Epic Systems (MyChart)

Ben Gilbert 0:00 The answer is somewhere in the middle.

David Rosenthal 0:02 Well, you texted me last night that you've made it to Singapore.

Ben Gilbert 0:05 I made it to Singapore, yes. Anytime you are researching anything in U.S. healthcare, you know it is time to stop your research process and start the episode once you've found Singapore. [laughing] [sighs] All right, let's do it.

Speaker 0:21 Who got the truth? Is it you, is it you, is it you? Who got the truth now? Is it you, is it you, is it you? Sit me down, say it straight, another story on the way. Who got the truth?

Ben Gilbert 0:38 Welcome to the Spring twenty twenty-five season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

David Rosenthal 0:45 I'm David Rosenthal.

Ben Gilbert 0:46 And we are your hosts. Listeners, today's episode is about a quiet company in rural Wisconsin that plays an enormous role in our lives, Epic Systems.

David Rosenthal 0:56 Indeed, whether you know it or not.

Ben Gilbert 0:58 Yes. You probably know them from their medical patient software, MyChart, that if you're listening to this, you most likely use. Epic is a very unusual company in so many ways. They do no marketing. They basically don't do any sales either. They often say no to potential customers who approach them. They don't negotiate, they don't discount. They never raised any venture capital, and they've never done any acquisitions in their forty-seven years of existence. They don't work remotely. Everyone is in person all the time. They notoriously have one gigantic campus on a farm, with buildings designed to look like the Land of Oz, a wizards academy, a tree house, a barn, a replica of New York's Grand Central Station, and an eleven-thousand-seat auditorium underground. They have the majority of the US's major hospital systems using their software, and of their over six hundred customers, they have never lost a single one.

David Rosenthal 1:50 Yeah, that is the craziest thing to me about this company, is forty-seven years old, they have never lost a customer. Actually, we found out that's not totally true. They lost one customer once for six months, and then that customer came back six months later.

Ben Gilbert 2:04 Yes. The company's founder, Judith Faulkner, is undoubtedly one of the great founders of our time. You probably don't know much about her or the company because the company is still privately held, and Judy and her family foundation own about half of it. Despite being large, and I think at this point they're close to six billion in revenue and over fourteen thousand employees, they have a stated goal to never go public and never be acquired, and Judith, at age eighty-one, has created a succession plan and a trust structure for her voting shares to ensure that that will stay true forever.

David Rosenthal 2:38 Yes, we heard all sorts of stories about companies sniffing around Epic over the years trying to buy them: GE, Microsoft, Google. You know, everybody you would imagine wants to buy this company, and it's never gonna happen.

Ben Gilbert 2:50 Yep, and we'll dig into this at the end of the episode when we sort of have all the context and all the numbers, but I believe that Judith Faulkner, in starting one of the most valuable companies in healthcare, is the most successful female entrepreneur in history.

David Rosenthal 3:05 Almost undoubtedly.

Ben Gilbert 3:06 Well, all right then, spoiler alert, listeners. [laughing]

David Rosenthal 3:10 [laughing] We'll discuss that at the end.

Ben Gilbert 3:11 Yes. So the healthcare industry, there is so much wrong with the American healthcare system. That is an incontrovertible fact. There's nobody that's gonna tell you, "Oh, actually, it's pretty good." It's not pretty good, it's a disaster. Runaway costs, burdens of administration, so much excess and waste causing... I think healthcare costs are now eighteen percent of our GDP.

David Rosenthal 3:32 Ooh!

Ben Gilbert 3:32 So rather than trying to eat that whole elephant today and unpack the entire system, today's episode is about understanding Epic's role within it and how Epic became so dominant.

David Rosenthal 3:42 Yep, and if you wanna understand the system, you have to understand Epic.

Ben Gilbert 3:46 Yep. Well, listeners, if you wanna know every time an episode drops, check out our email list. It is the only place where we will share a hint at what our next episode will be. We'll share corrections from previous episodes and little tidbits that we learned along the way. So that's acquired.fm/email. After this episode, come join the Slack, talk about it with us and the entire Acquired community afterwards. I bet there's a ton of people in the medical ecosystem hanging out in the Acquired Slack. That's acquired.fm/slack. If you want more Acquired between each monthly episode, check out ACQ2, our interview show, where we talk to founders and CEOs who are building businesses in areas that we've covered on the show to go a little bit deeper. Search ACQ2 in any podcast player. So as we announced last episode, we have a very fun save the date for you. We can't say much yet, but after incredible listener demand over the years, we are finally coming to New York City with our friends at J.P. Morgan Payments. So July 15th, mark your calendars, and if you wanna be the first to find out what we are up to, sign up at acquired.fm/nyc.

David Rosenthal 4:55 This is gonna be-

Ben Gilbert 4:56 A night of absurdity.

David Rosenthal 4:56 An incredible night.

Ben Gilbert 4:58 Yes. All right, listeners, before we dive in, we want to briefly thank our presenting partner, J.P. Morgan Payments.

David Rosenthal 5:04 Yes, and just like how we say every company has a story, every company's story is powered by payments, and J.P. Morgan Payments is a part of so many of their journeys from seed to IPO and beyond.

Ben Gilbert 5:14 So with that, this show is not investment advice. David and I may have investments in the companies that we discuss, although not Epic, and this show is for information and entertainment purposes only. David, take us in.

David Rosenthal 5:27 All right. Well, we start our journey in August 1943, when Judy, today Faulkner, then Judy Greenfield, is born in Earlton, New Jersey, which is part of Cherry Hill, New Jersey, suburb of Philadelphia, right across the Delaware River there, not too far from where you and I grew up.

Ben Gilbert 5:47 That's true, and Taylor Swift.

David Rosenthal 5:48 And Taylor Swift, that's right. Fertile ground for entrepreneurs-

Ben Gilbert 5:51 [laughing]

David Rosenthal 5:51 ... there in the, uh, Delaware River.

Ben Gilbert 5:53 And DuPont. So much great American entrepreneurship in that area.

David Rosenthal 5:57 So much indeed. And of course, I don't think Judy really knew about all this at the time, but yes, indeed, it is a pretty auspicious time and place to be born, because just about four years later, after Judy is born-... just up the road, a little ways from Cherry Hill in Murray Hill, New Jersey, William Shockley and his colleagues would invent the transistor at Bell Labs-

Ben Gilbert 6:19 Yep

David Rosenthal 6:19 ... that would enable Microsoft, and Epic, Intel, and all of this.

Ben Gilbert 6:25 And for a long time, the early pioneers of electronic healthcare records were hardware companies.

David Rosenthal 6:31 Yes, Lockheed, GE, Siemens.

Ben Gilbert 6:34 Yes, Lockheed was a vendor to hospitals.

David Rosenthal 6:37 Incredible. But for the moment, Judy probably didn't know anything about this because her family is not in the tech industry growing up. Her father, Lou, is a small town entrepreneur. He runs a local pharmacy and soda fountain there in Earlton called Lou's, [chuckles] Lou's Soda Fountain, and perhaps this is where Judy would later get her own entrepreneurial bent from.

Ben Gilbert 6:58 Could be.

David Rosenthal 6:59 So that's Judy's father. Now, Judy's mother, Dell Greenfield, was an absolute freaking dynamo. [chuckles] She graduated high school at age 15, and she worked first as a secretary, and then she worked with Lou at the store, pharmacy, and soda fountain, and then later got really involved in peace advocacy during and after the Vietnam War-

Ben Gilbert 7:21 Hmm

David Rosenthal 7:21 ... which I assume was not typical for her generation that lived through World War II. She ends up becoming the director of the South Jersey Peace Center, and then later in life, after the kids were gone, she and Lou moved to Portland, Oregon, where Dell became the executive director of an organization called Oregon Physicians for Social Responsibility, which, get this, in 1985, this group, in partnership with a broader international group called Physicians for the Prevention of Nuclear War, wins the Nobel Peace Prize. Judy Faulkner's mom was part of a group that won the Nobel Peace Prize in 1985. [chuckles]

Ben Gilbert 7:59 So David, where did you find this? Because in everything that I read about Epic, and you and I basically read everything you possibly can read about Epic that's out there on the internet-

David Rosenthal 8:08 Nobody knows this

Ben Gilbert 8:09 ... this is not cited anywhere. So how did you find your way to it?

David Rosenthal 8:12 I was curious. I was trying to learn more about Judy's family growing up, and I was trying to learn about the soda fountain, and the pharmacy, and the impact that her dad had on her future entrepreneurial career, and so I started Googling obituaries, and I came across her mom's obituary, where I learned this. Uh, the company actually confirmed this to us. Yes, Judy's mom won a share of the Nobel Peace Prize [chuckles] in 1985. Incredible.

Ben Gilbert 8:36 So cool. All right, so you've got entrepreneurial DNA. You've got sort of peace-oriented, divergent-thinking DNA.

David Rosenthal 8:44 Yep. Then you've got Judy, and at this point in time growing up, she's mostly just interested in math. So she loves to tell the story about how when she was in seventh grade, a teacher asked the class a number theory problem. Of course, probably didn't frame it as a number theory problem, but asked the class: why is it that numbers that are divisible by three, if you add up all the digits of that number, that number, that is the sum of its digits, is also divisible by three?

Ben Gilbert 9:13 Hmm.

David Rosenthal 9:13 This is like a law of number theory. So Judy hears this problem, and is just like, "My future is in math." [laughing] So in 1961, Judy graduates high school. She goes to Dickinson College to major in math, and while she's there, she gets a summer job one year at the University of Rochester, just a little bit farther north, in their particle physics lab, and for the work that she had to do over the summer, she needed to learn computer programming. This is in the early mid-'60s, and so like, "Oh, you, you gotta learn Fortran for the work that we're doing here and running these experiments over the summer." So they give her a book, like a manual, on Fortran, and Judy teaches herself Fortran in a week and becomes one of the best programmers in the lab. If you're not getting the picture here, like, Judy is a genius. She is an incredibly talented person.

Ben Gilbert 10:03 Yeah, and programming at a time when programming wasn't a thing. The field of software engineering was not a field. These are math people taking programming languages and using them, but there are very few of those people in the world.

David Rosenthal 10:17 Universities didn't have computer science departments until this point in time. Judy is intertwined with the beginning of computer science as a field.

Ben Gilbert 10:26 Makes sense.

David Rosenthal 10:27 So she absolutely falls in love with programming that summer in Rochester. She'd later say that she felt like a kid playing with clay, and that programming a computer was like this amazing combination of math, which, of course, she loved, but it was also language and art together with math.

Ben Gilbert 10:43 'Cause she has an artistic side, too. For as mathy as she is, she also has a hyper-creative streak.

David Rosenthal 10:51 Totally, and obviously, her story is very different, and she is a very different person than him, but the echoes that you're seeing here in Judy, in what she's exposed to as a kid, how she thinks, how she operates as an entrepreneur, you should be getting some Bill Gates vibes here. [chuckles]

Ben Gilbert 11:07 I thought you were gonna say Steve Jobs with the peacetime orientation around her upbringing and sort of the, I don't wanna say hippie for Judy, but almost hippie-esque movement, too.

David Rosenthal 11:18 Yeah, that's actually a good point. Well, Jobs and Gates... Well, the reason I said Gates is to sorta foreshadow some Microsoftian DNA and analogies that come into Epic here.

Ben Gilbert 11:28 And they're contemporaries. She is going to build her company in almost the exact same timeframe that Apple and Microsoft were built.

David Rosenthal 11:35 Totally. So when Judy gets back to Dickinson, to college, she decides that she's gonna apply to grad schools in math. So she applies to five PhD programs. She, of course, gets into all of them, and on her CV, she lists her Rochester experience and her Fortran programming experience. So two of the schools she applied to, Stanford and the University of Wisconsin, are just starting their computer science departments. When she applied, they didn't have computer science departments-

Ben Gilbert 12:03 Hmm

David Rosenthal 12:03 ... and in the interim, they started them, and so they saw Judy's application, and like, "Obviously, this is a brilliant person who we want here at the university. We're starting these CS departments." They unilaterally shift her applications-... to their new CS schools. And so Judy's like, "Oh, I didn't even realize I could go get a PhD in computer science. Like, amazing, this is what I'm gonna do!" So she ends up choosing Wisconsin, goes off to Madison, Wisconsin, to start her PhD in computer science, which, as we shall see, she never finishes, but she also never leaves. [chuckles] What a sliding door moment. If Judy had gone to Stanford instead, we would probably still be telling this story about her, but it would be a very different story.

Ben Gilbert 12:43 For sure. She would've been indoctrinated by a very different type of DNA, and what computers are for, and what types of companies you should be building with computers if she was in the Silicon Valley at that point.

David Rosenthal 12:55 Totally. So while she's at Wisconsin, Judy takes a class called Computers in Medicine, taught by a faculty member from the Wisconsin Medical School named Dr. Warner Slack. And probably this is the first course of its kind anywhere in the world. I mean, computer science departments themselves are new. The idea of applying computer science and computers to the practice of medicine is new.

Ben Gilbert 13:22 Yep, it had to be one of the first classes of its kind, because mainframes were really becoming a thing in the '60s, period. I think ENIAC was only 15, 20 years before.

David Rosenthal 13:35 Yeah, right. It's a good point. This is the first time anybody could use computers for anything outside of- [chuckles]

Ben Gilbert 13:40 [chuckles]

David Rosenthal 13:40 ... government and the defense industry, right?

Ben Gilbert 13:42 Yep.

David Rosenthal 13:43 So Judy takes this class from Dr. Warner Slack, and as you might expect, she's the star student in the class. Afterwards, Dr. Slack asks her to work on writing a program for use in the hospital, in the medical school, to optimize the on-call schedules for doctors. You know, doctors have to have on-call schedules, and so optimizing that, like, perfect thing that a computer application could do.

Ben Gilbert 14:07 Yep.

David Rosenthal 14:08 So Judy says, "Yes, great." She starts working on it, and this is, you know, a part-time job for her as a grad student. She's getting paid $5 an hour for her programming time. [chuckles]

Ben Gilbert 14:16 [chuckles]

David Rosenthal 14:17 Trading time for money here. [laughing] And apparently, the story goes that her programming was so good, and she was so efficient at writing these applications, 'cause she would go on to... Lots of departments in the hospital would ask her to write, you know, various applications for them, that she actually didn't make that much money because she just wrote them so fast, and she was getting paid by the hour. [laughing]

Ben Gilbert 14:37 [laughing]

David Rosenthal 14:38 They gave her a raise at one point. They doubled her salary to 10 bucks an hour, and still didn't make that much. Anyway, so as she's going around throughout the Wisconsin medical departments, she's working with psychiatry, and ob-gyn, and rehab, and in-patient in the hospital, in the intensive care unit. She starts to get these requests from all the different doctors in the different practices: "A big problem we have is we're seeing these patients, other departments are also seeing the same patients, but there's no way for us to know what's happening to those patients in other departments across the hospital as they're being seen. Like, we really would love if there was a single database that could keep records on every patient that we have across the whole longitudinal course of their care here at the University of Wisconsin Medical Center." You know, an electronic sort of health record- [chuckles]

Ben Gilbert 15:32 [chuckles]

David Rosenthal 15:32 ... for these patients, you might say. [laughing] And this is the origin of Epic. But before we go further on what Judy does next, I think it's worth taking a step back and talking about what are health records? What are medical records? What was the state of them in America here in the mid-'60s, and why is this idea of an electronic version of them so appealing? So patient health records, at least here in the American medical system, were a ragtag, informal process, and they were all paper-based, of course.

Ben Gilbert 16:04 And I think they had dated back to attempts at unifying them or creating standards all the way into 1912.

David Rosenthal 16:12 Yes, at Mass General. So all of the efforts to standardize them... And you can imagine all the reasons why standardizing them is important. You know, patients see different doctors at different hospitals, and they move, and even within a hospital, like here at the University of Wisconsin, cardiology really wants to know what has happened to this patient in other departments that they've been in before, et cetera.

Ben Gilbert 16:31 Right, or if you have to see a different doctor for the same thing, it'd be great if they're calling the same condition the same condition.

David Rosenthal 16:37 Exactly. So all of the efforts around standardization in the country really go back to Massachusetts General Hospital in Boston, which Mass Gen, or MGH, is the main and largest teaching hospital of Harvard Medical School. It would make sense that this is where a lot of sort of research is happening. And like you said, in 1912, a few members of the American Medical Association and the American Hospital Association get together there at Mass General in Boston, and they start working on, "Can we create some standard entry practices for physicians that we can distribute across the country, that physicians can use as their patient diaries?" As they're known back in the day. So in 1919, it takes them seven years to do this, they do finally introduce a standardized "treatment diary," quote, unquote, for distribution across the country. Now, there's no incentive for doctors to actually use this. [chuckles]

Ben Gilbert 17:33 Mm.

