In this episode of Acquired, host David Rosenthal explores the story of Epic Systems, the dominant player in healthcare software, and its founder Judy Faulkner. From its modest beginnings with $140,000 in startup capital to its current position controlling 42% of the hospital market, Epic's journey illustrates how a commitment to independence and customer service can lead to market dominance in the healthcare technology sector.
The episode examines how government policies, particularly the HITECH Act, shaped the electronic medical records industry and Epic's growth. It also delves into the company's unified software platform, Chronicles, and its impact on healthcare delivery, while addressing both the improvements in patient care and the challenges that have emerged, including provider burnout and industry consolidation.
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Born in 1943 to an entrepreneurial father and socially conscious mother, Judy Faulkner developed a passion for software development during a summer internship at the University of Rochester. After pursuing computer science at the University of Wisconsin, she founded Epic Systems in 1979 with $140,000 in combined equity and loans, deliberately avoiding venture capital to maintain control.
Epic's success stems from its commitment to a unified software platform called Chronicles, which seamlessly integrates clinical, billing, and patient-facing applications. The company maintains independence in product development and customer relationships, implementing standardized processes and fostering a customer-obsessed culture. By focusing on prestigious healthcare institutions and providing exceptional customer service, Epic has established itself as the industry standard for large networks.
The HITECH Act provided $27 billion in incentives for hospitals to implement electronic medical records, significantly benefiting Epic's growth. While the Act's emphasis on interoperability inadvertently strengthened Epic's market position, David Rosenthal notes that it also led to unintended consequences, including workflow disruptions, physician burnout, and healthcare system consolidation.
With a 42% market share of hospitals and 58% of ambulatory physicians, Epic maintains near-perfect customer retention. Ben Gilbert highlights the company's significant R&D investment, comprising 35% of operating expenses, which funds expansion into new areas like the Cosmos Data Platform and AI partnerships. However, Epic faces challenges, including an antitrust lawsuit and regulatory changes that could affect its market position.
The U.S. healthcare system currently consumes 18% of GDP, with Rosenthal pointing to insurance complexity and misaligned incentives as key factors. While Epic's platforms have improved patient safety and care coordination, the speakers note that industry consolidation and Epic's historical reluctance toward interoperability have potentially stifled innovation from smaller vendors.
1-Page Summary
Epic Systems has grown to be a leading healthcare software company, and its founder, Judith Faulkner, is hailed as a significant figure in the industry. Often described as a wacky founder who’s singularly focused on making Epic great, Faulkner's unique approach and business philosophies have been key elements of her entrepreneurial journey and the company's enduring success.
Judith "Judy" Faulkner was born in August 1943 in Earleton, New Jersey, part of Cherry Hill, a suburb of Philadelphia. Judy's father, Lou, was an entrepreneur who ran a local pharmacy and soda fountain called Lou's Soda Fountain. Her mother, Del Greenfield, was a peace advocate who became the director of the South Jersey Peace Center and later the executive director of Oregon Physicians for Social Responsibility, a group that won the Nobel Peace Prize in 1985.
Judy developed a passion for software development, particularly during a summer internship at the University of Rochester, where she likened programming to playing with clay, combining her love for math with language and art. She was accepted into several Ph.D. programs in math but was directed towards computer science due to her programming experience, ultimately choosing the University of Wisconsin.
At the University of Wisconsin, Judy took a seminal class, Computers in Medicine, likely one of the first courses of its kind. Although initially unsure about building and running a company, she was efficient as a developer, as showcased in her work on a program for optimizing doctors' on-call schedules.
Judy founded Epic Systems in 1979 with a self-reliant funding strategy, raising approximately $70,000 in equity from friends, family, and colleagues and securing a $70,000 bank loan. She avoided venture capital—a decision that allowed her to maintain control over Epic, shaping it into a company deeply rooted in software development and logical thinking.
Judy's initial work on custom ...
Epic Systems: History and Founder Judy Faulkner
Epic's commitment to a single, unified software platform has set it apart in the healthcare software market. This distinctive approach has been instrumental in driving the company's dominance.
Epic's single database, Chronicles, is the core of its offering and provides a unified platform where all applications, whether clinical, billing, or patient-facing, pull from one central database. This ensures reliability and integration across the continuum of care. David Rosenthal acknowledges that Epic's stability and continuity of the system across inpatient, outpatient, and billing were key reasons for its selection by Kaiser, illustrating the importance of a unified platform. The integration of scheduling, billing, and clinical care in Epic's offering suggests a unified platform approach, ensuring various aspects of hospital administration and patient care are reliably managed within a single system.
Epic's preference for independence, leading to a direct approach to customer without reliance on partnerships, reflects Judy Faulkner's belief in controlling product development and customer relationships. The company has a list of "10 commandments" on its campus, emphasizing its commitment to independence and long-term stability. Epic's culture is customer-obsessed, and Judy Faulkner's company-building philosophy ensures a hardcore focus on software development, with the satisfaction of both customers and the company in mind.
Epic is highly opinionated with its standard package and encourages customers to adopt as much of the standard setup as possible for ease of updating and adding new modules. The company's approach to convincing customers to implement systems in the way Epic deems best illustrates their focus on high-quality performance and long-term vision.
