National Business

Missouri firm Cerner wins huge contract to revamp military health records

Kansas City, Mo.-based Cerner Corp. 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 huge boost for Cerner, Kansas City’s fastest-growing 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 its bid for the $4.3 billion, 10-year defense contract. It beat out another team led by major rival Epic, a Wisconsin-based health IT firm.

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 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, referring 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, or DHMSM for short, is known as “dim sum” to industry insiders.

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

The modernization project is a massive undertaking that carries big rewards but also big risks.

The Government Accountability Office, a 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, an association for informatics professionals.

“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,” Smith said.

Some analysts are skeptical that any of the bidders are 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.

Koppel doesn’t understand why the Pentagon didn’t go with the Department of Veterans Affairs open-source VistA system.

The VA system is 100 percent interoperable, whether a veteran is in a VA medical center in Topeka, Kan., or Guam, Koppel said.

But with commercial systems like Epic, Cerner and Allscripts, “you go across the street sometimes in the same hospital and you can’t read the data,” he said.

But Pentagon officials say they’re confident in their choice.

Frank Kendall, the Defense Department’s undersecretary for acquisition and technology, said that overseeing the selection process has 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 (jet),” Kendall told reporters at a Pentagon briefing Wednesday. “We have taken the time to do it right.”

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.

Gillmor also cautioned that the government job likely will 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 in the half hour to finish the day at $73.40, up $4.91 or 7.2 percent.

The Pentagon’s Kendall said that in making their decision, he and his staff had spoken with health care providers who’d acquired electronic records systems and with numerous vendors of software and other related products.

One of the key criteria 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.

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 some 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 its 1,230 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, 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 – wasn’t a factor 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 Cerner.

“We are global,” Miller said. “We have to operate in lots of different environments, so we will be making sure that this (system) 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.

Mark Davis of the Kansas City Star contributed from Kansas City, Mo.