David Rosenthal 17:33 And doctors, as we shall see, are notoriously sort of a independent-minded group and profession and don't like being told what to do or how to design the notes that they take. [chuckles]

Ben Gilbert 17:43 Which makes sense. They've been the smartest people their whole life. They're doing this thing that required an incredible amount of education. It's a very prestigious, high-paying job.

David Rosenthal 17:51 Totally, and I think there's a good argument for this here, too. The practice of medicine, especially then, and still now, is equal parts art and science. Telling me how to standardize what is going on with my patient probably seemed anathema at the time.

Ben Gilbert 18:06 I'm the doctor. I know best. I'll figure out what delivers the best care.

David Rosenthal 18:09 Yep, exactly. So this continues for a while, and then finally, in 1928, the Association of Health Record Librarians of North America gets set up as an official body to standardize collection, storage, retrieval of patient data. This is a fun callback. I believe the Rockefeller Foundation was behind-

Ben Gilbert 18:30 Ah!

David Rosenthal 18:30 ... funding all this. Call back to our Standard Oil episodes.

Ben Gilbert 18:33 I believe that, 'cause wasn't our conclusion on Standard Oil that the Rockefeller Foundation is the initial funder of the nation's medical schools?... Yes, or sort of kicked off the movement of having real medical schools.

David Rosenthal 18:46 One of, if not maybe the main goal of the Rockefeller Foundations was to improve the state of medical care in America. Makes total sense that, oh, here in the late '20s, early '30s, this is getting funded by them. So all this is great, but the reality is, until this time in the 1960s when computers start to arrive, even the best intentions, that even, let's say, doctors really want to follow all this, as long as you're dealing with paper records, there's kind of a limit of how helpful this can all be. You could standardize it as much as you want, but you still gotta get the reams of paper from one physical location [chuckles] in a hospital to another. God forbid, you're trying to get to a different hospital or a different health system or a different state, it's a mess.

Ben Gilbert 19:32 Not to mention, paper doesn't lend itself well to structuring data, 'cause at the end of the day, you can write on paper however you'd like to.

David Rosenthal 19:40 So then we finally get to the current moment in time that we're here in the mid-1960s, and two really important things happen. [chuckles] And you could argue that they are both of equal importance. One, the arrival of the computer age. You can now digitize this stuff. It's possible to have portability and standardization, and the dream can really be realized here.

Ben Gilbert 20:01 Yep.

David Rosenthal 20:02 The other, maybe more important thing that happens, is in 1965, Congress creates Social Security and the Medicare and state-based Medicaid programs in America.

Ben Gilbert 20:16 Ah, yes. So we have so far given you the technological history of medical records, and now it's time to flip over to the sort of policy side of things, which in medicine, you have to understand policy before you can understand the business. All business structure in this industry is driven by what is the architecture of policy in America. So we rewind the clock again to 1942.

David Rosenthal 20:48 Oh, all right! Educate me here.

Ben Gilbert 20:50 We're gonna catch up to Medicare here, but in 1942, America is at war. There is something passed called the Stabilization Act that imposed wage and price controls. An interesting thing to note, at this point in time, only ten percent of Americans have health insurance, period.

David Rosenthal 21:09 Yeah, mostly the paradigm in healthcare is you pay for service. You go to the doctor, you pay the doctor.

Ben Gilbert 21:14 Right, you don't yet have these runaway costs and, "Well, I might have a procedure that could randomly cost a million dollars." But you don't yet have these amazing breakthrough treatments that could be very expensive if you were able to achieve them, so you mostly just paid out of pocket. So you've got these wage controls, but employers still wanna be able to attract top talent, so the way around the wage controls was to offer health insurance as a bonus to work around the system.

David Rosenthal 21:44 [laughing] Markets always find a way.

Ben Gilbert 21:47 Yeah, right? So as soon as this happens, unions go, "Oh, this is awesome. Our people can make more money? Amazing."

David Rosenthal 21:54 We're gonna make capital pay for our health plans now, yeah.

Ben Gilbert 21:58 Exactly. It increased wages for workers. This is what we're all about. They lobby to make it explicitly legal since it was kind of a gray area from the wage controls, and so the National War Labor Board makes it official: you can do this. Two, employers and the health insurance companies that are springing up then lobby to say, "Hey, these health insurance premiums, can we make these tax-deductible for the business? 'Cause the business, they shouldn't have to pay taxes on this money if they're going out and buying health plans for their employees with it. And on top of that, even though it's a form of compensation, can we make that not taxable as income? That would be really great." The businesses can deduct it, and the individuals shouldn't have it affect their income taxes, even though clearly compensation.

David Rosenthal 22:48 So this is where the whole origin of pre-tax stuff versus post-tax stuff in your paycheck comes from.

Ben Gilbert 22:53 Exactly it. So this sets it all in motion. With incentives like that, why would you want your healthcare any other way? What a dream! You can pay for your premiums with pre-tax dollars, and what a dream for employers that can now offer this benefit that was deductible.

David Rosenthal 23:08 [chuckles]

Ben Gilbert 23:09 So at the end of the war in 1946, the percentage of Americans who had medical insurance was already up to thirty percent from that ten percent number just six years before. Flash forward a couple decades, 1964, it's now up to eighty percent. So of course, it was gonna run the table and become the default as soon as this regulatory framework was set up, and once we did this, the US did not have a chance of implementing any other system. We were just going to end up with employers primarily being responsible for health insurance and creating large insurance companies to provide it.

David Rosenthal 23:39 Yep, and then, of course, that takes us to 1965 and Medicare and Medicaid because the big policy question is now: what do you do about all the people who don't have jobs?

Ben Gilbert 23:47 What do you do about people who don't have jobs, which actually aren't that many, but what do you do about people who are old or poor? America needs a social safety net. It's what we're all about.

David Rosenthal 23:56 Who also, by the way, are the highest consumers of healthcare.

Ben Gilbert 23:59 Yes. So here we are in 1965. David, you're exactly right. Medicare and Medicaid enter the picture as a part of the Social Security Act. How did we get here is sort of interesting. FDR, Truman, and Kennedy had all tried to pass a single-payer system the way that the UK did. Right after World War II, the UK is in this moment of sort of great nationalistic pride. We all have to band together, look after one another. They pass the National Health System. The US does not have the political will to do it, and so we don't. You sort of have this coverage gap, to your point earlier, of all these people who are not currently in the workforce. So the compromise is we will create Medicare for those over sixty-five and Medicaid if you have a low income or other special situations.... and we can't really fund either exactly right, so we'll sort of figure out how to fund Medicare out of the federal government, and Medicaid, let's make that the state's responsibility. We'll help, but we'll federate that out to the states.

David Rosenthal 24:59 Yep.

Ben Gilbert 24:59 So all of that is our system today: private insurers if you have a job, buying directly from the ACA if you don't, but again, still from private insurers, Medicare or Medicaid if you sort of fall outside those buckets. And the important thing to realize from all this is that the vast majority of patients do not feel the cost of their healthcare directly in the United States. Those costs are so laundered through private insurance companies and Medicare and Medicaid, that most people think about any given health encounter as being paid for by someone else, by a part of some system. If you're trying to unpack, how did our healthcare become eighteen percent of GDP versus eleven percent of the UK GDP, or a staggering six percent of Singapore's GDP, albeit at a much smaller scale? Why are we eighteen percent? A big thing you have to understand is, psychologically, every healthcare encounter is that the system is paying for it. I'm paying into the system, the system is paying for it, but what does it cost? What do I actually pay? It's a big abstraction.

David Rosenthal 26:03 Yep. Okay, so in case it's not glaringly obvious, why is this so important to medical records and the fledgling electronic medical record industry here? Well, it's because now with these second- and third-party payers set up, you need documentation of what happened in order to get paid. So if you're a hospital, or you're a doctor, or you're a clinical practice, before this system, you just see your patients, and they pay you. Now, after this system, you see your patients, and then you need to negotiate with the payer, whether that's the insurance company or the government, about getting paid for that. And the insurance companies and the government, they're like: Well, hey, I need proof. I need documentation of what you did. I'm not gonna pay you if you just tell me that you did this stuff.

Ben Gilbert 26:51 And I need it in, like, a really standardized form.

David Rosenthal 26:55 Yep. I need an official, standardized medical record. [chuckles] And so all of a sudden you start this Faustian bargain or slippery slope, if you will, for the medical profession of, okay, in order to get paid, and get paid more and more over time as my procedures that I'm doing become more and more complex, I need strictly codified and regulated and standardized documentation of what I did, and I need really bulletproof workflows and data flows between what's happening in the patient room and then what bills get sent over to the payers. And thus, the existential need for an electronic medical record system, but really also, and maybe more importantly, an electronic medical billing system.

Ben Gilbert 27:49 Yep, and the realization that I think the whole industry kind of had early is insurance wants to pool together in a very large pool, so the payers are always gonna have a tremendous amount of leverage over individual physicians, small hospital systems, even larger hospital systems. So you really need to be extremely buttoned up and extremely standardized and extremely auditable because you're negotiating with this large counterparty, whatever the given payer is, be it a government or a large insurance company, that's going to have leverage over you.

David Rosenthal 28:26 Yep, and for the hospitals, in terms of, quote, unquote, customers... I mean, they're not customers, they're payers. The reason they're called payers is they're not getting the delivery of care, they're just paying for it. Of that set of payers, Medicare and Medicaid are the big gorillas because they're covering the elderly population who are consuming the vast majority of care and the vast majority of complicated care and expensive care in the country.

Ben Gilbert 28:50 Makes sense.

David Rosenthal 28:51 So here we are in 1966, the year after Medicare/Medicaid get created by the government, and there's this existential reason now for healthcare to adopt systematized records. And so a group, once again at Massachusetts General Hospital in Boston, starts work on the first real computerized medical record system called COSTAR, Computer Stored Ambulatory Record. And it's used for patient scheduling and registration and clinical data, everything you would think in an electronic health record, but also critically-

Ben Gilbert 29:24 Billing

David Rosenthal 29:25 ... billing and interfacing here with the payers. And development for that was funded by the National Institute of Health. The technical requirements for creating this, though, are actually pretty difficult, especially with programming languages available at the time, like Fortran or whatnot. This is a very high-concurrency transaction system. A lot of users need to use this across a health system.

Ben Gilbert 29:53 Even then.

David Rosenthal 29:54 Even then, yeah. A lot of users across a health system need to use this, and it needs to interface with a lot of endpoints. And especially with the limited storage and processing power of computers, like mainframes at the time, the group of programmers that were working on this found that existing programming languages couldn't really suit their needs to build what they needed. So they end up writing their own new programming language, called the Massachusetts General Hospital Utility Multi-Programming System, or MUMPS. [laughing]

Ben Gilbert 30:28 [chuckles] Which is amazing that there's a medical-oriented programming language called MUMPS.

David Rosenthal 30:31 Yes, and Epic still uses MUMPS today, or actually it uses its modern descendant Caché, but this is the standard programming language for the industry and database system for the industry.

Ben Gilbert 30:46 Uh, I don't know about the industry, but for Epic-

David Rosenthal 30:48 Oh, yeah

Ben Gilbert 30:48 ... which I guess now for the industry.

David Rosenthal 30:50 Yeah, well, that's what I was gonna say. Many of Epic's competitors do not use this, but-... Epic does, so, uh, it's kind of de facto the standard now. [chuckles] So now there are two key features of MUMPS, and this is why these programmers had to create their own language. One, the language and the database are integrated. Right there within the programming language is a database structure, and that makes it very computationally efficient for handling all these high-velocity and data-intensive transactions that need to happen.

Ben Gilbert 31:20 Or at least efficient for the programmer, because you're not switching over to write SQL queries in the middle of your program. Everything is sort of in the same language. If what you're doing is primarily building a wrapper around a database, to use modern parlance, a glorified database that is gonna constantly being read and written to, kinda nice for it to all just be one standard language.

David Rosenthal 31:43 Yep. And then the other thing that they design it for is for multiple simultaneous users. Imagine you've got different departments within a hospital updating the same patient record at the same time. You've got then administrators in the hospital also updating that record to know what's been billed out to a payer, what's not been, what's been challenged, et cetera.

Ben Gilbert 32:02 Right. You don't want collisions to create data loss or something like that. This is people's lives we're dealing with.

David Rosenthal 32:07 Exactly. Now, the lead programmer of this group here at MGH, at Mass Gen, that is creating COSTAR and MUMPS, was a recent MIT graduate named Neil Pappalardo. And being the young, enterprising MIT grad that he is, a couple of years later, in 1968, Neil spins out and starts a company around this to sell his software, originally called Medical Information Technology, or MIT. [chuckles] Get it?

Ben Gilbert 32:38 Name's taken.

David Rosenthal 32:39 Hey! But soon he changes the name, perhaps at the request of the real MIT, to MEDITECH. And for folks in the industry, that'll sound very familiar because MEDITECH is still in business today and is the number three player in the EMR space behind Epic and Cerner.

Ben Gilbert 32:55 Yep. Pretty amazing.

David Rosenthal 32:57 So back to Judy now here at the University of Wisconsin. She's working with Dr. Slack and the medical department there, doing all these various application projects, and then Dr. Slack moves to Harvard, where he, of course, meets Neil and starts working with MEDITECH. But he and Judy keep in touch. Judy's part of this community of programmers and computer scientists building applications for healthcare systems, and like we said earlier, what the people at Wisconsin really want is the same thing that the people at Harvard and MGH really want, is this integrated system where they can get longitudinal patient records across the continuum of care and that they can use to bill the payers.

Ben Gilbert 33:36 The Holy Grail.

David Rosenthal 33:37 The Holy Grail. So through this connection, Judy learns about MUMPS, and she goes and learns MUMPS, the programming language, starts working on this problem, and legend has it that one day in the mid-1970s, she's sitting in her living room and has an epiphany about how she is gonna build a great system, a single database, that can do all of this. And her quote on this is: "The sun was shining, I was disattentive. I was just sitting there, and suddenly it all came to me. Here's how you build it, the integrated system. And I remember running to the kitchen, grabbing a pad of paper, and just writing code, code, code, code." And that code became Chronicles. She called it Chronicles. It's a chronicle of a patient's care journey, and that code and that database is still the core of Epic to this very day.

Ben Gilbert 34:31 Is it actually the same code?

David Rosenthal 34:32 No, I mean, she'll claim, "None of my code that I wrote is still in production," et cetera. That, I'm sure that is true, but it is true that Epic's core database, the core single database, and this is Epic's big differentiation, there's only one database that every application pulls from-

Ben Gilbert 34:48 Directly talks to.

David Rosenthal 34:50 It directly talks to, whether it's the clinical side for EMRs, whether it's the billing side with the Resolute module that Epic has, whether it's Cosmos, whether it's Stork for OBGYN or Beans for kidney or whatever application that Epic makes of their hundreds, it all pulls from one single database in Chronicles, and that's what Judy writes here in the 1970s.

Ben Gilbert 35:10 Okay, so it's just a database? Where does it go from she writes a bunch of code when she has this insight that there should be a database with the patient model at the center?

David Rosenthal 35:21 Well, that's a good question because it is just a database. Because the idea of applications and certainly graphical applications on top of it doesn't make sense because we're still in the mainframe world here. So what the product is, is this database, and then different departments in the Wisconsin Medical Center can write their own screens, like queries, on top of the database that can sit on their terminals, and that they can read data out of the database directly into their patient rooms or departments, wherever they're sitting.

Ben Gilbert 35:55 So these are terminals. I mean, these are eighty-character wide, text-only terminals.

David Rosenthal 35:59 Yes. Green screens, Unix terminals.

Ben Gilbert 36:02 Okay, so you run Judy's database, you run Chronicles somewhere in your hospital building on a big mainframe, and then there's these text-only terminals that can query it.

David Rosenthal 36:11 Yep, that's the product.

Ben Gilbert 36:13 Sweet. Long way to go.

David Rosenthal 36:15 So just like the projects in Boston at MGH, where the intention was to make the systems for use there at MGH, Judy, at first, she's just making Chronicles for the Wisconsin medical system. She's just a programmer employee of the medical center. But the doctors at UW, they're going to academic conferences all around the country, and they start telling other doctors at other academic institutions about this great system called Chronicles that they have, that this programmer that they employ, Judy Faulkner, has written. And demand for it starts to spread virally, and Wisconsin gets calls, and then Judy gets calls from all these other health systems around the country that are like, "Oh, hey! -... Can you write this for me, too?

