Cerner Corporation (NASDAQ:CERN)
2013 Analyst Meeting
March 05, 2013 9:30 am ET
Marc G. Naughton - Chief Financial Officer, Executive Vice President and Treasurer
Zane M. Burke - Executive Vice President of Client Organization
Michael R. Nill - Chief Operating Officer and Executive Vice President
Rick Heise - Vice President of Australia & Asia Pacific Operations and General Manager of Australia & Asia Pacific Operations
Donald D. Trigg - Former Vice President and Managing Director of United Kingdom
Jeffrey A. Townsend - Chief of Staff and Executive Vice President
Matthew Swindells - Senior Executive at Cerner's Global Organization
Dr. Rishi Sikka
Neal L. Patterson - Co-Founder, Chairman, Chief Executive Officer and President
Richard J. Flanigan - Senior Vice President of Research Services
George Hill - Citigroup Inc, Research Division
Jamie Stockton - Wells Fargo Securities, LLC, Research Division
Marc G. Naughton
Good morning. I'll try that again. Good morning. Thank you, thank you. I want to welcome you all to Cerner's 2013 Analyst Meeting held here at HIMSS. I'm Marc Naughton, Chief Financial Officer. I've been here 20 years, 17 of those as Chief Financial Officer.
Last year, in our analyst meeting in Las Vegas, I tried to compare the ambiance of a couple of Las Vegas hotels. Given that the Sheraton has been very nice to us and my desire to keep the webcast going the entire length of the time, I decided I was going to, instead of comparing hotels this year, I thought I would offer a few comparisons between New Orleans and Las Vegas for those of you who are listening but were unable to attend Las Vegas this year.
So in Las Vegas, the Bellagio has beautiful dancing fountains and a beautiful pool outside and the water extravaganza, oh by Cirque du Soleil inside. In New Orleans, your hotel features low water pressure, nonfunctioning toilets and undrinkable water, so you get a little bit of the sense.
In Vegas, there are over 10 million neon light tubes on The Strip, creating the illusion of day in the middle of the night. In New Orleans, there's a power outage at the Super Bowl, creating the illusion of night in the middle of the game. So kind of the same thing.
In Vegas, you can visit Tiffany's at the Bellagio to purchase an extravagant gift, professing your eternal love. In New Orleans, you can purchase a plastic set of beads at Walgreens to randomly throw to strangers.
So I think to summarize, Las Vegas aspires to create an atmosphere of excitement, style and hope. New Orleans appears to be more focused on providing the ambiance of a 5-day carnival cruise to Mexico. So I think with that perspective, we could probably go ahead and move on but -- so today for our agenda, we'd like to give you a view of the company, let you meet some of our executives. Most of these executives are people that you know well and have seen for a significant amount of time, so that is one of the strengths of Cerner, a long -- and a lot of us have a lot of history with the company.
So we'll have Zane Burke start talking about the marketplace once I finish my remarks. Mike Nill will talk about 2012 execution and '13 focus. Katie Chaffee will do Cerner Consulting. Rick Heise will talk about revenue cycle. Donald Trigg will give us some policy and marketplace observations. Jeff Townsend will talk about population health platform, and then we're very honored to have Matthew Swindells moderating the panel with 2 of our esteemed colleagues from Advocate Health. And then finally, we'll have Neal Patterson kind of run the Q&A, provide some closing Chairman comments. So with that, why don't we go ahead and get started?
That's our Safe Harbor Statement. It's available on our website. This is our Cerner at a Glance slide. It's been updated relative to the newer numbers. I'm not going to spend a lot of time on this since I probably know almost everybody in this room by name. I think you've been covering us for a while. So let's go on to the financial highlights. Obviously, 2012 was a very strong year for us. Bookings, up 15% to $3 billion. Revenue, up to $2.7 billion. Operating margin continuing to improve with 70 basis points improvement there and EPS, up 28%. Balance sheet still remains strong with $1.5 billion of cash and low debt. Free cash flow is up 18% for the year to $425 million.
I would talk at times about cash deployment as we go into '13, on our call, we talked a lot about the investment we're going to make this year in R&D. So you're going to see the element of capitalized software increasing for '13 even though our R&D expense line will also increase. So there's not a whole lot of leverage we're going to get from that, but we are going to get a huge amount accomplished relative to R&D. We've also initiated the $170 million stock repurchase program and we'll begin executing on that program once we cleared our quiet period in Q1. And we will continue to look for strategic acquisitions, some of which you've been aware of that we've done pretty recently.
So looking at this slide over the years has always been compelling to me. It talks about the visibility and profitability of the company. If you look back to 2000, some of these numbers such as the visibility of revenue is -- when we go into a year, things that are highly visible or in our backlog, what percent of the revenue for the year does that represent? In 2000, it was 55%. It's now 72%, which is a significant number.
Contribution margin from those businesses and the visibility is up from 41% to 72%. And this is really the first year that we've seen those numbers basically be the same thing. Our visibility to the revenue and our visibility to profitability is about equal, so good strength there.
Operating margin since 2000 has gone from 8% to 23%, a significant growth in services revenue and margins. And also obviously, we've attained some R&D and SG&A leverage as we've been going. We continue to target margin growth of about 100 basis points per year.
So this is the business model slide updated for 2012. These slides are online so those of you that are trying to break your wrist copying all the numbers, you can relax. But I think I want to take you through some of the highlights. Once again, just a reminder, this goes from sales pipeline all the way down to operating margins. Middle 6 boxes represent our basic business models because they're all -- have a little bit unique impact as far as how the revenue comes into play.
But just looking at those to compare them, the -- on the revenue side for software, the revenue was up 6% after a 21% growth in the prior year, which is the highest 2-year growth in a decade for us. The revenue relative to technology is up significantly. We talked during the year as how we've really been focusing on Advisory sale and growing that top line. We did that successfully in 2012 with a 59% increase in revenue.
The contribution margin has remained relatively flat, which was actually okay with us because of the amount of hardware and single-digit revenue that comes in there. Contribution margins in total, because of the growth on the top line, are up 66%, representing those strong resales.
On subscriptions and transactions, again, strong growth there, 22% up over the comparable time. Contribution margin staying in about similar levels, slightly improved based on expense levels.
On the professional services, revenue up 25%, so a significant increase there reflecting the enhanced business that we have. Contribution margin has been pretty consistent at 30%, which is very strong for a services organization. And we've also, in keeping that 30%, have absorbed a lot of the lower ITWorks and RevWorks margins that we've talked about in the early stage that will be impacting our overall total margins. So we've actually started those businesses and are covering them with the profitability of the remaining Professional Services business.
Managed Services, our hosting in other services related to that, revenue up 19%, contribution margin is up to 33% from 31%. So we continue to get the leverage out of that fixed cost base.
And then finally on Support & Maintenance, the revenue there was up 10%, contribution margin was basically flat, down 1% to 75%, basically based on some slightly higher third-party costs to us.
So that's kind of the highlight of the business model. I think that's still an effective tool for us to help explain the elements of our business and how we'll continue to grow.
So in the time I have left, I want to take you through a couple of views of our ability to grow through this decade. First our is bottoms-up view. We've provided this last year to say, based on new initiatives and growth and existing initiatives that are kind of outside of our normal base, we think that we can grow double-digits top line through the end of the decade.
The bars to the left represents what we've accomplished so far, and that is ahead of what we would have expected. So we are growing faster than our original expectations were. Some of that growth is coming from increases to the base. If you remember, our original assumption was that our base would remain flat.
So as we go forward and look and take -- kind of expand and look at that 10-year CAGR from 2010 going to 2020, where we were with a flat base of 10% growth at top line, we're now at 11%. So about 100 basis points better on that 10-year CAGR.
We've also taken a look at so what if the base does continue to grow? So if it doesn't stay flat, we also would get some growth. So 5% growth or a 10% growth from the core are reflected in the other graphs, which give you a 13% total, a potential 14% top line.
Now I know some people will say, okay, well you're ahead of your plan. So therefore, your growth for the rest of the decade, if you're going to get to your 10%, 11% growth, won't be doubled. So we -- not that anybody in this audience would say that but -- so we want to at least provide that perspective. So I'm looking at kind of the 8-year or 7-year CAGR.
Certainly, if we keep our base as flat from this going forward and grow the initiatives as we laid out earlier, we would end up with a 9% top line growth. We don't think that's going to be a realistic view of what we are going to see. We think the core growing slightly at the 5% level is a more realistic view. And based on that, even with the shorter CAGR period and looking -- not taking any benefit from the tailwinds that we've gotten so far, we'd still be at 11%. So I think that's a pretty good view of what our bottoms-up was as an update and then kind of what we see for the rest of the decade.
Quickly, I want to take you through the kind of the top stand. We presented this at the last HIMSS meeting. Mike Nill, I'm sure did a much better job than I will do at this point. So I think the slides are instructed to say okay, based on the bottoms up, you were saying we're going to get to a $5.5 billion to $7 billion top line in 2020. If you look at the macro growth and that roof, that view supports that.
So the logic here is that in the first year, you're looking at -- take the total health care operating spending, take the percent spent on IT and end up with the number on the graph for total HCIT worldwide spending. We look at the Cerner percent of that and we come up with the percent of the spend that we're getting, and that gets us to about the $2.7 billion revenue that we had for last year. So that's kind of the macro down to the Cerner level.
So if we look at kind of the 2020 estimate, we say health care spending is going to continue to grow. So I think it's about $4.1 billion, and we think the percent spent on IT is going to increase. So that goes up to $4.5 billion, that would give Cerner client spending a level of about $27.7 billion based on market share. We expect to acquire new clients, their spending will be about $4 billion, which gives us about $32 billion of total client spending.
Our strategy is to get a bigger percent of each of those. So that percent turns into 23% which was 19%, which gives us about a $7.3 billion top line. Now you can flex that up or down depending on growth rates, which gets you the $5.7 billion to $9.6 billion. But I think these 2 graphs give you a good view of the long-term nature of bottoms-up and tops-down opportunities in the company.
