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Epic Systems: Slay the whale strategy, regulatory tail winds, and network effects

The most successful companies in vertical markets pair product innovation with go-to-market disruption. In this series we explore that marriage, how companies many have never heard of came to dominate their markets, and how they scaled with distinct tactics. These history lessons inform what we look for when investing in vertical markets at Scale Venture Partners, and hopefully provide blueprints for the next generation of vertical market winners. 

Company name: Epic Systems

Founder: Judy Faulkner

Year founded: 1979

Company vertical: Healthcare

Market dominance: Electronic Health Records (EHR) for enterprise healthcare

What do they actually do: The core of an EHR is a database that stores patient medical histories and insurance details. Three main functionalities live on top of the core database: clinician-facing software for doctors to view patient medical histories and document new encounters; back-office software for administrators to input patient insurance information, schedule appointments, and prepare payor bills; patient-facing software for patients to access records, schedule appointments, pay bills, manage medications, and communicate with their care team (known as MyChart – you’ve probably used it before!).

Product innovation: Epic’s key innovation was building their EHR for health systems that offer a variety of tightly integrated services, often referred to as “Integrated Delivery Networks” or “IDNs.” This meant Epic’s product had to serve a variety of different care modalities – inpatient stays, doctor’s visits, radiology labs, etc. – that all had to communicate with one another, while competitor EMRs were largely built for standalone entities only offering single services.

Building for IDNs required three major product innovations vs. the standalone entity EHR. The first was developing a unified, interoperable backend that enabled compliant patient data sharing across the network. The second was creating a flexible, infinitely customizable frontend that could be tweaked to serve the needs of almost any care modality. The third, and possibly the most impactful in the long-run, was dialing in a customer service and implementation motion to understand the needs of an IDN, translate those into software, and implement Epic across the entire network (a mixture of hospitals and outpatient clinics spread across a region).

Building for IDNs was a gamble that ultimately paid off. When Epic first got started in the 1980s and 90s, IDNs were a relatively new development and the R&D effort required to serve them wasn’t obviously worthwhile. However, IDNs started to expand rapidly in the 90s and 00s as a response to rising healthcare costs, and Epic was the only product on the market that was ready to meet the growing demand.

Scaling magic moment: Epic’s scaling magic moment came in 2009, when the HITECH act mandated that all providers accepting Medicare reimbursements must implement an EHR by 2014. Epic was better poised to take advantage of the regulatory push than competitors, and, as adoption spread, local network effects emerged that continued to accelerate their growth as the market matured.

In 2009, the HITECH act passed as a precursor to Obamacare. Amongst other things, it mandated that providers adopted EHRs, first by offering financial incentives and then by threatening to cut Medicare reimbursement by 1% for all providers not in compliance by 2014. In 2008, only ~10% of hospitals had an EHR, and by 2014 ~95% of hospitals had an EHR.

Epic’s focus on IDNs in the 90s and early 2000s set it up well to capitalize on the newfound demand. Pre-HITECH required adoption, Epic already had blue chip names across the country: UW Health (Midwest) in the late 90s; Kaiser Permanente (California), Stanford (California) Cleveland Clinic (Midwest), Legacy Health (PNW), Yale (East Coast), MedStar (East Coast) in the early 2000s. So, when HITECH hit, Epic knew how to sell and execute enterprise deployments and had tier 1 scaled customers already on the platform.

Epic’s head start in IDNs helped for two reasons. The first was having referenceable customers and implementation reps significantly de-risked adoption for new customers: no one got fired for choosing Epic—if it was good enough for an enterprise like Kaiser, it was probably good enough for your enterprise. The second, less obvious reason is local network effects started to emerge. Epic’s interoperable backend meant that it was (relatively) easy to electronically trade data Epic <> Epic, both within and across IDNs. Once a major IDN in a region adopted Epic, it became advantageous for other entities in that region to adopt Epic. Healthcare often straddles competition and collaboration. IDNs want it to be simple to refer to one another if a patient’s care necessitates it, and simultaneously they want it to be frictionless for a patient to switch networks if they aren’t happy with the care they’re receiving. This advantage was eventually weakened by open data sharing standards, but when the market jumped from 60% → 95% adoption in 2013 this was a major differentiator against other systems.

Where are they now: Epic is the dominant EHR vendor for hospitals and health systems in the US: ~2,400 hospitals and ~45,000 clinics use Epic, or about ~40% of the IDN market. In 2022, they recognized $4.4Bn of revenue. They remain a private company.

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