboration to occur among caregivers across different venues of care.

In summary, providers who have done business the same way for decades now know they must quickly transition to risk-based, population-based models of care provision. In this environment, existing and new IT systems are needed to provide the levers for managing costs, changing workflows, coordinating care and producing the results needed to satisfy the new payment systems. Suddenly it's critical to have reliable information about who is well and who is sick, who is stable and who is at risk of having complications, who has received preventive care and who has not, and who is likely to be an engaged consumer and who is not.

At last, providers are to be rewarded for thinking about how to keep people healthy — and that's the whole idea.

THE FUTURE OF POPULATION HEALTH MANAGEMENT

Factors in the health IT environment and broader health care environment are combining in 2016 to create a new wave in health IT, a wave of demand for population health management systems and services. Fortunately, we predicted this and began investing in research and development of a true platform for population health management in 2012. The art of business is in the timing. Too early and you die. Too late and you are irrelevant. I feel very good about our timing with regard to population health management.

At a very simplified level, population health management is a model of care provision where a group of providers are responsible for the health of a defined population, and they actively work to improve the health of that population so that costs are controlled and outcomes are improved. Core philosophies about population health management are not new; they have been theorized since the managed care era as an ideal way to manage health. I even wrote about them in my letter to shareholders in 1994. In the capitation of the 1990s, however, the incentive structures around payment were not right to create true population health management. What's more, the state of technology would not have been ideal to support the deep and rapid analytics needed for population health management. To do population health management right, you need the right incentive structure, a lot of data, and a way to analyze it and put it into action quickly.

It only took two decades of waiting, but the timing finally began looking right. As detailed in the last section, the incentive structure around payment is finally arriving. And the gradual digitization of health care — including devices — has solved the need for a lot of data. Personal technologies and consumer devices now allow pervasive and low-cost methods of tracking health indicators and behaviors in daily life. In 2012, digital health care generated an estimated 500 petabytes of data worldwide. By 2020, that number is expected to grow to 25,000 petabytes. 8 The only missing ingredient, then, has been a systematic way to analyze the data and make it actionable in providers' workflows. Fortunately, as we saw this situation developing in the early part of this decade, we knew a good health IT systems company that could take care of the problem.

When payment reform was still a small but growing dot on the horizon, we spent time thinking about what a true population health management platform would look like. We used our experience with our own health plan and employee population to learn about incentives, behaviors and device usage. We realized that the platform needed to have EHR data, but it also needed to have and be much, much more. If you have a chronic condition and see four specialists across town on different EHR platforms, who is going to put together the total picture of your care? If you're asthmatic, how is information about the weather going to make it into decisions about what you do that day? If you leave the doctor's office and don't fill your prescription, how will your doctor know? And if you have a genetic variation that puts you at greater risk for medication-related side effects, how will you and your doctor know what to watch out for? In design sessions, we broke out of our EHR box and began to picture a very large-scale data aggregation engine that could sit above the level of the EHR, accept data from any source, normalize it and create an actionable, single longitudinal record out of all of the complexity.

We suspected it from the beginning, but it became perfectly clear that population health management done right was going to be its own platform, not just a tab in the EHR. It would have a family of solutions that would run on it, and other solutions that would reside within the EHR and in personal devices, accessing information from the layer above. This might have been daunting if we had seen ourselves only as an EHR company, but we have a history of transforming ourselves through systems development multiple times over the years' first PathNet® in the early 1980s, then Health Network Architecture® in the 1980s, Cerner Millennium® in the 1990s, and CareAware® for devices in the 2000s. We have had good instincts and unparalleled experience building very successful platforms for health care. We view ourselves as a health care architecture and systems company first, and an EHR company second. Throughout our history, we have expanded our vision multiple times while never letting go of our core. We still have our first PathNet client.

It's a little bit like the movie Field of Dreams. You make a leap of faith and build it when no one else can see the need. You do your best to build it right. You read the signs and hope you have built it at the right time. Then you wait — hopefully not too long — to see if they come.

We began building the HealtheIntent platform in 2012. In early 2013, we signed a very good alpha client, Advocate Health and Advocate Physician Partners, which was ahead of the curve in taking on risk for the populations they managed. On September 18, 2013, seven months after contract signing, our IP Development and Population Health teams made an on-time delivery of the first set of platform deliverables for population health, a solution called HealtheRegistriesSM. The data aggregation engine fired up and began connecting data sources, building a record above the EHR. To date, we have connected 274 data sources (and counting) from 83 unique systems, ranging from EHRs (of which Cerner Millennium is only one) to insurance claims feeds to device data to open source environmental data.

Word began getting out, and we picked up some more innovative clients in 2014. In 2015, the platform had a breakout year, and we ended the year with 85 signed clients.

In Everett Rogers' classic Diffusion of Innovations theory, the technology adoption lifecycle resembles a bell curve, with innovators, early adopters, early majority, late majority and laggards all following each other into a market. With HealtheIntent, we have captured some key innovator clients, and we seem to be on a path to attract the early adopters to follow. We believe that there is another wave of opportunities in health IT beyond the current EHR market. We know what pre-chasm, early markets look like and have experience leading with vision to shape them.

One of the most exciting things about our collection of HealtheIntent clients is that it's attracting high quality clients and new types of clients. We are getting business from the leading health systems who are Cerner Millennium clients, but we've also broken outside of the Cerner base in 2015 and signed two of our main EHR competitor's clients. We are in talks with others and do not expect that to be a fluke. We secured our first state Medicaid program clients, and we recently signed a Fortune 500 financial services group with a reciprocal interinsurance exchange, opening up the commercial non-health system market. We have also signed our first UK client, one of the National Health Service's integrated primary and acute system vanguard sites in the UK.