Ben Gilbert 36:59 Doesn't she get asked to start a company several times, and she's like, "No, I, I just made it this one instance. We don't need to build a whole company around this thing"?

David Rosenthal 37:07 Exactly, and this happens again, and again, and again, and so legend is finally she just breaks down and is like, "Fine! [chuckles] I'll start a company. I'll be part-time on it. We'll get some other people who are working with me who will be part-time. This will be a small, little thing." And so thus, finally in 1979, the company is born: Human Services Computing.

Ben Gilbert 37:27 Amazingly generic.

David Rosenthal 37:28 The future Epic Systems. But before we tell the story of how Human Services Computing became Epic-

Ben Gilbert 37:36 Yes, this is a great time to thank our presenting partner, J.P. Morgan Payments, and in particular, to dive into how essential modern payments infrastructure has become to building your business today, whether you are a large multinational business or a startup in your early days of processing payments.

David Rosenthal 37:54 Yep. If you think about it, there are whole companies and industries that couldn't exist a decade ago without the payment tools we have today. It's absolutely essential to create businesses with modern product experiences, like ride-sharing, the creator economy, or B2B use cases like SaaS marketplaces or managing supplier relationships. For those types of companies, payments is their business. Thankfully, J.P. Morgan has built the stack to let them focus on their differentiation instead of reinventing the wheel. J.P. Morgan Payments has been pioneering in this industry for decades. They move $10 trillion a day. You can literally never outgrow their capabilities.

Ben Gilbert 38:30 Yes, so while we are examining the healthcare landscape today, let's look at the industry through the lens of payments. There's a lot of innovation promise coming with telehealth, and AI, and preventative treatment, and new clinical trial processes. Seamless and secure payments are critical to improving patient experiences in unlocking innovation for businesses and providers. And when you zoom out, healthcare is an incredibly complicated ecosystem of payments, healthcare providers, insurance networks, specialists, health monitoring services, and more. It creates a complex and friction-filled payment experience: who's paying who, and when, and under what terms? And then you layer data privacy requirements on top. It's wild.

David Rosenthal 39:10 If you're a company or a provider trying to innovate in this space, you know getting the payments piece right is paramount, which is why J.P. Morgan's array of products, including their healthcare payment solutions and InstaMed offering, provides a patented cloud-based technology to securely transform healthcare payments by driving electronic transactions, processing payments, and moving healthcare data seamlessly.

Ben Gilbert 39:30 If you're in the industry, you likely know that J.P. Morgan is finely attuned to all these innovations on the frontier, hosting the premier healthcare industry event every January. If you learned anything at this year's event that's relevant to this episode, come share it with us in the Slack. Listeners can check out jpmorgan.com/acquired to learn about how J.P. Morgan's end-to-end payment solutions can accelerate your business and discover more innovation happening across all industries. All right, so David, Judy leaves her job. She starts... What is it? Human Computer- [laughing]

David Rosenthal 40:04 Human Services Computing.

Ben Gilbert 40:05 Human Services Computing.

David Rosenthal 40:07 Really rolls off the tongue.

Ben Gilbert 40:08 Yes. She's not planning up till this point to be the founder of a company, and yet, for the next forty-seven years of her life, she would be. How does that go?

David Rosenthal 40:17 Well, before she does anything, she needs to raise some money, for not the least of which to buy a computer to do this work on.

Ben Gilbert 40:26 Which wasn't it, like, seventy grand to buy a computer?

David Rosenthal 40:29 Yes, a computer being a Data General Eclipse 16-bit minicomputer, [chuckles] which is the size of, like, a washer-dryer system and sits in the basement.

Ben Gilbert 40:40 That's right, 'cause we're in this awkward era between mainframes and microcomputers. The microprocessor hasn't been invented yet, and so we have these, quote, unquote, "minicomputers" that are still, yeah, washing machine-sized.

David Rosenthal 40:51 Yeah, we're right before the PC era here.

Ben Gilbert 40:53 It's so interesting how sometimes you have the technology wave that eclipses all prior, but sometimes you have these half steps along the way that turn out not to eclipse everything.

David Rosenthal 41:04 Yeah. Minicomputers, they were like the Netbooks of their time, you know? [laughing]

Ben Gilbert 41:10 Yes.

David Rosenthal 41:10 We talked about this a lot on our Microsoft episodes, but the critical thing about minicomputers, and especially for Judy here and fledgling Epic, was, look, a consumer wouldn't buy these things, but small businesses could, and small departments of big companies could. Like, an IBM mainframe system was gonna cost you a lot of money.

Ben Gilbert 41:32 Yep.

David Rosenthal 41:32 A Data General or DEC minicomputer is gonna cost you about $70,000, and Judy needs to buy one, and she also needs to fund the company. So she goes to the bank, and she gets a bank loan for $70,000 to finance going and buying the Data General Eclipse minicomputer, and then she rounds up a bunch of friends, and family, and other people, whether physicians or other programmers in the University of Wisconsin system who are working with her on these projects, to invest money in the new company, and together they all put in about $70,000. They value the company at $70,000, so pre-money valuation of $70,000. [chuckles]

Ben Gilbert 42:14 Another seventy thousand of new on top.

David Rosenthal 42:17 Yep, post-money of $140,000. [chuckles]

Ben Gilbert 42:20 Taking fifty percent dilution from your seventy K fundraise, and then you also have this $70,000 loan.

David Rosenthal 42:26 Yep, and those were the only primary investors ever in- [chuckles]

Ben Gilbert 42:31 [chuckles]

David Rosenthal 42:32 ... Epic Systems. And there's some really fun stories about what happened to those shares that the other original investors bought over time. The company has bought a lot of them back, but not all of them.

Ben Gilbert 42:44 There are still some floating out there.

David Rosenthal 42:46 There are some floating out around there. We can't share all the stories that we heard in the research, but one fun thing is that at one point in time, I think this was probably the 2000s maybe, a pretty good chunk of those shares made their way to Sequoia Capital.

Ben Gilbert 43:02 ... Yes.

David Rosenthal 43:02 Sequoia did not put that one on their website.

Ben Gilbert 43:04 Almost the only way in which Epic intersected with Silicon Valley in the entire company's history. But this is a crazy point: they do five point seven billion dollars in revenue today, they dominate an industry, at least here in the United States, and in total, they raise seventy thousand of equity capital and seventy thousand of bank debt.

David Rosenthal 43:23 Yes, and that's it.

Ben Gilbert 43:25 This is IKEA all over again.

David Rosenthal 43:28 Totally. And I think a huge part of what enabled this, building software is not a, uh, necessarily a capital-light activity. It is really hard, especially in those days, to build great software. I think kinda like how Microsoft never really raised primary capital either. It's because Judy was a generational talent as a programmer.

Ben Gilbert 43:51 Mm. I hadn't made that linkage. That's interesting.

David Rosenthal 43:55 They had kind of a cornered resource as a startup. You know, Microsoft did in Bill Gates, and Paul Allen, too, but Epic totally did, too, in Judy. Like, she could write really, really great software. [chuckles]

Ben Gilbert 44:04 They didn't need to go hire an army of programmers.

David Rosenthal 44:07 No, and the company stayed very, very small for a very long time.

Ben Gilbert 44:11 Hmm. 'Cause as legend has it, it's three halftime people in the basement of a building that started the company, and I think they got pretty far on just that.

David Rosenthal 44:20 I think so, and for years, they didn't hire that many more people. That would obviously change over time. Okay, I am ninety percent sure I'm gonna stump you on this one. You mentioned the basement of the building. So they get their first office space, Judy gets the company's first office space, in the basement of an apartment building at 2020 University Avenue in Madison, Wisconsin. Do you know what other great American company from Madison, Wisconsin, also started in that same office space, and I believe overlapped? I think they were both in this same shared office space concurrently.

Ben Gilbert 44:57 David, there's only so much material out there on this company. We were both gonna find this.

David Rosenthal 45:00 Oh!

Ben Gilbert 45:01 Listeners, this is-

David Rosenthal 45:02 Darn it

Ben Gilbert 45:02 ... the American Girl Doll company.

David Rosenthal 45:04 Oh, I really thought I had you on this one. [laughing] You know, Ben and I don't do our research calls together. We do most of them separately, but we were on one together, and the person we were talking to was about to say this, and I was like, "No, don't say it! I want to stump Ben on the episode." [laughing]

Ben Gilbert 45:17 [laughing] I did see it somewhere else, though. The crazy thing is, I think when American Girl moved out, Epic bought some of their furniture.

David Rosenthal 45:24 Yes, I think that's right. So listeners, what we're talking about is the American Girl Doll company, founded by Pleasant Rowland in Madison, Wisconsin.

Ben Gilbert 45:32 My sister had, I think, a few of these growing up.

David Rosenthal 45:34 Oh, man, Jenny had so many of these, and a lot of them have migrated now to our house, and our girls have them. And already, my three-year-old runs around our house with the American Girl Doll magazine, and she tells me on a weekly basis, "These are the ones I want for my birthday,"-

Ben Gilbert 45:50 [laughing]

David Rosenthal 45:50 ... she's pointing at, like, a two hundred and fifty dollar doll. [chuckles] Yeah, incredible company. It actually ends up getting acquired by Mattel in the late-

Ben Gilbert 45:58 Ah

David Rosenthal 45:58 ... nineties. It was a big part of Mattel for a long time. Ah, I'm so bummed I didn't stump you on this one. [laughing]

Ben Gilbert 46:04 [laughing]

David Rosenthal 46:06 Okay, back to the Epic story. So Judy's got the financing, she's got the computer, but she still doesn't know anything about building and running a company. You know, she's a software developer. So Warner Slack says, "Okay, come on out to Boston. I'm gonna set up a couple days for you to spend time with Neil and Meditech, and I'm gonna ask him to help you out starting this company."

Ben Gilbert 46:27 I gotta say, this is a pivotal moment, and not just for everything she learns from Meditech, which I know you're gonna get into, all these cool things that she brought over. But instead of, "I'm gonna introduce you to a business person," he says, "I'm gonna teach you, as a programmer, everything you need to know about running a business." And it's not true, but it kinda rounds to true to say Epic basically never did hire any business people. It is essentially a big, gigantic company of programmers, logicians, implementation people who could be programmers, who think like programmers. That is the DNA of the company to this day, and it could have gone a super different direction of, "You need to go figure out a sales and marketing strategy and a business plan," and that is just not what happened.

David Rosenthal 47:15 This is a history turns on a knife point moment for Epic and Judy, because the likelihood that she would get introduced to a business mentor who is also a software developer and not a business school graduate business guy... We're talking about the 1970s here. The, you know, business playbook is you bring the grown-ups in, right?

Ben Gilbert 47:36 Yep.

David Rosenthal 47:37 Bring in the suits, bring in the business school graduates, you know, fire the founders.

Ben Gilbert 47:40 Well, that only happens if you raise capital. [chuckles]

David Rosenthal 47:42 Well, right, that's... [laughing]

Ben Gilbert 47:43 [laughing]

David Rosenthal 47:44 Exactly. You wonder why Judy was so, uh, you know, averse to venture capital. Everybody else she knew who was taking it in that era was getting fired.

Ben Gilbert 47:52 Swapped in for a business guy.

David Rosenthal 47:53 Totally. But yeah, Neil, he came out of MIT. He's a programmer. He was on the original MUPS team. So Judy goes out, spends three days with Neil, and gets a total crash course in setting up and running a company. And Ben, like you said, Neil ran Meditech like a software developer, so all the processes were extremely standardized. He had, like, hardened APIs for running-

Ben Gilbert 48:16 [chuckles]

David Rosenthal 48:16 ... the company, you know? [laughing] He had manuals and documentation for everything, and he shared the manuals with Judy. "This is how you set up a HR system. This is how you do benefits, payroll."

Ben Gilbert 48:28 How you do college hiring, how you promote internally.

David Rosenthal 48:32 Well, yes. Meditech recruited from the universities there in Boston. They didn't hire experienced programmers. They were hiring fresh college graduates. Totally natural that Judy's gonna do the same thing at Epic, out of, first, the University of Wisconsin, and then other schools. But yeah, that was the playbook, and that DNA runs right through to this very day at Epic.

Ben Gilbert 48:54 It's mostly people from non-medical majors. They're hiring from Midwestern schools, from people with technical majors, just operating under the assumption, "Eh, you can learn this healthcare thing."

David Rosenthal 49:06 It's the same thing as Microsoft or Google or Meta or what have you. They are going to-... universities, all departments in recruiting kids on on-campus recruiting at colleges.

Ben Gilbert 49:16 Yep, and she was doing this at a time when it wasn't the norm. I mean, I've gotta keep drilling in how different the world was then in a bunch of different ways, but one of them was you didn't have these college career fairs where you would just assume you could get this amazing high-agency job right out of college. Microsoft was really on the frontier of hiring smart college grads and empowering them and letting them run free. Epic was doing the same thing, and this was not industry standard.

David Rosenthal 49:45 And Microsoft wasn't even really doing it at this point in time. They had only just moved to Washington. They'd only just left Albuquerque. This is the timeframe we're talking about.

Ben Gilbert 49:54 Yeah, what year are we in?

David Rosenthal 49:55 We're in 1979.

Ben Gilbert 49:57 So Microsoft really isn't starting to ramp hiring yet.

David Rosenthal 49:59 No, and to that point, there is no DOS yet. There is no real PC industry. Microsoft is still, its main product is the basic interpreter. For Judy and the fledgling human services computing here, yes, they have demand from other large academic hospitals out there and medical systems that have mainframes set up, that have university computing infrastructure that they can leverage and use, but your average hospital or medical clinic or outpatient clinic out there in America, they don't have a mini computer. They don't have a mainframe. The market isn't really there for this kind of stuff yet in a big way, except at these university medical systems.

Ben Gilbert 50:41 Yeah, and part of what she is doing is going after a different segment than Meditech was doing. It's a little bit out of deference to Neal and his company. They're kinda going after the small hospital market. She's gonna take the more sorta upmarket, enterprise-y approach and go after the most complex institutions, these academic training hospitals, later on, the IDNs, or the integrated delivery networks, which are huge hospital systems, or children's hospitals. Again, the most complex, upmarket, enterprise-y, has the most possible needs for the most complex software, that is where she's about to point the company.

David Rosenthal 51:18 Yep, which she has to for the Unix-based product that she's making, 'cause those are the only institutions that have Unix infrastructure. [chuckles]

Ben Gilbert 51:27 Right, that can afford these big computers.

David Rosenthal 51:28 Yeah. So 1979, they start out with four initial customers. Four years later, in 1983, is when they renamed the company to Epic Systems. Ben, why did they rename the company?

Ben Gilbert 51:41 Well, aside from the first name just being an awful name, you can start to see Judy's quirkiness come through. I mean, y- I think you saw it originally with Chronicles, her sort of abstract, creative thought. The notion of an epic, the Greek epic, is this big story, this big longitudinal historic event, and I think the way that she's thinking about a patient record is that the life of the patient is an epic.

David Rosenthal 52:07 Mm-hmm. Yep.

Ben Gilbert 52:08 Does that kinda jive with your understanding?

David Rosenthal 52:10 Yeah. It definitely was not a declaration of aspirations as a company because this was still a very, very small business. They started with four initial customers. In 1983, when they changed the name, they only have nine [chuckles] customers, and in fact, by the end of the company's first decade of existence, so end of 1988, they only have twenty-four customers, and it's only doing one and a half million dollars in revenue, and they've got, like, a handful of employees. That's the crazy thing. Unlike Microsoft, this was a small business from the get-go.

Ben Gilbert 52:45 Right. It took, um, a decade to get to a million and a half dollars in revenue.

David Rosenthal 52:49 Yes.

Ben Gilbert 52:50 That's kind of a slow-growing startup.

David Rosenthal 52:53 A great software business for a local entrepreneur in Madison, Wisconsin, I think is how you would describe that.

Ben Gilbert 52:58 Yep.

David Rosenthal 52:59 So yeah, for the first ten years of the company, you know, yes, it's growing, but it's not exactly setting the world on fire, and part of the reason is the computing infrastructure wasn't there at customers, like we talked about. The other big reason why they weren't getting crazy customer adoption is they actually were only doing the clinical medical record stuff at this point in time. They weren't doing the really important stuff of the billing system-

Ben Gilbert 53:23 Mm

David Rosenthal 53:24 ... until 1987. So for the first, you know, what is that, call it eight years of the company, they weren't addressing the actual [chuckles] critical problem in the hospitals, which is, "Help us bill for this stuff."

Ben Gilbert 53:35 Right. If you can help them make more money, they're gonna be a lot more excited to buy your software and pay a lot more for your software.