So with that, I'll just throw the guidance slide up that we provided at our last call, that's when we provide guidance. So this is not new guidance, this just reflects what we said on that call. Rather than read it to you, I will at this point, turn the dais over to Zane Burke.
Zane M. Burke
Good morning. Thank you. I'm going to do a couple of marketplace viewpoints, focusing first on the 2012 highlights. So 2012 was a fantastic year from a top line perspective for Cerner. We had record bookings inclusive of a Q4 billion-dollar quarter, strong performance across all areas of our business. So every piece of our business grew in 2012.
Strong performance in the works areas, and our clients also showed the benefits of using Cerner. Last night, I was able to attend the HIMSS level 7 achievement which is the highest level of achievement for clients, and Cerner had more than double, all other competitors combined. So a unique year for our Cerner clients, so over 32 clients that attested for HIMSS stage level 7. That helps us as we move forward, demonstrating the value in that space. We've had great success in our ambulatory marketplace. So our ambulatory marketplace has grown by 100% -- over 100% from 2010 to 2012.
As you look at the kind of the marketplace overall, the bookings from new business, our competitiveness has never been better than it is today. So we entered 2013 with the most competitive solutions. Our clients are doing extremely well. Mike will talk a little bit about some of the elements that they're getting from -- the other value elements they're getting from our solutions as well but that's helping drive our top line.
So in the last 2 years, we booked more than the previous 4 years combined, in new business clients. Our competitive win rate has gone up 38% from 2010 to 2012. So again, reflective of the investments we made in the solutions, reflective of our investment in our sales organizations and our client-facing relationships.
The pipeline has never been stronger. Our pipeline has doubled from 2010 to 2012. So this is the same time we've taken out almost $6 billion of bookings out of that pipeline, we removed $6 billion from a win rate perspective over the last 2 years, but that pipeline has doubled in that same time period. And I think as importantly, is that all pieces of our business have seen growth in the pipeline. So that includes our new business, our installed business and our global business. So across all areas of our business, we see, as you look at the outlook for Cerner, it's very, very strong, reflective of the pipeline here.
Overall trends, if you look at it, there's clearly a separation between winners and losers, and it's increasingly more a duopoly for that core EMR solution, that many of our competitors, in fact, all of our competitors, are spending most of their energies on just getting to Meaningful Use. They're not innovating for the future so they're just trying to attain and keep up with the standards that are there. We have made a focused effort around investing in the elements of today. So of course, we'll achieve Meaningful Use in those elements but a huge focus around the investments for the future. And I'm going to talk about that here in a little bit.
Our clients are facing increasing mandates and measures and an impact on their bottom line, so our client bases and our prospective clients have never seen more change. Every single one of them is undergoing cost savings elements, so they're trying to cut cost from their systems to prepare for the future changes in the reimbursement and the impending changes in the reimbursements today.
The revenue cycle is increasingly an important element of how they're thinking about. So preparing for bundled payments, preparing for the future of that until we see that revenue cycle becoming an increasingly important part, as well as we think that's going to be a big driver in our business as well.
Population Health as a core element of strategy for clients is very important and then you see this continuing consolidation in the industry overall. And probably, one of the little-known elements is Cerner has 7 of the top 10 systems in terms of size today, and they are typically the consolidators and the winners overall. And that represents great opportunities for Cerner as we move forward.
I'd kind of want to speak a little bit to the competition overall. So there's always been a competitor of the day for Cerner. So when Neal, Paul and Cliff started the company, we had a significant competitor in the term of -- in the name of Sunquest. So when we started the lab company, huge, bigger competitor in that space.
And they had the foresight to again, to invest in it today, so to beat Sunquest today in that day but then also, invest in the future. And invest become more than a lab company. And that's as we see things today. So we have a bidder or competitor of the day and you'll see how I mark them and how my chart works is actually this is sort of the end of that decade. As we look forward to the end of the decade, we see our competitor evolving from -- the competitor, the duopoly of today, to a change where we're really focused on competitors of the future. And that's much of how we are thinking about the investment in Cerner. That's much of how our clients are thinking about who they should partner with for the next 10 to 20 years as their primary core EMR supplier. They're beginning to think more and more about where things are heading and who they should partner with and who has a vision for that and who's going to have a proven delivery track record around not just doing the vision side of that but executing on that. And Cerner's track record in that is exceptional in that space.
That leads us to where -- how I view the marketplace overall. I view the -- this is the view of 200-bed -- the greater than 200-bed EMR core marketplace and really looking on a going forward, we do this in multiyear period of opportunity for Cerner, where we feel the install bases of the respective organizations are going to be up for bids if you will.
So many of these clients are beginning to reevaluate who their core EMR supplier is as they move to different -- they have to think about getting access to data. As they have to think about analytics, as they have to think about population health, as they've got these raining mandates below in terms of readmission, in terms of the quality reporting and other things that are going to have a direct impact on their bottom line. They're evaluating their core EMR solutions as they move forward. And basically, about 80% of the marketplace over the next 5 to 7 years, we see as open hunting ground for Cerner and the solutions that we deliver.
And finally and really looking at going forward, we've continued to invest in the global marketplace. We're in 24 countries. We've had -- we have 7 countries where we have HIMSS level 6 or 7 more than all other competitors combined in terms of number of countries where they have reached that kind of status. Our pipeline growth we've talked about a little bit previously, we see that growth principally in countries where the economies are doing well. So doing well in Canada, doing well in Australia, in the Middle East and then we see the U.K. as a great opportunity for Cerner as we move forward. So I'd anticipate 2013 will be a strong global year for us.
And with that, I'll turn it over to Mike Nill.
Michael R. Nill
Good morning. My name is Mike Nill, I'm the Chief Operating Officer for Cerner, and my topic this morning is to -- I stood up here a year ago. Probably many of you were in the room. I talked about our plan for 2012, where we were going to focus and it's my job this morning to explain what we had done and where we intend to focus in 2013.
All right. This was a slide that I presented last year, and I talked a little bit about -- we have nearly -- we have over 12,000 associates in Cerner and it's very important for us to create focus for every individual so they know exactly what we intend to accomplish on an annual basis.
We set -- last year, we set 3 primary objectives for Cerner Corporation and those were driving Meaningful Use, dramatically improving the physician experience with our applications and the third being powering population health management. So how did we do?
With respect to Meaningful Use, we anticipated the fact that Stage 1 was going to put tremendous pressure on all of our clients and tremendous pressure on Cerner internally and we prepared for that. We increased our investment. We got our software ready and we moved nearly 80% of our clients through a new release of software. And I often tell my organizations back in Kansas City, I said, you guys, I know this was very difficult but we made it look easy. Our clients progressed through that effort and as we look right now by the end of Q1, we'll have 86% of our clients that have either attested for -- well, they should have attested for Stage 1. I mean, if we use -- it approached nearly $0.5 billion in incentive payment. So I would mark that as a clear success on that imperative.
Second imperative was to dramatically improve the experience with our applications in physician communities. With Meaningful Use and the requirements that are being placed on physicians, they're being required to use technology in an unprecedented level. And in doing so, it has the potential impact of reducing the productivity. So we stepped back and we looked at our applications, we looked at the way that they were designed and we implemented tremendous enhancements into both the desktop, as well as building a brand new platform, leveraging the tablet device to deliver a completely new experience for our physicians.
So how did we do? In 1 year, we built a brand new architecture. We had 13 clients live on the solution by -- in the ambulatory setting by our health care conference and we now have 29 clients that are in the process of implementing PowerChart Touch. So I would give the second imperative a check. We met the goal there.
Third imperative was powering Population Health Management. Our focus in 2012 was to create more clarity around the topic. There are many organizations that are experimenting with different solutions, trying to attack the problem. We stepped back and designed what we think is a very comprehensive architecture that will meet the needs of our clients and designed a roadmap to build a new set of applications for our clients. And in addition, we partnered with Advocate to help confirm that the path we were on, from an application perspective, was correct. So I would give us a check mark on the third imperative as well. I believe we had a very successful year in 2012.
So where are we headed in '13? As I said earlier, we have over 12,000 associates and we try to create clarity. Oftentimes, we create acronyms to try to help them remember our focus. So the acronym we came up with this year was PPR/CIM+1. Now I'm sure after I say this to you, it's all very clear to you now and you'll remember this when you go home tonight. But trust me, if you say it over and over, PPR/CIM+1, you'll remember it, okay? You'll be dreaming about it tonight.
All right, so I'm going to walk through the next series of slides, what that acronym means. So the first P is again physician experience. We're carrying that forward from 2012. It's still a tremendous focus for us in 2013, and the hard work that we did in '12 building the platform for PowerChart Touch. What you're going the see is the assembly line begin cranking out applications in 2013.
We initially focused in ambulatory. We're moving to inpatient and the icons that you see represented on the slide represents the specialties where we're going to deliver specific applications for each specialty, because we know that a general purpose solution is not going to be as effective as something that is tailored specifically for the needs of a specialist.
Second P is population health management, again a carryforward from 2012. It's very clear that the only way -- our clients are striving to deliver higher-quality care at a lower cost. And it's very clear that the current fee-for-service model is not going to enable them to do that. They need to take responsibility, and they assume the risk for a population for conditions, and the payment model will change for them to pay for their effectiveness in managing a population or a condition.
We are -- this picture represents a high level of description of the architecture that we're constructing. We are enabling, and Jeff will go into more detail on this, we're going to pull together data from a variety of sources, normalize that data into a common repository, build an intelligent analytic layer on top of that, that will identify the patterns of care that are most appropriate and drive those recommendations back into the clinical process. And we believe that it's this complete thought, this complete architecture that's needed to allow our clients to achieve the objective they're striving for.
Third imperative, R, is revenue cycle. We had a spirited debate in our prep meeting yesterday, whether this should be the second or third imperative because the truth is, the revenue cycle component, revenue for our organizations is really what's -- for our client organizations, is what's driving population health management. The model is changing in a way that they're going to be paid. And whether they're for-profit or not-for-profit, it's important that revenue is maximized and they receive the payments that they deserve.
