Deal Radar 2009: Medsphere

Medsphere offers open source solutions for healthcare IT. In an industry that has been inundated with proprietary vendors who charge high prices for electronic health records, Medsphere aims to stand out by offering an affordable and proven electronic health records system.

Medsphere was founded in 2002 by Scott and Steve Shreeve, brothers who leveraged the VistA-based electronic health record developed by the US Department of Veterans Affairs.  Current CEO Mike Doyle joined Medsphere in October 2007 after serving as president and CEO of Advantedge Healthcare Solutions, a SaaS physician-billing company backed by private equity investors. From 2000 to 2004, he was chairman and CEO of Salesnet, an enterprise software provider. Rick Jung, COO, has two decades of experience in healthcare and IT, including sales and executive management positions in traditional healthcare corporations and leadership positions with healthcare IT startups. Edmund Billings, CMO, is a pioneer in the development of electronic medical records (EMR) and is a seasoned healthcare IT entrepreneur. In 2007 he co-founded Open Health Data, an open source company to share and use healthcare data.

Dr. Kenneth Kizer joined as chairman of the board in 2002.  From 1994 to 1999, Kizer served as the Undersecretary for Health in the Department of Veterans Affairs (VA) where he was the CEO of the VA healthcare system, the largest provider of healthcare in the US, managing an annual budget of over $20 billion and 200,000 employees.

Medsphere has raised over $37 million in capital: a $5.7 million Series A from Thomas Weisel Venture Partners, EPIC Ventures (formerly Wasatch Ventures) and several high net worth angel investors in 2003; an $18.3 million Series B led by Azure Capital Partners with participation from previous investors in 2005; and a closing Series C targeted at approximately $13 million to fund growth.

When Medsphere was launched in 2002, proprietary vendors such as McKesson and Cerner filled the space with expensive electronic health records that were not interoperable and charged approximately $22 million on average for full EHR implementation.

A national study recently published by the New England Journal of Medicine reported that of 2,700 practicing physicians in the US surveyed, only 4% had a “fully functional” EHR system that enabled them to view laboratory data, order prescriptions and help in making decisions. Most hospital administrators and physicians cite the high cost of purchasing EHR systems and equipment as a significant barrier to their adoption. Medsphere believes it can change this because of the availability of code from the VA through the Freedom of Information Act (FOIA) and the open source business model. 

Since so much time and so many tax dollars have already been poured into VistA, Medsphere is able to cut costs by using that developed code and enhancing it for the commercial hospital without reinventing the wheel. Similarly, the open source model enables Medsphere to create a parallel development and support structure by releasing the code for OpenVista into the healthcare open source ecosystem. In this way, OpenVista users can tap the community for improvements and support, lowering Medsphere’s costs and hence the price of the overall solution.

OpenVista differs from other systems in several ways. First, the software is free and healthcare facilities only pay a subscription fee for support. OpenVista works with existing hardware and software and all software and procedures are compliant with Health Insurance Portability and Acountability Act (HIPAA) and privacy laws. The program is collaborative, allowing physicians and staff to share information with others and gives an organization freedom to be in control of their own system. Since 65% of doctors have trained in the VA system, they are familiar with OpenVista Medsphere’s research via the Health Information Management and Systems Society (HIMSS). Analytics suggests that the total addressable domestic hospital IT market is $9.2 billion annually. The company’s target market of 2,265 hospitals, which comprises 45% of the total addressable market, is $4.1 billion. Medsphere’s potential market is substantial given that roughly 80% of all healthcare facilities in the US function without extensive health IT systems. They do not consider all hospitals in that 80% to be potential customers and are focused primarily on acute care hospitals and integrated delivery networks ranging in size from 25 to 500 beds with a further concentration on facilities in the 100-500 bed range. Within that group, their main focus is on critical access hospitals in underserved areas and facilities with tight resources.

Medsphere’s early success is based largely on the proven reliability of VistA in the VA. VistA, according to The Institute of Medicine, is “one of the best healthcare information systems in the nation.” Customers pay for a comprehensive EHR from their operating budget without huge upfront costs, massive back-end balloon payments or long-term contracts. 

Medsphere had record bookings in 2008, double the number from the previous year. 2009 bookings are also comparatively higher than 2008. Currently, over a dozen hospitals and more than 20,000 individuals, including 2,500 physicians, use OpenVista. Medsphere declined to disclose revenue numbers.  Customers include Lutheran Medical Center in Brooklyn, New York and Midland Memorial Hospital in Midland, Texas.

Medsphere aims to build a multi-million dollar company, and it occupies an advantageous place in the current market:  President Obama’s stimulus plan includes $20 billion for hospitals to adopt electronic health records. Due to their high cost, fewer than 15% of hospitals in the US have these systems in place. The company plans to take full advantage of federal legislation and is currently making plans with several facilities that are going to maximize incentives and funding opportunities.

Related Reading:
Deal Radar 2009: Advanced MD
Forbes Column 08: Healing Health Care
Critical Innovation In Healthcare Claims Processing: athenahealth CEO Jonathan Bush

This segment is a part in the series : Deal Radar 2009