Cerner's CEO Hosts Annual Shareholder Meeting (Transcript)

| About: Cerner Corporation (CERN)

Cerner Corporation (NASDAQ:CERN)

Annual Shareholder Meeting

May 24, 2013 11:00 am ET


Neal L. Patterson - Co-Founder, Chairman, Chief Executive Officer and President

Cliffword W. Illig - Co-Founder and Vice Chairman

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

Jeffrey A. Townsend - Chief of Staff and Executive Vice President

Neal L. Patterson

Come on, let's rock and roll. Good morning.

Unknown Executive

Good morning.

Unknown Executive

Good morning.

Neal L. Patterson

So I'm Neal Patterson. I'm the Chairman, Chief Executive, President of Cerner, and I've got all of those big titles by being one of its 3 founders. And the other 2 are in the room, Cliff Illig and Paul Gorup. Where's Paul? There he is.

So we -- in the fall of 1979 or the summer of '79, we sat in Loose Park, studying for the CPA exam. None of us were accountants, but we wanted to show our brother nerd, Arthur Andersen, which my mother would remind me doesn't exist anymore. So the CPA exam was nothing -- no big deal. So we probably did more daydreaming about starting a company than we did studying for the exam. And so it's through that interaction -- Loose Park's a beautiful -- it's a beautiful place to have envisioned this. I don't think we were good enough to envision all of this, Cliff, Paul, but it's a great country, and we've had a great opportunity to be at the intersection of health care and IT. We wake up every morning with those -- thinking about 1 of 2 of those subjects, and then we spend the rest of the day thinking about how they interact together.

So I'm going to make some comments at the end of the session and take some questions from you all, which I enjoy every year. So I need to kind of officially -- so I'm going to chair this meeting, which I officially call to open. And we have a quorum. Randy Sims is our Secretary, and he has informed me and assured me that we have a quorum to conduct business today. So -- and we have an agenda. And this is our agenda. So the -- we're going to basically do a series of presentations. We're going to do the business part of the meeting. And as I said, I'm going to come back and we're going to take a -- make a -- I'll make a few comments and then we're going to take some questions. Cliff?

Cliffword W. Illig

Thanks, Neal. Good morning, everybody. I very briefly am going to start with some introductions of some of the people we have here in the room. First of all, the board -- or the Cerner Board of Directors and that -- you met Neal, Neal Patterson, Chairman, CEO, President, co-founder of Cerner. I'm Cliff Illig, Vice Chairman and co-founder. Along with the 2 of us, which are the inside board members, we have a nice complement of independent board members, starting with Dr. Gary Bisbee. Gary, if you would, please just stand for a moment. The Honorable Jack Danforth; Linda Dillman; Dr. Bill Neaves; Bill Zollars; and Dr. Denis Cortese. So that's your Cerner Board of Directors.

And then just as a matter of formality here, I want to introduce the representatives of our independent auditors, KPMG LLP: Dana Foote, Erik Sisel and Brad Sprong. Welcome. Thank you.

And then because this is a shareholders meeting, we need to have inspectors for our election, and they're representatives of Stinson Morrison Hecker LLP, are Jim Allen and Craig Evans. Thank you, gentlemen.

We've got several members of our executive leadership team that are here today. Some will present. Marc Naughton, Executive Vice President and Chief Financial Officer; Zane Burke, Executive Vice President, Client Organization; Mike Neal, Executive Vice President, Chief Operating Officer; Jeff Townsend, Executive Vice President and Chief of Staff.

Other Cerner executives, part of the leadership team, that are just here today: Joanne Burns, Senior Vice President and chief Strategy Officer; Kate Chaffee, Senior Vice President, Worldwide Consulting; Paul Gorup, Senior Vice President, Chief of Innovation and Co-Founder; Mike Neal, Senior Vice President and President, Pacific; John Peterzalek, Senior Vice President and President, Atlantic. So we've got the left and the right part of the country well represented.

Neal L. Patterson

World. The world.

Cliffword W. Illig

World. Sorry. Randy Sims, I already introduced, Senior Vice President, Secretary and Chief Legal Officer; and then Julie Wilson, Executive Vice President and Chief People Officer.

So while I'm up here, I'm going to do something we haven't done a lot in these meetings. I'm going to talk just for a minute about what goes on here in Kansas City. Cerner is a lot of places in the world now. We are, as a company, trying to be very good corporate citizens in all the communities that we're a part of. But because we have a very substantial and certainly founding footprint here in Kansas City, I want to just touch on this for this group here today and give you a little bit of a sense for how that impact is kind of stacking up.

There's a number of dimensions of the impact that Cerner has on the community. There's an economic dimension, which I think everybody appreciates and we'll talk about just a second. We have a lot -- we impact a lot of the educational systems in the region, all the way from elementary up through secondary and then into the grid education programs.

Cerner, although we're 33 years old, I think we still work pretty hard at maintaining an entrepreneurial attitude and culture, and we are significantly committed to helping the entrepreneurial community portion of Kansas City. We work every day, trying to prove -- improve health and health care, take some innovative approaches to those issues here in the Kansas City area. And then finally, we -- I think we've made a fairly significant impact around the film [ph] tropic landscape here in Kansas City as well.

First, I -- let me talk to -- speak to the economic one. In terms of the jobs that are a very big part of the Kansas City economy and certainly very big part of what makes Cerner -- the people are a big part of what makes Cerner go. We've got over 8,000 associates here in the Kansas City area. We've created here -- in Kansas City alone, we created over 3,000 new jobs over the last 2 years. Our payroll is now in excess of $650 million every year.

I was visiting with our -- the executives responsible for our recruiting effort, which we are hiring a lot of people this year, over 3,000 that we'll hire this year. To date this year, we've conducted over 4,000 interviews. We've hired over 1,800 people. Close to 500 of those are computer engineers. So we're investing very, very heavily in that human capital as necessary to drive your company forward. We'll talk a little bit more about this in one of the later presentations. We're getting ready to open the new campus, which most of you, I think, are aware of in western Wyandotte County. It's our continuous campus. Once we get that open, Cerner, from just a physical plant footprint standpoint here in Kansas, will have over 3.6 million square feet of space in the area.