So we've spent the last several years improving our application, hardening our solution, providing additional revenue cycle solutions. So this is our third area of focus for 2013. We are placing -- from an engineering standpoint, there's many resources that are being applied to the physician, population health and revenue cycle imperatives.
The final 4 imperative CIM+1 so it's PPR/CIM+1, the final 4 really are sub-bullets to population health. These are 4 imperatives that help enable our -- the population health imperative to be successful.
The first C, continuum of care, again, as our clients are taking responsibility for a population or an individual or a condition, it's critical that we provide them with a data set that spans the full continuum of care, starting with the home, moving through ambulatory, acute, rehab and back into the home on the back end.
So we're focused on delivering a comprehensive set of solutions that spans that full continuum of care. They're fully integrated and provide a view of the record that our clients need to make decisions across that process -- that entire process, because if any step in that process fails, they need more control, they may not have the ability to deliver the outcomes that they desire.
Second sub bullet under population health would be the I, which is intelligence. Intelligence has always been a concept embedded within our architecture. This is the ability to analyze the data and transactions that are flowing. Analyze that data so that we can either drive new actions into the workflow or provide alerts to change behavior in some way. Discern Analytics was the tool we used in the past. Now as we aggregate this data into the cloud and formed the Healthe Intent layer, we intend to -- we're in the process of building another layer of intelligence that can analyze that longitudinal health record and drive new actions down into the care delivery process.
Next is M for facilitating member engagement. And really this is the process of establishing a better connection between the patient and the provider. We want that -- it's important that greater alliance, more data is captured about an individual. The greater continuity that we can establish between the patient and provider, the better decisions that can be made. So we'll -- we're very focused on delivering applications that improve the stickiness between the patient and provider and that's a huge area of focus for us this year.
Final is the +1. The +1 is really genomics. Again, this is not a new thought for Cerner. We -- with our Helix application, we designed our data model so that we can capture the human genome and be able to direct -- it becomes a more scientific process to -- I've got this certain genetic marker, this particular medication is most appropriate in this situation and there's more predictability around the outcomes.
As the costs of mapping the human genome come down, it's going to get to the point where it's going to be very easy for each and everyone of us to have our genome within the medical record. And that again becomes an important factor in making the right decisions on the care decisions, the care actions that are being made.
So that's PPR/CIM+1. You'll remember that, right? Keep saying it, PPR/CIM+1. That's our focus for 2013. I think we have created -- that acronym covers really the bulk of what Cerner is working on. We literally have thousands of initiatives and imperatives but they all align with these 7 areas. So I feel very good that we have the Cerner organization programmed on the right items, and I'm very confident that we're going to deliver as successful of a 2013 as we did in 2012. So I look forward to standing in front of you a year from now and describing the success we're going to have this year.
So with that, I'll end, and I will turn the microphone over to Katie Chaffee, head of our Worldwide Consulting.
I appreciate that, Mike. Thank you for that introduction. As Mike said, I am Katie Chaffee, I'm our Vice President responsible for Cerner Consulting worldwide. What I'd like to do today is start with a little story about how this business model had evolved over the last few decades.
So it probably was about 2 decades ago where we're kind of at a decision point trying to reflect, will we be a fantastic software company that has about 200 technicians and we partner with the industry consulting firm to go and implement our solution, or the decision on the other hand was, do we grow our own professional services organization to 2,000 people, stay close to our clients and really protect the Cerner brand and marketplace.
So clearly, this is why I'm here. We made the decision to make -- take that growth. What's been interesting is I've built my whole career at Cerner. I've been here 17 years around building this organization from bottoms up. So where we stand today, we're about 4,000 associates around the globe, 26% of Cerner's revenue is affiliated with our professional services business.
In today's model, our clients are looking for help. They want our help to go advance their strategies. I then kind of outlined our competitiveness on the marketplace. 100% of our new contracts utilize Cerner's services to really achieve their goals.
In this era, supply and demand has been a challenge. So being able to bring the right talent to the marketplace has been crucial for our ability to execute. And one of the things that I studied in the marketplace is I couldn't buy the talent out there. I looked around, everyone said, they had this, they had that. They didn't have the talent out there. We had to grow this -- grow that skill set, we had to recruit, build and adapt our services that we have -- that we deliver to our clients, and also we have to retain that best talent across all of Cerner.
If you could see, our revenues have grown. Marc mentioned, last year we had a 25% year-over-year growth. So why are clients choosing Cerner Consulting? One of the key differentiators that we have is around our implementation methodology. So we start with the standard design of our system. We represent a prebuilt system to our clients that represent the optimal workflows to our clients. We spend the time teaching, educating them on how that works and how that's adapted into their organization. So our focus is really around how do we localize and tailor as opposed to having to design in that new solution.
The other key differentiator that we have in the marketplace, and this is the one I love when you get to compete against third parties out there, is we embed a model of continuous process improvement. So this is how we can go down, take the analytics of what's happening in our system, have really understand the workflow and usage patterns of our users to say, "Hey, maybe something's not quite right. We need to adapt or we need to tweak something." We will have a specific focus around the physician users, obviously being the major user of our system as our clients are heading towards BPO [indiscernible].
The other part of the story is, we're beyond just implementation. So now that we've put in the foundation of the system, we're in a great position to be strategically aligned with our clients to advance much bigger strategies than just putting in the foundation. And we're going to talk a little bit, our team from Advocate here is going to kind of tell the story around how we've leveraged that foundation to really advance our strategies in the population health arena.
So when I look across Cerner Consulting today, I kind of categorize our offerings into 4 major buckets. I kind of talked about the implementation arm, which is where we do our solution technology, workflow optimization, training and change management. That's a significant core of our business today, about 75% of our revenues come out of that bucket.
Other major area is around operational management. So these are where our Works models come in and play; ITWorks, where we do the full outsourcing, revenue cycle, application-managed services and our upgrade [ph] services.
Moving over into our performance improvement side, as Lighthouse is our performance improvement offering for Cerner and really focused here around the quality, performance improvement, revenue cycle optimization, workforce management and this new era of health care intelligence and analytics.
Our fourth bucket and our new emerging growing marketplace is in our strategy, which is our advisory consulting services. So easy one there is our regulatory programs. We partner with our clients every day and we advise them exactly on where the regulatory requirements are driving us and put a plan in place for their clients. In addition to that, we do different things around employee outreach, delivery network and value-based purchasing programs.
So how does this impact kind of our financial performance? So the grid here kind of outlines the last 5 years of -- and I kind of mentioned before, the core of our business has been in the implementation arm. So we've seen some growth over that primarily driven out of the U.S. market in the era of Meaningful Use.
Where we see it going in the next 5 to 7 years is we're going to start blending the operational management side with the implementation work, so now we're going to start owning a much greater portion of that mark. And it blends and the picture there as you could see how it's kind of that purple and green blending together as we grow that sector.
And then as we advance into some of these new era and the new opportunity, we'll be growing our performance improvement and our strategy advisory consulting firms.
So in here, this is a quote from one of our newer clients that joined the Cerner family back in Q2 of last year, and they've really kind of -- I think it kind of sums the story around what Cerner -- how we are delivering value to our clients. We're bringing the fantastic software to the table and the full complement of the professional services that really advance their strategic directive.
So with that, I will pass off to Rick Heise, Vice President of Revenue Cycle and second best-dressed at Cerner.
This is going to be a dressing contest next year. Okay. Thanks, Katie. So I'm Rick Heise. I have responsibility across -- responsibility for Cerner for our revenue cycle and our RevWorks business, which I'll take through in here in a few minutes.
I've been at Cerner for 13 years. Prior to Cerner, my background was on the provider side of health care. I worked at Mayo Clinic in a number of administrative and revenue cycle positions prior to coming to Cerner.
So first of all, I want to take you through just a little bit of -- reiterate some of the strong growth that we're seeing in rev cycle. As David mentioned before, we are growing at an amazing rate inside of our business. A lot of investments we've made over the last 3 or 4 years we're seeing the results of. So we've grown from a $20 million a year business to over $100 million a year business in just a few years.
That's really getting contributions from 2 major parts of our business. And I held [ph] a discussion at breakfast with a few of you about this, but I have responsibility. Our RevWorks business is actually 2 key areas, one of which is the traditional software business. The other one is our revenue cycle outsourcing solutions, which we call our RevWorks business. So as I go through the slides, I want to make sure that you understood of those 2 parts of the business were being represented here.
We also expect to see accelerated growth in 2013. You might have seen last night, came over the wire pretty late. So perhaps all of you were staying up late and were out having dinner on Bourbon Street, you would have seen that we announced a brand new very strong relationship with -- an expanded relationship with Adventist Health West, based in Roseville, California. This marks actually our 7th RevWorks client. There are $2.7 billion net revenue organization, about 19 hospitals, 150-plus clinics and extended care facilities where Cerner is going to be taking over responsibility for all of their revenue cycle management business. So a very exciting relationship for us and another important point of our growth in revenue cycle, revenue management.
The other thing I want to point out too in terms of how we look at the health of our organization is really just the amount of footprints that we're putting out there in the marketplace. We've been in revenue cycle for a long time at Cerner, and one of the more recent solutions that has -- is gaining a lot more -- strength in the market is around patient accounting and practice management.
You can see from the slide that we've added additional 32 hospitals in 2012 to our footprint, growing now over 100 hospitals at the end of 2012. That growth is continuing in 2013 as well. The other thing I would point out there, too, is that those hospital clients that are buying our revenue cycle solutions and patient accounting solutions, for those that actually are running ambulatory facilities and clinics, they're also taking advantage of our ambulatory solutions as well. We're having that single common platform across clinical and financial integration, but also inpatient and outpatient allows us a very nice asset to take into the marketplace.
And as we start talking about population health, what clients are looking at is the ability to have a platform where they can have all their information in one spot to prepare for those new future reimbursement models, which I'll touch on in just a minute.
I thought it'd be useful just to take you through a little bit of evolution of rev cycle. Now interestingly, rev cycle really hasn't changed a lot in the last 30 years, so the traditional revenue cycle which is the provider side solutions, the registration, scheduling, HIM patient accounting, those have been in place for a very, very long time and for the most part of them has remained untouched.