HealtheIntent has proven its ability to scale. It currently has 5.5 petabytes of data, 59 million persons, and it is performing more than 100,000 processing jobs daily across activated clients, giving them access to near real-time data.

It supports our clients' abilities to scale their population health management activities, allowing the automation of personalized plans for care and programmable intelligence. Taking data from all connected sources, it is designed to drive actions to providers, health coaches and individual people — both when they are healthy and if they become patients. It enables strategic payer and provider network management informed by analytics and research. The key to it all is distilling content with context out of very big data. It is a big job with a purpose that gets very personal — creating healthier stories.

It is impossible to tell how big the population health wave will get, but the numbers of clients who have signed on in the first two years after publicly introducing the platform resemble the early numbers with Cerner Millennium. Like Cerner Millennium, HealtheIntent is a platform that enables a family of solutions. The solutions are complementary to the function of EHR and device platforms, and they have the potential to create a lot of value for providers and people. The maturity of the platform and introduction of solutions are working out well with the timing of the market, and they are drawing in new types of clients. In short, we think we have a good chance to become a market leader for population health management systems and, in doing so, to change health and care for the better.

PERSONAL NOTE

Before I close, I want to share a personal update. Most of you know that I am on my own journey through the health care system. As I shared in late January, I was diagnosed with a soft tissue cancer just after the start of 2016. I'm finished with the first phase of my treatment, working on the second phase even as I write this. It's not fun, but it is a great opportunity to observe the health system through the eyes of a patient. I have had great support from inside and outside Cerner.

I have been curious about what would interest me the most about this experience, but I haven't settled on a precise theme yet. I am struck and personally impacted by how much being a patient can at times be a full-time, all-consuming job that requires active management. It's causing me to reflect on how we can make it easier for patients. Health care ultimately becomes personal and is simply too important to stay the same.

I debated about whether to include this next detail, but it seems to have relevance. As it turned out, the best place to receive specialty care for my type of cancer is a facility that happens to be in the midst of converting from an outdated and heavily interfaced multi-vendor electronic medical record environment to an enterprise-wide system. The system is from one of our competitors. (Someone up there certainly has an interesting sense of humor!) Since their go-live, my observation is that it has been a bumpy ride, with reduced appointment volumes and delays at appointment time. I've had appointments with my physician go missing from the system. I've experienced waits related to my record being locked. I have had a key piece of lab work left out of an order, resulting in a 3-hour delay in my treatment and "active management" to resolve. The doctors and nurses are wonderful, and the staff is kind and professional, but my personal experience is that the conversion has definitely had challenges.

As frustrating as this experience has been, it has also been a blessing in disguise for two reasons. One, it validates for me some of the tough design decisions we have made with our systems over a number of years and how real the consequences of those decisions can be. Two, I'm receiving an invaluable perspective that will help us do an even better job for providers, patients and families in the future. There is nothing like experience for a teacher.

Long story short — I see plenty of opportunities in health care.

CLOSE

I feel very good about our future. The complexity of health care and the universal desire to be healthy are market drivers that aren't going away. The next era in health care is a shift toward prediction and prevention, personalized engagement and new types of interactions that are both continuous and contextual. Because Cerner invests in the future, we continue to arrive at the right place and time with systems that address real needs in health care. One thing I have learned is that clients rarely tell you to invest in the future, but they count on you to have thought about it when it arrives. So far, Cerner has done an exceptional job of seeing around the corner and navigating big transitions between eras in health IT markets. Our success is a function of three things:

  1. having a compelling vision for the future, sometimes years or even decades in advance,
  2. innovating by investing heavily in solutions and services that create future value for clients, and
  3. building a culture of trusted relationships based on a shared commitment to health.

What we do is incredibly important, and it's personal. It touches our friends, our family and, ultimately, ourselves. I am fortunate to have thousands of associates and clients that share a powerful mission to change health care for the better, who are passionate about making a difference.

During our 30 years as a public company, our vision, innovation and culture have resulted in superior shareholder value over time. Nothing in nature or business moves in a straight line, but I believe Cerner is well positioned for continued success.

Thanks for your confidence in Cerner.


2Richard Hillestad et al., "Can Electronic Medical Record Systems Transform Health Care? Potential Health Benefits, Savings, and Costs,"Health Affairs Vol. 24, No. 5, September 2005.

3Federal statistics retrieved from The Office of the National Coordinator for Health Information Technology, HealthIT.gov Dashboard at: http://dashboard.healthit.gov/quickstats/quickstats.php

4HIMSS Analytics, Abbreviated United States EMR Adoption ModelSM, available at:http://www.himssanalytics.org/provider-solutions(See 2015 Q4 Stages 6 and 7.)

5Joyce Frieden, "HHS: Dramatic Downturn in Hospital-Acquired Conditions," MedPage Today, December 1, 2015, available at:http://www.medpagetoday.com/HospitalBasedMedicine/GeneralHospitalPractice/54954

6United States Senate Committee on Health, Education, Labor and Pensions, Full Committee Hearing: "Health Information Exchange: A Path Towards Improving the Quality and Value of Health Care for Patients," June 10, 2015, available at:http://www.help.senate.gov/imo/media/doc/Patterson2.pdf.

7William B. Rouse, "Health Care as a Complex Adaptive System: Implications for Design and Management," The Bridge, vol. 38, No. 1, Spring 2008,available at:https://www.nae.edu/

8Jimeng Sun and Chandan K. Reddy, "Big Data Analytics for Healthcare," Tutorial Presentation at the SIAM International Conference on Data Mining, Austin, Texas (2013), available at: http://www.siam.org/meetings/sdm13/sun.pdf

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