July 9, 2010

Analysis of EHR Vendors "Preferred" by the RECs

Healthcare IT
• After seeing Iowa announce the EHR vendors that its REC will be recommending, we
have done some analysis of how companies have fared on the six “preferred” lists so far. Jamie Stockton, CFA
We eventually expect 40-45 preferred lists, so keep in mind that it is early. 901-579-3501
jamie.stockton
• ATHN and ECLP have done well, which we expect to continue for ATHN. MCK, MDRX @morgankeegan.com
and QSII have been lagging, although MDRX should make up some lost ground. CERN
and GE have been absent, although we expect each to make a few lists going forward.

Iowa Announces Preferred EHR Vendors – The regional extension center (REC) in Iowa announced earlier this week
that it has selected Allscripts, eClinicalWorks, EHS, eMDs, Greenway and McKesson as the preferred EHR vendors for
physician practices in the state. The REC went through a four month evaluation process where over 200 EHR vendors
were narrowed down to the six listed above. Our prior conversations with the REC indicated that they would name about
fifteen vendors to the preferred list. The fact that the list was narrowed is an example of a trend that we have experienced
throughout our recent REC conversations, which is an increasing bias toward having a preferred list of EHR vendors and
making that list small enough to allow the REC to develop expertise about those software vendors.

REC Overview – Just as a reminder, there are 60 RECs across the country (most states have one for the entire state)
that are expected to help at least 100,000 physicians become “meaningful users” of an EHR in the next two years. The
RECs get roughly $5,000 of funding for each physician that signs up for assistance in selecting and implementing an EHR.
The RECs are supposed to target offices with ten or less primary care physicians. We believe this program should
represent more than half of all physician practice EHR demand in the next two years.

When a physician practice signs up to have a REC guide them through the EHR adoption process (consulting that is
almost entirely subsidized by the government), the REC will typically perform an evaluation of the technology currently
used by the practice. After the evaluation, most RECs will point the practice toward the list of preferred EHR products for
that geographic area. The preferred EHR vendors are also likely to pitch their product to that practice, either directly or
through a group demonstration with other practices. After selecting an EHR, the vendor will generally handle the
implementation (although some RECs are also going to implement) and the REC will advise the practice to ensure a
smooth implementation. Once the practice has implemented an EHR, the REC will make sure the practice is collecting the
appropriate quality measures to qualify for the government EHR incentives. The RECs will work with practices regardless
of whether their EHR is from a preferred vendor, but practices that have not adopted an EHR are likely to be heavily
biased toward the preferred lists. The REC funding is released by HHS as the practice meets three milestones: physician
sign-up, EHR adoption and officially becoming a meaningful user (mostly reporting the quality measures).

Lists So Far – Only 6 of the 60 RECs have announced preferred lists to our knowledge. We would expect a trickle of lists
to be announced throughout the rest of July, and then a flood in August. The following are the lists that we are aware of so
far. The physician count is the number targeted within each geographic area by the REC.

REC Physicians Preferred EHR Vendors

Alaska 700 eMDs and Greenway
Iowa 1,200 Allscripts, eClinicalWorks, EHS, eMDs, Greenway and McKesson
NYC 5,000 eClinicalWorks, Greenway and MDLand
New York 5,000 eClinicalWorks, Eclipsys, Greenway, NextGen (Quality Systems) and Sage
Vermont 1,200 Allscripts, PRISM (Fletcher Allen) and athenahealth
Virginia 2,300 Allscripts, athenahealth and MDLand

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Vendor Share Capture – If we divide the physicians targeted by each REC equally among the preferred vendors named
by each REC, then we get the following REC share capture for each vendor. This is not a perfect analysis due to the
likelihood that physicians will not equally choose among the vendors, but we do believe it is informative.