We also have the payor solutions, which in simple terms are the health plans an adjudication systems and the EDI or electronic data interchange. We share information between payors and providers, and that's really the traditional rev cycle. Now certain of health care organizations that are very, very good at running their rev cycle will spend anywhere from 2.5% to 3.5% just to collect their own money.
For those that aren't running their revenue cycle very well, they'll spend up to 7% or 8% of their net revenues just chasing their own money, just trying to collect the money they deserve. So the important part of our strategy is to continue to build out those core solutions, but also advance those and take out the human intervention necessary and get those costs down.
So an important part of the work we continue to do on the traditional revenue cycle side. From a smarter revenue cycle using innovation, we're actually enjoying a strategy we put in place over 15 years ago that you might have heard the term clinically driven revenue cycle. We're going to continue to build our systems to take advantage of clinical automation.
And with all the activity over the last 10 years, thanking Meaningful Use for getting their clinical side of the business much more -- our clinical side of the automation advanced and accelerated, we're now able on the financial side of our integrated solution, to take advantage of what's that automation that occurred on the clinical side. So our ability to interrogate that clinical information in an automated way could benefit taking down the cost of what it takes to get reimbursed and to get a clean claim out has been an important part of our strategy and a major differentiator for us.
The last part is really in the future, we're not all entirely sure where all the reimbursement models are going to go. What we do know though is that eventually, the claim will go away. The claim, which is the vent-based [ph] methodology that all of our clients get paid on right now, that's going to go away. We're going to measure things differently in the future. We're going to have to measure utilization. So as our clients take on risk for the population, they need to understand where that utilization is taking place, where there's gaps in care, how to do analytics around unplanned care and in and out of areas where they have patients going in and out of their network.
But the patient is in my network and I have responsibility for them. I'm probably going to be able to care for them better and at lower cost than if they go outside of my network. So our ability to leverage the programmable network that Mike talked about a little bit, for both clinical and financial information is important part of our strategy and I think a major differentiator.
I thought it would be useful also just to share with you what our portfolio is because it's actually grown a lot and there's really no other company out there that does this has this complete thought. The areas in green are really the traditional revenue cycle I talked about, some of those kind of core functions. You don't need to read the bullets, they're just examples of some of the functionality inside of that core rev cycle.
The items that are shaded with the blue are where we have taken our responsibility to embed some of the content and third-party bolt-ons that typically exist. The way health care reimbursement models have been put together, the reimbursement process has been put together over time and unfortunately requires a lot of content. So billing edits, utilization information, eligibility information, the list goes on and on. Some of our clients or prospective clients have anywhere from 10 to 15 to 20 different third-party bolt-ons that they have to deal with just to get their claim out.
So what we've done is we've embedded those into our core workflow. And again, a major differentiator for Cerner there. We take -- for the end user, they don't have to deal with all launching of separate systems in dealing with some of those bolt-ons.
The next part that I've already talked about a little bit is around clinical and financial integration. So care management is one example in the area where we're taking advantage of our automation to leverage and interrogate clinical information for the benefit of the financial side of the business.
Last thing around that portfolio of solutions and services is our revenue management service and this is our RevWorks organization. This is where we have an opportunity to go help our clients not only with software but also with service beyond implementation to help them on their revenue cycle.
So our RevWorks business, as I mentioned before, is one of the major growth areas of Cerner not only in 2013 but beyond. There's only 2 things I wanted to mention here. Our approach to RevWorks and revenue management services really has 2 models, one of which is through a central business office. And our central business office where we have a number of employees, associates in Kansas City that will do billing and remote billing and collections work on behalf of our clients, whether it's in acute care facility or a physician office.
We also do on-site work, so we'll put an executive in charge, we'll go run the departments of revenue cycle on behalf of our clients both in the acute setting and the ambulatory setting. You can see at the end of 2012, we ended with 5 hospital clients. We've added additional 2 here in Q1, and we help do RevWorks services for 92 physician offices. And the organizations between these acute care organizations and physician offices, we manage about a little over $2.3 billion in gross revenues on behalf of our clients and you can see in the chart how we expect that to grow in 2013.
Okay. I'm going to close there, and I'll hand it off to Don Trigg.
Donald D. Trigg
Good morning. Good morning. I'm Donald Trigg, I'm the President of Cerner Health Ventures. And as we transition into the sort of final third section to focus on population health management at some level of granularity, I'm going to do a little bit of framing around health care reform and some of the marketplace realities that play into that. Maybe a level up from some of the discussion that we typically have around Meaningful Use, ICD-10 transition, value-based purchasing to a lesser extent, so a broader frame on health care reform, contextual for population health management.
So if you think about the current reform landscape really dating to March of 2010, we think about sort of 3 phases of reform as being contextually relevant for thinking about the transition to population health management. ACA, really properly understood, is fundamentally insurance reform. You had 3 big dimensions to it: The administrative cap on medical loss, which is made to payors, big actors and movers around business model. You had the exchanges which are now being stood up, October 1 for Jan 1, and then finally Medicaid expansion.
So really fundamentally insurance reform but in the context of a traditional fee-for-service. Where we find ourselves today is in this phase 2 space, and we talk about it contextually about alternative payment models, bundling, the guising our model, if you will. But the reality is, we're still living inside traditional fee-for-service.
And the big dimensions of that, which I'll talk about in greater detail in the next slide, are downward pressure around Medicaid at the state level, particularly coming out of the macroeconomic challenges in '09 into '10, and then with the midterm elections in '10, a big momentum around Medicare reform, which hasn't really come to pass but had significant impacts on providers in terms of thinking about, how do I elevate revenue generation and simultaneously manage the expense line.
At some point, we move beyond the current fee-for-service model to some sort of alternative delivery environment. Fee-for-value is the current term of art, and the timing dimensions of that will be interesting to watch as they play out in the back half of the decade. So from a phase 2 cost containment perspective, as you guys know and cover frequently, reimbursement tends to be the big driver and model around approach.
From a flow of funds perspective, let's start by looking a little bit of what's going on in the government space. I think from a provider perspective, it's an improving environment for them because they have made steps to contain cost around the expense line. The Medicaid expansion is playing out. The advisor board data here has 24 states. I think that number is likely to move up as the part-time legislatures play out through the end of Q2. And then finally, there's really diminished momentum from a federal perspective around some of those significant changes beyond sequestration in the entitlements phase.
I think the final feature that is relevant and germane from a government perspective is that there's still a fairly heavy bias around funded change, Meaningful Use, experimentation activity around accountable care, both from pioneer in the Medicare shared savings perspective and innovation fund-related activity as well.
From an employer perspective, our employer services business has been an area of investment and something that we've highlighted in previous discussions at this event. We think they're taking a wait-and-see attitude on the exchanges and coverage expansion. The Dardens [ph] of the world has gotten a lot of visibility and a lot of ink, but in reality, we think the players are broadly taking a wait-and-see attitude relative to this phase.
Significant focus on cost containment obviously. And then I think an important trend around provider as employer looking to incubate wellness strategies within their covered lives and also then engage commercial payors within their catch net as a key strategy around both revenue generation and playing through the transition to some alternative payment model in the back half of the decade.
From a consumer perspective, you saw the bias and our vernacular for using the term "member," then we talk about progression from patient to member to consumer, but we think the member orientation sort of represents the reality of how this market is going to evolve and that some of these nascent strategies around consumerism are really an absent sort of core business model reality.
Let me transition just to how we think that manifests itself in the marketplace in terms of what we're seeing on the floor. There's a significant anchor tenant presence, and Zane talked a little bit about that from a competitive perspective and what landscape looks like. You also have a significant sort of elevated footprint, particularly on the payor side, that big-cap presence coming in.
And as we talked about earlier in the week, it's very akin to some of the discussions we might have had with this audience in 2002 in the traditionally ajar space where you had [indiscernible] buying Shared Medical, McKesson buying HBOC, with GE making a step change in terms of footprint and presence. So some interesting sort of early market dynamics relative to population health management as payors react to that phase I insurance reform playing out and look for these model opportunities around it.
And then finally, obviously, there's a lot of what I call, what Neal calls, forest floor activity, the 10x10s that are springing up. They tend to play both in this NEXT and NOW space. As you walk the floor, you see a lot of activity around voice rec, a lot of activity around CDI, a lot of activity around content, of playing into that physician trend and then also some early-stage strategies around pop health, particularly around analytics.
So it's an interesting marketplace and one that we would say has features that are dimensionally consistent with what we would have described as the EHR market in the early part of the last decade.
And that's really then my final slide before I turn it over to Jeff to talk a little bit about the platform and then for Matthew to talk a little bit about what we're doing with Advocate Health. But this is a slide that we presented in a slightly different form in 2002, so 10 years ago approximately, but what are the attributes that we think differentiate us in the population health management space. We actually think they are very similar to the ones that have historically differentiated the company over its various life cycles.
System's view around approach delivery reform, Phase III delivery system reform is going to require more than point solution strategies. It's going to have to have a whole dollar orientation. We think there are huge opportunities to focus around value creation. We think business model innovation is as important as products and services innovation.
And again, as several folks talked about, Mike and Zane in particular, how do we do both NOW and NEXT? And we think PPR represents that and is sort of the opportunity that we see playing out on a 5-year basis in this space. So with that, I'll turn it over to Jeff and he'll talk a little bit about the platform investment around population health management.
Jeffrey A. Townsend
Thanks, Don. So to keep with Mark's theme, I have PPR/CIM+1 policy business model disruption and revenue cycle. So I think it's a gumbo here again in New Orleans.
So the NOW + NEXT theme is something that we spend a lot of time talking on both with current clients and perspective clients. And it's really in their environment, they're living in multiple worlds, or in this picture, multiple swim lanes at the same time. So that bottom row representing the progression of how advanced their workflows are inside the EMR, inside the care delivery process. The center row is the use of data and measures, and the top row is the disruption or changes in their business model as they progress from fee-for-service to population health.
