Our views on how Healthcare needs a Moneyball moment after attending the Health Catalyst Health Analytics Summit 2014

1. Steven A. Rubis rubiss@stifel.com (202) 778-4780
Stifel Equity Trading Desk (800) 424-8870
Industry Update
Digital Healthcare Check Up: Paging Bill James; Statistician Needed in OR Stat!
The Affordable Care Act (ACA) represents a major impetus for the U.S. Healthcare system to become more efficient,
primarily through improving care and reducing costs. We recently attended the Health Analytics Summit 2014 (HAS14),
hosted by Health Catalyst, which focused on how analytics can be brought to bear, primarily in the acute care setting, to
achieve better care and reduced costs. We believe the U.S. Healthcare System faces two primary problems associated
with bringing analytics to bear in the clinic: (1) the lack of understanding around which performance metrics may drive the
greatest impact, and (2) cultural problems.
Advanced statistics and predictive analytics seem to be permeating nearly every industry, but healthcare remains behind
the curve for the most part. Our current electronic foundation provides a strong transactional structure, but fails at
collecting a complete picture about the care that is provided. Recent examples include the failure of nurses and doctors
communicating effectively via the EHR about the possibilities of a patient being at risk of exhibiting signs of the Ebola
virus. Furthermore, physicians continue to complain that EHRs provide a hindrance rather than an impetus to efficiency.
Either healthcare professionals do a poor job of entering data, or EHRs lack the true data architecture to drive advanced
analytics. An important point made by Dale Sanders, Senior Vice President, Strategy, at Health Catalyst was the
healthcare system lacks key data around healthcare outcomes to drive accurate predictive analytics models. In our view,
healthcare continues to await the arrival of advanced statisticians who can drive analytics in a similar fashion as Bill
James did for advanced analytics in baseball. We think Health Catalyst seeks to fill the analytics void in healthcare, which
will be a major theme in years to come. We provide our thoughts on key trends and topics from HAS14, below.
More Disruption Please! Our channel checks with people in the healthcare industry over the past several months lead us
to believe that disruption is building and the status quo will likely face significant change. We believe innovative solutions
to many of our problems will likely evolve from smaller entities rather than large cumbersome bureaucracies. Additionally,
investors should pay special attention to technologists from other industries attempting to solve problems in the healthcare
setting. We believe the fresh perspective will likely be instrumental in driving change over time. Investors should favor
those public companies that embrace change and seek to facilitate new ways of solving problems or providing insights to
clients.
Investment Hypothesis: We continue to recommend the companies in our coverage universe that exhibit a proprietary
technological advantage and benefit from a data driven and analytics focus culture. In our view, the best examples of such
companies include: athenahealth (ATHN: $130.02, Buy), Everyday Health (EVDY: $12.74, Buy), and Medidata Solutions
(MDSO: $42.64, Buy). We believe these companies exhibit a strong focus on driving insight from data to their respective
clients in order to improve their clients' performance. In our view, advanced analytics will represent a key investment
theme over the next three to five years in Healthcare IT, and analytics capabilities will likely become a key differentiator
between success and failure for many Healthcare IT companies.
Prices are as of 10/8/14 close.
Continued on page 2. . . . . .
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All relevant disclosures and certifications appear on pages 7 - 8 of this report.

2. Patient Engagement Represents Difficult Low Hanging Fruit: One
presentation focused on the importance of patient engagement as a key driver of
improvement for the hospital. The message was that patient engagement is as
simple as showing patients respect, better communication between staff, and
exhibiting a positive or happy demeanor; essentially, it is about helping to
alleviate the major stress factors associated with coming to the hospital not only
for the family, but also the patient’s family, too.
Margin Pressure May Disrupt the EHR Monetization Standard: According to
an April 2014 report from Moody’s, the median operating margin for a non-profit
hospital was 2.2%. Given the move toward value based purchasing, one can see
how margin pressures may likely lead to a disruption in the EHR market. Some
hospital CIOs we spoke with suggested that EHR vendors need to adjust their
revenue model by sharing risk with hospital clients. Based on our discussions,
we believe that EHR monetization could mimic Infrastructure-as-a-Service (IaaS),
where users essentially pay according to utilization of the EHR versus a high
installation fee and monthly maintenance fee.
A key theme was that current EHRs do not represent the standard going forward.