Also from an economic standpoint, our annual health conference, which we do on October every year, is one of the larger conventions that we host here in Kansas City with over 10,000 people coming to Kansas City for a week-long conference. It's probably one of the best conferences in health care, if you listen to the people that come, and has an economic impact of over $7 million to our local community. We also are responsible in one form or another for about 40,000 room nights in Kansas City hotels every year. And then we do over $66 million worth of business with just local suppliers that we use in -- across the region.

The other piece of the equation I'd like to pause for just a second and speak about is it's -- something that's very special to Cerner and our associates. It's really a joint venture between Cerner and our very large associate base worldwide, this thing called the First Hand Foundation. First Hand works very hard to have -- it's a very unique foundation, works very hard to have a significant and meaningful impact on the lives of children kind of one life at the time. As the slide indicates, we've touched about 172,000 lives since 1995 when the foundation was founded, and that's across our commitment in over 80 different countries. First Hand has a number of dimensions to it. It has a number of different things that it does. There's a tremendous amount of involvement of Cerner associates in it.

The Healthe Kids Institute is -- works very hard here in Kansas City on, for instance, health screenings for over 20,000 Kansas City school children to give them a chance to make sure they know what their health issues may be and give somebody else a chance to work with them on those issues.

We have a program called the Staff Program where we engage high school students in an agenda that is intended to help them appreciate what healthy lifestyles are all about. And then we've got a very innovative program in the south end of town where not only we're working with kids but we're working with a very compact adult population. So many innovative approaches to managing wellness.

At the bottom of the screen, the Impact program really reflects the commitment that hundreds and I think thousands of Cerner associates here in the -- here in -- at least in the Kansas City area, a commitment of over 140 hours -- 40,000 hours of their time over the last 4, 5 years to a number of philanthropic, charitable and civic causes.

So again, there are a number of different dimensions to ways Cerner impacts the community, but I want to make sure that -- because we don't do it in very many of these meetings, I want to make sure that, at least for those of our attendees here that are from the Kansas City area, that you get a little bit of a reflection on how we impact the community beyond our economic impact.

So with that, I'll wind down and turn this over to Marc Naughton.

Marc G. Naughton

Thank you very much, Cliff. It is my proud honor to run the business meeting portion of the shareholder meeting. The Board of Directors set April 5, 2013, as the date of record for the shareholder meeting. We have at this meeting a record of shareholders as of that date. A duplicate record has been on file at the principal place of residence. A business of the company for the 10 days immediately prior to the date of this meeting has been available for inspection by any stockholder during that period.

Randy Sims, our Secretary, has delivered an affidavit of mailing of Broadridge establishing that notice of this meeting was duly given on or about April 15, 2013, to stockholders of record on April 5, 2013. A copy of the notice of meeting and the affidavit of mailing will be incorporated into the minutes of this meeting. In addition, the inspectors of election have advised that at least a majority of Cerner's issued and outstanding shares entitled to vote is represented in person or by proxy at today's meeting. Since a majority of Cerner's shares is represented here today, a quorum is present, the meeting is duly constituted and the business of the meeting may proceed.

The polls are open now and will be closing 10 minutes following the conclusion of this meeting.

If you have previously voted by proxy, it is necessary to vote by ballot. Only stockholders who have not voted or those who wish to change their vote on the proxy should vote by ballot.

We'll be following the agenda and the shareholder meeting rules that were distributed at the registration table.

The first order of business is the election of Class III Directors to serve until the 2016 Annual Shareholders Meeting. The Board of Directors is divided into 3 classes, with 1 class to be elected each year for a 3-year term. As indicated in Cerner's proxy statements, the Board of Directors had nominated Gerald E. Bisbee, Jr., Denis A. Cortese, Linda M. Dillman for reelection as Class III Directors. No other persons have been nominated in accordance with the Cerner's bylaws, so the nominations are now closed.

The second order of business is the ratification of the appointment of KPMG LLP as Cerner's independent registered public accounting firm for the fiscal year ending December 28, 2013.

The third order of business is to approve on an advisory basis the compensation of our named executive officers as described in our 2013 proxy statement.

The fourth item of business is an amendment to our Second Restated Certificate of Incorporation, repealing the classification of our Board of Directors.

The fifth and final item of business is an amendment to our Second Restated Certificate of Incorporation to increase the number of authorized shares of common stock.

A preliminary tally of proxies and votes cast at this meeting indicates that each of Dr. Bisbee, Dr. Cortese and Ms. Dillman have been elected as directors for a term ending at the 2016 shareholders meeting; the appointment of KPMG as our independent registered public accounting firm for 2013 has been approved; the compensation paid to our named executive officers, as disclosed pursuant to Item 402 of Regulation S-K, has been approved; less than 80% of the total outstanding shares have voted in favor of the proposal to amend our Second Restated Certificate of Incorporation to declassify our Board of Directors. As noted in our proxy statement, an amendment to Cerner's certificate of incorporation to declassify the board must be approved by at least 80% of the outstanding shares. And the shareholders have approved the proposal to amend Cerner's Second Restated Certificate of Incorporation to increase the authorized number of shares. It is noted in our proxy statement an increase in our authorized number of shares requires the approval of a majority of the outstanding shares.

If you've not yet voted or turned in your proxy, please do so at the voting table located at -- just outside the doors to this auditorium before you leave at the end of the meeting. Voting will close 10 minutes following the conclusion of this meeting. The final tally and verification of all votes will then be completed by the inspectors following the conclusion of this meeting and the closing of the polls.

This concludes the business portion of our meeting.

Now I want you all to memorize the Safe Harbor statement. Before I turn it over to Zane, I just want to reference our Safe Harbor statement.

We are likely to make forward-looking statements during our meeting, and we are actually almost always likely to make forward-looking statements because that's the kind of company we are.

If you want to have more information about this, it's available on our website should you like to pursue it further. With that, I'd be happy to turn over to Zane Burke.

Zane M. Burke

Thanks, Marc, and good morning. I wanted to cover a couple of highlights from 2012. 2012 was an excellent year for Cerner, our clients and, consequently, our shareholders. When you look at our bookings for last year, we had record bookings, over $3 billion inclusive of a fourth quarter billion-dollar booking for the first time in the company's history. We had strong contributions from all pieces of our business in 2012, and you see that reflected in a number of our new initiatives around DeviceWorks, Revenue Cycle, ITWorks.

