Epic Systems: Madison Healthtech’s “Unwitting” Anchor Company

As healthcare technology grows increasingly important in our everyday lives—from the software that manages our medical records to the explosion of health and fitness-monitoring devices and apps—different cities around the country are trying to claim the mantle of “America’s healthtech capital.”

Madison, WI, is among the places vying for that title. And while it can thank Epic Systems for even putting it in the conversation, there are also rumbles of discontent that Epic could do more to bolster the nascent local healthtech industry.

Founded in 1979 by the ambitious but media-shy Judy Faulkner, Epic has enjoyed an incredible growth spurt over the past decade. Capitalizing on the healthcare industry’s federally subsidized shift to digitized medical records, Epic has grown from about $500 million in annual revenue in 2007, according to Forbes, to $1.8 billion in revenue last year. Epic’s rapidly growing corporate campus in the Madison suburb of Verona is the home base for about 8,000 employees, up from 5,200 just three years ago.

That makes Epic one of Wisconsin’s largest private employers and the undisputed anchor of Madison’s burgeoning healthtech cluster. Locals have compared Epic with the likes of Microsoft (NASDAQ: MSFT) in Seattle and Dell in Austin, TX, two tech titans that formed the roots from which their respective tech communities sprouted.

Those hubs took time to grow, and Madison has its work cut out to ascend the national healthtech throne. But Greater Madison Chamber of Commerce president Zach Brandon believes the region has the requisite strengths in biotech, healthcare, and software to churn out more healthtech winners.

“Epic happened to be the first of them,” Brandon says. “But the argument I’m making is it won’t be the last.”

But as Madison’s healthtech cluster picks up steam, where does Epic fit in? Does its status as the region’s anchor healthtech company mean it has a responsibility to support the local ecosystem?

So far, Epic has basically been an “indirect or unwitting contributor” to the local sector’s growth, says James Dias, co-founder and CEO of Madison-based Wellbe, which makes cloud-based software that helps guide patients through the process of medical treatments and surgeries.

Epic is a magnet for recent college graduates from around the country who are wowed by its massive, whimsical headquarters that seems like it belongs in Silicon Valley, rather than rural Wisconsin. The campus certainly worked its magic on Dan Wilson, a Detroit-area native who had never been to Madison or heard of Epic before the company recruited him in 2007, right after graduating from the University of Michigan with degrees in economics and German. Wilson was “blown away by the campus” and impressed enough with the company’s pitch that he turned down a job offer in Europe and moved to Wisconsin instead.

Wilson says he “learned a ton” over the next four years managing teams that installed the company’s software in hospitals. “I got exposed to some of the biggest institutions around the country, got to learn what they’re looking for, how they function,” he says. “I learned a lot of valuable lessons you wouldn’t get in other settings.”

Wilson quit Epic in 2011 because he was “looking for a new challenge,” he says. He’s not alone—hundreds reportedly quit the company each year.

But instead of abandoning Madison for a city like San Francisco, he decided to stay and form his own healthtech company, Moxe Health. He chose Madison partly because it’s cheaper to build a business here than in Silicon Valley, but the presence of Epic was key. It’s an abundant source of talented people that have experience with enterprise healthcare software, he says.

“I have remained because I continue to believe that if this business is going to be successful, it’s going to be successful from Madison, Wisconsin,” Wilson says.

He’s not the only one who has come to that conclusion. It’s tough to pinpoint exactly how many Epic ex-pats have stayed and launched startups, but other recent examples include software companies like Redox and Branch2, as well as a cadre of consulting companies that have sprung up to help hospitals and clinics optimize their Epic software. Those include Nordic Consulting Partners, Vonlay (since acquired by Huron Consulting Group), BlueTree Network, and others.

All this is to say, the mere presence of Epic has spawned related companies and helped grow the local healthtech cluster. “Other companies have benefited from being in the orbit of Epic,” Brandon says.

Still, it’s reasonable for local advocates to hope for Epic to contribute more directly to the local scene, say by forming a venture capital arm or an incubator. Dell’s investment unit, Dell Ventures, announced a $300 million fund in 2013 to invest in tech startups. And Microsoft launched a home automation startup accelerator last year, housed in its headquarters located outside Seattle. That program is a partnership with one of Epic’s neighbors, Madison-based American Family Insurance, which also has a VC fund to invest in startups.