So for Cerner, a majority of our clients are in this column moving to the right. And as Advocate gets up and talks, they're one of the few that are, I would say, all the way to the right-hand side. So if you're going to move from an environment with 1% to 2% at risk around measures to as much as 7% or 8% at risk around those mandates, and as you move from that left-hand column to the next column, one of the big elements there is, in today's terms, ACOs begin to come to life. They're now looking at coordination of care. And as we announced yesterday with the Commonwealth Health Alliance, the ability to interoperate becomes a bigger deal there. Many of the platforms are in place. Within a particular geography, those organizations are now wanting to partner, and the need to move the data back and forth and measure it across potentially disparate platforms at the bottom row becomes a very strategic element for those organizations.
As you move from the center to the far right, you now move from a era where you're focused heavily on patient on the far left and process-based measures of whether or not I hit a target or I performed a particular task. To the center where you're looking at things like shared savings and saying, over the course of the year for someone on Medicare, this is the average 3-year run rate. You spent less than that, we're going to share in that particular savings for the far right where you're taking on more of a full risk, whether it's bundled payments at early stages or it's full capitation.
And so as you move through those progressions, the needs for the systems change. And the way things are delivered today on the care delivery side, have to shift with that. A big part of the challenge, especially in revenue cycle, which Rick talked about is, all those provider organizations live in all of these spaces at the same time. So you still have a large percent of business that's fee-for-service, they have a mix of penalties in mandates, a fair number of pilots around populations, and then in some pockets, full capitation.
So to move from kind of this landscape to what's this look like -- as you're planning out for single individual. So this is a Christine Miller, and this is lifetime spend. So this is an individual that we've modeled on somewhat on the population health side. And you see for the most part, starts relatively low as she ages, there's spikes in there around various health care events, goes from one chronic disease to multiple chronic diseases, and then the acceleration towards the end of life.
So if we zoom in on that, that Stage 1 or Column 1 back to my grid, is primary around quality reporting and value-based purchasing type measures. So those are very data-set heavy and that you need to extract very specific data sets, like aspirin being given to a patient with chest pain as they come through the ED. But they're not outcome-heavy, and they're looking at the holistic data set. They're looking at very specific-point-in-time type data on it. And based on whether you make those or miss those, then there's either penalties or incentives around those.
And within the EMR, the ability to apply intelligence at this point in time could potentially change either the size of that spike or the duration of that spike may change that particular outcome. That's what moves you to the second stage.
So in the second stage of population health, you're now looking more holistically on -- at an end-to-end event or an episode, and you are trying to pull those spikes down. So it may be a little hard to read there, but that purple line represents, inside of those events, for the most part, in a reactive nature, you're attempting to cause something to be avoided. So the term we broadly use there is potentially avoidable complications.
So you're in for the surgery, you're in for the event, what are the things that could either extend the length of stay or cause the outcome to be more expensive. Readmissions is the big one that's gaining a lot of focus today. And as you walk the floors, you'll see a fair amount of discussion around that.
The next one is coordination of care. So how do you manage the transitions and the handoffs more effectively and not only remove redundancy, but remove waste.
The third stage, which is something very attainable, but it requires a different type of platform and different type of delivery system, is where you're now to trying to avoid the conditions themselves. Then those cost curves from moving spikes to either smoothing those lines out as you zoom in those, avoiding the readmission completely and changing the course of treatment when it does need to occur. This is where you're getting much deeper into predictive modeling, using that data rather than just trying to get to reporting, but using it for discovery of new patterns, new treatments and new protocols, which I think, our team from Advocate will discuss.
So from time to time, inside our quarterly calls, I frequently mention relationship. I don't go necessarily real deep on that relationship, but I thought it was important to show you a few of these. So many of you know that starting in 2005, 2006, we started running our own health plan inside Cerner as a self-funded employer. We have on-site clinics, and we experiment a lot with member engagement. And over the course of this last year, we -- actually, I think, we're now, over the last 2 years, have bent the cost curve to negative. So we actually spent less year-over-year on total health care between us and our associates.
Our associates have not seen an increase in premium for several years now based on those efforts. Now that's a closed system, so we control a lot of the levers. So what our next attempts have been is, how do we take that learning and move it to a broader community? And Advocate is going to share their story in that space.
A few others that we've mentioned in the past, in Kansas City, working with a group of employers, a recently formed primary care ACO, many of which aren't running Cerner's EMR, but are integrating their practices with some of the population health capabilities over-the-top, and they pilot a project in the region with Walmart. We've created what's called a primary health network. And the objective there is ahead of primary care, there's additional health services or access models that we think can lower their overall cost of care. So it's not a replacement for primary care, it's an extension or supplemental set of services, where retail health may be open longer or where wellness initiatives, unlike having screenings, don't need to be done at the employer anymore. They can be done in that retail setting. And as long as we can coordinate that activity, get the data back to the health care provider and run those decisions support elements, we think it'll have a significant impact on total costs, as well as total engagement of those individuals. So that's an experiment and it's kind of in that middle zone around wellness, can we get the member to engage, can we increase convenience and can we create new delivery models.
We mentioned last summer a project in a rural community in Nevada, Missouri. So it's called Nevada, not Nevada. The -- it's a community of about 5,000 people, about 15,000 in the overall county. They rank 88 out of 99 rural communities in Missouri for its health status. The target is, over the course of 3 years, can we move them to the top quartile? And it's the same type of model. Can we take what we're learning in these other living labs and find what works localized to that community?
The last one I'll talk about, we -- I think, we've announced multiple times some of our efforts with the University of Missouri around a CMS innovator grant. And it's around 10,000 medical home patients in Medicare and Medicaid, and the target is to reduce annualized cost by 5% year-over-year for 3 consecutive years for that population.
And so the last one which I have not talked about before is Vancouver Island Health Authority in Canada. I'm rounding numbers here a little bit, but it's around 750,000 lives all on an island. The neat part there or the challenge, I guess, is the reimbursement models are completely different, but the entire dollar is boxed into one delivery system.
So the ability to kind of step over the chaos and confusion of, how do I get paid, and design the delivery model and, in their case, we're specifically targeting seniors, the densest population is 70- and 80-year-olds in the country. Apparently it's the Miami Beach of Canada. So this is where you go to retire.
And in their space, their benefits aren't length of stay or avoidance of some of these things. Their benefit is, keep me from having to build another facility. They have it down to how many beds, in long-term care assisted living and in acute care they have to build per month based on the aging population. That's a curve they're attempting to bank.
So I wanted to share those, and all of those create experimental areas for us to develop new knowledge, new patterns of learning and attempt to put that back into a programmable network. So this time last year, we had a picture of something like this that showed that population health data, that metadata layer sitting over the top and a physician at the point of decision, attempting to say, everything I know about you from inside my 4 walls and everything that can be known outside the 4 walls is now expressed onto my tablet or my desktop at the point in time I'm trying to decide what to do. That's kind of the end game around continuum of care, around intelligence, and around member engagement. And if you get a chance to be in the floor this year, you'll see that we're highlighting applications across that grid or that entire metric.
So I'd like to turn over to Matthew, our partners from Advocate to talk about what it's like in the real world versus back where you're just writing code.
Guys, grab a seat. So I'm Matthew Swindells, and I'm the Senior Vice President for Population Health and Cerner's Global Strategy, and it's great to be here again to see so many of you again. I'm absolutely delighted to welcome Mike Englehart, the President of Advocate Physician Partners and Dr. Rishi Sikka, who is the Vice President for Clinical Transformation at Advocate Health Care. We've worked with Rishi over the past year on the pilot development work to see if we could really make a difference in population health. And in the last few months, we've worked very closely with Mike to persuade him that we can go to the next level. And they're both going to take some time to talk to us about what they sort of -- what their thought process are and where they've got to.
But I'd like to after that great presentation from Jeff and a deep dive into what we do. I'd just like to take a step back into, for a moment, on to why we think that the population health management challenge is the single biggest debate that is going on in developed health systems around the world. We see across America and in all the other countries that we work a set of common challenges around aging population, around life style-related diseases and around the cost of new technologies that are available in health care that are driving up the cost of health care, whilst at the same time, governments are trying to drive down what they spend on health care.
And we have focused with great partners like Advocate and around the world on how do you improve quality and drive down cost on the provider side. How do you use our Millennium solutions to improve hospitals and get best value out of them? So that new challenges isn't going to be solved just by the improvement of the way in which hospitals work.
And so we believe there are 3 new elements to that. One of them is to optimize where care is delivered. So only bring it the hospital for people who need to be in hospital, to care for people in the right place. The second element is to be able to focus on health and prevention by understanding the population, being able to predict what's going to happen to individuals in the future and be able to intervene in order to change the path of both their health and the cost profile for the health system. And thirdly, we need to be able to put in place a system that secures the income by managing the health network within which the health system operates because if -- we need to -- health systems need to be high-quality, but they also need to be able to be profitable, they need to operate within their budgets.
And so we see this as being the great challenge going forward. And we're absolutely delighted to have the opportunity to work with Advocate, to be able to build the solutions that we think are going to make that possible in the future. I'm going to hand it over to Rishi, first of all, to tell us a bit about his experience. He's the big green button.
Dr. Rishi Sikka
Thank you, Matthew, and good morning. It's really a pleasure to be here and share the work that we have done together over the past year or so. Actually, it's under a year, actually.
A little bit about Advocate Health Care. This is a reality we are living with respect to population health management. We have approximately 500,000 attributable lives that we are responsible for in shared savings or ACO type contracts. So for us, this is the reality. With respect to Advocate itself, we are the largest provider in the Chicagoland area, the largest health system in the Chicagoland area, one of the largest in the Midwest.
And we really represent a microcosm of the diversity actually that exists in the U.S. health care landscape, we have urban teaching hospitals, we have suburban non-teaching hospitals, we have rural critical access hospitals within our organization. We have academic medical centers that provide quarternary level of care, including transplants in one of the top LVAD programs in the country by volume. We also have a very robust ambulatory group in the form of our employed physician network and with Advocate Medical Group, Dreyer Medical Clinic. We also have a division of home care and laboratory.