We've also seen a lot of success with our clients. So they're taking our solutions and achieving a high level of adoption and achieving the highest levels of connectivity and data usage. And so we had -- as a consequence of that, Cerner had more than double all other competitors combined in terms of HIMSS Level 7, which is a measurement of that high level of adoption for clients.

We had continued success in our physician marketplace, where we had actually doubled in the last 2 years the number of physicians using our ambulatory solutions. We're over now 45,000 physicians using our ambulatory solutions.

Looking a little bit at the marketplace trends overall, you see a separation amongst companies. So there's only a handful of companies that have been able to succeed in the marketplace based on the increasing demands placed on Meaningful Use, the changes in government mandates and otherwise. So that's creating great opportunity for Cerner and our clients overall.

There's a number of we'll call it raining measures and mandates. So the government continues to put out new guidelines, new requirements on our clients, which actually means I call it the full employment act for health care IT professionals because it literally means forever, there's going to be a need for health care IT and a need for solutions like Cerner's to be delivered.

We are seeing some trends around our clients themselves in terms of pressures on their costs and their top line revenues. And then as a result, you're seeing more consolidation in the industry. So you do see that as one of the trends that actually favors Cerner. So we have 7 of the top 10 systems have a health kind of Cerner EMR core footprint, which means as those clients consolidate, we are among the winners in the future of health care as they continue to consolidate.

You see Revenue Cycle gaining continued importance. Our Revenue Cycle solutions made great progress in 2012 and continue into 2013, as well as our initiatives in population health become increasingly important to our clients as we move forward.

I'd like to use this slide to talk about what's going on in your company and how we think about what -- how we operate. And one of the key elements is every decade at Cerner has been defined by a buying behavior. So you'll see at the top of this, in the case of departmental billing systems towards the end of the 80s, everybody bought in terms of a lab system or a pharmacy system or a radiology system. And at that point in time, we had one very bitter competitor, and that was Sunquest, on this. And what Cerner did is we focused on that competitor today, and we also focus on the future. And so that's one of the things that served this company extremely well and Neal's vision around what -- how we operate, is a strong discipline towards always investing in the world of today but also investing for the future and investing for that significant future.

And as you see the evolution over time, we see that -- Cerner competing in these additional marketplaces. You'll see the competitors will change over time. So our traditional competitors have been the EMR, core EMR world. The future world looks more like a health insurance company that will be our future competitors as you look at the Optums that -- in the world in that space and perhaps some of the big data companies like Oracle and IBM coming back into that marketplace as well. But just know that it's a discipline of how we think about things [ph] to invest for today but invest for the future.

Finally, I'd like to close with some things we're doing on our global marketplace. So we're currently in 24 countries. We actively have clients in those 24 countries. We have almost 2,000 associates working outside the U.S. currently. We very -- we have a very disciplined process around how we enter countries, and we have a discipline around we do not leave countries because that's incredibly important in a global marketplace.

We've also seen great success in our clients globally in achieving some of those HIMSS-level elements. And we're the company in the world that has 4 different countries with HIMSS Level 6 and 7 clients. So again, we look at the opportunities. As we move forward, we're well positioned in the future as the global markets turn back around to succeed in that place.

And with that, I'm going to turn it over to Mike and let him take you through some of the imperatives.

Michael R. Nill

Is this on? There we go. Good morning. My name is Mike Nill. I'm the Chief Operating Officer for Cerner. And my role at Cerner is to work with all of my associates to try to take our vision and turn that into reality for our clients and basically just to try to make these solutions work.

So this morning, what I'm going to do is to cover a little bit about the direction that we set forth for the company in 2012 and what we're going to focus on in 2013.

So our challenge every year as a cabinet is to -- as Zane indicated on his slide, we have over 12,000 associates at Cerner, and our challenge is to provide clarity and direction for each one of those associates so they know what to do every single day.

When I -- I think what I said in front of you last year, we identified -- we had come up with 3 priorities for the company in 2012, and I'll talk a little bit about our progress. The first was driving Meaningful Use. It's where our government is defining for these health care delivery organizations what type of technology they need to adopt and over what time period. And initially, they will receive incentives for implementing that technology. But longer term, if they don't implement, it will end up being a punishment to them.

So how did we do? We -- it was -- this was driving a tremendous amount of work for Cerner. We had to upgrade nearly 200 of our clients to the latest release of our software. And today, we can report that approximately 85% of our clients have achieved Meaningful Use Stage 1. And what that means from a business standpoint, nearly $500 million worth of additional revenue has been received by our clients. So I give us a green checkmark. We accomplished that objective.

Second imperative for 2012 was to dramatically improve physician experience. With Meaningful Use, it's driving the adoption of technology at an unprecedented level for physicians within these health care organizations. And there is -- the opportunity could either be very good or could be very bad. And obviously, we want it to be very good. With that pressure, we could affect their productivity. And it was very important for us to deliver applications that enhanced their experience with their patients and enable them to deliver care more effectively. So we've put a tremendous amount of focus on this, much of which was embodied in a new set of applications that we deliver on the iPad.

And what's pretty cool is this week, we actually received an award for the applications that were built by the user experience group. And we competed against organizations like Google and Nike, and we achieved a bronze level award. So it's -- I mean, it's a great accomplishment for Cerner, and it's a great example of the type of work that we've done. So again, I give us a green checkmark for improving the physician experience.

Third imperative for 2012 was to begin the enablement for a population health management. This is the future for our clients, moving them into a model where they're responsible for populations and they will be reimbursed based upon the effectiveness of managing that population. In 2012, we -- I think we defined a comprehensive architecture, a comprehensive vision, a comprehensive application road map and engaged with one of our premier clients, Advocate, to launch this imperative. So I believe we made the progress in that space that we wanted to achieve as well.

So in 2013, what are we focused on? Yes, as an executive team, we try to put our vision and direction into a concise format or in a format that our associates can remember. We often create acronyms. So in 2013, we created the acronym PPR/CIM+1. I'm sure you'll all remember that. It's so easy to remember. Trust me, if you say it over and over for the rest of the day, by the end of the day you will remember it. If you ask actually probably any of our 12,000-plus associates what does PPR/CIM+1 mean, they could answer that question. So I think we're doing a very good job. So I'll walk through these pretty quickly.

