Computer Programs and Systems, Inc.: Investment thesis
Equity research: Computer Programs and Systems, Inc. (Part 2 of 5)
Computer Programs and Systems, Inc. (CPSI) investment thesis
This section includes a description of the business and a quick summary of the key points to the investment thesis, including how the idea was originally brought to our attention.
Computer Programs and Systems, Inc. (CPSI) is a healthcare information technology company that designs, develops, markets, installs and supports computerized information technology systems. CPSI’s enterprise-wide system automates the management of clinical and financial data across the primary functional areas of hospitals and healthcare facilities. The company offers services that enable customers to outsource certain data-related business processes in the areas of clinical care, revenue cycle management, cost control, and regulatory compliance. CPSI’s software products include Patient Management, Financial Accounting, and Clinical. Patient Management enables hospitals to identify a patient at any point in the healthcare delivery system and to collect and maintain patient information through the process of patient care. Financial Accounting provides various business office applications to track and coordinate information needed for managerial decision making. CPSI’s Clinical product automates record keeping and reporting for a range of clinical functions such as: laboratory, radiology, physical therapy, respiratory care, and pharmacy. In addition, CPSI offers support and maintenance services, business management services, and system implementation and training services. CPSI, headquartered in Mobile, Alabama, was founded in 1979 and has over 650 client hospitals in 45 states. Their target market consists of acute care hospitals with 300 or fewer acute care beds, with the primary focus being on hospitals with 100 or fewer acute care beds. These facilities with 100 or fewer acute care beds comprise 94% of CPSI’s customer base. 1
Meaningful Use
Healthcare is the largest industry in the United States economy, compromising 17.9% of GDP in 2011. In the coming years, this number is expected to grow to almost 20% of GDP. 2 Within the healthcare industry itself, hospitals account for about 31% of total healthcare expenditures. 3 In 2012, 44% of hospitals reported having at least a basic EHR, an increase of more than 17% since 2011 and nearly tripling since 2010. 4 Depending on the source used: either the Centers for Medicare and Medicaid Services (CMS) or the American Hospital Association, there are between 4,000 to 4,200 hospitals in the U.S. with 300 or fewer acute care beds and about 2,600 in CPSI’s primary target area of 100 or fewer acute care beds. All of these hospitals are incentivized to adopt electronic health records (or EHRs). The incentives come via The American Recovery and Reinvestment Act of 2009 (ARRA), Health Information Technology for Economic and Clinical Health (HITECH), Medicare, and Medicaid. Beginning in 2015, hospitals and facilities not using electronic health records will face a 1% reduction in Medicare and Medicaid payments, which could rise to as high as 5% by 2018. 5 Meaningful Use is the set of standards defined by CMS incentive programs that govern the use of EHRs and allow eligible providers and hospitals to earn incentive payments when they adopt a certified EHR and attest to the stages of Meaningful Use. There are three stages of Meaningful Use:
Stage 1, data capture and sharing
Stage 2, advance clinical processes
Stage 3, improve outcomes. 6
Above is a chart detailing some of the incentive payments of Meaningful Use.
The cutoff for Meaningful Use Stage 1 is October 1, 2015. Once Stage 1 Meaningful Use is achieved, healthcare facilities have two years to achieve Stage 2. However, facilities that achieved Stage 1 in 2011 have three years to achieve to Stage 2. CPSI generates the most revenue from facilities wanting to achieve Stage 1 because this is the stage where the bulk of CPSI’s software packages is sold. This number typically ranges from $600 thousand to $1 million depending on the healthcare facility’s size. To achieve Stage 2, hospitals must purchase additional software such as Physician Documentation. The additional software sales to get to Stage 2 generate about $100 thousand in revenue for CPSI. The company estimates that it will make an additional $100 thousand of revenue per Stage of Meaningful Use from additional software sales after achieving Stage 1. 7 That equates to roughly $65 million per stage after Stage 1 based on the current customer base of over 650 hospitals. Currently, about 75% of CPSI’s customer base is Stage 1, so there is still Stage 1 low-hanging fruit left to be picked. Of the 2,600 facilities with acute care beds of 100 or less, CPSI estimates that about 400 of them will buy an EHR system that they currently do not have to get them to Stage 1. 8 CPSI’s current market share of hospitals with 100 or fewer acute care beds is about 28%. Assuming they maintain market share, that would amount to about 100 new clients that need to get to Stage 1. This would be a potential $80 million in revenue from hospitals needing to get to Stage 1 (using the $800 thousand estimate for sales, the mid-point between $600 thousand and $1 million) and an additional $10 million per stage after Stage 1. These small, rural hospitals that are CPSI’s target market are adopting the functions of EHR systems at a faster rate than large urban hospitals. 9 This means that they are achieving the Meaningful Use Stages faster than their larger peers, and thus receiving more incentive payments.