But the chances of Epic providing direct support to local startups are unlikely, observers say. That would run counter to Epic’s “ethos,” Brandon says. Faulkner never took venture capital, and it’s well known that two of her core rules are never to sell the company or take it public.

“The argument is if they weren’t a venture-backed company, it’s not part of how they operate, you’re asking them to sort of change their culture” by investing in startups, Brandon says. “I don’t think that’s a fair expectation.”

Epic isn’t “obligated to lend a hand or make a handout,” says Michael Barbouche, founder and CEO of Forward Health Group, a Madison company that makes Web-based software that can gather and analyze data about large groups of patients. Epic has “created a huge groundswell of energy about the space of health IT,” Barbouche says. By “that, in and of itself, they’ve already given a huge gift to many of us.”

And perhaps that’s enough to spark a thriving healthtech hub in Madison.

Seattle startups and their supporters have at times grumbled that Microsoft doesn’t do enough to directly support the local sector, but the fact is that the tech behemoth, much like Epic, helps attract both talented employees and other companies that believe they’ll have strategic advantages by setting up shop nearby. In fact, one of the reasons Jeff Bezos put Amazon in Seattle was so he could tap into the pool of Microsoft software developers for his staff, Xconomy reported in 2010. Amazon has become a key driver of Seattle’s tech community in its own right.

Wellbe’s Dias even argues that Madison startups might be better off without Epic’s assistance. For all its recent growth, Epic isn’t seen as innovative, he says. As Forbes noted in 2012, Epic’s electronic health record software is based on a programming language developed in the late 1960s. Epic usually does quite well in industry rankings by independent researcher KLAS, but some doctors and industry observers criticize Epic’s software as “costly,” “clunky,” and “complicated,” Dias says.

“Like many of the other dominant [electronic medical records] players, Epic developed their technology and business model in the 80s—the Paleolithic technology era when main frames roamed the planet—way before the cloud or mobile or user-centered design took hold,” Dias says in an e-mail message. “That makes them the old guard, fossil fuel, incumbent part of the healthcare industry. Would we want them incubating new innovators and entrepreneurs? Would they know how?”

But while it might not be fair to criticize Epic for not actively nurturing the local healthtech scene, the company is coming under more legitimate fire for playing what critics say is a negative role—by actually putting up barriers to the local industry. Those critics contend that Epic has hindered the growth of startups and stymied industry innovation. An Epic spokesman declined to comment for this article.

One barrier, critics say, is the non-compete agreement Epic requires employees to sign. The document, in part, forbids them from working for an Epic customer for one year after leaving the company, or from working for a direct Epic competitor, such as Cerner (NASDAQ: CERN) or McKesson (NYSE: MCK), for two years, according to one former Epic employee who went on to launch a local startup. (This person requested anonymity because publicly criticizing Epic could have repercussions for his company.) In addition, when third-party software developers or consulting companies sign agreements that Epic requires in order for them to work with Epic’s software, those agreements also stipulate they can’t hire ex-Epic employees for one year after those people leave the company, this source says.

The source acknowledges that prospective employees agree to the restrictions when they sign on the dotted line, but he doesn’t think most of them realize how much it limits their options for working in healthcare after leaving Epic. There are now hundreds of companies that have signed Epic agreements and are forbidden from hiring ex-Epic workers during their non-compete period, the source says. “This has a major dampening effect on innovation for the industry and the startup community locally,” he says in an e-mail message.

Some leave Madison after quitting Epic. Others stick around and wait for their non-compete restrictions to expire—perhaps taking a job in another industry or working on projects at the 100state co-working space, for example—before getting back in the healthtech game locally.

Taking the glass-half-full view, Brandon simply sees this as a window of opportunity to convince these people to stay in Madison. “The non-compete actually creates a runway where people, because they don’t have portability of their knowledge immediately, they actually kind of cool their heels here and stick around,” he says.

Critics also complain about the roadblocks Epic puts up for other healthtech companies. When a company wishes to do work for a hospital that involves interacting with Epic software, Epic won’t grant access to its systems unless the company signs an agreement that forbids it from subsequently creating proprietary software that it would go out and sell to more hospitals.That “effectively shuts down your ability to create any tools that the clients might want because Epic sees them as derivative works,” says the former Epic employee. “Seems fair until you realize that Epic is now the Microsoft Windows equivalent in the healthcare IT space,” he says. “It is effectively an operating system for the healthcare industry. Can you imagine a world where no one was allowed to make a software program for Windows, except Microsoft? That is where we are today in healthcare.”