David Rosenthal 53:41 Yep, totally. So in 1987, they launch a billing module called Resolute, again, on top of the Chronicles single core database, which still today is the company's revenue cycle application [chuckles] for all their hospitals. And I know we've made this point a few times, but I really wanna underline, it is still just an application built on top of the Chronicles database. And fast-forward to today, I think that is actually the single biggest reason why Epic wins over their competitors.

Ben Gilbert 54:14 Hmm. I would argue there's two big reasons Epic wins today. One is reliability.

David Rosenthal 54:21 Yep.

Ben Gilbert 54:22 But the reliability also comes from the fact that it's all built on one database. You're not gluing multiple systems together. All their competitors along the way, or almost all of them, other than Meditech, became 30 other companies glued together through M&A and take public, take private, crazy transactions. Epic's just been Epic the whole time. So you get this system that when you buy it, and they say it's gonna take X dollars and X time to implement, it does, and then you go live, and it works, which sounds crazy, but it does the thing that they say it's gonna do on time and on budget or as good as anyone does in this industry. And then the second reason, in addition to reliability, David, as you're alluding to, is the fact that the clinical side and the billing side are completely stitched together in one code base, working off of one database. It is perfect harmony. You don't have information dropped when one system is talking to another.... if your goal is to adopt a system that keeps track of everything in your hospital and makes sure that you can make money from it for your organization, this is sort of the ideal architecture- [chuckles] -for such a product.

David Rosenthal 55:31 It's funny, I'm laughing as you were saying earlier of, it sort of does what it's supposed to do as an EMR. I assume you're referring to the actual clinician, doctor-facing EMR side of it. If you're looking for a system as a hospital that ties what happens in your medical practice to your billing and your revenue events, there is no if!

Ben Gilbert 55:50 That's all you're trying to do as a hospital. [chuckles]

David Rosenthal 55:52 That is what you are looking for. That is the product.

Ben Gilbert 55:55 Yes.

David Rosenthal 55:56 And Ben, like you said, all the competitors out there, except arguably Meditech, in many cases, the billing system is a separate and often separately acquired product from the medical record. Not only is it just like, ooh, maybe not ideal if some of the information doesn't pass quickly or efficiently or accurately between those two systems, it's, like, incredibly not ideal. It's like you're not getting paid for the work you're doing, or even worse, maybe you're submitting documentation that is wrong, which is like a federal crime. [chuckles]

Ben Gilbert 56:29 Right. Or even if it's bad in the other direction, then it's not just that your billing system is not making it into clinical, you're potentially causing patient harm and costing lives. Any data flowing in either direction that's bad is really, really bad in this particular use case. So there's a great Substack called Health API Guy, which I'm gonna reference a few times 'cause it's just some of the best writing on Epic you'll find. He put it perfectly: "Epic becomes the natural choice for enterprise decision-makers precisely because of its integrated system architecture. Rather than managing multiple vendors and systems, buyers get a comprehensive platform with a single database, unified workflows, and built-in operability through Care Everywhere," which we'll talk about later, but Care Everywhere is the magical button that makes it so that your hospital records at one hospital are easily integrated and viewed in any other hospital that is, of course, also an Epic customer.

David Rosenthal 57:25 Yes. Okay, so after they launch Resolute, and now we're in the late '80s into the early '90s, we're finally entering the PC era. It's now possible for hospitals and health practices to adopt computers for a few thousand dollars instead of a few tens of thousands of dollars. The market really starts to take off for Epic, and on the back of that, in 1992, they launch EpicCare, which I believe is the first graphical user interface, like Windows-based EMR application in the entire industry.

Ben Gilbert 57:59 Certainly. Epic definitely says that that is true.

David Rosenthal 58:02 Yep. So what does that mean? Go back to what Chronicles was originally. It was terminal access directly into a Unix-based database [chuckles] on a mainframe or on a minicomputer. This is not something that your average doctor or nurse or medical assistant is gonna use. Now, here in the '90s with EpicCare, they've created a Windows application that any PC user can fire up on their Windows machine and use a graphical interface for their patient interactions and their EMR. And oh yeah, by the way, it's tied directly into your billing system for your hospital or your health practice. This is all of a sudden really compelling.

Ben Gilbert 58:41 We're approaching holy grail here if you're a hospital administrator, especially with scheduling, in addition to billing. Their scheduling thing is called Cadence. But once you have billing, scheduling, and EpicCare handling the actual clinical part of it... And this is all ambulatory, right? We haven't gotten to inpatient yet.

David Rosenthal 58:59 Yes. So the initial launch of EpicCare, the GUI EMR application, was only for ambulatory, only for outpatient settings.

Ben Gilbert 59:08 Not overnight stays.

David Rosenthal 59:10 Yes, not overnight stays in the hospital.

Ben Gilbert 59:12 Yeah. As a non-healthcare person, that's always how I [chuckles] define what inpatient is.

David Rosenthal 59:16 Yes. You hear ambulatory, you just hear non-overnight stays. [chuckles]

Ben Gilbert 59:21 Yes.

David Rosenthal 59:21 Too confusing otherwise.

Ben Gilbert 59:22 But this is it, scheduling, billing, and EpicCare on the clinical side for ambulatory. Pretty amazing product that is trajectory-changing for the company. It's now got enough functionality that it's not gonna stay a small business for long.

David Rosenthal 59:37 Yep. So by 1995, they hit eighteen million in revenue, up from one and a half million in 1988.

Ben Gilbert 59:45 So pretty phenomenal seven years there, where they more than 10Xed. So by m- most measures, you'd look at this and be like, "Business is going well."

David Rosenthal 59:55 Yes, no longer a small Madison, Wisconsin, business.

Ben Gilbert 59:58 Right. However, where we were comparing it before was Microsoft. You made the Bill Gates comparison. This company was started... When was it? Seventy...

David Rosenthal 1:00:06 '79, so only a couple of years after Microsoft.

Ben Gilbert 1:00:08 Four years after Microsoft?

David Rosenthal 1:00:09 Yep.

Ben Gilbert 1:00:10 In 1995, Epic did eighteen million dollars. In 1995, Microsoft had gone public and shipped Windows 95 and did six billion in revenue.

David Rosenthal 1:00:21 Right. [laughing] Very different trajectories.

Ben Gilbert 1:00:24 You know, the primary reason here is one is a small, vertical-focused healthcare company, and one is creating the horizontal platform of the future. But it's worth contextualizing business is going well [chuckles] by making sure that we stop making the Microsoft comparison from here on out.

David Rosenthal 1:00:42 [laughing] Well, I think I wanna come back to it later in the episode and in analysis, because, yes, Epic is and always will be constrained by being a vertical software provider instead of a horizontal software provider like Microsoft or Google or Oracle or what have you.

Ben Gilbert 1:00:59 Vertical being one industry.

David Rosenthal 1:01:01 Vertical being one industry. However, [chuckles] the one industry that they operate in is eighteen percent of American GDP. So how big can this get is... Well, it's a question we'll revisit.

Ben Gilbert 1:01:11 Yes.

David Rosenthal 1:01:12 Okay, so then finally in 2001, they launch the inpatient version of EpicCare. So yes, this is for inpatient hospital stays overnight.... Now you finally have the Holy Grail. You've got Chronicles as the one single database. You've got EpicCare Ambulatory for all your outpatient clinics. You've got EpicCare Inpatient for all your inpatient activities. By the way, again, inpatient activities are probably gonna be your majority revenue stream, 'cause that's where the most expensive, most complex care is happening. Kinda similar to Medicare is your most important payer relationship because old people is where [chuckles] the most complex, most expensive care is happening. So you've got that, and then you've got Resolute, the billing system. All single database, all tied together, all built on top of it. Yeah, if you're a hospital system administrator, this is the best thing you could possibly imagine.

Ben Gilbert 1:02:10 And Epic is really starting to get religion around this point, and our future is breadth. Our customer, these hospitals, do not wanna buy piecemeal solutions. They wanna buy everything from one vendor, and they want that one vendor to provide the very best, most integrated experience possible. So we need to continue to orient the company around that philosophy.

David Rosenthal 1:02:31 Yep. Now, right around the same time, actually, before EpicCare Inpatient launches, Epic also launches MyChart. This is crazy. If you had asked me before doing research for this episode, when would I guess that MyChart launched? This is a Internet-based, consumer-facing medical records access, uh, interaction platform on the web in a highly regulated, HIPAA-regulated industry.

Ben Gilbert 1:03:01 Right.

David Rosenthal 1:03:01 I would've guessed like, I don't know, twenty ten maybe, mid-two thousands at the earliest. No, Epic launched this in the year two thousand, [chuckles] which is wild.

Ben Gilbert 1:03:11 Right. Right around the dot-com bubble.

David Rosenthal 1:03:13 Yeah. Crazy! It's absolutely wild that they launched this and that their customers launched this. [chuckles]

Ben Gilbert 1:03:20 Well, and it's incredibly innovative. I mean, it is truly cutting-edge. I mean, it wasn't nineteen ninety-four like Amazon, but the fact that, yeah, to your point, the medical record thing was being surfaced on the web, that's pioneering.

David Rosenthal 1:03:33 Yeah, that consumers had direct access to. Well, I wanna come back in a minute to how important this is for Epic and their customers, but the origin story of MyChart is kinda fun. So it actually started as an outgrowth of what was called Epic Web in nineteen ninety-seven, which was a project that they were working on for remote access to the EMR, to EpicCare-

Ben Gilbert 1:03:59 Mm

David Rosenthal 1:04:00 ... for doctors at home. So the idea was like, oh, you're a doctor, you go home, you wake up in the middle of the night, you're thinking about a case, and you wanna check the medical records, maybe you wanna update.

Ben Gilbert 1:04:10 Some foreshadowing here of how doctors are gonna spend their time in the future. [chuckles]

David Rosenthal 1:04:14 Yeah, exactly. [chuckles] Little did they know how much doctors would hate what we're saying here. But you wanna be able to access remotely from your home the medical records of your patients, so they start working on Epic Web. And a young, right out of college programmer is working on this by the name of Sumit Rama. Sumit today is the president of Epic, and he goes to the then president of Epic, Carl Dvorak, and says: "Hey, you know, this is good that I'm working on this, but I'm kind of bored. Can you give me something hard to do?" [chuckles]

Ben Gilbert 1:04:45 Which this says a lot about the culture of Epic. This is a early career programmer going directly to the president, and that says enough on its own.

David Rosenthal 1:04:54 Yes, and the president is running this patient web project.

Ben Gilbert 1:04:57 Right, is kind of a computer architecture person himself, and the conversation is about, "I want a more interesting project. Can you give me something more cutting edge to work on?"

David Rosenthal 1:05:05 Yeah. "Give me something more challenging," and out of that is born the initial idea for MyChart. I think they started working on it in nineteen ninety-eight and then launched it in the year two thousand.

Ben Gilbert 1:05:16 So it becomes the first integrated patient portal, and I mean, truly, this is a very fair thing to say. This is insanely innovative. For as many reasonable barbs get thrown at the company, some around, "Oh, old technology," and, "Oh, the UI is kludgy," and all this stuff, come on, MyChart in 'ninety-nine is real cutting-edge. People immediately got it. Once you could access your own medical records from home, from your own computer directly without talking to anyone, you were never going back. The world changed overnight.

David Rosenthal 1:05:45 It was a little bit like Zillow in real estate.

Ben Gilbert 1:05:47 Yes.

David Rosenthal 1:05:48 As soon as you can look up how much homes in your neighborhood and your friends and neighbors' homes sold for, you're never gonna go back to not being able to do that.

Ben Gilbert 1:05:56 We're gonna have some rich debate later about the pros and cons of EMRs, and sort of are we better off today than we were? But I just can't fathom being in a world where I don't have a way to access, other than going to the physical building and asking them for my records or placing a call and asking for them to call me back.

David Rosenthal 1:06:12 Oh, records used to have to get faxed back and forth when you moved or changed providers. It was brutal. But the other really compelling use case for MyChart, especially when it first launches and even through to today, is managing family members' care. You have elderly parents who are using the health system, as you do, as you get older, and you need to help manage that, but you don't live in the same city, or even if you do, having MyChart access to family members was huge and starts this whole patient-side virality now for the company. And then for their customers, I imagine initially it was very scary to roll this out. Once they add self-scheduling into MyChart, this becomes the greatest thing for hospitals. I mean, the workflow savings of calls that had to happen to scheduling appointments are huge. The other big thing is no-shows. Before MyChart and self-scheduling and the wait list that MyChart manages for patients, if a patient no-showed, that was lost revenue for you as a hospital system. That was a big hole in your daily revenue operations.

Ben Gilbert 1:07:26 Yep.

David Rosenthal 1:07:26 ... And now you can automatically fill that in with another patient on the wait list.

Ben Gilbert 1:07:31 Yep, so we're foreshadowing this, but everyone adopts this, basically. Today, there are one hundred and ninety-one million active users of MyChart, and this is deduplicated. This is active, unique users of MyChart today.

David Rosenthal 1:07:44 Yep. So on the back of this, they launch MyChart in two thousand, EpicCare Inpatient in two thousand and one. The company crosses fifty million in revenue, and they feel like, "Okay, we're finally, like, ready for the big leagues."

Ben Gilbert 1:07:58 And just to contextualize that fifty million of revenue, they're up to eighty-eight health systems now. So they really are starting to penetrate the market, just going one by one by one by one to all these different hospital systems and selling them their software.

David Rosenthal 1:08:12 Yep. So they're ready for the big leagues, and then in two thousand and three, they get a call, not just from the biggest player in the biggest league, Kaiser Permanente in California. But before we tell the Kaiser story, which completely transformed the company-

Ben Gilbert 1:08:30 Yep. This is a great time to thank friend of the show, Fundrise. The Fundrise team is awesome, and they are big Acquired listeners, just like all of you, and they've been evolving since we first worked together about three years ago. So at the time, Fundrise was mostly known as the US's largest real estate investment platform for retail investors. However, they were watching technology markets get larger and larger than ever, thanks to Moore's Law, and technology, of course, sort of took over every industry.

David Rosenthal 1:08:58 Like healthcare.

Ben Gilbert 1:08:59 And the team there [chuckles] was really feeling like, "It really is a shame that all these tech companies are staying private longer, and that means that retail investors can't get access." So in twenty twenty-two, they launched their move to bring the democratized model they had developed into venture investing, which was a pretty contrarian idea.

David Rosenthal 1:09:16 Totally. This had been tried in the past but never really worked. Fast-forward to today, Fundrise has invested in great companies like Databricks, Canva, Anduril, Ramp, fellow friends of the show, Vanta and Anthropic, and also ServiceTitan, which just went public last December.

Ben Gilbert 1:09:32 Yeah, it is crazy what Fundrise has done. They've taken a retail platform that any American can invest in and gotten pre-IPO access to some of the best private companies in the world. They have enabled access to all the value creation that's been locked up in private companies.

David Rosenthal 1:09:46 When the ServiceTitan IPO happened, thanks to Fundrise, tens of thousands of regular investors got to celebrate alongside VCs, LPs, and employees. And look, timing really is everything here. Fundrise is doing this at a moment where, thanks to AI, there's more value than ever being created in the technology sector of the economy.

Ben Gilbert 1:10:04 You can go check out the full portfolio that Fundrise is building at fundrise.com/venture, and if you are a growth stage founder looking for a great Series C or later investor, get in touch and tell them that Ben and David sent you. This is a paid endorsement for Fundrise, and all investments can lead to a loss. All right, so David, Kaiser Permanente, the biggest of big fishes, comes knocking.

David Rosenthal 1:10:28 Yes. So Kaiser Permanente is this fascinating organization that was started and is headquartered here in California that is a fully integrated, quote, unquote, "managed care consortium." And so what that means is that essentially, they are both your health plan, your insurance, and your hospital system all in one. It'd be like if a insurance provider married up with a hospital system and said, "This is our captive hospital system. You, as our members, are only gonna go get your care here, and we control the whole system."

Ben Gilbert 1:11:00 Yep.

David Rosenthal 1:11:00 It's the closest thing that you can sort of have to a single payer here in the country.

Ben Gilbert 1:11:07 Hmm.

David Rosenthal 1:11:08 But importantly, they do also need to work with and interface with Medicare, as they have their own Medicare Advantage plan, and so for their older patients, customers, once they get older, they transition to Medicare Advantage through Kaiser.

Ben Gilbert 1:11:20 Gotcha.

David Rosenthal 1:11:21 Now, at the time, here we're in two thousand and three, Kaiser was the largest single hospital system in the entire country: thirty hospitals, four hundred plus clinics, eleven thousand physicians, and eight and a half million patients that are part of Kaiser here in two thousand and three. And they decide that they are gonna put out an RFP for a whole new integrated, entire Kaiser system-wide EMR system.