So the first P is physician experience. It's -- it continues to be a focus for us. It's very important that our physicians that we work with are extremely productive not only because they're involved in a care delivery process but also because they're becoming more influential in the buying decision. So it's very important to keep that group extremely happy.

Our focus has been -- we all have these devices that we work with. I set my phone down, but we have our phone, we have the tablet and we have the desktop. We've taken a step back, and we want to ensure that the workflows that we design and deliver work well across that continuum of devices.

The picture is representing -- you see all the different icons. As we deliver our applications on the tablet, our focus is also to provide an application that works specifically for the individual specialties. We're not -- we're moving out of the mobile. We deliver one workflow that is more common and applies across all the different specialties. It's important that we tailor the app for the individual physician and the area that they're practicing.

Second P is population health management. Again, this is the future for our clients as reimbursement models are changing. It's very clear that the current fee-for-service model does not provide the appropriate incentives to improve the quality of care. And we know that the reimbursement models are moving to a point where our clients are taking over responsibility for a complete condition or a complete action, and that's the only way they're going to get paid, is if the quality of service is where it needs to be.

This picture represents -- is a very simplistic diagram of the architecture that we're building. And Jeff will go through more detail on this, but if you start from the left, we're taking data from many, many sources, and we're aggregating that into a common repository. We go through a process to reconcile that data and put it into a common language so that it can be interpreted across the full continuum of care.

We then provide the analytics that sit on top of that data to allow you to identify populations of individuals that can be addressed in a particular way so you can prescribe a certain care process or certain actions to either get individuals through the health care system more quickly or to prevent them from entering the health care system in the first place.

This is -- we think we're very -- we actually know that we are very unique in the industry with our vision. Many of our competitors, what they're doing is delivering individual point solutions. There's no one that can put up an architectural diagram like this and has a comprehensive thought around the management of the health of population. So we believe this is what's going to propel Cerner into the future and continue our future growth.

Third imperative is our Revenue Cycle. There's actually a lot of internal debate around this whether the R should be the second imperative or the third, but I don't want to change PPR now because I'm sure it's burning into your memory. You better have it. But Revenue Cycle is what drives population health management. It's changing reimbursement models. It's driving a need for the new solutions in the population health management space.

And we see a shift over the last several years that our clients were purchasing more best-of-breed revenue cycle solutions. But now, it's very clear that these Revenue Cycle solutions must be tightly integrated into the clinical process, so you can ensure that you're going to get the reimbursements at levels that you deserve in the right time frames. And the only way that you can do that is if you're making the right decisions at the right time during the care delivery process. So Revenue Cycle is very key.

The final 4, CIM+1, they're really sub-bullets underneath population health management. They're imperatives to support that effort. The first C represents the continuum of care. So again, as these organizations are taking responsibility for the reimbursement for a particular -- an entire episode, it's important that they now can control all the activities across that full life cycle, starting at the home through the ambulatory setting, acute, rehab and potentially long-term care on the back end.

So we've always delivered a set of solutions that cover that full continuum of care. Our focus in '13 and beyond will be to create very tight integration between those solutions, not just interfacing but actually tight integration.

I stands for intelligence. We've always had intelligence built within our architecture. This is the ability to interrogate transactions as they flow through our system and prescribe proactive actions for the clinician so that they can make better decisions. With population health management, we have to elevate that intelligence to a new level to be able to look at that entire longitudinal health record to drive proactive actions or allow clinicians to make the right decisions during the process.

M stands for member engagement. This is the connection between the physician and the person receiving care. What we're trying to do is create more stickiness between us, so we're delivering better patient portals, better physician portals because it's important that once an individual establishes that relationship, that they have a reason to come back to that health care organization. That allows us to accumulate more data. The more data we have, the better decisions that can be made for that individual long term.

The +1 is genomics. Cerner has always had a vision. We know that capturing the human genome and associating that with the care that's being delivered is critical. We have that -- we've had that in our data model for many years. With the price of getting your DNA mapped continuing to come down, there's going to be a date where all of us have our DNA mapped within our medical record. With it being mapped, it then allows us to deliver personalized care and be able to identify that this particular action, because this individual has this genetic pattern, will result in this outcome. And that is a critical component of population health management and making the right decisions, which will ultimately drive down the cost of care.

So that's what we're focused on in 2013. We have -- this translates into thousands and thousands of projects and initiatives across the organization, and it's our job to manage that and deliver it. I actually feel we have -- I've been at Cerner approaching 17 years now, and I think, as I look back, we have more clarity and focus within Cerner than I've seen in my entire career. I think we understand exactly what our clients need, and we have translated that into a very good plan, and we're doing an excellent job managing that. We're nearly halfway through the year, we've made a tremendous amount of progress on these items already. So I look forward to coming back to you next year reporting on the progress.

I'll conclude with this final slide. Cliff mentioned this. We -- we're opening a new campus out west. Actually, we had our first -- I had my first meeting out there earlier this week. It is -- if you haven't seen it, it's an awesome facility. It's -- we're putting up 2 9-storey buildings that will ultimately house about 4,000 associates. If you look at the building, I mean, it is a landmark on the horizon. I mean, it's very impressive when you drive up. But I'll give you a secret. If you look [ph] at the outside of the building, there's a design behind that. If you look at it closely with the window pattern and the dark and light, it actually looks like the DNA fingerprint. And obviously, that was intentional because as if by accident, we looked at it once, and it looks like a DNA fingerprint.

Just like our spiral, where we had the 1s and 0s wrapping the double helix, what we're representing inside of that building are all the technologists who are building the technical solutions that will enable health care. So it's showing technology being wrapped with the human genome, which is pretty interesting. So you can tell all your friends when they ask you about the look of the building.

Inside the building, we call it continuous because the groups that will reside in that building are the individuals that have responsibility for keeping our client systems up and running and operational 24/7, 365 days a year. Their job -- because we manage nearly 3/4 of our client systems today, and these individuals are the ones that keep it up and running.

So it's very exciting. We're going to move in, in the first building in a couple of months, and then the next building will be operational, I think, early next year. And so it's a very excited to move out there, and it's a great thing for Cerner. So with that, I'll end and turn it over to Jeff Townsend.

Jeffrey A. Townsend

Thanks, Mike. Well, I usually get the assignment to do a little bit of the futures [ph] and some of the more abstract that we're working on. So -- and at the end, then there's a test of whether anyone understood what I talked about.