So that's just a little bit of the snapshot of Advocate itself, but really, a lot of the strength, which has propelled us into this world of accountable care has really been on the foundation that has been laid for the past 10 to 15 years with Advocate physician partners.
My name is Mike Englehart, and I'm here to share a little bit about the Advocate physician partners story. Like most organizations, back in '97, we stood up our PHOs where we went together with our physicians, both employed and independent, to secure the best contracts we could. We've been on a journey.
And back in 2004, we were one of the first health care systems in the country to be recognized by the Federal Trade Commission to be clinically integrated, and that's an important notice of distinction. We were able to show the government that we came together with both our independent physicians, our employed physicians to improve care and quality for the community. There are detailed metrics that we work with our physicians. They help to govern the day-to-day of what we're trying to achieve. And by doing that, we were able to go out to all of our key payors and secure additional dollars for this work.
A lot of this work was done outside of what normally is traditionally paid by the payors. And so we've been on this journey for the last 9 years. As you can see, we're just over 4,000 physicians, and only 25% of them are, in fact, employed. This is more like the reality of what's going on in health care today. You look at each one of the coast [ph], and there's a significant amount of health care systems where 95% of the physicians are employed. We're 25%.
Most of our practices are 1-, 2-, 3-men and women shop. We're able to come together and work with them and provide them support and services, driving towards quality. And so back in 2009, we had an interesting conversation with the largest payor in our marketplace. We were looking for about an 8% increase and they were looking for about a 4% cut. We decided that we might want to look at this a little bit differently.
And so with accountable care on the horizon, we came up with the unique relationship where we would do a shared savings contract, a commercial ACO. That set us down the pathway and we've since stepped into the Medicare shared services program with Medicare back in the summer of last year. And so we are absolutely both feet into the accountable care population management. I'm going to turn it over to Rishi to talk about the collaborative, and I'll come back at the end to talk about population health.
Dr. Rishi Sikka
Great. Thanks, Mike. And that really sets the stage for the partnership and the work that we launched together about a year ago. And I think, like all good partnerships, it really came out of both a strong need within our organization and really bringing together strength. The need that Mike was alluding to, is that this is a reality that we are living right now with respect to managing population health, and it really demands 3 things: It demands being able to understand what is going on in your population to understand the current state, to understand that state of being; the second thing is to be able to predict what will occur, understand the future; and then finally, to be able to intervene on that in a meaningful way that leads to impact within the population itself.
So that was really the need. Now the strength actually that are brought to bear are Advocate's strength with respect to population health, Advocate's clinical expertise and, quite frankly, a large amount of data, a large amount of big data that we simply hadn't been able to capitalize on or really leverage in a meaningful way. The strength that Cerner brought to bear was an extraordinary technical knowledge and deep expertise and the know-how to be able to get this done. So it was really a marriage of strength to be able to drive this forward.
What are we trying to do on the course of this collaborative. We'll, I talked a little bit about the 3 imperatives, about current state, being able to predict the future and then intervene in a meaningful way. There's really 2 basic elements to this: the first is actually creating a repository of data to drive all of our work. What we are doing right now is we're taking all of the data that exists within Advocate, within all of our silos of information, within all of our disbarred EMRs and loading that up into a cloud-based repository to Healthe Intent platform. Right?
So folks say, well, a lot of folks have electronic data warehouses. People have data warehouses in the cloud. But this is very unique. What we're doing is we're actually taking all of the silos of data, normalizing and reconciling that along a single Master Patient Index, right? So usually, when you look at the data warehouse, you're merely looking just at an episode of care. But what we're doing now within the Healthe Intent platform is we're creating true longitudinal patient history across the continuum of care. We are not looking at things on an episodic basis. We're looking at the entire longitudinal history of the patient over a multi-year period over the continuum of care. That is the foundation for all the work we're doing.
As we've been building that data platform, we've started to advance the work on the analytics, on the predictive modeling and the interventions to be able to get that to move forward. Specifically, actually, in the past year, we've already made significant progress on developing a new readmission model that predicts the risk of 30-day readmission. We've also been doing a great deal of work on developing the new model to be able to predict and intervene on patients that are at risk for falls on the inpatient setting.
A lot of our Year 1 work has been focusing on building the data model and actually on those opportunities, particularly on the inpatient side. But we've actually started to rapidly move now into looking at analytics on the true continuum of care population health side.
And just to share a little bit about what we're doing there. I -- we were speaking earlier to a smaller group. I kind of think of this population health game as trying to solve a Rubik's cube, right? Every color on every side is interdependent with each other. So when you play with one side, you're having an impact on the other.
But traditionally, what you see right now in ACOs in the population health work is that folks are solving for one color. And the color they're solving for is around high-cost, high-risk patients, right? And the traditional model to attack that is without patient case management. The traditional utilization management function that has its history back in HMO and managed care days from about 20 to 30 years ago. And that is a very important strategy to the very important tactic, and it's probably been the predominant tactic that you see out there in the marketplace, but it is only one tactic. It is like solving for yellow. You still got to solve for blue, green, red and the other colors. And that is exactly what we've started to do with Year 2, is we are solving for all the other colors. We are taking our patient population by disease and clustering them into discrete categories. So everybody has a risk associated with them. Everybody has a cluster profile. And everybody has an intervention associated with them. That intervention could be small and it could not be resource intensive, or it could be significant and very resource intensive.
So now you know where your population fits along the clusters, and you know who will or not move out, who will be predicted to go into a different cluster and what are the interventions associated with it. So that is some of the exciting work we're starting already. And we're a little bit ahead of schedule, to be honest with you, on the Year 2 side of things.
Really quickly, I talked a little bit about the readmissions work that we did. This is exciting work also that came in probably about 3 to 6 months ahead of schedule from our timeline. We have actually developed a new readmissions risk tool that can predict 7-day, 10-day and 30-day risk of being readmitted to an inpatient care setting, and it statistically performs about 10% to 15% better than any other existing risk tool that is out there right now.
And that's the first step. Now the second step is actually building it into the point of care and actually leading to the impact, which we are working on right now. But already, we've seen results where we're actually building better models that are out there and continuing to iterate on the work that is there. Now I'll turn it over to my collegue, Mike Englehart, to talk a little bit more about our work on [indiscernible].
This slide we often put in front of our physicians, just to kind of walk them through the journey we've been on. 2004 marked when we stood up clinical integration. Why, I think, this slide is noteworthy is that, when you speak to health care systems that are just on this journey, just putting their foot into the water for some type of ACO. They're going to have to slam in all of these experience in a short period of time. They're going to have to work with their independent physicians on quality outcome, passing information back and forth. We like to say that we're an overnight success, 9 years in the making. This all has been evolving over time.
And Advocate, by nature, is a very conservative organization. So when we decided to go forward with the Blue Cross, Blue Shield and the Medicare shared savings plan, it was really because we had the underpinning. All these technology is outstanding, but if you don't have a strong relationship with your physicians, both independent, primary, specialists, and passing information and agreeing upon terms of what is quality, none of this really is going to move the dial. In our first 2 years, we've been able to, through our Blue Cross, Blue Shield contract, beat the marketplace by 2%. This is a predominantly PPO book of business. The patient have decisions and opportunities to go to all the wonderful academic institutions in the Chicagoland market, but we were able to, because of our relationship and some of the data we have in place right now, improve the care and lower the costs by 2% in the marketplace.
So if you were to look at how we came to be, we became essentially an alphabet soup. We kept pulling different best-of-breed software solutions off of the shelf and saying, "This will work, let's slam it in there." Ready, fire, aim. And so we kept putting in all of these key components. Our hospitals are all on Cerner. We have physician groups employed that are on 2 key product lines. And then we just went down the list of just picking the best-in-breed, registry, physician portals, data warehouse. And so it's all really evolved. Last year, in the fall, we decided enough is enough, and we had to lay out our 5-year plan for how we were going to do population management, and that's what led us down the decision process of relooking, first, at our disease registry.
Someone always will ask, what's the most important ingredient? You better start with the disease registry because if you don't know who the patients are and have a meaningful way to pass it back over to a data warehouse, everything's lost. If you can speak to your physicians and share with them what they should be focusing on, you're probably wasting time.
So ultimately, why do we choose Cerner? A lot had to do with our past track record with Cerner. I think, a lot, though, really came down to the work that they've done in the collaborative. We believe that the data warehouse makes all the sense in the world. We like to say that we're agnostic. If you wanted to be independent, God bless you, come and work and be part of APP. If you want to be employed, join our medical group. Cerner would love to paint the landscape with all of Cerner flags all over the world. But realistically, they know that there's going to be a lot of different data points. And so we've subscribed to their methodology and their theory. And ultimately, the work are able to do in the data warehouse really put it over-the-top for us, because we believe that they are going to try to leapfrog ahead of their peers, and this is where, I think, care is going to be provided on a go-forward basis.
So the last slide is how we view the world. The most important tool for our physicians, the 4,000 physicians, every single day, they will look at the disease registry. We needed to provide them more information. They need to know how they're scoring. So our physicians will look longitudinally at the patient. They'll understand, who's the diabetic? Have I converted them over to generic? Where am I on my scorecard? That information will happen on a daily basis on our new program.
Population management. Behind the scenes, we need to know what's going on in our hospitals, in other hospitals across the marketplace and ultimately, what action are we going to take? The last thing that we think is extremely powerful is the ability to write reports. We, essentially, are an insurance company. We are taking on risks. We will have actuarials sitting next to nurses, sitting next to doctors as to what is our care pathways and our strategies to how we can better provide care. We have 109 embedded case managers. We have limited resources. So where do you apply these resources? Where can we actually turn the dial, bend the cost curve and actually, positively impact care throughout our system? So we're really excited about the relationship we have with Cerner, and I'll turn it back over to Matt for the questions.
Yes, thanks. Appreciate it much. That's actually great. Mike, I would like to -- there's a couple of questions that spring to mind, and I'd like to refer to you, first of all. You said some really nice things about Cerner and why you selected us. I have to say, whilst we were persuading you to select us, it's sort of bit like a knockdown drag out site. So we just like to share with the audience a bit about how many others solutions you considered and how easy it was for it get to that point?