Ben Gilbert 1:11:52 And this is when you, you really should start to think, "Okay, EMRs are not just medical records or medical records tied to billing and scheduling."

David Rosenthal 1:12:02 This is the operating system-

Ben Gilbert 1:12:03 Yes

David Rosenthal 1:12:04 ... for this industry.

Ben Gilbert 1:12:05 Someone described it to me as the nervous system for a healthcare system. You know, you've got twenty hospitals, a bunch of doctors, a bunch of administration people. The whole thing is tied together by this unbelievably complex, tentacles-everywhere piece of software with thousands of different screens and levels of authorization and authentication and roles and permissions, and, I mean, it is incredibly hairy and is the single nervous system that the entire organization runs on.

David Rosenthal 1:12:37 Calling it an operating system is taking it too lightly. It's like your operating system, plus your ERP system, plus your applications on top of your operating system. It's your everything. [chuckles]

Ben Gilbert 1:12:49 It's quite reasonable, even though we refer to these things as EMRs, to start thinking about EMR as a feature for a constituency of the whole system.

David Rosenthal 1:13:01 Yes. So in two thousand and three, Kaiser puts out an RFP for a new, again, quote, unquote, "EHR," but really new nervous system-

Ben Gilbert 1:13:09 Yep

David Rosenthal 1:13:09 ... for all of Kaiser, and Epic wins the deal.

Ben Gilbert 1:13:14 And Epic was a little company. Just a few years before, they were a fifty-million-dollar company.

David Rosenthal 1:13:18 Yes, and after they sign Kaiser, they go to a hundred and sixty-two million in annual revenue, so transformative, probably more than doubled their revenue overnight.

Ben Gilbert 1:13:28 Yep. Interestingly, let's talk prices for a second.... The headline number, as everyone reports it, it's a $4 billion deal. They call it a $4 billion, three-year project, and that Epic's portion is around $400 million. Of course, not all in one year, but the way these things work is there's a big implementation that costs a bunch of money up front, and then there's the ongoing license that I think eventually would transition to a subscription, but at this point, it's licensing to use the software. It's just funny to see these headlines 'cause the $4 billion number, not only do they capture many years of the deal and the implementation, but they also roll in there the head count of the hospital employees that have to do the work, and they roll in there the potential lost productivity from all doctors across the health system who have to sort of ramp on the new software.

David Rosenthal 1:14:23 Which is a real economic impact, by the way.

Ben Gilbert 1:14:26 For sure.

David Rosenthal 1:14:27 But it's not like Epic got $4 billion out of this.

Ben Gilbert 1:14:29 No, and I always chuckle 'cause every single one of these numbers looks huge, multi-billion dollar-- oh, even if it's a small health system, $300 million project, and it, it ends up resulting in nowhere near that much money to Epic, but this is how the industry has decided to talk about the size of these deals.

David Rosenthal 1:14:45 [chuckles] Yeah, it's funny. We should start talking about the size of Acquired and, you know, like, uh, [chuckles] this-

Ben Gilbert 1:14:50 Fourth and fifth degree, uh, tertiary impacts.

David Rosenthal 1:14:53 We are a billion-dollar business.

Ben Gilbert 1:14:55 Just think about-

David Rosenthal 1:14:56 Yeah. [chuckles]

Ben Gilbert 1:14:56 ... all the business that our customers do-

David Rosenthal 1:14:58 [laughing]

Ben Gilbert 1:14:58 ... when [chuckles] Acquired listeners... [chuckles] But to your point, it is actually fair. If Kaiser is gonna engage in switching their central nervous system over several years, it's going to be net $4 billion of impact to them.

David Rosenthal 1:15:13 Yes. So the story of how this goes down is wild. At the time, Kaiser's two main centers of gravity were Northern California and Southern California, and they were almost like separate companies under the Kaiser umbrella. Had different systems, had their own EMRs, different management. Of course, talked to each other and part of the same parent organization.

Ben Gilbert 1:15:38 Wasn't there, like, a almost, like, cousin organization that was Northwest?

David Rosenthal 1:15:42 Yes.

Ben Gilbert 1:15:42 Like, this stepchild? [chuckles]

David Rosenthal 1:15:44 So they had... I don't know if it was just Northwest or they had maybe some other smaller regional operations at the time, but they had a Pacific Northwest small region based in Portland, Oregon. Today, actually, Kaiser has large regions through a large part of the country. They've grown a lot since then. But this small little Portland region, they had started using Epic for their ambulatory clinics, so, like, not even inpatient stuff in the hospital, but their outpatient clinics. And at the time, the Northern California and Southern California big factions were battling each other, and they were each trying to develop their own proprietary EMR systems with software consultants, with, like, Accenture and stuff.

Ben Gilbert 1:16:26 Yeah, there was this era where hospitals thought that EMRs should be their IP, that they develop and have sort of a competitive advantage over other hospitals 'cause their EMR was better. I don't know what the thinking was, but people wanted to own their own EMRs.

David Rosenthal 1:16:41 Uh, I think there may even have been some pipe dreams of, like, "Oh, we're gonna commercialize this and sell it to other hospitals," and it seems like not a core competency that hospitals should be doing. Anyway, within the Kaiser system, though, there was a fairly high degree of rotatability of physicians, of doctors. So if you were a doctor in Portland with Kaiser Pacific Northwest, and you wanted to move, or your family had to move down to California, you could transfer pretty easily to Northern or Southern California Kaiser. So this was happening, and as physicians from the northwest started coming down to California, they'd be like: "Man, what are you guys doing? You're spending all this money with Accenture and, you know, blah, blah, blah, all these consultants to try to roll your own. Like, we've got this thing called Epic up in Portland that we're not even using at the hospital, and it's way better than the stuff that you're trying to build."

Ben Gilbert 1:17:34 Yeah.

David Rosenthal 1:17:35 So finally, after a year or two of this battle between north and south, they finally agree, like: "All right, ceasefire. Let's come to a truce. We're gonna ditch our competing projects, and we're gonna bid this out to third-party vendors." So they hold an RFP for a new EMR for all of Kaiser, one integrated system, and they pick IBM. IBM's gonna come in and do this big $4 billion project for Kaiser.

Ben Gilbert 1:18:03 Nobody gets fired for buying IBM. We're on, like, the end of that era, but it's still a little that era.

David Rosenthal 1:18:08 I mean, this is only 2003 here. This bid might have even happened before 2003. So IBM comes in, and the project fails. Doesn't work.

Ben Gilbert 1:18:17 And this is not uncommon, especially think about ERP, the number of times you've heard, "Oh, failed ERP implementation," and some CEO is explaining on an earnings call, "Yeah, we lost, uh, hundreds of millions or billions of dollars, and we actually didn't even switch systems." This sort of thing does happen in the hospital world, too, and Epic has bet the whole company on having a reputation for "we don't have failed implementations," and that wins deals.

David Rosenthal 1:18:44 Totally, and I think this is one of the most important reasons why their customers love them.

Ben Gilbert 1:18:49 And we're gonna say this a bunch of times on the episode, their customers love them. When we say customer, we mean hospital CEO, CIO, the chief information officer, and CFOs. When we refer to their customers, that's who we're talking to. Obviously, the chief medical officer and all of the physicians and nurses and care folks are a part of that, but a part of my research has revealed the customer is the hospital administration.

David Rosenthal 1:19:15 I doubt that's even, like, a controversial statement, probably at Epic themselves. I think they consider the customer to be the CEO, CIO, and CFO of their customers.

Ben Gilbert 1:19:25 Yep.

David Rosenthal 1:19:25 So the IBM project fails, and maybe it's worth another word on that, too. It's not like-... this doesn't impact the physicians and the staff at the hospitals, and poor performance for the hospital, as is in the case of this failed IBM implementation, massive detriment to the physicians. This must have really, really sucked for them. Like, they want stability, too.

Ben Gilbert 1:19:50 And the physicians provide the value at hospitals, and so therefore, you need to make the physicians happy to retain your administration job. [chuckles] They have the leverage in the organization 'cause they provide the core competency, but still, you're not going in and pitching the doctors when you're going in and trying to land a customer.

David Rosenthal 1:20:08 You could think of a hospital almost like a media company. The doctors, and the nurses, and the clinicians, they're the on-air talent.

Ben Gilbert 1:20:15 Yeah.

David Rosenthal 1:20:16 The on-air talent are not the ones, you know, at Disney or Universal or wherever, who are making the business decisions.

Ben Gilbert 1:20:22 Right. And in this case, the medical staff is involved, but they're not the decision-maker.

David Rosenthal 1:20:26 Yeah. So, okay, Kaiser's now gotta rebid this project, and by this point in time, enough Portland doctors had come down to California and sung Epic's praises that they're like, "All right, we should take this little company seriously." So they start the RFP, and it comes down to Epic and their big main rival, Cerner. Now, we haven't really talked about Cerner so far in this episode, part of Oracle today, so we will get into later. Cerner was a much bigger company.

Ben Gilbert 1:20:52 Yep. Interestingly, started right around the same time, right?

David Rosenthal 1:20:55 Yeah, wow, I think it was started the same year as Epic, right? Nineteen seventy-nine.

Ben Gilbert 1:20:59 Yep, by Neal Patterson.

David Rosenthal 1:21:00 By Neal Patterson in Kansas City, Missouri. Unlike Epic, which took the no venture capital, no acquisitions, single platform, stay private forever route, Cerner took the lots of acquisitions, raise capital, go public, get big route.

Ben Gilbert 1:21:19 Which could have worked, too.

David Rosenthal 1:21:21 Uh, it did work, too.

Ben Gilbert 1:21:22 It did work for a long time.

David Rosenthal 1:21:24 Yep. At this point in time, Cerner is almost a billion-dollar-a-year revenue business. They're a public company, way, way, way bigger. They're international, et cetera. So the RFP comes down to the two of them.

Ben Gilbert 1:21:36 But it's worth saying, before they were acquired [chuckles] by Oracle, was a merger of twenty-four different companies. Put a nice little wrapper on it and call it Cerner, but a lot of companies along the way.

David Rosenthal 1:21:46 Yes, a different path than the one Judy took, let's say.

Ben Gilbert 1:21:49 Yes.

David Rosenthal 1:21:50 But that's not to knock it. It is, and especially back then, was a good, really competitive product. The obvious choice for Kaiser here in two thousand and three would've been go with Cerner, and they actually try to go with Cerner. [chuckles] So supposedly, at one point, they come to both companies, to Cerner and Epic, and they say, "Look, Cerner, we wanna go with you for inpatient in the hospital, since that's your bread and butter. This is the most important thing. This is the big business. We trust you. You've been around forever. And Epic, hey, you've got inpatient now, but you only just launched that in two thousand and one. Like, you're new at this. You are good at ambulatory, at outpatient. You're doing a really good job for us in Portland. We wanna split the baby here and do one system with Epic for our outpatient clinics and one system with Cerner for our inpatient clinics."

Ben Gilbert 1:22:38 Oh, yeah, that always works.

David Rosenthal 1:22:39 And Judy says, "No, that is a bad choice. That is the wrong choice to make, and I don't care if you go with us or them, but to do the right thing for your patients and for your whole system, and to make billing work, and have this all function correctly, and have patient records transfer between your ambulatory clinics and your hospitals, which you really, really need, you should just pick one of us." Now, this was a little self-serving on Judy's part because Cerner was not good at ambulatory. [laughing]

Ben Gilbert 1:23:09 [laughing] It's a calculated high-risk decision.

David Rosenthal 1:23:12 However, definitely super ballsy to do this, but she knew that Epic had a good product in both. The problem was just that their inpatient product was still new, and so didn't have trust yet in the marketplace.

Ben Gilbert 1:23:24 Yep.

David Rosenthal 1:23:25 But she's still a pipsqueak. I mean, Cerner's a billion in revenue, and Epic is, like, somewhere slightly north of fifty million at this point in time. So they go a little further in the process, and at one point, there's a technical due diligence meeting, where Kaiser asks both companies to come in and present to them about how their systems are gonna handle all the volume of concurrent data transactions that Kaiser has. Remember, eight and a half million patients, eleven thousand physicians, is a high-volume system here.

Ben Gilbert 1:23:55 Yes, and listeners, this is a great story. This is kinda the eleventh hour of the deal. This is, "Hey, we're pretty close to a decision, but we haven't made it yet. Can you both come to the same building and sit in different conference rooms, and throughout the day, we're gonna bounce back and forth and keep spending an hour with each of you, formulate some questions from hearing the other pitch, and then come back and ask you those questions?" And so if you're on one team or the other, you can kinda learn through the questions what is being pitched in the other room, and why am I suddenly being grilled on this new topic?

David Rosenthal 1:24:30 So the Epic team is doing their planning, you know, getting ready for all the preparation for this really big meeting, and the team had decided that the way they were gonna handle this question was to do a theoretical presentation about how Epic's architecture worked, the single system, and theoretically, how much load could the system handle all at once. And the story is that Carl Dvorak, the president, flew in to California the night before the pitch, meets with the team, sees this plan, and is like, "Guys, no. We need to model out in Excel exactly what Kaiser's transaction flow is gonna be throughout the day in the system and how our system will process it, and prove to them that we have far in excess bandwidth capability to handle their system, and it'll never go down."

Ben Gilbert 1:25:24 'Cause I think they had done it at sort of a theoretical formula level, but Carl knew that Epic had the advantage here, that they actually could, if they played it all the way out and really built out the spreadsheet, show, "Actually, we're gonna be more performant for you."

David Rosenthal 1:25:40 Yep.... So he and the team pull an all-nighter the night before the presentation. I don't know if Judy was there as well. I assume she was, too. Come in, and they show the model during these meetings that Kaiser is having back and forth between the two teams, and as the day's going on, it becomes really clear that Cerner has not done a similar level of-

Ben Gilbert 1:26:00 Mm

David Rosenthal 1:26:00 ... modeling and can't actually prove to Kaiser that their system is gonna be able to handle the transaction flow. I think this was the moment when the tide turned, and Epic was like: "Oh, yeah, we're gonna win this thing."

Ben Gilbert 1:26:10 But it still wasn't obvious right away. I think they earned big points there, but my understanding is that Kaiser still went to Cerner and said, "We're interested. Can we do an equity deal on top of this? Can we take part of the company in exchange for basically giving you this big deal?" I think Cerner said yes.

David Rosenthal 1:26:32 Yeah. The story, as we heard it at least, is that at the last minute, then right before the decision, yeah, Kaiser came to both companies and said, "Hey, we'd really like warrants in your company. We're the biggest health system in America. This is the biggest contract you're gonna get. We want some equity in your companies for working with us." And apparently, Cerner did offer them ten percent of the company for this deal. That's how important this was.

Ben Gilbert 1:26:57 So then they come to Epic, and they say-

David Rosenthal 1:26:59 Then they come to Epic, and they're like: "Well, what do you have to say about that?" And Judy's like: "No, we're not gonna do it. We're not gonna do it for you. We're not gonna do it for anybody, and it's the wrong thing to do. If we did it for you, we'd have to do it for all our big customers, and then that would turn out poorly for you, too, so absolutely not." And they still picked Epic in the end.

Ben Gilbert 1:27:19 Through that, through the architecture bake-off, and through the, "No, you have to pick one of us," Epic still won out-

David Rosenthal 1:27:30 Yeah

Ben Gilbert 1:27:31 ... and stuck to their guns all the way through that negotiation.

David Rosenthal 1:27:34 Which I think really should just tell you how important the stability and continuity of the system across inpatient, outpatient, and billing is, 'cause Epic is the only one that can offer that.

Ben Gilbert 1:27:49 Yeah. By the way, earlier, when I said twenty-four different companies merged together to create Cerner, I forgot that this chart that I'm looking at predates when Cerner then bought Siemens. So then there's another twelve companies that had merged together to become Siemens that merged also into Cerner. [chuckles]

David Rosenthal 1:28:06 Yep. We're gonna come back to the Siemens acquisition in a minute. I think that was twenty fourteen when that happened, but yeah, this is key. This is why Epic wins.

Ben Gilbert 1:28:16 Yep.

David Rosenthal 1:28:16 So they win the deal, basically doubles or triples revenue overnight. The L.A. Times writes about the deal when it gets announced: quote, "Because of its scope, the Kaiser Epic system could become the Model T of its industry, not the first of its kind, but the first to reach masses of people." Once this happens, Epic gets elevated to the new gold standard. If you're a hospital system, if you're a CIO or CEO looking to rebid your EMR, well, Kaiser, the biggest system in the world, just chose Epic, and they chose it over all of these reasons not to. There must be something really good in there. Like, of course, you're now gonna consider Epic, and of course, Epic is gonna perform really well in these evaluations.