So I've talked a lot probably 2 or 3 years around population management and kind of a movement to a new middle or to a new landscape of how health care is going to transact. The -- more recently, as this market -- I wouldn't say begins to mature because it's still a very mature market, but there are now broad sets of estimates out there of the size of this marketplace, anywhere from $50 billion up. So it very much has the potential to be larger than the market that core Cerner is in today, potentially by a factor of double that size.

So the ability to go in and manage at the individual level health care in a coordinated way and drive those efficiencies, costs and bring best evidence does have a very meaningful impact. And from a value proposition, if you can move the total spend, whether it's this country or one of the 20-some others that we're in, by 5%, 10%, 20%, that is significant value back into those economies. So we're very excited about the potential in that space.

As we look at the competitive landscape, the competitive landscape will play out much like the medical record of the clinical system landscape did. And it is working that way as we speak. So a fair amount of very focused, very narrow niche systems that are attacking fragments of the problem. We think we're probably the only ones that are attempting systemically to cover the whole thing under one umbrella, which is a significant differentiator. And if you look at the last 2 decades, that strategy has put out very well for us.

In the near term, if we look at today, we're approaching around $300 million worth of products and services sold into the marketplace to address components of this need as we design or build towards the bigger objective.

As Mike mentioned, we have a very strategic partnership with Advocate. They have been the thought leaders in this space for a long time around clinical integration, is the term you'll frequently hear used. What that means to us is consumers is the silos of healthcare or highly coordinated, the quality that you receive as you move from primary care to specialty care to inpatient and back out again is highly coordinated. And taking that friction out not only produces a higher-quality health care experience and outcome, but consumes less cost. And you'll frequently see them on the speaking circuit in Washington D.C., trying to coach and educate others on how you achieve that, both in their journey and as they've used data with us and the journey going forward.

So again, in an abstract level, I just like to use pictures a lot. This is how we see a fair amount of what Mike had in the quadratic equation looking when it comes to life. So when you take those acronyms, really comes down to you have a physician and a patient, and a decision needs to be made on the next action to take. That set of stuff up above, which we'll frequently refer to as the cloud, is all new information about you as an individual, as well as all of the relevant evidence related to your condition or potential problem, combined with everything else we know about entire populations that have matching characteristics or matching problems.

All of that needs to come together in a moment in time at the decision. You notice here the physician has a tablet, patient has the phone and they have doing websites going back and forth. Well, I saw this type of thing. So we look at it as the physicians going to get no more time to make that decision, but the amount of information available to them may go up by 10x, 20x, 30x what they have today. So there has to be a system to filter out the noise and get them to what's the best evidence for me to make that decision.

What do I not know, because it happens somewhere else in the network, that I need to know there. And a very small recent example, so in Oklahoma, we have a network that is connected a large portion of the providers in that region. And as the tornado hit this week, there's a set of healthcare assets that are now gone. But the information about those individuals was available to those outside of that -- the area that was hit. And so as those folks were being treated, they knew and saw that information, where in a traditional setting, that information would've been lost as well.

So ability to share, in context, real world example, not futuristic Star Trek stuff. It's stuff that's happening today, which is pretty cool.

So we frequently use the term now and next. So Mike pointed through a fair amount of how we're executing incredibly well in the now, and at the same time, we have to prepare for the next. So what I'm going to take you through is you'll hear the term population management, we're going to show you some really incredible technical drawings, but what's that mean to us as individuals.

So we've done here is kind of abstracted for one person from birth on the left through end of life, their consumption of healthcare resources. And over the course of time, there are little spikes in there, where we have healthcare episodes or things happen or babies are born, with that ever increasing as you age and complications rising.

So when we're talking about it from a how systemically can we change that or bend it, Stage 1, which is where most of the market's at today, is trying to drive quality measures into those spikes. So was the best thing done in the best possible way without err, without complication. And so most of the marketplace, including in the U.S. here, sitting between Medicare and Medicaid, are driving quality measures that providers have to report on. And they're creating small 1% to 2% incentive or penalties based on whether you hit those targets. And most of that information is now publicly available. There's a 1 year to 18 month tail of when we get to see that, but for most of your providers, you can go out and see how they score on some of these things. So were antibiotics given proactively prior to surgery. You show up with chest pain, how long does it take until you get an aspirin. So some very process-focused, in some cases, but proxies for improvement.

So this next stage, which is only a few of them in this space, and Advocate's one of those, is what's out there that's an avoidable complication that I could potentially remove. So you see the red line now as compared to the purple line. You didn't completely cause those things not to happen, but they weren't quite as severe. You didn't get an infection in the hospital. So your length of stay wasn't longer. We caught something in primary care, specialty care rather than in catching it in the emergency room. So you're starting to bend that curve a little bit, and those episodes aren't quite as big, and you can react and drive those a little bit differently.

So total cost of healthcare is now starting to come down as you put systems in that can drive, interrupt and predict those things. Sepsis is one we've talked about for quite a while. That is something we've rolled out across our client base.

The third stage, this one takes a little longer, this is to actually avoid the condition completely. So where can we drive wellness initiatives, engagement earlier on or predict that us, as individuals, are going to have this problem in the future and take proactive steps to avoid that? And it isn't all necessarily bad conditions. So one that Cerner's done inside our health plan here over the last year's we created a maternity excellence program in Kansas City. And as an employer sent RFPs or request for proposals out to providers in the community and said this is what we expect, you answer how you would treat our associates and their spouses and family members during that window and time.

Price was less than half our criteria. So this was not who's going to give me the lowest cost. It was quality and it was heavily weighted towards experience.

What's it feel like as an individual? What's my wait time? How am I managed through the system? My access to a lactation consultant 24 hours after I'm sent home. So by interviewing our individuals, our members and spouses, we came up with a list of what would make their experience better, what would have improved their outcomes from their perspective, and we drove that into the proposal process, and picked 2 providers here in town, the net debt criteria that we thought got it. There's a lot of them that didn't, that in a fee-for-service world, they're procedure-based and really didn't get the experience side of this thing.

So several areas in here, and I'll click ahead and describe this in a little more detail. So we like to experiment or attempt to go validate our ideas or thinking in the marketplace. And you see that in press releases in this event and ads more broadly in the marketplace. So this is 6 of the experiments, and there's a few more than this, that we're running today to say how could we change the outcome in a population.