Several times we heard how EHRs will need to change in order to maintain their
position in the system. We believe the opportunity exists for small, nimble
innovators to develop products where large, traditional EHR vendors may exhibit
holes in their offerings. The task of the small innovator is to develop an offering
so compelling that CIOs do not “turn off” your solution once the EHR vendor
develops something similar. Additionally, some presenters suggested that
hospitals have not realized the leverage they can exert over EHR vendors.
Should hospitals and health systems realize their place in the power structure we
could see significant disruption.
Data Architecture: A key theme revolved around the fact that healthcare
generates a lot of data, but that we do not necessarily know how to harness the
data effectively. A common cry is that technologists spend significant time
developing advanced technology for marketing rather than healthcare. We think
a key problem likely lies in data architecture and the ability to organize and codify
data from disparate systems and data sets in order to apply advanced analytics.
In our view, those that can discuss how data is collected and organized and how
it fits together in an orderly or meaningful way will likely develop successful
solutions.
The Value Equation = Quality / Cost: Several speakers from major health
systems, Allina and Texas Childrens’, discussed the value equation. An
interesting point was that many healthcare administrators erroneously believe
that an impetus to lower costs equates to lowering quality of care as well. The
presenters pointed out healthcare providers should focus on improving quality
rather than reducing costs to achieve the optimal outcome.
The Irony of Big Data in Healthcare: An interesting comparison made by Dale
Sanders revolved around big data. Specifically, a Boeing 787 making a cross
country flight collects nearly 500GBs of continuous data over a six hour flight. In
healthcare, the average patient generates nearly 100MBs in a year. Certainly,
patients taken in aggregate as a community drive big data, but in our view, Mr.
Sanders’ comparison suggests that healthcare should be able to achieve robust
advanced analytics that provide meaningful insights. Of note, Mr. Sanders also
pointed out that healthcare could also benefit from simply suggestive analytics,
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3. as we need better data to drive strong predictive analytics. Simply being able to
recommend between several options will go a long way in terms of improving
care outcomes and reducing costs.
News and Notes from Digital Healthcare
Collecting from Patients: Consumerism’s Double Edged Sword. Recently,
Bloomberg Businessweek looked at the trend of hospitals seeking upfront
payments from patients. We believe this phenomenon illustrates the double-
edged sword of consumerism in healthcare. On one hand, employers and health
plans are able to better manage risks and costs by pushing cost and care
decisions to consumers. Many seem to laud consumerism as a way to equal
healthcare and healthcare for all through lower cost health plans. What goes
overlooked is that high deductible health plans results in a consumer gambling
on his, her, or their family’s health. According to the Kaiser Family Foundation,
roughly 41% of American workers receiving coverage from their employer have a
deductible of $1,000 or more, which is up from 10% of the U.S. work force in
2006. According to the Robert Wood Johnson Foundation, the average
deductible of “silver” plans under the ACA totals $2,267. At the same time,
hospitals are having more trouble collecting from patients. According to the
American Hospital Association, uncompensated care reached $46 billion in 2012,
which represents roughly 6% of expenses. Anecdotally, we have heard stories of
patients electing against non-threatening surgeries (think orthopedics) when they
realize how much money may be required up front. In May, my 3 year-old son
received a new set of ear tubes and his adenoids removed; I was required to
bring $1,500 to the surgery center. We think high deductible health plans seem to
treat the symptom rather than problem. Essentially, we have given the masses
low cost health care, but cost reductions may occur due to lack of utilization
rather than better care. We believe the double-edge sword of consumerism will
remain a problem for hospitals for years to come.
What the Dallas Ebola Patient Means for EHRs. Recently, the first case of
Ebola diagnosed in the United States occurred in Dallas at Texas Health
Presbyterian Hospital, part of Texas Health Resources. While the diagnosis of
the first Ebola patient in the U.S. was significant, even more so was the snafu the
hospital experienced in allowing the patient to leave the hospital after the
patient’s initial visit. Initially, Texas Health Resources cited problems around care
coordination due to its EHR; there seemed to be a flaw between how the
physician and nursing portions of the EHR interacted. We note that Texas Health
Resources has since backed off of blaming its EHR. Nevertheless, we believe
the damage has been done. In our view, the Dallas Ebola patient represents the
fact that one or several “black swan” type events could be looming that drive
radical change throughout the traditional EHR industry. We believe perception
will be enough to drive change, especially when a significant societal health risk
may be involved.