By securing contracts with leading academic hospitals and treating university hospitals as separate customers, Epic ensures that new healthcare professionals are trained on its platform, reinforcing its standard position within large networks. After winning the Kaiser contract, Epic became the industry's gold standar ...
Epic's Approach to the Healthcare Software Market
The Health Information Technology for Economic and Clinical Health (HITECH) Act has profoundly influenced the adoption of electronic medical records (EMRs) and the rise of Epic Systems as a dominant force in the health IT industry.
The HITECH Act, as David Rosenthal notes, was successful in digitizing the healthcare industry by providing $27 billion in direct incentive payments to hospitals to implement EMRs—part of a broader $36 billion dedicated to health IT—though he argues it fell short of achieving a digital transformation.
Ben Gilbert discusses that the incentives of the HITECH Act and the resulting accelerated EMR adoption benefited Epic significantly. The Act's "Meaningful Use" requirements played into Epic's strengths as a reliable enterprise system provider, leading to an increased demand for their software.
While the HITECH Act stressed the implementation of interoperable standards, this emphasis on interoperability unintentionally strengthened Epic's market position since Epic already offered an extensive integrated EMR system that appealed to large healthcare providers who were looking for comprehensive solutions.
The demand for industry standardization and the synergy with Epic's systems notwithstanding, the HITECH Act's repercussions extended beyond mere market shifts.
The legislation was specific about what "Meaningful Use" entailed, influencing software features and the work habits of healthcare providers. This, in turn, disrupted workflows and spurred physician burnout, as the software became more demanding.
The podcast with Ben Gilbert and David Rosentha ...
Impact of Government Policies on Emr Adoption and Epic's Growth
Epic solidifies its dominance through a focus on customer success and by continually improving and expanding its product offerings.
Ben Gilbert notes Judy Faulkner’s strategy for targeting hospitals with complex needs, indicating Epic’s sophistication in software solutions. This focus has led to Epic becoming the standard across large healthcare systems. MyChart’s enhanced features, such as self-scheduling and waitlist management, offer workflow savings and reduce revenue loss from no-shows, bolstering Epic’s market dominance.
Epic’s team demonstrated their system’s robustness by modeling Kaiser’s transaction flow overnight, convincing Kaiser of Epic’s performance reliability. The 42% market share of hospitals and 58% of ambulatory physicians that rely on Epic further supports their leading position. Epic's deep market penetration, evidenced by 79% of the US population interacting with their system, shows that they're a cornerstone in healthcare systems.
Epic’s commitment to customer success is also evidenced by the strategy of continually adding new features, like telehealth modules, to existing customer packages, ensuring ongoing client satisfaction.
Epic’s focus on product improvement is apparent in its R&D investment, which has allowed for the strategic expansion into adjacent products and services, such as Cosmos Data Platform and AI/automation partnerships. With its bundling strategy and initiatives like Care Everywhere promoting usability and interoperability, Epic is positioning itself for sustained growth in a rapidly evolving market.
Epic is looking to grow by tapping into opportunities presented by AI and automation. The launch of Cosmos, which allows extensive data analysis from anonymized patient data on their platform, signifies Epic’s foray into data-centric services. AI partnerships with companies like Nuance indicate Epic’s open-mindedness towards integrating AI into its suite of services.
The introduction of AI ambient listening through partners and AI scribe products allows physicians to focus more on patient care than on documentation, transforming EHR into a potential AI operating system, further reducing administrative costs and improving clinical efficiency.
Epic's Market Position and Future Growth in AI/Automation
Experts David Rosenthal and Myles E. Johnson discuss the challenges of the U.S. healthcare system, which spends an unsustainable 18% of the nation's GDP, and the complex role played by Epic, a dominant electronic health records (EHR) provider.
With healthcare costs now at 18% of the GDP, the American healthcare system is described as being characterized by escalating expenses and inefficiencies that fail to provide good value to consumers, amounting to about $800 billion in waste, comparable to Switzerland's GDP.
Rosenthal notes the massive inefficiency within the healthcare industry, attributing the runaway costs to a variety of factors, including the complexity of insurance and misaligned incentives.
The speakers discuss the contributing factors to physician burnout, such as the compliance burden and the complicated user experience of EHRs, which partially result from the HITECH Act. EHRs have led to the ordering of unnecessary care and increased billing codes. The workload for doctors has increased with the digitization of EHRs, and the industry has responded with solutions like adopting AI technology for ambient listening to aid physicians.
The discussion also delves into how government actions like the High-Tech Act and meaningful use requirements have unwittingly led to industry consolidation, which, in turn, created monopolies and stifled competition. Hospitals merge often to survive and scale, with the successful ones reinvesting profits into growth to deal with large-scale entities in the healthcare system. This need for scale, driven by regulatory compliance, minimizes competition and does not lead to decreased prices for consumers.
Epic has had a significant yet multifaceted impact on the healthcare landscape.
Though Epic's systems have prevented countless potential adverse drug interactions and surgical errors, the consolidation in the EHR industry, driven by the financial stimulus of the HITECH Act, has prevented newer, potentially innovative competitors from entering the market, suggesting a stifling effect on smaller vendors' innovation.
State of U.S. Healthcare System and Epic's Role
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