So on the upper left-hand corner, you'll see Healthe @Cerner. That's our initiatives we've been working on for several years as an employer with our populations. Over the last 3 years, our total spend, which is Cerner as an employer plus out-of-pocket for individuals, has been negative year-over-year. Just last year, I think we were a little over 6% versus year-over-year.

Our associates haven't seen an increase in their healthcare costs for 5 years, 6 years now. So we know that's possible and we've learned a ton in doing that. We're now taking that out into broader markets. So I mentioned Advocate. Advocate has about 750,000 lives in Chicago with varying degrees of risk where they're saying, "We'll take all of the demand for care. You pay us a flat per member per month fee." And it's on us to get those folks healthy and get them through the system as efficient as possible. They're one of the leaders in that space with their very large primary care network.

The trick or what I think is unique and incredibly powerful about them, a large percentage of the providers, they do not own. So they found a way to create a partnership around clinical integration and breaking down the silos without having to buy all the assets. And that learning is what's going into our solutions. University of Missouri, a little over 1 year ago, won a CMS innovator grant. There was not a lot of those pushed out across the country. Their's is one of the largest in this broader region of the country, and it's absolutely the largest grant they've ever received in the space, ground taking 10,000 Medicare and Medicaid lives, and year-over-year pushing the total spend down by 5%.

So you don't do that by price because you don't set price with Medicare and Medicaid, it's set for you. You do that by changing consumption of healthcare. And in some cases, increasing access in the lower cost venues and decreasing access in the high-cost venues.

So how many emergency room visits can be avoided if I know that person and I'm more connected to him. And this broadly, I use the phrase frequently of the system just knows. And it's very important that it knows me as an individual with the context of all of my touches.

Here in Kansas City, we worked with employers for quite a while, and we just launched something here recently, which is a collaboration between employers, a network of about 300 independent primary care physicians in the region and Walmart.

We call it the Primary Health network. What we're experimenting there is we believe there is another setting of care that is highly coordinated with your primary care physician but it sits outside of their office. And the attempt there is how can we use retail care, which is open and available, much more than your physician has as an extension of their practice.

So in this early pilot combination of Hallmark and the Walmart store and Liberty, as they do their wellness screenings rather than having to bring people on site to do the blood draws and the measures, you now get a coupon or a ticket that you take to Walmart. They know what needs to be performed, they know who to bill and they know where to send the results, all based on that bar-coded ticket.

You as individual, it's a painless transaction. Do it on your time when you have availability, your spouse has availability, you go do that in a much more convenient and incredibly low-cost way. So a different kind of experiment.

Here in Missouri, we spent about 1 year looking for a community, I'll say, to adopt. And we adopted Nevada, Missouri as a county. And they are, compared to the rest of Missouri, out of 99 rural counties, they rank 88 in health status. 88 is on the bad end of the metric.

So our objective is over 3 years, can we get them into the top 25% of health status, to actually bend and change the number of smokers, the compliance or control of those with chronic conditions, and can we get greater access to care delivery assets without people asking to get in their car and drive to the big city, which has a broader economic development impact on that community. It's very significant.

The last one I'll touch is on Vancouver Island, which is in Canada. And that one is in a socialized medicine environment. So as we like to experiment, we like to try rural healthcare, big city, lots of combinations of what does and doesn't work.

Their main focus is around the seniors population. That is the retirement mecca for Canada, the island. So they have a higher density of 70- and 80-year-olds than anywhere else in the country, who are relatively healthy, living at home and need a higher level of coordinated care.

The fun part there is it's one management team that owns the entire breadth of healthcare. From mental health services to nursing homes, acute care, everything in between, it's one set of about a dozen people you get in the room, and you can call a play and make a change on how people work together. They're really cool but they need a system or an infrastructure to go do that. So that's a more recent -- they've been a client for a long time, that's a more recent partnership that we just did last quarter to create another institute, saw a relationship to innovate there.

So they jump back to technology and I'll land here. It is a large and growing portfolio of solutions to cover coordination of networks, management of health at the individual level, engagement, a lot of the things you've seen over the last 2 or 3 years out in the halls and the booths. The difference in the space is I think this is more raw or pure innovation than what we've done in the first 20 to 30 years of Cerner. And that there isn't a place to go study to say, "I can see the process, I see what it looks like." So this is more inventing the future of healthcare and the solutions that go with it somewhere on a whiteboard. Because if you go ask the current space how to go do this, they're more, and here's my day in the life of today. So we are truly trying to create a new future in the space, and we think that portfolio does probably end up being 2x the size of what we have today. So Neal?

Neal L. Patterson

Thanks, Jeff. Okay, there's going to be a test. So we covered a lot there. Broadly, we take that meeting, you came. We don't make pens or chairs or run trucks across roads, which are very tangible and you could see and understand it. So we take the time to basically share what we do.

What we do is very hard, it's complex, and as you can tell, it's ambiguous at best. So at the center of it, there's almost always software. There is increasingly amount of models, predictive models, so math-specifically based statistical models that predict when something's going to happen, and we embed that. And then we have a lot of services that we provide from consulting services to running computers for our clients.

So we -- it is understandable when you look at the pieces, but the reality is healthcare is this part of our society that for the last 60 years has grown faster than the rest of our economy. So healthcare, on a percentage of our overall economy, continues to get to be a bigger and bigger number.

With the federal deficits that most countries have, in other words, borrowing money to pay for things in this window, or we'll borrow on it and sending the bill to our kids, the federal deficit setting out there and this increasing amount of cost of healthcare, there is a collision course. So something fundamentally will change and will have to change on around healthcare and how it works. We believe that the IT embedded in healthcare, doing the kinds of things we just took you through, okay, will most certainly -- I don't think there's any other options. So we'll have to automate more and more, the systems will have to get smarter and smarter.

The other option is to ration healthcare. So there is another option. It's just, say, we're only going to spend so much and we'll stop doing a whole lot of stuff we're doing. So we think innovation around IT is going to be the core of it.

It wasn't intentional, but we did burn most of the hour, like I think we're done with the hour. I do want questions, so let's have some questions. Identify who you are, where you're from and whether you're a shareholder when you ask the questions. I know there are questions out there. If I don't get some, I'll call.

Question-and-Answer Session

Neal L. Patterson

Yes, ma'am.