Ben Gilbert 1:29:02 Yeah. It helped a little bit at first, but after the go-live a few years in, after the whole implementation took place, and they didn't tip over, and it did go well, that was really when the floodgates opened, sort of in that two thousand six, seven, eight timeframe.

David Rosenthal 1:29:16 Yep. So by two thousand and seven, Epic has hit five hundred million in revenue, so another three X what they were doing once they added Kaiser, and like eight X what they were before Kaiser, almost ten X what they were before Kaiser. They're really starting to transform into a big company.

Ben Gilbert 1:29:34 I spoke with one former employee, and I was asking: What were the inflection points in the company? And this employee said, "Oh, after we won the Kaiser deal, we had been hiring, like, ten kids a month out of college, and it now felt like hundreds a month were just flowing into the doors, so we could scale."

David Rosenthal 1:29:50 Which will bring us in a minute to Epic's Epic, [chuckles] shall we say, Verona, Wisconsin campus.

Ben Gilbert 1:29:58 Yeah, and one thing, just for our storytelling narrative there we kinda skipped over, was there's another thing that happened in the early two thousands that reads a little bit as a sort of alternate history for what could have happened at Epic. Imagine you're a small company, and a big company comes to you and says: "Can we co-develop a new product together? You can distribute it to your customers. We'll distribute it to our customers, you know, under our brand name and everything, but you get some of that revenue, and we'll sort of build this with you, and it really will charge your business up." And if you don't know any better, and you've never done it, it kinda sounds appealing. Maybe we should do that. And there are many instances of it working, so, you know, that's extra tempting. My favorite weird example of this in history of it not really working is the HP iPod. Do you remember this?

David Rosenthal 1:30:47 Oh, yeah, that's right. [chuckles] I do remember this. I think I might have had one. No, I had one of the U2 iPods, the red and black one.

Ben Gilbert 1:30:54 Listeners, Google it. It's this really odd thing. It's an HP brand on the back of an iPod. That tells you all you need to know about what a weak position Apple was in at the time, that they were willing to let HP put their brand on something entirely created by Apple to get HP's distribution and get some cut of that revenue, and, of course, it would have bootstrapped their ecosystem since it used iTunes and all that. But that's basically what happened here. So Philips, the Dutch company, comes to Epic and says: "We wanna do something focused on the radiology segment. You do a lot of the development work. We have the customer relationships and distribution."

David Rosenthal 1:31:29 Right, 'cause they're probably selling the machines.

Ben Gilbert 1:31:31 Yes. "We, Philips, will get a license to Epic's whole IT system, everything that you already sell, we wanna sell also."

David Rosenthal 1:31:38 Oh, wow!

Ben Gilbert 1:31:38 "And we're gonna market that-... as Philips Externity Enterprise to our customers. So they're gonna buy a Philips-branded version of Epic.

David Rosenthal 1:31:48 Hmm, interesting. And I imagine Philips probably has a lot of customers, not in America, too, like in Europe, so this is a way to go international.

Ben Gilbert 1:31:56 Right. So Epic starts hiring people in the Netherlands. They build up this team. They spend multiple years, or at least a year, building it out. I think they even launch it. The whole thing ends up folding, and within a year or two of coming out, it was a really expensive detour, and the company develops this intense scar tissue for partnerships. Partnerships at this era to the Epic team means, A, stuff I can't control outside my organization, B, big risk, C, never in our history do we have an example of it working. This is an uncontrollable dependency, and they sort of internalize this scar tissue as, "Stay focused on what we can control. Go directly to the customer. Don't try to do any fancy partnership integration stuff with other people." And that's oversimplifying it, but I think it's still reasonable to say that some of the DNA of what Epic would become, and they would take tons of arrows for this, this closed, not interoperable, blah, blah, blah, some of it stems from this failed partnership.

David Rosenthal 1:32:59 With Philips. Yep, totally. They're now partnering again, finally, but, yeah, like fifteen, twenty years later.

Ben Gilbert 1:33:07 Yes, and thanks to Health API Guy for the tip on that.

David Rosenthal 1:33:10 Yeah.

Ben Gilbert 1:33:12 So at this point, in the late two thousands, Epic is eyes on the prize. We're building everything ourselves. We can get big customers on our own. We can stand firm and not negotiate, not have to give up pieces of our company. The price is the price, and we know that we're gonna deliver, and so it's time to invest in our future. How do they invest in the future?

David Rosenthal 1:33:35 Ah, the Verona campus. So for the probably minority of you listening who know anything about Epic as a company or been involved with them in the past, if you have, you almost certainly know about their corporate campus.

Ben Gilbert 1:33:48 Yes.

David Rosenthal 1:33:49 So there's sort of two stories of how the campus came to be. First is Judy's son, by this point in time, is actually working at Microsoft in Redmond as a developer, and Judy and Carl had always been inspired by Microsoft's way of doing things. And so one time, when Judy's visiting her son, she's like: "Hey, can you go give me a tour of the campus in Redmond? We're thinking about expanding. We're outgrowing our space. I wanna see what it's like there." And she's really impressed by Redmond, as I think anybody who goes there would be.

Ben Gilbert 1:34:22 Yep, especially in this era. It was sort of pre-Googleplex. It was kind of the fairy-tale tech campus.

David Rosenthal 1:34:29 Yes, it was Google before Google.

Ben Gilbert 1:34:31 Yep.

David Rosenthal 1:34:32 And she's like: "This is like a college campus here, the atmosphere that you've got."

Ben Gilbert 1:34:36 Sports field and tons of buildings, and all of them are pretty short, two, three, four stories, a lot of outdoor space, walking space. Everyone gets an office. This is perfect.

David Rosenthal 1:34:48 So Judy comes back and basically copies the campus strategy of Microsoft almost exactly.

Ben Gilbert 1:34:54 They had been in that renovated schoolhouse. I mean, if you think about where they came from and sort of what they now have the opportunity to build, they had renovated the schoolhouse to be nice, but-

David Rosenthal 1:35:05 Yeah, that was well before they were a half-a-billion-dollar-a-year revenue company.

Ben Gilbert 1:35:08 Yes, exactly.

David Rosenthal 1:35:10 So she goes out and buys a thousand acres [chuckles] of farmland in Verona, Wisconsin, which, just like Redmond, is a kind of bucolic-looking suburb about half an hour outside the city in Madison, or I guess maybe Redmond was bucolic before [chuckles] Microsoft, everybody got it built up. But just like Microsoft kind of owns Redmond, Epic owns Verona spiritually, so they build this incredible campus there.

Ben Gilbert 1:35:35 And what is very different about it than Microsoft is it is not utilitarian the way that the Microsoft buildings were. A thing that was already happening at Epic was this fairy-tale, whimsical thing that you can kind of see in their product names. But David, what was the story we heard about the schoolhouse fireplace?

David Rosenthal 1:35:54 Yeah. Okay, so this is the second story of the Epic campus. So like you said, Ben, before Verona, the headquarters was in an old school building in Madison that they'd bought and renovated, and as they were renovating it, the designers decided that in one of the main conference rooms, they were gonna put a fireplace in there to make it feel more homey.

Ben Gilbert 1:36:17 Yes, like a Wisconsin lodge.

David Rosenthal 1:36:19 Yes, and I don't even know if the designers did that, but I think Judy and the company were like: "Well, this kind of feels like a Wisconsin Lakes lodge. Let's lean into it." And so they decorated it like a lodge. They brought snowshoes and furs and, like, an ax that they put on the wall and stuff, and it ends up becoming the most popular room in the building, and anytime customers are coming to Madison, they always wanna meet in the lodge [chuckles] -

Ben Gilbert 1:36:43 Yes

David Rosenthal 1:36:43 ... conference room. And so now they're building this new campus, and Judy's like: "Oh, well, let's take the lodge idea and-

Ben Gilbert 1:36:50 Really blow it out

David Rosenthal 1:36:51 ... maximize it."

Ben Gilbert 1:36:52 Yeah, so they inject this fairy-taleness times ten when they're building out the new campus. They hire the same firm that did the Disneyland California Adventure renovation in two thousand and eight.

David Rosenthal 1:37:10 I think it's even more on the nose on that. They hire two architecture firms. One is that.

Ben Gilbert 1:37:15 Uh-huh.

David Rosenthal 1:37:15 And then they also hire the firm that built a lot of the Redmond campus for Microsoft.

Ben Gilbert 1:37:19 Oh, is it really?

David Rosenthal 1:37:20 Yep. [chuckles]

Ben Gilbert 1:37:20 Wow! And it's crazy. I mean, it's Alice in Wonderland stuff. It's Harry Potter-inspired stuff. It's Wizard of Oz-inspired stuff. Just Google pictures of the Verona campus for Epic, and we'll link to some in the show notes, too. It's bananas, but it is extremely attractive to new hires coming out of college who want to-... kind of feel like they're still in college, and want to go work for a company that seems fun and interesting. And Epic is this sort of two-sided culture that seemed to play well together somehow. This goofy, whimsical fairy tale thing, and this hard-driving, win at all costs, performance-oriented, fierce competitor, and it just is both. To understand the company, you have to hold in your head that the DNA of- is both of those things concurrently, and I think it's because that's what Judy is.

David Rosenthal 1:38:14 Yes, a hundred percent. That is completely spot on. I had in my script here, the question of all this is, why on the campus? And that is exactly why. We are hiring super smart, young, hungry, new college grads. How are we going to attract them to Verona, Wisconsin? Well, we are gonna create a paradise for them. [chuckles]

Ben Gilbert 1:38:36 Yes. So some interesting stats, it's seventeen hundred acres, four hundred and ten of them are the campus, the rest is the farm. It now covers eighty-nine buildings. There are four indoor auditoriums with eighteen thousand seats total. The big one, Deep Space, is the world's largest subsurface auditorium. There are eleven thousand four hundred seats. This is an auditorium. This is two Radio City Music Halls full of people smashed together in one giant auditorium underground on a corporate campus. The number of seats is much closer to a Chase Center. It's much closer to a basketball arena than it is to any other auditorium that I can think of. It goes down seventy-four feet beneath the surface. I mean, the whole logic behind it is, when they built it, they thought, "Oh, we'll never grow to eleven thousand four hundred people. We can have our all-hands in here, no-brainer, but this can also be the place where we have all of our customers, and our whole ecosystem can come here." Of course, now they don't actually fit in there 'cause they've outgrown it. Not even all their employees can come to all-hands there. The logic for building it was that they had a movie theater that they used to do their monthly all-hands meeting, and they wanted to sort of have this opportunity to do it on their new campus, too. It's wild. I mean, when you look at it, you just can't believe the scale of this building.

David Rosenthal 1:39:57 Yep. All right, I think now is the right time, while we're talking about the campus and Epic culture, to really talk about Epic culture.

Ben Gilbert 1:40:05 Yeah, because the first thing that you have to understand is Judy refers to it as a software factory. When you keep looking at it and you're like, "Why is it so weird?" The biggest takeaway is, in Judy's mind, since they don't ever go buy any other companies, and they don't have any competencies at the company other than making software, what they are is a factory that churns out software. They take in software developers, and they turn that into software for the medical industry.

David Rosenthal 1:40:34 That's funny. Apparently, she was just ahead of her time with-

Ben Gilbert 1:40:37 The AI factories?

David Rosenthal 1:40:38 ... because NVIDIA and Dell are calling, you know, yeah, AI factories now, yeah. [chuckles]

Ben Gilbert 1:40:41 Yeah, absolutely. And so it starts to click and make more sense when you think, well, what would a factory for turning developers into medical code, medical applications look like? Well, Verona, Wisconsin.

David Rosenthal 1:40:52 Yep. So while we're on culture here, one of the most amazing things about the campus is Epic has a list of Ten Commandments. It's the Epic Ten Commandments. It's like, you know, Moses and the Bible here. They have them posted in every bathroom [chuckles] and in every break room across the entire campus. And so any visitor who goes there, and it's open to the public, you can just go in and see the Ten Commandments in the bathrooms there. The Ten Commandments are, number one, Do not go public. Number two, Do not acquire or be acquired.

Ben Gilbert 1:41:27 By the way, those first two things, you don't need to communicate that to employees. Only the CEO can do either of those things, so it's just funny to put it as commandments. That shows how deeply Judy feels it needs to run in all [chuckles] of the employees.

David Rosenthal 1:41:39 And I think the other big motivation for doing this is, and having it there in the bathrooms, is every customer who comes to visit, it's right there to the customers, too.

Ben Gilbert 1:41:47 Right.

David Rosenthal 1:41:47 We will never go public, we will never be acquired, and we will never acquire another company. You can trust this is one system forever. [chuckles]

Ben Gilbert 1:41:55 Yep.

David Rosenthal 1:41:55 Yep. Okay, so that's one and two. Number three, Software must work. Number four, Reality equals expectations. Number five, Keep commitments, even the unspoken ones. Number six, Focus on competency. Do not tolerate mediocrity. Number seven, Have standards, be fair to all. Number eight, Have courage. What you put up with is what you stand for. Number nine, Teach philosophy and culture. And number ten, Be frugal. Do not take on debt for operations.

Ben Gilbert 1:42:25 Zero of those pertain to healthcare.

David Rosenthal 1:42:27 Yes. [laughing]

Ben Gilbert 1:42:29 When I was looking at them, I kept thinking, "Oh, I'm gonna find something here about every life is important, or the patient is at the center of everything," or... No, this is how to run a company. This is my opinion on how to run a company, period.

David Rosenthal 1:42:41 Yep. And I think specifically to your point, this is a pretty good way to run a software factory.

Ben Gilbert 1:42:47 Yes. So these hang in the bathroom. Other interesting things about the campus, they have wedding bells that will play campus-wide when a new client is signed, just showing that that's the type of commitment that this is. It's a, "We've now married this client for the rest of our lives."

David Rosenthal 1:43:02 Yeah, it's like the wedding march, you know? Dun, dun, dun, dun. Like, that's their version of, like, ringing the gong.

Ben Gilbert 1:43:07 Yes. And I think we haven't really talked that much about what it is like to be an employee there, so this is a probably a good time to do that. This is an insanely awesome training ground if you are a smart, ambitious person out of college. People accuse them of being cult-like, but there are ways in which that's a good thing. I mean, they take you fresh out of your career, and they teach you everything. And when I say everything, I mean how to take notes. There is an Epic way to take notes on a yellow legal pad. There is an Epic way to write emails, and these are, like, hardened practices over the years that they just believe through iteration, through testing, through data.

David Rosenthal 1:43:47 Probably going all the way back to Neil and Meditech, and-

Ben Gilbert 1:43:50 Yeah

David Rosenthal 1:43:51 ... the three days in Boston.

Ben Gilbert 1:43:52 This is the best way to do this, period. And so we're just gonna teach everybody the best way to do everything, and everybody is gonna be, like, reasonably robotic.... we can sort of trust that once we squeeze you through the Epic system, when you come out the other side, you are able to operate in a way that works really, really, really well in our machine, where people can really trust each other. So because of that high level of trust, there's very few middle managers. You understand the system that everybody else works within, and you don't have to corral chaos. Most of the people they're hiring are right out of school, so they've been there for a long time. They don't have budgets, which you can kind of only do when you have a high-trust environment like this. I mean, there's some financial controls, of course, but Judy's got this great story that she used to go see customers, and they'd say, [inhaling] "Oh, this is the right thing to do. I just don't have the budget for it this year, so we're gonna push it to next year." She's like, "That's stupid." Or they would tell her, "Can we squeeze this in this year? 'Cause if I don't spend this money, I'm gonna lose it in my budget." And she would say, "Well, that's also stupid. So at my company, we're not gonna have budgets like that." They're super light on titles. You might have a business card, whether you've been there twenty years or six months, that says, "Implementation," that you hand to a customer when you go and do an engagement. Everyone does immersion trips, where the software developers, I mean, everyone is required to spend time in clinical settings, like operating rooms, to directly observe workflows.

David Rosenthal 1:45:16 Yep. I think when you start, you have to do five of them, and then you do more every year.

Ben Gilbert 1:45:20 Wow! Y Combinator preaches, "Go talk to your customers. Spend time with customers." Epic's been doing this forever, and this is the Epic way that I think the rest of the world sort of woke up to and startups internalized as doctrine. But every person in the company spending time in medical settings, talking to customers, hugely valuable. On the developer side, there's a super prescriptive software methodology that they use to minimize bugs. So you go through this intensive training for six months when you join, and then when you start programming, the whole system is designed around minimizing the number of hours between when a line of code is written and then when it is tested. So if a bug is found, then you drop everything as the original developer, and you fix it so that you still have the whole context fresh in your head. You don't sort of go months, and then the system gets tested, and bugs aren't allowed to compound into bigger problems this way. They get caught right away.