Companies certainly can, and do, develop healthcare software that can run independently of electronic health records software made by Epic and its competitors. But if a hospital or clinic wants to integrate a vendor’s software product with Epic’s software in some way, Epic often charges fees to open a portal to its systems—essentially setting up an API, the former Epic employee says. And if the hospital doesn’t have in-house IT staff with the skills to set up that link, it might need to hire expensive consultants who are certified by Epic to handle such work.

“A client can quickly be in over $100,000 before they have even spent a dime on the third-party product itself,” this person says. “This is a big reason why many startups with product ideas in the healthcare IT space fail to roll their product out.”

It’s worth noting, however, that it’s not a death sentence for a healthtech company if it doesn’t integrate its products with Epic. Wellbe’s software, for example, is capable of interacting with electronic health records software, but it can also operate independently, Dias says. His company has raised about $4 million from investors since it was founded in 2008, and its software is used by 12 hospitals nationwide and nearly 5,000 patients annually. “A third of our customers use Epic and are driving the promised full value from our platform without the integration,” he adds.

Still, Epic isn’t afraid to throw its weight around to thwart software companies that don’t play by its rules. Another former Epic employee, now an executive with a healthtech consulting company located outside of Wisconsin, recalls an example in which he was attempting to help implement a third-party software product in several client hospitals. The product required access to Epic’s software, but the developer hadn’t signed an agreement with Epic to do that. Epic got wind of it, and one of its executives called the hospitals and pressured them not to buy the product, this person says.

The healthtech exec says he “had to scrap the whole” project. “In hindsight, it was not a smart move,” he admits.

But he still chastises Epic for acting like a “bully,” and he doesn’t understand why Epic sees these smaller software companies as threats. “The only guess I can come up with is they want to control everything. They want to make sure they can develop it in the future. But they don’t have time to develop it. There’s so many government regulations coming up, they can barely keep up with those things.”

Instead, Epic should make it easier for other companies to develop software products on top of Epic’s platform, he argues. “The point for Epic is either get out of the way, or assist their innovation,” he says.

There’s some cautious hope that Epic is starting to open up its platform more.

Earlier this year, Epic confirmed it was launching an “App Exchange” that theoretically should make it easier for third-party software companies and hospital systems to create apps that work with Epic’s software products. Epic hasn’t released details about the exchange, so there are still a lot of questions about how it will function.

“Only time will tell how open they actually are,” says the former Epic employee who lives outside Wisconsin.

Brandon, the chamber of commerce president, defends the caution by Epic to completely open up its platform, pointing out that “there’s too much at risk when it comes to healthcare records.” But Epic is becoming more open, Brandon insists, citing both the App Exchange and Epic’s partnership with Apple on the Silicon Valley company’s new HealthKit software tool that ties together consumer health and fitness apps. “Maybe that’s not moving as fast as everybody wants, but you have to acknowledge it’s happening,” Brandon adds. And as this gradually increasing openness continues, it could bring more opportunities for the local healthtech sector.

Meanwhile, there’s at least one recent instance of Epic getting more involved in the Madison business community. Epic is now a member of the local chamber, and Epic chief administrative officer Steve Dickmann joined the chamber’s board last year—the first time Epic has participated in the organization’s leadership, Brandon says. “You’re seeing them get more involved and understanding the value that they’re contributing and the responsibility that comes with it,” he adds.

Even without explicit support from Epic, the local healthtech sector is growing and thriving, with more than a dozen startups and established companies that employ more than 700 people and generated more than $139 million in revenue last year. And they’re not waiting for Epic’s help to promote Madison as a healthtech hub.

To date, Madison’s healthtech startups have primarily collaborated via a casual networking and events group that has been organized without any outside funding, Moxe Health’s Wilson says.

Now, Madison’s smaller healthtech companies are starting to team up in more prominent ways. Last month, 13 of them issued a joint press release touting their recent growth and highlighting the local scene, which advocate and investor Mark Bakken is trying to brand as “Med-ison.” The press release was timed to coincide with the industry’s top annual conference, hosted by the Healthcare Information and Management Systems Society (HIMSS) and held in Chicago this year.

Several of Madison’s healthtech startups have also been in talks with the chamber of commerce about partnering to launch a more formal initiative to promote the region’s healthtech cluster. The details are still being worked out, but an announcement should be made by the end of the summer, Brandon says.

“They need to band together, create density, and also celebrate their accomplishments—but also Epic’s accomplishments,” Brandon says.

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