Unknown Shareholder

I'm Judy A. Gloss [ph] from Kansas City and I'm a shareholder, but I wanted to ask both from the shareholder and the consumer perspective. As we're going through this, let's see, quality of care model, I guess that was what you said are available for health -- accountable for health, okay. If a person has -- how does a serious chronic condition fit into that, especially as our population ages and there's more Medicare patients?

Neal L. Patterson

I think chronic conditions, everybody that's looked at and studies the problem gets to a common collusion that the chronic conditions in our population are the single -- needs to be the single focus -- or a focus, major focus, of any of these programs. Fundamentally, the models that we're talking about are models that basically say, let's engage people in their health in a much more continuous fashion, as if I have fit bet with me. So more -- in the future, more and more of the time, we'll be wearing monitors that will be able to monitor key factors about our health. That information will go into the system real-time while you're in your living room, while you're, in the morning, when you take your -- after you take your shower, you step on the scale. That information will be instantly available to the overall system. So the overall objective is to know what the conditions are, know what are the risk factors for your conditions, find the lowest -- the fastest way of understanding how you're doing on those risk factors and create an intervention in the lowest cost model. So in essence, it is try to keep you out of the hospital, out of the emergency, out of the ICU, and frankly, even out of your doctor's office. And in doing that, while doing that, create a better health outcome for you. So it has a way -- that's where the cost savings are going to come from, is keep you out of the hospital, keep you out of emergency, keep you out of the ICU and keep you away from the specialist, but make you healthier. And that's -- IT has to be part of that system. Yes, sir?

Unknown Shareholder

Gary Ferguson [ph], Lincoln, Nebraska.

Neal L. Patterson

Shareholder? Good.

Unknown Shareholder

Is this thing on? Yes. First of all, I would like to congratulate you and Cerner on a fabulous year, a fabulous quarter, very, very impressive. Would you talk a little bit about your competitors, particularly EPIC, how you are different from them and how you're competing with them going forward?

Neal L. Patterson

They are our largest, most direct competitor in this era. They are a very good company, it's a -- they're a private company. They use -- the fact that they're private and we're public as a -- as part of their -- where they compete with us, they like to say they don't have shareholders. I'd like to point out to the reality that they do actually have shareholders, it's basically almost a single individual. And they also point out the fact that in this country, you can't pass on an ongoing operation. So there's a -- so we are -- we think competition is the best thing ever invented. Competition makes -- creates as a source of innovation. So we are very comfortable that we have specific -- our plans are to take away their advantages and make their -- and make our strengths stronger and make their strengths weaker on a relative basis. So we're very focused on the subject. So the reality is this marketplace almost became a duopoly, and they being the other side. A lot of the other companies have big challenges kind of over the long term. So we're very healthy, we're the most innovative company in this industry, we have always been, and that's why in every area, we've always had direct competitors for the kind of the current marketplace. We, as a team though, are committed that tomorrow becomes yesterday fairly quickly. So we have to basically invest in where it's going, as well as what people are doing today. So more questions. Yes, ma'am?

Unknown Shareholder

I have a question. I...

Neal L. Patterson

You have a very projected voice, too, I can hear you.

Unknown Shareholder

I am from Leawood, shareholder. I have a question that with maybe your Nevada, Missouri contest, you could incorporate, since more and more people that I hear about are getting bills when they think they were insured before they went to the doctor, that perhaps, the Nevada people could -- when they're billed, to pay the money themselves sometimes that they thought they were covered. Don't they get well so they can be self-sufficient and independent? That might be good in your contest.

Neal L. Patterson

I like the general thought. Jeff, do you have a specific...

Jeffrey A. Townsend

No, I think that's -- a big piece of the effort to start is education and creating some of these competitions. So they've ran both a weight loss and a steps challenge competition, but I like your -- there's a big piece of making individuals more aware of what healthcare does cost and what those choices cost, so that's a good idea.

Neal L. Patterson

We've got time probably for 2 more, so if you've got one burning. John [ph], go ahead. Just speak loud.

Unknown Shareholder

Neal, you mentioned in your annual letter to shareholders...

Neal L. Patterson

I'm so glad that you read that because I didn't write that. And I get the feeling there's nobody really reading it very deep.

Unknown Shareholder

Oh, I do read it and it's a great letter.

Neal L. Patterson

Oh, thank you.

Unknown Shareholder

But you mentioned that Americans spend $2.8 trillion on healthcare, which is more than the entire federal budget [indiscernible]. So my question is, how many more years before healthcare IT spends the cost for [indiscernible] in a quantitative measurable way as these costs continue to go up unbelievably?

Neal L. Patterson

Right. There's -- I think we're making a dent now. We're in -- the era we're in is digitizing the entire content of the entire industry. So in every industry, the content has been digitized. There's fundamental second and third order changes that were not necessarily anticipated. We're all used to the music example. But if you just think about it, when music became digitized, some of us are old enough to remember the vinyl, okay, record, and that once we got that digitized, it was -- we put it on those CDs. And we were excited because there were just more songs on the CDs, but we still kind of had to have a platter and change. What happened after that was the whole concept of how you produce music and how you get your music changed drastically, a.k.a. not a good idea to be in the retail record business back in those days because it just rolled over you. So we have to get -- we're at the primary -- we're doing the primary work today. The fundamental second and third order benefits aren't in the system. I believe they will be there. I think it'll be another 10 to 20 years for it to have a full effect, and I think the effect will be very, very significant. And we're trying, that's kind of what we're talking to you up there. One fundamental -- we have to change the policies and the practices in this industry significantly. Today, the fundamental incentive from a healthcare provider, most of them still get paid when you're sick, and they get paid for doing more things to you. That's -- until that changes -- okay? Now that's why we like employers as a model because we're an aggregator of care as employers. Because you're self-insured, you've got the risk. And your fundamental incentive as an employer with regards to healthcare is exactly where we all want us to be, and that is keep us healthy, keep us productive, okay, and when we are sick, let's get the best damn care, okay? Yes, we want it for a reasonable price but we want the best care because it's us. So the people that have been paying for healthcare and the middle, or what I call the old middle, the insurance companies, have had an opportunity for 40 years. And here's a Cigna board member, but -- and there's maybe -- I do not -- they bring me Christmas cards from Blue Cross Blue Shield, for example. They've had an opportunity and they have perpetuated the system because they think they make more money, the more money this thing's been on healthcare. So we've got a lot of work and innovation to do at the technology -- in a lot of ways, but we also have got to change some fundamental policy and practice. So I apologize for the brevity of the amount of questions. We've got time for one more question. I see one hand here. Okay, we're going to get 2 questions. We'll get you and ma'am up there.