David Rosenthal 1:46:17 And I believe the rule, right, is that every developer must fix their own bugs.

Ben Gilbert 1:46:22 That's my understanding, too. It's this method of software engineering that places way more importance on a zero-bug environment because lives are on the line than other ones. So you're not necessarily gonna ship software the fastest way. You may not even ship the most innovative, clever, amazing, cutting-edge. You're just gonna make sure that you're shipping bug-free software.

David Rosenthal 1:46:42 Yeah. Well, I think the reasons are twofold. One, it absolutely is right that lives are on the line. If a order for the amount of dose in a prescription gets messed up 'cause of a bug, a lot of people are gonna die.

Ben Gilbert 1:46:53 Yep.

David Rosenthal 1:46:54 And also, the complexity required for the revenue cycle and billing for your customers is of paramount importance. You cannot have bugs there either, or at best, the hospital's gonna lose a lot of revenue opportunity. At worst, they're gonna get sued for federal crimes, for medical fraud.

Ben Gilbert 1:47:14 Yep. Great point. So that means you need a-

David Rosenthal 1:47:17 Highly robust system.

Ben Gilbert 1:47:18 Yes. The work done as an implementation person at the company is insane. It's like military-level logistics. You're handling multiple customers, all of which are among the most complex systems on Earth. Peter Drucker famously referred to hospitals as the most complex form of human organization that we have ever attempted to manage. You have to understand all these dependencies at the customer and the status of a dozen interrelated things on a daily basis. You really are in this high-adrenaline, high-stakes leadership role as a really young person. You can work ten, twelve hours a day, but a lot of them love it 'cause you're winning. You're doing really big things right out of school. You're doing it with other really bright people, so they really try to get high IQ, high EQ, often, like, very sweet Midwestern kids, to take these customer-facing roles.

David Rosenthal 1:48:14 Yeah. And I think also 'cause the flat organization, like, you're also doing it alongside-

Ben Gilbert 1:48:19 Yes

David Rosenthal 1:48:19 ... other senior people and learning from them directly. Like, the story about Carl and Sumit. You know Sumit? As a young programmer, working on a project with Carl, the president, who's also a programmer leading-

Ben Gilbert 1:48:31 Yeah

David Rosenthal 1:48:32 ... the team. Like, that happens.

Ben Gilbert 1:48:33 If you're an ambitious, career-focused person, there is nothing more fun than winning in a high-stakes environment with other high performers as a team. That, plus the whimsy, encapsulates pretty well the Epic culture, and the result of that is it becomes the number one thing in your life. If you talk to a lot of these people who spent time there or still work there, you're all in, and you're in the middle of nowhere. This is the other job that campus does. You're not really getting exposed to other things [chuckles] you could leave and go do. They make it very easy for your whole life to become Epic.

David Rosenthal 1:49:08 Yeah, you could drive to the big city of Madison. [chuckles]

Ben Gilbert 1:49:10 Yes.

David Rosenthal 1:49:11 I know we keep making the comparison, and it's a direct one with the campus here, too, but the company that this reminds me the most of is those early days of Microsoft. This is exactly what being at Microsoft in the '80s and '90s was like when we talked to people doing that research.

Ben Gilbert 1:49:27 And I heard from some people, too, when I was researching for this, two or three times, Palantir came up, of these sort of bright-eyed, bushy-tailed, smart, young people, where you're deployed into these really intense environments. But you know your stuff, you've been through the training, you've been through the process, you're armed with good tools, and you're gonna go make it happen.

David Rosenthal 1:49:44 Yep.

Ben Gilbert 1:49:45 So the other side of this is it is up or out. They aggressively trim bottom whatever percent of performers, and they work you really, really hard. And so with the vast amounts of new hires, they're trying to figure out if you're gonna cut it, and it's more cost-effective to replace you than keep you as deadweight. And so you have lots of attrition in the first few years, but you know that once someone's been there for a while, they're good. You can count on them.

David Rosenthal 1:50:09 Yep.

Ben Gilbert 1:50:10 ... Their method of hiring is crazy, and this is more common now to give out programming tests as a part of the hiring process.

David Rosenthal 1:50:17 Oh, this story is so good. Can I tell it?

Ben Gilbert 1:50:19 Yes, please.

David Rosenthal 1:50:21 So we mentioned that Judy's son was a programmer at Microsoft, and that's how she went to visit him, part of the inspiration for the campus. His involvement in the company actually predates him becoming a programmer at Microsoft or even an adult. In the late '80s, Judy was hiring software developers and found that interviewing them just wasn't that predictive of whether they were gonna be great software developers or not. Meanwhile, her son, I think, was in, like, seventh grade or something like that, and was doing these programming competitions around the state. And she was talking to him and was like, "Well, you do these programming competitions, and they're these tests, and then you're winning some of them, and that's a pretty good judge of whether you're a good programmer or not."

Ben Gilbert 1:51:04 They're reasonably predictive.

David Rosenthal 1:51:05 "Do you think you could write one of these types of tests for me, and I can use it at Epic and test software developers as we're hiring them and see if they're any good?"

Ben Gilbert 1:51:15 And for eighteen years, listeners, that was how they tested to determine if someone should work at Epic. And many, many times, I don't know if the number is close to a hundred percent or-- but some large percent of the time, they just don't interview you. They believe that their tests are predictive enough, that that's it. You can get a job offer. You come visit campus and all that, but, like, you get a job offer after scoring high on this test. And it's not just that test. Now, there's other tests. There's a Rembrandt test. They've got a bunch of tests. It's all systemized and cataloged, and everybody takes one on the way in.

David Rosenthal 1:51:48 For every role in the company, yeah.

Ben Gilbert 1:51:49 The culinary team, we heard, takes not full software developer tests, but logic tests on the way in.

David Rosenthal 1:51:56 Yep, amazing. But yeah, Judy's teenage son wrote the first test that is now no longer being used. I think the answers have gotten out on the internet, but for a long time [chuckles] was used, and it's a funny story. But this was in the '80s. This was way before Google was doing this kind of stuff. This was really out-there hiring practices at the time.

Ben Gilbert 1:52:15 Yep. So we've talked a lot about the internal culture. The most important thing that we haven't really dove into yet is how it touches the outside world. The Epic culture is completely customer-obsessed, and I mean that the way we talked about customer before. There's a great quote from Jeff Gottney, the chief information officer for Rush University System for Health. He says, "You get what you pay for a hundred percent of the time," despite Epic being, quote, not cheap. You kinda see that echoed over and over and over again in these customer conversations is reliable. It worked. They didn't overpromise on something. It is fully integrated. At this point, no one gets fired for buying Epic the same way it used to be true about IBM.

David Rosenthal 1:52:58 Yep. Customers are, like, always number one, everything. [chuckles]

Ben Gilbert 1:53:02 They vote. I mean, the way that they pick the next things to build is when all the customers come to campus for their annual conference, they ask for ideas, and then they vote and take customer input as a way for figuring out: What are we gonna do next?

David Rosenthal 1:53:16 Totally. There are basically only three roles at the company. There's software developer, project manager, who are the implementations managers doing the new active implementations for new customers, and then there are technical specialists who do ongoing customer support. There's not a sales or marketing department. There are eight or so salespeople, quote, unquote, in the company, who only react to inbound requests, and they all came from either project management or technical specialists. [chuckles] That's the whole company. The technical specialists are the biggest group in the company. Every single customer of the six hundred and seven whatever hospital system customers that Epic has, every single customer has their own technical specialist teams for every single product that they use. So, like, if you're a hospital system, you have your own technical specialist team for your EpicCare EMR, for MyChart, for Resolute, for Cosmos, for you name it. Anything you use, you have your own dedicated team for that. And then on top of that, every customer has their own dedicated BFF, best friend forever, like BFF, who is a single person within Epic, and their sole job, their only job, is to make sure that you, as a customer, are successful with their products. So this means they do things like they grade you as a customer every year, benchmarked relative to what other customers are doing and how you're doing with the Epic tools. So they will send separate report cards every year to your CEO, CIO, and CFO, and they will grade you one through five [chuckles] on a bunch of dimensions, and then they will show you benchmark data against other customers at your peer set of, like, relative similar size hospital systems, how you're doing. [chuckles]

Ben Gilbert 1:55:07 Wow, that's crazy.

David Rosenthal 1:55:09 Yes. I've never heard of any other company that does stuff like this.

Ben Gilbert 1:55:12 Well, they have a lot of leverage in the customer relationship. I think at this point in history, you know, twenty twenty-five, when the customer wants to do something a certain way and Epic wants to do something a certain way, ultimately, Epic is customer-focused, so they will do whatever the customer wants. But they're going to lay out very compelling, convincing arguments why their way is the correct way. And what this leads to is things like a standard package. A lot of times, when people are setting up Cerner, every implementation looks completely different. Epic is highly opinionated. Please use as much standard stuff as you can so that we can easily push out updates, or we can easily add in new modules for you, or interoperability all works exactly the way that we're thinking it should. They have a strong negotiating position with customers when they're saying, "Uh, I think you should do it this way." Because at some point, they may choose to just say, "You know what? I don't think you're ready to be a customer yet."... I think we're gonna focus elsewhere this year, 'cause we're gonna pick up only ten to twenty, maybe thirty new customers.

David Rosenthal 1:56:17 And we're happy to wait.

Ben Gilbert 1:56:18 We're happy to wait until you're ready to work with us, and they actually have the leverage to pull that off now.

David Rosenthal 1:56:23 To your point about the standard implementations, I believe this is the only way that you can get discounts on pricing with Epic, is by doing either fully or mostly standard. I think there probably are some tiers based on how standard your implementation is, and the more you deviate from it, the more you have to pay. [chuckles]

Ben Gilbert 1:56:45 I could see that. I know if you stay up to date on things like database maintenance and versioning and all that, then they give you discounts.

David Rosenthal 1:56:51 Yep. So all of this sounds sort of Epic accruing power for Epic, which it is. There is also this almost altruistic part of the company and their customer relationships, and I think this comes from just Judy and who she is as a person.

Ben Gilbert 1:57:07 Altruistic capitalism does feel like ultra-competitive, ultra value-maximizing, altruistic capitalism is kind of like how I would describe the company.

David Rosenthal 1:57:17 Yeah, I think that's how you sum up Epic, and this altruistic piece is, despite certainly being expensive, they basically never raise prices once you're a customer. They do, but their average yearly increase is about two percent across the board, so below inflation. Compare that to [chuckles] lots of other software companies out there, and they're not raising prices two percent every year. They also do things like they have never, in its entire history, changed the price of MyChart.

Ben Gilbert 1:57:48 We got told this multiple times. I think that's a red herring. We don't know what the bottom-line price looks like. We got told one piecemeal... It's not like we have a full contract in hand of what it looks like to be a customer and add up all the subcomponents.

David Rosenthal 1:57:59 Good point.

Ben Gilbert 1:58:00 Two points to make: Yes, they're customer-obsessed; yes, they're listening, but yes, of course, it's to do what's in Epic's long-term interest. I mean, the core functionality of-- If you're a customer, the reason you pick Epic is to turn an interaction with a patient into as many dollars as possible for the health system without risking downside.

David Rosenthal 1:58:18 With the lowest risk possible.

Ben Gilbert 1:58:20 Yes. So that is why the customer is picking them, and what is Epic trying to do? Epic is trying to win deals and stay in forever and achieve world domination. So they do these very interesting things that feel very customer-focused and are, but are also very valuable for Epic. Like, they'll recommend alternative third-party new pieces of software to their customers. Some new thing comes out, "Oh, it's twenty twenty. Telehealth suddenly is really important. Here's a HIPAA-compliant way to do Zoom. By the way, we're gonna start working on our own telehealth thing. It'll be out soon. You should feel free to use Zoom right now. By the way, when our new module comes out, it's just gonna be free to you. You're already a customer, it's just gonna be free to you." So you're certainly not gonna go around shopping for some new thing when you know that it's just gonna come for free to you, and you're not gonna take it right away, 'cause it's gonna be too bare bones. But at some point, it'll get good enough where you can say, "Oh, yeah, I'll just adopt the Epic version now, part of my enterprise-wide agreement." It's this kind of amazing bundling strategy that certainly reminds me of the Microsoft episode. [chuckles]

David Rosenthal 1:59:27 Yep, you're totally right.

Ben Gilbert 1:59:29 I think that's the right way to look at it. They're customer-obsessed because, in the long term, that is the right thing to do for Epic also, and this is not a new realization. There is a Jeff Bezos quote, and I just thought of it. I don't have it in my notes, but it's something about, in the long run, there is no difference between what the customer wants and what Amazon wants, and I distinctly remember him saying this in, like, ninety-nine or something, some really old video.

David Rosenthal 1:59:55 Yep.

Ben Gilbert 1:59:56 Epic is absolutely customer-obsessed, again, CEO, CIO of hospital systems, because if you deliver for them, you deliver for Epic in the long run.

David Rosenthal 2:00:06 Yep. Well, I mean, that's kind of like-

Ben Gilbert 2:00:08 That's, like, the goal of running a company. [chuckles]

David Rosenthal 2:00:09 ... theoretical underpinning of capitalism, right? [laughing]

Ben Gilbert 2:00:14 Right. [laughing] Right.

David Rosenthal 2:00:14 So all that to say, it is a very fascinating corporate culture and organization.

Ben Gilbert 2:00:22 Yes. All right, so listeners, if you know anything about this industry, you know that we haven't gotten to the important part yet.

David Rosenthal 2:00:28 [laughing]

Ben Gilbert 2:00:30 We've gotten to the Kaiser deal. That was a big deal. Gotten to moving to Verona. It's an important part to understand the culture, and it's like this cutesy thing that most journalists who write about the company kinda latch on to, "Oh, cool campus! Like, I should go take some pictures and write a cool story about campus." There's a whole big, crazy thing that happens as a part of the Great Recession, and some legislation that gets passed, transformative for the industry and causes a whole bunch of good and a whole bunch of bad to happen. But before we do that, this is a great time to thank good friend of the show, ServiceNow. ServiceNow has been working on something really exciting, CRM. Now, I know we've talked about ServiceNow as the AI operating system for the enterprise, but what you might not know is they've also quietly been building a billion-dollar-plus CRM business for years.

David Rosenthal 2:01:21 Yep, and part of the reason it's been hiding in plain sight is because ServiceNow has always been one single platform for all your company's data and operations. So it's a totally natural consequence that ServiceNow is also one of the best ways for the whole enterprise to access and interact with customer data.

Ben Gilbert 2:01:40 It's fascinating because ServiceNow approaches CRM from a completely different angle. Traditional CRM systems were built decades ago, primarily to record data and report on activities, not to take action or connect customer-facing teams across your business. ServiceNow believes the new age of CRM is not just about selling but also about delivering service across the whole totality of your organization.

David Rosenthal 2:02:04 Ah, you mean like delivering service now?

Ben Gilbert 2:02:06 Heyo. [laughing]

David Rosenthal 2:02:09 [laughing] Heyo. But yes, exactly. Think about it. If you have separate systems for sales, service, and operations, you end up with what ServiceNow calls human middleware, employees manually updating different systems with the same information.... But ServiceNow is all just one platform and one single source of truth.

Ben Gilbert 2:02:26 Ah, sounds like a familiar strategy.

David Rosenthal 2:02:28 Ah, kind of like what we've been talking about this whole episode. Yep, service or sales interactions automatically get updated everywhere on ServiceNow because it's just one platform. So since ServiceNow is already your enterprise operating system, shouldn't it also be your CRM?

Ben Gilbert 2:02:43 And timing is everything with the rise of AI agents. So let's say a customer contacts support about a delayed shipment. In traditional CRM, you might log the complaint, but the root cause remains hidden in your operation system. And with ServiceNow's modern CRM approach, AI agents can seamlessly access your data across departments, from inventory, to logistics, to consumer history, and not just track the issue, but actually resolve it. It's not just about managing customers, it's about connecting your entire business to serve them better.

David Rosenthal 2:03:11 Yep. So if you want to learn more about ServiceNow's modern approach to CRM, go to servicenow.com/acquired, and just tell them that Ben and David sent you.

Ben Gilbert 2:03:20 Okay, so we're coming through the two thousands here. We just got through the Verona campus. You know everything about Epic's culture now, or at least everything that we could discern from the outside anyway. And we're in this pretty interesting era in two thousand and six. We're in the Bush administration here in America, and Bush says in a State of the Union, "For all Americans, we must confront the rising cost of care, strengthen the doctor-patient relationship, and help people afford the insurance coverage they need. We will make wider use of electronic records and other health information technology to help control costs and reduce dangerous medical errors." Wide applause.