Vendor REC Capture MK Commentary

Greenway 21% #1 rated EHR software for small/medium practices. Very involved with the
government program. Moderately priced software. Estimated market share of
roughly 1%, so the REC program could be a life changer for this company.
eClinicalWorks 19% Solid and inexpensive product that has been very popular in recent years. Doing
well with REC capture versus an estimated 5% market share. Strong in NY and
NYC, so they may lose some steam as more RECs announce.
MDLand 16% Predominantly serving physicians in the northeast. Doing much better than the
estimated market share of less than 1%. We would expect the company's REC
capture to fall significantly as the rest of the country announces.
Allscripts 9% Not getting into NY or NYC put them in a hole early, relative to their estimated 20%
market share. Have been on the last three REC lists. We expect the company to
continue to make up lost ground. Big footprint and great distirbution channels.
athenahealth 8% Outperforming their roughly 3% market share thus far. Just broke into the KLAS
EHR software ratings at #2 for small/medium size pracitces, which should benefit
the company as future REC decisions are made.
Eclipsys 6% Doing better than their roughly 2% market share. Has a very strong presence in NY,
which is the only list including them. We would not expect the company to be on
many more lists. NY capture is a bonus for Allscripts in the acquisition.
Quality Systems 6% Slightly less than their roughly 7% physcian practice market share. Robust and
expensive system that tends to do better in large practices that the RECs are not
targeting. We would expect their REC capture to continue to lag market share.
Sage 6% Lagging their estimated 10% market share. Very fragmented customer base that
was built through acquisitions. We believe they will be on some incremental lists,
although their REC capture is unlikely to change significantly.
eMDs 4% Highly rated software with a moderate price tag. Targets small practices. Doing
better than their roughly 1% market share. We would expect them to continue to
show up on some REC lists and maintain 3-4% REC capture.
Fletcher Allen 3% Healthcare provider with a proprietary EHR that is used mostly in Vermont. Almost
no market share. We do not expect them to show up on other REC lists. We would
be surprised to see other EHR providers like this show up in the future.
EHS 1% Performing in line with their roughly 1% market share. Might show up on the REC
preferred lists in a handful of states, especially in the southeast. We expect 3-5
regional EHR vendors like EHS to show up as all of the lists are announced.
McKesson 1% Significantly underperforming their roughly 11% market share in the physician
practice space. Built the business through acquisition. The fragmented nature of
their customer base is a hurdle. We expect their REC capture to improve slightly.

Notably Absent – There are a few vendors that are notably absent from the REC lists thus far.

• GE has a very large practice management software base, which gives the company an estimated 14% market share.
We believe it should be able to get on a few REC lists in geographies where the company has high customer density,
but the company’s REC capture is likely to be well below its current market share. We believe GE has been losing share
in both the hospital and physician practice market for years, due to a weak clinical software offering.
• Epic Systems is a very strong player among large physician practices and has an estimated market share of 10%. We
do not believe the company is actively pursuing the REC opportunities, because of the mismatch between its core
competency (selling expensive software to large practices) and the REC focus on small/medium practice EHR adoption.
Some states like Oregon might name Epic to their preferred EHR vendor list due to high physician density, but we do not
see them getting on many lists.
• After years of attrition within the acquired VitalWorks physician practice base, Cerner is finally gaining ground in the
physician space with roughly 4% market share. We expect the company to show up on a few REC lists, but it will be
challenging to equal its current market share.

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Open States – After initially surveying the RECs in February and March, we believed that roughly two-thirds of the 60
organizations would have a preferred list and one-third would work with any interested EHR vendor. At this point, we
believe that roughly 15-20 of the RECs will eventually have an open program. States that are apparently going to be open
include California, Nebraska, Nevada, North Carolina, Rhode Island, Tennessee, Utah, West Virginia and Wisconsin.
Some of the RECs in states like Florida, Minnesota and North Dakota have hinted at being vendor neutral, but the jury is
still out. EHR vendors that are not positioned well in states with preferred EHR lists may disproportionately focus on the
states that tend to be more open.

Impact on Fundamentals – We expect the RECs to have some positive impact on fundamentals for EHR vendors in the
September quarter, but the full force of the program is not likely to be felt until the December quarter when all of the
preferred lists have been determined and the RECs are fully staffed.

Public Companies Mentioned In This Report:

• Allscripts (MDRX, $17.01, O-S)

• athenahealth (ATHN, $24.62, O-S)
• Cerner (CERN, $79.83, O-M)
• CPSI (CPSI, $41.49, O-S)
• Eclipsys (ECLP, $19.24, O-S)
• General Electric (GE, $14.83, NR)
• McKesson (MCK, $67.99, NR)
• Quality Systems (QSII, $58.52, M-S)

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Morgan Keegan & Co., Inc. Healthcare IT

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