Advocate looked at 20 different solutions in the marketplace. We have a consulting arm, so we quietly used them under the guise of the fact that they were doing some homework for our clients. We narrowed the field down to 5. I have to say, I'm a recovering hospital president, and I always viewed Cerner from the walls of inside of a hospital, and it really wasn't until the fall of last year that I totally appreciated the work that was going with the data warehouse.
So to be honest with you, Cerner was a late entry into their actual queue. And the way we went about doing it was, we invited 6 physicians to participate, primary and specialists, and 3 office managers. Office managers are critically important for the purpose of making sure that the information is accurate, because it's, in fact, the support staff that enters in all the information and really queues, and looks at the population management and the disease registry. And through -- I consider a very intensive process, Cerner was, head and shoulders, above everyone else. First and foremost, through the disease registry, but we saw a bigger play here. We saw the next 5 years. We were speaking the same language, They appreciated our sense of urgency, and that this was the underpinning of our 4,000 physicians that we work with.
That's great. Thank you. And Rishi, I know when we started the first project nearly a year ago, I was sitting around at the Board meeting with you, and you were a little nervous at that stage. I wonder where the -- so we tell a good story now about where we've got to. But tell me about the journey from nervousness to confidence?
Dr. Rishi Sikka
Yes, well, the punchline to the good story is that I, about 3 or 4 months into the partnership, I went away for a week of vacation and I came back and a lot of problems were solved. So maybe, I wanted to hear about my role a little bit. But the nervousness leading up to that is -- was nervousness really borne about how groundbreaking the nature of the work we were doing, and honestly, some of the difficulties.
The first priority is building this data warehouse. Just remember, we are taking silos of information across multiple EMRs amongst multiple silos of data and bringing it together, reconciled along a single Master Patient Index, right into one location. And that proved to be a very formidable technical hurdle. It seemed, week after week, there was another hurdle, and it was a little bit higher more difficult for us to cross.
Now here's where the wonder that came in, is the horsepower of Cerner and really, the spirit of innovation in getting it done that evolves amongst this collaborative team, between Advocates and Cerner. We actually were able to cross those barriers in spite of them coming up almost week after week, and learn from them faster and accelerated the process in development faster. I think, what we thought was going to initially take certain milestones about 6 months, we did in 3 to 4, which is really quite surprising actually, that we got that rapidity of work getting done in spite of the technical hurdles. I mean, this is really ground-breaking. People talk about bringing your silos of data together, try it. It's really, really hard, and you can't do anything, this type of analytics or this predictive modeling. I keep going back to that framework. You need to know what is occurring. You need to know what will occur. You need to prevent it from occurring, right? And you can do that unless you have data, and that data has to transcend, actually, outside of your 4 walls itself.
That's great. We need to give the platform back to Neal Patterson now. So thank you very much, indeed, guys.
Neal L. Patterson
Good morning. So I'm Neal Patterson. I'm the Chairman and Chief Executive Officer of Cerner, including President. I've got all those big titles by being one of the 3 founders. 34 -- it's actually, I think, 34 years now. So the -- so for a while. We've been there since we were all in our 20s, okay? So you can do the math, yes, it adds up.
So I actually have goosebumps, okay? Many of you have heard me speak, so you know I'm not that good of a speaker, but I have goosebumps because we just heard the future. Frankly, we're -- our industry, which is kind of set at the intersection of healthcare and IT, that's kind of where we wake up every morning, at that intersection, it's a pretty busy intersection. There's a lot going on in the information technology. There's an awful lot going on in healthcare. And we're doing well. We could be doing better, but trust me, we always work on that part, too. But we're at this intersection, and it's been a very good intersection for us for -- now going on for a decade. The reality is we're in a golden era now. There has been a lot of change around what is happening at this intersection, and we are at a golden era. There is just no question of it. The question really is though for you, if you all come from a privileged life, you kind of get to step outside of the -- you don't have to be in the traffic flow, okay? You could just set out and study things and count cars or whatever the right metaphor is. You get to think about it and say what's going to be the future of companies such as us. So I will say we're in a golden era. We're privileged to have the opportunity to do it because we are -- I mean, when I say we kind of collectively are the generation, that's something that is digitizing the content of healthcare. And healthcare is the largest sector in our economy, and it will continue to grow. No matter what you do, it will continue to grow. So we're left to be at this intersection. We're blessed to have a client as great as Advocate and as articulate as Advocate to share and talk about the era we're in today, where we're just beginning.
So the question you all have as analysts, are we kind of -- we're in a golden area, but are we -- is the golden era going to end with Meaningful Use? Okay. So that was great wind in the sail and in our back. Or is this the degree of beginning of the golden era? Now part of what my goosebump moment sitting here was just presented kind of our internal way we managed our population of Cerner Associates. We use ourselves as a living lab to say, what if you could design the benefits, do the right kind of engagements with people in a population? We're restricted a little bit because we don't have -- we don't have 4,000 docs and 12 hospitals. And our delivery system is a little restricted, but we've created the medical home. We create engagement models with [indiscernible]. And he said our costs have gone down, what, 3%, with no premium increases for several years.
Now keep in mind the macro picture of healthcare and what all the topic is. Then I heard Mike basically say that -- I don't want to misquote you because you -- correct me if I get this wrong. But basically, you've taken the cost of care down 2%, 2%. I mean, you get what works. This is an answer to a very big problem. It is very hard to see overnight success. I feel like the same way. There -- so this probably, in my opinion, is the beginning of a golden era. We take -- and we're -- so as we digitize the content of this industry, that content is the predictive side. In statistics, there's descriptive data and predictive data. The theory is -- and Rishi and I have had long conversations about this, not frequent enough in my case, but that predictive data in that record to be able to go identify people that are -- need another layer of management around their condition or a condition that will happen. So identify and basically predict and act, okay? That's all in the information-driven model, and it was brilliantly described by our colleagues from Advocate. And -- but the end result is costs were going -- went down. It will be hard to keep them down long-term, but that's what this country needs, that's what the country in the U.S. needs, that's what every country I've traveled to -- which is a fair number once, too. And it's not the EMR, EHR picture alphabet soup is incredibly important, what's important is in the layer above it and how it's used.
So we grew up doing laboratory systems. The laboratory systems are very important to Advocate, okay, to every client we have. We still -- we do pretty well selling laboratory systems. The laboratory systems are a piece of the machinery that gets built, okay? And the -- so the EMR, EHR 10 years, 15 years out will be viewed strategically and by organizations that are -- that have taken their strengths and their assets and their intellectual capital basically to be more active in managing population health. That EMR is more likely a lab system today. So there is another layer that is being created. I talked about the New Middle for a long time, most of you kind of glazed over. Cheryl -- she actually -- she took -- you don't think she takes notes, she's too d*** smart. But she got it and probably understood it better than I did. So -- because the other thing that's happening here, and you heard Mike and Rishi say it, they manage populations better, and they are increasingly becoming more like the traditional, old metal, if you will, insurance company. And just think, if they got the first dollar and 20% to 30% of it didn't evaporate before you get it, how powerful this is. So structurally, the real interesting thing as this decade plays out is the structural impact on healthcare and basically how funds flow. And so there's a pretty major battle going to happen there. So that's -- now what you -- what I believe this venue is the best to do for Cerner is -- and you could see, we had a lot of 10-minute presentations. Our intent is to make sure you kind of -- you see the team, okay, the talent and that you're only seeing a small part of it. Trust me, there's -- you probably didn't see the best parts of it. So -- but this is a very good team. I'm talking about myself here, okay? We have a lot of -- the talent -- the team is big, but you get to see -- we don't have any other venue we can show you this much of the team. You get to see the talent that is behind that, and then you get to see the thinking. I mean, we tried to actually expose you to our thinking. I know sometimes it gets confusing and -- but it is coming together pretty fast.
So that's what we're -- we do here. It's great for me because I can actually be last, and you can see that we're not actually -- there's a lot of people at Cerner that can start a sentence and complete one, okay, versus just trying to rely on what did he say and who is he?
So with that, let's take a few questions and we'll close.
So we'll just start -- we'll get Marc, the funniest CFO in the industry. Not everybody -- Mike and Rishi, this might have been the first time you saw Marc present, but there's always a joke, usually a joke that few get. This was the most well-scripted joke I've ever seen him do. He gave a lot of thought to this.
Marc G. Naughton
I spent 3 hours doing my jokes and 30 seconds reviewing my slides. I probably should have reversed that. But anyway and obviously, I should have worn something nicer since everyone else is so well dressed and I'm not. But at this point, we'd like to take about 15 minutes to just answer some questions, if we can. [Operator Instructions] George, why don't you be next?
George Hill - Citigroup Inc, Research Division
Just had a question on the economic model for the population health businesses and how you think that will evolve, so in terms of will this be a PMPM model, you take risks alongside your customer? And then what you think the eventual margins will look like and what the ramp of that business will be? And then how capital intensive could it be as you think about that?
Neal L. Patterson
So Marc, you want to do that -- Jeff, you're welcome to do that. I thought you did a really good job on the call. I can do the short version. It is not actually clear there. So we have traditional ways of licensing software, and it really, really depends on if -- where our clients go and basically how much of that New Middle they become and the amount of really work that -- in the algorithms. I think Rishi would agree with this. There is going to be hundreds and -- hundreds of things that you're going to basically -- ultimately have predictive models to do and options and thousands of ways of creating interventions that will make a difference in health and in costs. So we're probably at the beginning of a very long journey here. We haven't focused -- it is -- was not -- our clear focus at the beginning as to what the best business model is because we think we're at the beginning of a major era here. So Marc, you probably need to be more clear than I was.
Marc G. Naughton
The -- clearly, it's early. So I can't tell you what the margins on the business are going to be. We're not even sure exactly what the business model is going to be. It's logical at some point. It's going to be a PMPM-type model because that's what the industry will be serving, is going to be paid on [indiscernible]. I would remind you that today, we've got over $150 million [ph] kind of coming from that area of our business. So we have our services elements who are focused on improvements and quality initiatives, about $300 million. So we're already making a significant amount of money in that today. This is -- it's just -- this is a new business. We're rolling it out there. By the end of the decade, we expect it to be contributing heavily to us. But as we evolve the business model we'll be surprised. It's too early right now to really give you more details on that.