Unknown Shareholder

Tom Briar [ph]...

Neal L. Patterson

Wait, wait. We got the mic -- Tom, you're coming second. You get the final word, Tom. Ma'am?

Unknown Shareholder

Okay. My name is Sharon Music [ph] and I am from Bucyrus, Kansas.

Neal L. Patterson

Lovely out there.

Unknown Shareholder

Absolutely. A piece of heaven out there. My friend Betsy [ph] and I represent our little tiny women's investment club.

Neal L. Patterson

Is that Betsy there?

Unknown Shareholder


Neal L. Patterson

Hi, Betsy.

Unknown Shareholder

Betsy is right here and Betsy is a retired nurse, by the way. And first of all, I appreciate the friendliness in this company. From the time we walked in the parking lot to being in this room, there are tons of friendly people. I think friendly companies do better than unfriendly ones, so thank you for setting that tone. My question is, are there any numbers that you all keep that tell you, does -- for example, does Cerner keep 100% of the people or the companies who use your products, your IT, do you keep them all or do they -- do you have some who moved to your competitor?

Neal L. Patterson

The short answer is we do not keep 100% of our clients. And there is a long list of reasons that create that fact. So the analogue to that fact is all of our competitors, we've replaced them, too, okay? So there isn't anybody that have 100% -- that can ever -- that will answer that because their in business more than any reasonable amount of time. So that's -- I don't know if that was the heart of your question. It's certainly how I interpret it. Did you see Kip [ph] next to you over there?

Unknown Shareholder

I haven't met this person over here.

Neal L. Patterson

I was really talking about the dog.

Unknown Shareholder

Oh, I'm sorry. Yes, I saw the dog earlier because our daughter has a Yorkie and she absolutely would die if she was here. But she's working so...

Neal L. Patterson

Okay, okay. So thank you. Tom, you get the last word.

Unknown Shareholder

Tom Briar of Manhattan, Kansas, shareholder. Interested in your current status and future initiatives with both the Defense Department and the VA.

Neal L. Patterson

Well, there was some news on that this week. So Zane, why don't you do current status and comment on the future.

Zane M. Burke

Sure. So there was just recently this week, actually, a RFP that came out for the DOD for their entire iEHR, which is their electronic health record.

Unknown Executive

[indiscernible] I'm going to come back, I'm going to come back to that. So it's electronic health record, so that's what they call it, which basically just means it's -- an RFP is a request for proposal so...

Neal L. Patterson

Are we bad about that? It drives me crazy.

Zane M. Burke

I'm sorry about that.

Neal L. Patterson

Talking about [indiscernible] okay.

Zane M. Burke

I apologize for that. That's their terminology, and actually, I would kill you if -- it would be really bad if I did all the government language that they use for those processes. So they've actually just recently done a request for a proposal for -- which basically just means they go out and look at what's going on in the marketplace and think about what they might do, both from a broad electronic medical record and from a lab-specific medical record. And so that just came out this week. We are the only company that's actually done a computer off-the-shelf integration with VistA in the VA. And so there's a lot of discussion about whether the VA and the DOD come together and create one system together. And so the dialogue will be whether they stay on VistA, which is the government-built solution, or whether they do something on a commercial company like Cerner.

Neal L. Patterson

Okay, Zane, so do a little bit of what we do today in the Department of Defense.

Zane M. Burke

So today, we have a couple of different initiatives. We have one program that's around what we call our Smart Rooms. And this is -- and we do that at Walter Reed, which -- that was just now called Bethesda Medical Center, which is where the wounded warriors come back. So these are the worst of the worst cases that come back, the kids that come back that have faced battle. And as part of creating the best experience for those wounded warriors, they're utilizing Cerner technology to have a better patient experience. And so all the devices are connected to their electronic medical record, all of the entertainment and education is all wired. All of the lighting outside so you know, the families know, if the physician is in a room or not, who's in the room, whether that room is clean, all those kinds of things. It makes you feel good as a taxpayer in terms of how our wounded warriors are being treated. So that's a big initiative we have that has a lot of opportunity for us to roll out in other facilities, in addition to the work we're doing in migratorial [ph] revenue with the VA.

Neal L. Patterson

So you're doing some lab work. So we're kind of excited about the opportunity. It would obviously be very large. I've been doing this long enough that I've actually seen this happen before. And I've seen our government make major mistakes and go down directions and waste just tons of money. So we're going to continue, so let me just wrap here. So I had dinner the night before last with a CEO of a major company. And he said, "Oh yes, I had my annual shareholder meeting last week." I said, "How many people came?" And he goes, "Two." He says one of them came because his dad had passed and he thought his dad had bought him stock of that company. So he came to see if he was on the record, okay. So it was like one interested shareholder coming from a very, very large company. So I think this is kind of unique and spatial. I think we -- you kind of get inside, and we arrange trying to talk to you through what we are doing. It's got to be really a little bit of a blur. But we're at this intersection of healthcare and IT. Healthcare has got to make fundamental changes. And the more changes that need to be made, the more opportunity it will create for us. We're not [indiscernible] -- I have been a lot better, we could've been a lot bigger. I've made -- we make mistakes. And when you make mistakes, you basically -- you got to make sure you learn from them and then you basically, you make the adjustments, you go forward. You can't fixate on it. I still feel like we've been blessed and we're at a special place, and I'm really glad to hear we're friendly. So -- and that you don't mind we bring dogs to work. So we're going to work very, very hard. We're going to be bold, okay, we're going to take risk. There's nothing -- we've been doing things that have never been done before for a long time. So it's not -- you don't have absolute clarity what the right answers are. But we're going to make the best decisions for the best reasons for this company, and we're not going to optimize in the short term. So we're going to -- so with that, let's land -- thank you for coming on a holiday weekend. And I was very proud to tell that other CEO that we have -- I don't know how many people in the room, but I can really now say standing room only in ours. And we're in the biggest auditorium, so thanks. Have a great weekend.

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