Apple’s HealthKit Ecosystem Grows: 23 Apps That Connect to HealthKit:
Since Apple (AAPL: $100.80, Buy, covered by our colleague Aaron Rakers)
unveiled HealthKit over the summer and then officially in early September,
healthcare technologists and companies have been focused on how to connect
or leverage the app in their own offering. Recently, mobi health news provided a
list of 23 apps that connect to Apple’s HealthKit. The list comprises two parts: 16
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4. apps hand-picked by Apple, and another seven apps that also connect to
HealthKit. Among the 16 picked by Apple, include: Centered, UP by Jawbone,
FitStar Personal Trainer, Calorie Counter & Diet Tracker, Human, Noom Coach:
Weight Loss, Run with MapMyRun+, Yummly Recipes, Fitnet Personal Fitness
Workouts, MotionX 24/7, Carrot Fit, Zova – Workouts for women, 7 Minute
Workout, Omvana – Meditation for Everyone, WebMD. The other seven apps
integrating with HealthKit include: iHealth, Lark, HumanaVitality, AmWell,
drchrono, HealthLoop, FitPort, and RunGap. Many of these apps seem to allow
consumers to utilize their HealthKit data within the integrated app. We are
particularly intrigued by the AmWell app due to the telehealth component of the
app.
Can Sensor Technologies Drive Contextually Relevant and Personalized
Treatment? Boehringer Ingelheim, a leader in digital health innovation, recently
announced a pilot testing Propeller Health’s sensor technology. The two entities
will test Propeller Health’s sensor technology with Boehringer Ingelheim’s
Respimat inhaler. Propeller Health’s sensor technology attaches to the inhaler
device and allows a user to track time and place of inhaler usage. The sensor
also allows users to track data around symptoms or medication adherence.
Propeller’s goal is to provide contextually relevant, personally meaningful
interventions for patients in the moment. We note that previously Boehringer
Ingelheim has been involved with digital health companies such as Ayogo,
AdhereTech, and Healthrageous. Investors can participate in the Propeller story
via Safeguard Scientifics as the company recently closed a series B investment
in Propeller Health.
Facebook Says Me Too to Using Healthcare to drive Engagement: Media
sources are reporting that Facebook (FB: $77.52, Buy, covered by our colleague
Scott Devitt) continues to explore how it can enter the healthcare arena similar to
rivals Apple and Google. Reports say that Facebook remains in the planning
stages with product ideas focusing on “support communities” and “preventative
care” apps. We note that “support communities” are quite successful. For
example, Healthline uses Facebook to power its “You Got This” campaign for
Multiple Sclerosis, which boasts 20,000 MS sufferers. PatientsLikeMe represents
a successful standalone social network for disease sufferers to connect and
share tips and experiences. While we have no doubt that Facebook could likely
generate significant interest in “support communities” we think monetizing said
communities will be difficult. Currently, Facebook remains out of bounds for
biopharmaceutical advertisers due to FDA regulations. The requirement to allow
comments on all Facebook pages keeps biopharmaceutical advertisers at bay
because of the inherent risks associated with comments. Biopharmaceutical
advertisers seek to avoid off-label or unsubstantiated claims regarding a drug
posted by Facebook users, as such comments land the biopharmaceutical
advertiser in the FDA penalty box.
Medidata Solutions Hires Mike Capone as Chief Operating Officer (COO).
Recently, Medidata announced the hiring of Mike Capone as COO, reporting
directly to CEO Tarek Sherif and president Glen de Vries. Mr. Capone’s
responsibilities will involve product development, professional services, go-to-
market and day-to-day operations. Previously, he served as corporate vice
president and chief information officer (CIO) for ADP. We look forward to seeing
how Mr. Capone will shape Medidata’s focus on clients beyond the top
biopharmaceutical companies.
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5. Walmart Teams With DirectHealth for Healthcare Sign-Ups. Recently, Wal-
Mart (WMT: $78.24, Hold, covered by our colleague David Schick) announced a
partnership with DirectHealth.com to help provide easier health plan enrollment
for consumers. The partnership will launch the Healthcare Begins Here
campaign, which represents an in-store program designed to educate consumers
on their healthcare options. Consumers will be able to shop, compare, and enroll
plans via the DirectHealth.com website or via telephone. Additionally,
DirectHealth.com will provide independent, licensed insurance agents in 2,700
Wal-Mart stores to offer in person enrollment and to provide education and
guidance on health plan products. We believe the Wal-Mart / DirectHealth.com
partnership may represent a compelling offering during the 2015 Open
Enrollment Period (OEP). Based on our discussions with Enroll America, we note
that low income populations typically respond better to personal communication.