Yes, Neal, I was wondering if you could talk for a second. There was a slide on the competitive environment. It looked back 20 years ago with Cerner, HBO and Sunquest, Cerner, Allscripts, EPIC. Now we look to the future at Cerner, United and Aetna. How should we think about -- does that reflect the growth of Cerner? Does it reflect the change in the competitive environment? And talk to us about like how does the change what Cerner will be to customers going forward?
Neal L. Patterson
Well, I think that the part -- the last part of the slide you referred to is a perspective view of ours. It really had to do with my core statement of the EHR, as known today, which is the driver -- the core business we're in, will become a lower part of the dataflow for our clients, and there's a new layer. That new layer basically will be how to most effectively build networks, providers, how to assess risks in populations, segment those populations and to manage -- to -- in manners which they can be managed in new ways and then keep them into the lowest cost venues that will produce the highest outcome. So that's what managed care was supposed to do, the latter part of the description. They promised that, okay? They actually have the cash flow to do it. And the reality, I don't think they have -- managed care was supposed to be a verb, and it became a noun, okay? So we -- so the last part of that slide was prospective. I know, George, you -- the announcement we made yesterday with Commonwealth. So interoperability is a key need. Essentially, it has to be there. And this country, as well as other countries, have to have interoperability as a national policy. And they -- we can't allow the word intraoperability to be substituted for interoperability. So data has to be liquid and move up. There are tremendous amount of work and processing have to do to get it to -- when it moves up, to get it meaningful. But that was a key moment in time, I think, that will change the landscape of how competition happens. So -- and in reality, it's going to help smaller companies compete and from the first floor, but it's also going to basically allow these New Middle companies to operate better with really high predictive value, predictive information. So I think this week, a lot of things are happening at the competitive level in the -- at the landscape of the competition. So I don't feel like you think I answered your question. So -- okay. So -- but I did want to get to the Commonwealth.
Marc G. Naughton
Can we get to Cheryl and [indiscernible].
So you mentioned that the pipeline has doubled in 2010, and I'm curious how the nature of what's in that pipeline has changed and whether it's more clients or just bigger deals and how the composition compares to what you think target revenue looks like in 2020.
Marc G. Naughton
So the composition is -- it's across all segments. So we're seeing it in the small hospital segment, medium, large, so across the board. And I think one of the key points, as I've mentioned it, is it's in our core installed base, which reflects a lot of our new business models around the works side of that, so our ITWorks, our RevWorks and some of those types of areas, as well as the population health elements of that. We also saw the global side increasing dramatically as well. So it really is across all segments of our business and across all areas. So when we look at it, certainly, it's supportive of the types of guidance that we put out. Pipelines are not in nature a 2020 type of a thought process. Pipelines are more indicative of what you expect over the next couple of years in that sense. So certainly, it's supportive of the guidance we put out there.
Neal L. Patterson
Next question, Jamie.
Jamie Stockton - Wells Fargo Securities, LLC, Research Division
Yes, this is pertaining to Rick's presentation, so I don't know if it's for him or Marc, if you want to take it. But for the slide showing the net patient revenue that you guys are managing through the RevWorks business, and, obviously, you have the deal you announced last night, which gives you a pretty decent leg up, but there's maybe another $10 billion of net patient revenue that you're reflecting in that chart that's going to come online in 2013. So my question is, is that deals that you've already signed that are driving that ramp to some extent or is that purely the incremental deals? And I -- it sounds like maybe you've signed 2 RevWorks deals in the first quarter.
Richard J. Flanigan
Yes. The slide was actually gross revenue versus net revenue. So most health systems, healthcare organizations probably accomplish out of their gross revenue between 30% and 40%. So that was probably a little bit hard to translate, but that was gross revenue we're showing. In terms of the things that have already happened in 2013, so we have had 2 new RevWorks deals happen earlier this year. We've got a couple in the pipeline as well.
Marc G. Naughton
This may be a simple one for Zane. But in your slide presentation, you talked about the replacement market and a significant, I think, 70% to 80% opportunity in replacement. And I'm curious about where you feel your sales organization stands to go out and kiss all those babies and win all that business. Or is the product going to sell it? Is it a lot of relying on the reputation of product and selling itself? Just kind of a resourcing question.
Zane M. Burke
It's not as simple as standing by the fax machine, so it is a little more challenging than that. But we feel good about our coverage model. A lot of the -- we play man-to-man coverage on our installed base, and we probably have one of the, I would say, the best in the industry, no doubt. On the new business side, we continue to invest in that model. I feel comfortable about that, about our coverage as we move forward. But, again, the more opportunity, the more growth out there, the more we'll cover it to make sure. I'm a big believer in more coverage [indiscernible].
And I think one then on the Advocate side. Is that possible?
Marc G. Naughton
Yes, please. Absolutely.
So I'm curious what the gentleman from Advocate's view there. Your payor mix changing is coming here and how that affects what you think your top line looks like. And therefore, what does that mean that you're trying to achieve on a cost savings standpoint with your efforts in -- on the IT front with Cerner?
Long story short, we have aggressive targets for growth at Advocate. Every healthcare system worth its weight in salt is doing at a minimum of back of the envelope calculation on what would happen if you move completely to a Medicare reimbursement. So I would assume that we're no different than anyone else as far as focusing on taking costs out. We were very aggressive in our negotiations with Cerner. But ultimately, consolidation is going to take place, and we need to be very cost effective in our hospitals and in our employed physicians and in our practices. And so there's a major initiative and has been for the last 2 years to take costs out, not knowing what the future has for us but knowing that the reimbursement probably is not going to get much better as we walk into the exchanges. One last point, in the state of Illinois, there's 7.5 million people. The last estimate that we sized that's somewhere in the neighborhood of 450,000 could be eligible for the exchanges, could be eligible. In our marketplace, that would put us somewhere -- that will be about 5% of the overall potential lives. We think that might be aggressive, but we're preparing for that. We're waiting to see what the plans come out. Everyone understands that there are -- it's a metallic plan, and so we're waiting to find out where the silver, which is the second lowest tier, it's the second lowest model that's put out that really helps you to understand what is kind of the level set. And so we're waiting to see what that looks like. We have no idea if it's going to be north or south of Medicare reimbursement, but I think everyone is moving to try and be cost-effective and moving towards more like a Medicare reimbursement and hope that, that will be 5 to 10 years out.
Mike, will you consider putting a product out on the exchange?
To be determined. We're waiting to see what the -- the [indiscernible] truth is we don't know what the model is going to look like, so it would be really ridiculous for any healthcare system to step in until you understood what the rules of the roads were. So we're trying to figure out what does this silver plan look like, what's the reimbursement. If we choose not to do it initially, it doesn't mean that we can't come back in, in the back half of next year. We're well-positioned as anyone else, but is it a race towards the bottom? So we want to be smart about when we step in and what the model looks like. Technically, we're in. We will be in because all of the payors in the marketplace, they've got our pricing. They know exactly what we are willing to take. Now will we do something different and offer some unique narrow market type of solutions for the exchanges? That's what we're waiting to see, whether or not it makes good business sense to move forward with that.
Marc G. Naughton
Why don't we take 1 more question, Sandy?
A question either for Zane or for Neal. Looking at the competitive landscape, obviously, Meaningful Use Stage 1 was the catalyst to get some folks to make a change. When you look out for the next 5 or 6 years, is it Stage 2 and Stage 3 that's the catalyst for some people to maybe change? Is it population health and data liquidity? What are the things that are unseat it? And the thing that was really interesting to me is that when you actually put EPIC up there now. I don't think that's ever been up there as a replacement opportunity. What's going to get somebody who's spent, $100 million, $150 million, sunk costs? How does that type of institution make a decision to rip and replace because you're -- that's a big writeoff?
Zane M. Burke
I'll start and I'll let Neal add color commentary. I think it is much a post-meaningful use market today. So we're already in that marketplace today, and that's why people that -- there are people that are making decisions first, and I think Stage 3 will drive some more decision points. Ultimately, I think it is the -- it's the data analytics of population health. It's the other mandates that are coming -- other governmental mandates that are coming at our clients and prospective clients that cause them to make changes. And, really, it is that population data analytics piece that I think causes at the client base to be at risk. And I think you're starting to see -- and I think if you looked at my chart, I put that in the 2015, 2016 view. I think you will start to see some of the early elements of that coming to bear.
Neal L. Patterson
To wrap with this comment, I think all of healthcare will have to look and reassess. Will their platform basically allow them to get the rewards of the rest of Meaningful Use, not be penalized by the potential of the downside, the assessments that are really built into Meaningful Use? And probably most importantly, will it -- is the investment I'm making going to take me to -- into the future and help me build the future organization? I think I need to survive and then thrive in this fundamental changing world that's happening in healthcare. So healthcare is -- in just closing, this is an industry that will not go away. You cannot -- society, we will not let it go away. It's one that's under a lot of pressures, but it will continue to grow, too. So there are some fundamental -- sometimes when you -- when Mike talked about all the cost-cutting and all the preparation for the future, you can -- it starts -- you can create a view that says, "Oh my gosh." But then what I end up doing is -- we're at the intersection of healthcare and IT. Both of them are into the whirlwind in every one of our lives, okay, and that is going to continue in our society, in our individual lives. So we need -- it's a real exciting time to be where we're at. Those pressures are going to create change. Those thoughts [ph] are going to create a much stronger, vibrant, high-valued health systems that's going to basically be there to service when we need it.
With that, let's land. Thank you very much for coming. Thanks for all the engagements here and the questions and putting up with -- I didn't count how many presenters we had, but for a 2-hour meeting, it was relatively efficient. So have a great day. We'll possibly see you around.
Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.
THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.
If you have any additional questions about our online transcripts, please contact us at: email@example.com. Thank you!