Another positive for CPSI is that several of their direct competitors for the 100 or fewer bed facilities are struggling to get clients to Meaningful Use. Some healthcare facilities are unhappy with their current EHR vendor. As a result of CPSI’s Meaningful Use track record, those facilities are looking to CPSI to get them to Meaningful Use. CPSI has gotten more healthcare facilities to Meaningful Use than their next five direct competitors combined.[Source: Forbes, “Land Shares of CPSI Cheaper Than the CFO Did.” May 21, 2012]
TruBridge
Earlier this year, CPSI rolled out TruBridge, a wholly owned subsidiary. TruBridge provides business management, consulting and managed IT services. TruBridge leverages CPSI’s expertise and resources to help clients alleviate some of the fixed costs of a business office by identifying their IT objectives and helping to come to a resolution to meet those requirements and manage the resulting projects and associated technologies. TruBridge has the same target market of CPSI. The goal with the formation of TruBridge was to be able to have those add-on sales to its current customer base, but also to market TruBridge and its business consulting services to healthcare facilities that currently do not use CPSI as their EHR vendor.
From our conversation with CFO David Dye, he believes CPSI can grow 8% to 10% a year from selling to their existing base apart from TruBridge. What he sees as the opportunity is a continuing trend where hospitals start looking at third parties for the services offered by TruBridge. If, in the next five to seven years, TruBridge can penetrate into the non-CPSI hospital base (2,600 hospitals), “Then we have a $180 million business in TruBridge alone, and right now TruBridge has a gross margin in the low 40s.” Mr. Dye does not see any risk with TruBridge other than, “Looking like fools that tried something new and failed, because it will not hurt what CPSI is doing and has been doing all along.” None of CPSI’s competitors offer business consulting services like TruBridge; instead, they are focused solely on being EHRs vendors. Thus, the competitive landscape that TruBridge is facing is very attractive.
TruBridge is starting to gain traction. The subsidiary has signed 11 new contracts, four of which are for full service. One of the full-service contracts is a hospital that does not utilize CPSI as its EHR vendor. 10
The Market Realist Take
The company said in its 2Q 2013 earnings call that during the quarter, TruBridge executed 13 new accounts receivable management contracts—three of which were for full services and ten for product pay and insurance follow-up services. Of particular significance is that two of these 13 contracts are with hospitals that don’t use CPSI as their EHR vendor.
CPSI’s competitors include Cerner Corporation (CERN), Quality Systems Inc. (QSII), McKesson Corporation (MCK), Veeva Systems (VEEV), and Quadramed Corp (formerly QD, which was recently purchased and went private in June).
Source: CPSI 2012 Annual Report ↩
Source: Centers for Medicare and Medicaid Services (CMS). CMS Fast Facts May 2013 ↩
Source: 2012 Centers for Medicare and Medicaid Services (CMS) Statistics. ↩
Source: “Health Information Technology in the United States 2013: Better Information Systems for Better Care.” By: Mathematica Policy Research, Harvard School of Public Health, and Robert Wood Johnson Foundation. ↩
Source: Medical Records.com, “Electronic Medical Records Deadline: Will I be assessed Penalties For Not Using An EMR System?” ↩
Source: “What is Meaningful Use?” Healthit.gov ↩
Source: CUSH Capital interview with CPSI CFO David Dye 5/21/2013 ↩
Source: Computer Programs & Systems Inc. Q1 2013 Earnings Call ↩
Source: “Health Information Technology in the United States 2013: Better Information Systems for Better Care.” By: Mathematica Policy Research, Harvard School of Public Health, and Robert Wood Johnson Foundation. ↩
Source: Centers for Medicare and Medicaid Services (CMS). CMS Fast Facts May 2013 ↩
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