Therefore, we believe providing independent, licensed insurance agents in 2,700
Wal-Mart stores across America may result in significant health plan sign ups. In
our view, the partnership may further limit eHealth’s opportunity to sign up new
IFP members that were previously uninsured. Additionally, the partnership may
hinder eHealth’s (EHTH: $22.09, Sell) ability to sign up Medicare consumers in
lower income locations.
Additionally, we recommend investors listen to the replay of our conference call
with Adam Stalker, National Digital Director, of non-profit Enroll America. The
conference call titled: Preparing for Open Enrollment 2015: An Overview of Enroll
America” can be accessed by dialing (800) 332-6854 for domestic investors, or
(973) 528-0005 for international investors, and utilizing the passcode 968745.
The call replay will be available until October 15, 2014.
Walgreens and WebMD: Interesting Partnership, but Indicative of Some of
Our Larger Concerns. Walgreens and WebMD (WBMD: $38.23, Hold) recently
announced a partnership to integrate some of WebMD’s content and lifestyle &
condition management programs with Walgreens’ retail experience. The key link
between the two entities will revolve around Walgreens’ Balance Rewards loyalty
card program, as Walgreens’ consumers will be able to accrue points for usage
of WebMD’s Healthy Target mobile app. Additionally, Walgreens’ consumers will
be able to access prescription refill functionality and clinic scheduling via
WebMD’s desktop and mobile offerings. Walgreens will incorporate WebMD
content around topic areas, including: allergy, healthy eating, skincare, fitness,
healthy aging, emotional health, heart health, cold & flu, sleep, and oral health.
Additionally, Walgreens will offer virtual wellness-coaching programs from
WebMD in areas such as: smoking cessation, weight management, nutrition,
exercise, stress management, emotional health, diabetes, and heart disease.
We applaud WebMD for announcing what appears to be an interesting
partnership with a high profile brand such as Walgreens. Nevertheless, we have
concerns with the partnership as described in WebMD’s press release.
First, what are the economics associated with providing the core value driver of
WebMD Health Services to Walgreens’ customers? The core value driver of
WebMD Health Services revolves around the communicable cost savings
associated with the wellness-coaching programs being made available to
Walgreens consumers. If these programs are being made available to
Walgreens’ consumers, why would a health plan or employer seek to offer and
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6. pay for these programs for their members or employees? The press release did
not disclose financial terms of the agreement.
Secondly, the agreement seems to have a have CPG focus, at least around the
services and content WebMD will provide to Walgreens. A major question
investors should ask is whether WebMD is trying to become a more health and
lifestyle brand. Walgreens seems to be utilizing health & wellness related content
and solutions rather than some of the biopharma focused content.
Ultimately, we think the deal is likely more important to WebMD than to
Walgreens in terms of long-term success. We think WebMD needs the
Walgreens rewards program to help solve its engagement issue. In our view,
Walgreens likely sees WebMD as a simple way to add an additional touch point
with consumers.
In our view, the deal illustrates the waning excitement around standalone Health
& Wellness solutions. Our channel checks of human resources executives at top
U.S. employers suggest that benefits design offerings such as Castlight Health
are becoming a more important offering. Entities such as Castlight Health provide
cost transparency and a true means to managing health care related costs for an
employer across an employee base.
We are not sure how strong an incentive Balance Rewards provides when one
needs to achieve 5,000 points to accrue $5 in savings. In our view, other entities
are creating more compelling incentive plans to drive healthy behavior, e.g.
SeeChangeHealth. Additionally, a major question will be how many of the 83
million Balance Reward customers, as of October 21, 2013, are included in
WebMD’s roughly 64 million unique monthly visitors?
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7. Important Disclosures and Certifications
I, Steven A. Rubis, certify that the views expressed in this research report accurately reflect my personal views
about the subject securities or issuers; and I, Steven A. Rubis, certify that no part of my compensation was, is, or
will be directly or indirectly related to the specific recommendations or views contained in this research report. For
our European Conflicts Management Policy go to the research page at www.stifel.com.
For applicable current disclosures for all covered companies please visit the Research Page at www.stifel.com or write to the
Stifel Research Department at the following address.
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