David Rosenthal 2:04:04 This is one of the craziest things to me in doing the research. The narrative out there, and certainly in as much as I knew or paid attention to any of this, was that Obamacare and the Obama administration were the ones who really pushed EMR adoption, and meaningful use, and all this stuff that we're really going to get into. Totally bipartisan, totally started in the Bush administration. [chuckles]

Ben Gilbert 2:04:27 Yeah, and just to give you a little look into how much the window changes of which side represents which party, the next paragraph, George [chuckles] W. Bush also says, "We will do more to make this coverage portable so workers can switch jobs without having to worry about their health insurance."

David Rosenthal 2:04:42 [laughing]

Ben Gilbert 2:04:43 I mean, it's crazy. If you're a Republican during the Obama era, talking about having coverage that's portable across employers, that's a scary thing to be talking about just four years later.

David Rosenthal 2:04:54 Yep. So funny.

Ben Gilbert 2:04:56 So you're starting to get these political winds of, "Hey, everyone wants a good system for electronic medical records. We think in the abstract, there will be a lot of good that comes from it."

David Rosenthal 2:05:10 Well, I think there's an even deeper motivation than that. In two thousand and six already, I think everybody knows in America, the current healthcare system sucks. Yes, there are great things about it, but overall, this is cost disease run rampant, a huge portion of GDP, massively inefficient. We want to try and fix it.

Ben Gilbert 2:05:31 How to fix it, we don't all agree on.

David Rosenthal 2:05:32 How to fix it, we don't know, but this promise of digitizing it and incentivizing EMR adoption is held forth as a promise that can deliver us from this problem.

Ben Gilbert 2:05:44 Right. It feels like a step in the right direction.

David Rosenthal 2:05:47 And at the time, only thirteen percent of healthcare facilities in America had an EHR system at all. This is a massively not digitized industry here in the mid-two thousands.

Ben Gilbert 2:05:59 Which I think there's some pushback on that thirteen percent. People would say, "Well, the definition of EHR just changed," so actually, there were a lot more than thirteen percent that had it, but that's the best data that we have, is that.

David Rosenthal 2:06:10 Fair enough.

Ben Gilbert 2:06:11 Okay, now, before we get to the actual legislation of what happened, there's one other concept to sort of have in your mind, which is interoperability, because this word comes up every time Epic comes up or any EHR comes up, and it's worth knowing sort of the buckets. So there's the first and easiest interoperability, which is Epic to Epic at a different hospital. I want to transfer my records from one hospital to another. They also have Epic. It's the same technology, that should transfer easily. Two is Epic to another EMR that's at a different hospital, Epic to Cerner, Epic to Meditech, Epic to Allscripts, Epic to some home-rolled system. You can imagine the technical reasons why that would be harder.

David Rosenthal 2:06:52 They have different architectures. All the other ones, arguably, except Meditech, don't have a single database, you know, et cetera.

Ben Gilbert 2:06:59 And standards have not been quite as standard in this industry as they are in SaaS software, easier B2B software mode. Now, before we get to the third category, let's just think about some of the incentives that are probably at play here. Epic transferring to themselves, fine, easy. A hospital transferring to a different hospital, you can imagine these places are competitors, they're businesses. They may not want to support that unless it's really in the patient interest, but they're at least going to be sensitive to it. Epic to another EMR at another hospital, well, not only the hospitals maybe don't want that, maybe Epic doesn't love that either.

David Rosenthal 2:07:35 Right. Interests are sort of aligned against this happening.

Ben Gilbert 2:07:37 Right.

David Rosenthal 2:07:37 Epic doesn't want that, and the hospital doesn't want that.

Ben Gilbert 2:07:40 And, you know, they talk about a lot of good reasons why, "Hey, actually, we do want that," but let's just call a spade a spade and say, there's no business reason why Epic would love for that to happen, other than, of course, it's in the patient's interest, and everybody really should do what's in the patient's interest because we all get care from multiple places. Then there's this third category, Epic to third-party application that wants to use data from Epic, or sit on top of Epic, or interoperate somehow with Epic. As a company, they have been very, very careful about this one over the years, and for good reason. I mean, you don't want patient data to leak. Epic has publicly referenced the fact that they have never had a Cambridge Analytica situation because they're very, very careful about sharing-... data with other application developers. But the result of this is that it's been much harder to integrate with Epic as an application developer than you would be used to in any other software category.

David Rosenthal 2:08:35 Yep, and again, very justifiable reasons why that should be the case. We're dealing with HIPAA data here.

Ben Gilbert 2:08:41 Yep.

David Rosenthal 2:08:42 But also massively in Epic's interest for that to be the case.

Ben Gilbert 2:08:46 It's very convenient as a strategy.

David Rosenthal 2:08:48 Yes.

Ben Gilbert 2:08:48 So as for that first scenario, Epic to Epic, it's actually awesome. They have this thing called Care Everywhere. Today, there are twenty million patient records exchanged daily. I used it as a part of prepping for this episode to join all my MyChart accounts across the three health systems I have in Seattle. It just seems to work pretty well. There's a great story of how it actually happened and how it came to be. Judy made the call personally that Care Everywhere wasn't a thing or shouldn't be a thing where their customers could pick and choose. If you were enabling it, it worked across all Epic customers, even if they were your local competitor. And so here's the story. One of the first customers to accept that new software that came with Care Everywhere unknowingly agreed to the interoperability feature, and he later admitted that he would have declined it if he realized that it was included in the contract that he was signing.

David Rosenthal 2:09:38 Yeah, this is the CEO of that health system, later admitted that, yeah.

Ben Gilbert 2:09:41 Of that hospital, and Judy described it as pure luck that Epic was actually able to move ahead. And so after that win, they then made it mandatory for all of their customers, and they retrofitted old versions of the software to support Care Everywhere. So every Epic customer in the US has it and can share with every other Epic customer in the US. So this is kind of their talking point of, "Hey, actually, we have lots of interoperability. We launched this thing called Care Everywhere. It shares millions and millions of records all the time."

David Rosenthal 2:10:12 Yeah, they talk about, "Hey, we are the biggest sharer of medical record data of anybody."

Ben Gilbert 2:10:17 Right. So coming into two thousand and eight, that's sort of the historical baggage that you should know about in Epic land, of they believe they're doing a lot of interoperability in the way that they like to do it. Almost no one is great at interoperability. I saw some transcripts of talking with hospital administrators who are like: Interoperability in this industry is just laughable, period. No one's incentivized to share with each other unless they absolutely have to, and it's not easy, and these are incredibly complicated systems, and there's lots of risk.

David Rosenthal 2:10:49 One CIO put it to me in an interesting way when I was chatting about this with him. Because it's patient data and health data, there's this sort of, we feel like interoperability should be a thing. You should be able to share your data everywhere and, like, sure, of course, you should. I don't want to discount that whatsoever. However, he was like: Imagine this were a different industry. Imagine this were the airline industry. Does United share their customer data with Delta?

Ben Gilbert 2:11:16 Even though it's customer-friendly to do so?

David Rosenthal 2:11:17 You know, even though it's the customer's data, no, of course not. They never would. So do I feel great about sharing my patient's data with my competitor down the street? No, of course not!

Ben Gilbert 2:11:29 Right. This is where you really start to feel the friction. I'm sure you're listening to this, and you're emotionally getting charged up at this point because you're feeling your inner capitalist think, "Well, it's a business. They should do the things that make sense for them as a business." And you're feeling your inner human being, who is part of a society that has your own health needs, thinking, "Well, maybe, but this thing shouldn't be subject to the bad parts of capitalism. Maybe this thing should function differently, and business interests... It feels yucky to me that business interests are governing the way that things get done." You should feel that tension because this is one of those bothies.

David Rosenthal 2:12:11 Well, that kind of describes the whole healthcare industry.

Ben Gilbert 2:12:14 Right.

David Rosenthal 2:12:14 Make no mistake, this is definitely a for-profit industry.

Ben Gilbert 2:12:17 Yes.

David Rosenthal 2:12:17 And it's highly regulated, and there's all these issues.

Ben Gilbert 2:12:21 Yep. Okay, so we're into the meat. Two thousand and eight, the great financial crisis happens. At some point, we should just do a whole episode on the great financial crisis and the collapse and the government bailouts and how we managed to figure out how to not collapse as a nation and a global [chuckles] ... We pulled out of it, and it was amazing. Took some time, but we pulled out of it.

David Rosenthal 2:12:42 But one element of pulling out of it, just like during COVID, is the government said, "All right, we need-

Ben Gilbert 2:12:49 Stimulus, baby.

David Rosenthal 2:12:50 -stuff. We need stimulus. We need programs that we can throw money at the economy."

Ben Gilbert 2:12:55 Interest rates go to zero, money out all over the place, turn on the printers, figure out how to get people doing productive stuff and reward them for it.

David Rosenthal 2:13:03 And there's the monetary policy stuff of interest rates to zero, but there is also the fiscal policy stuff of we need to helicopter money into the economy.

Ben Gilbert 2:13:11 So the question is, when you're going to helicopter money into the economy, you could mail everyone checks, and that happened during COVID.

David Rosenthal 2:13:17 Yep. Not a ideal way to do it.

Ben Gilbert 2:13:20 A more productive thing to do that calls all the way back to the Civilian Conservation Corps and the FDR sort of New Deal era is we wanna look for shovel-ready projects. What are things that we just kind of all agree on are good ideas for the country that should happen? And let's just pass some legislation that rewards the crap out of people with money, with free money, for doing the things that we think are a good idea anyway. The hope is you get this double whammy. You get the money distributed, which is just a goal. You're just trying to create jobs, trying to create economic motion, and you get something accomplished that is widely agreed upon to be a good idea. Oh, my gosh, a shovel-ready project right here, electronic medical records. Let's do it. Let's just figure out how to finally make that a thing. So the goals: one, fiscal stimulus to stimulate the economy after the Great Recession. Two, promote the adoption of electronic health records. Three, promote the use-... which is different. The actual use-

David Rosenthal 2:14:28 The meaningful use!

Ben Gilbert 2:14:29 -of electronic healthcare records. Not only do we want people to become users in your system that never log in, we want them logging in all the time using the stuff. And promote the adoption of interoperable standards so that providers could share patient data nationwide. These are the goals of the HITECH Act.

David Rosenthal 2:14:51 The 2009 Health Information Technology for Economic and Clinical Health Act.

Ben Gilbert 2:14:58 I love how they name these things.

David Rosenthal 2:14:59 I know. Which gets folded into the almost trillion-dollar American Recovery and Reinvestment Act.

Ben Gilbert 2:15:05 Yes. So the mechanics, in 2009, when the bill is passed, there is twenty-seven billion dollars available in direct incentive payments to hospitals that implemented electronic medical records. And if you include broader incentives, other health IT projects, data exchanges, training, the total actually comes to thirty-six billion dollars. This is amazing. Imagine if you're a software startup, and the government just starts mailing checks to your customers, not only for signing up and becoming a customer and paying you money, but then paying them even more for actually using your software. It's like the best thing that could happen if you're a software vendor.

David Rosenthal 2:15:44 This is the government going to your customers and saying, "Hey, I'm going to give you money, but it's like a dedicated use credit card. The only thing you can use [laughing] this money for, and you must use this money for, is to buy this software startup's products, and then you must also use them. And if you don't buy it and you don't use it, not only are you not gonna get the money, I'm going to penalize, and you're gonna have to pay me money."

Ben Gilbert 2:16:09 Yes, carrot and stick. So specifically, it amounted to forty-four thousand to sixty-four thousand dollars per physician in incentive payments over a few years for adopting it. Now, that actually went to the hospital, but it was basically you get paid for how many physicians are doing this.

David Rosenthal 2:16:25 Yeah, so imagine a huge system like Kaiser with eleven thousand physicians. It's a lot of money.

Ben Gilbert 2:16:31 Yes. HITECH contained the phrase "meaningful use," which is this crazy phrase where if you say meaningful use or you even say MU to anyone, it is a triggering term in this industry. First, meaningful use was a carrot, and then as a stick. So after the stimulus ran out, David, as you were saying, after about five years, health systems would face meaningful financial penalties for not meaningfully using health IT software like EHRs. There's a, uh, KFF article entitled Death by a Thousand Clicks that has a quote on this: "The EHR vendor community, then a scrappy two billion dollar industry, griped at the litany of requirements but stood to gain so much from the government's thirty-six billion dollar injection that it jumped in line. As Rusty Frantz, CEO of EHR vendor NextGen Healthcare, put it," and NextGen is one of the top ten Epic competitors, "the industry was like, 'I've got this check dangling in front of me, and I have to check these boxes to get there, and so, yeah, I'm gonna do that.'" For everyone that wants to just think this was the most amazing thing ever for Epic, yes, it was obviously net very good. They had to do a bunch of hoop jumping through to make sure that it was exactly the thing that the bill was gonna reward, and everybody in this industry had to make sure that they spent a bunch of development time and a bunch of reprioritization in the company to make sure that it was exactly the thing that HITECH was saying that it needed to be.

David Rosenthal 2:17:58 Yep. It's more nuanced than, "This is really good for Epic." Of course, it was really good for Epic, but really, it's that this was really good for the entire EMR industry. The competitive dynamics within the industry are almost like a separate kind of question.

Ben Gilbert 2:18:13 Well, okay, so who's it gonna benefit the most? Probably the most reliable one. If I wasn't gonna do this before, and now I just have a check dangling in front of me as a hospital to implement an EHR, I want the one with the integration that's a hundred percent gonna work. I'm taking no risk. And also, that Epic one, I think someone told me before that was an expensive one. Well, I guess it doesn't matter that it's expensive anymore 'cause it's free, so I'm just gonna buy the good one.

David Rosenthal 2:18:37 Yeah, right. It's effectively free.

Ben Gilbert 2:18:39 So Epic, by being the high-price, high-value vendor and the one that you could count on working with the lowest risk, they were gonna win in this situation.

David Rosenthal 2:18:49 Yeah, that's a great point. It's like you're getting a stimulus to buy a handbag, and you could get the Target one, or you could get the Birkin bag-

Ben Gilbert 2:18:57 [chuckles]

David Rosenthal 2:18:57 -and they're all free.

Ben Gilbert 2:18:58 And it's not exactly like that, but it rounds to that. It also is interesting 'cause it basically rewards the most reliable software, not necessarily the most innovative software. You end up not taking any risk in situations like this because you're not gonna get rewarded unless you actually stand the system up and then start getting meaningful use. So you end up with the one that's just going to work. So what did HITECH actually do? We'll go through sort of each of the goals. Did it accelerate usage? Absolutely. Market penetration of electronic healthcare records went from nine percent of hospitals in 2009 to ninety-five percent by 2014. That's insane. David, what other markets have you ever heard of that saw usage go from almost nobody to almost everybody in five years?

David Rosenthal 2:19:42 [chuckles] Uh, certain categories of software during the pandemic.

Ben Gilbert 2:19:47 Yeah, that's a good point.

David Rosenthal 2:19:48 I would imagine maybe Zoom during the pandemic is the closest thing.

Ben Gilbert 2:19:52 I mean, to be an Epic employee at this moment, where suddenly your category is just free for all your potential customers, it's crazy. And digitization was great for patients, even though, like a lot of doctors will complain about it. It is totally amazing to be able to message your doctor about something and pull up your own records electronically, as we talked about with MyChart.

David Rosenthal 2:20:12 Schedule your own appointments. You have all of the above. Manage your family's care.

Ben Gilbert 2:20:16 Yes, absolutely. Okay, so then the next goal, cost reduction. There are stats both ways on if EHRs generally reduce costs. We found one stat that claimed that costs in hospitals went down by ten percent with the introduction of EHRs. There's also arguments that the adoption of EHRs may actually have accelerated-... the ordering of unnecessary care, as well as increased billing codes for either more codes or higher dollar codes for the same procedures. So that's sort of the counterargument to, did it decrease costs in the system? The critics of EHRs say that basically, more stuff is getting ordered from exam rooms for the exact same procedures than was happening before, and frankly, that's the goal of, of hospital buying an EHR. I mean, part of it is revenue maximization.

David Rosenthal 2:21:06 Right. Again, these are commercial entities. You know, even though many of them may be nonprofit organizations or part of a university system or what have you, at the end of the day, this is revenue being generated by a hospital with a management team and with its primary staff being doctors and nurses who like to make money. The reason you go to medical school to be a doctor or a nurse is to get a good job and make a good living.

Ben Gilbert 2:21:35 And the prestige of it, and you wanna help people, but it's a high-paying job.

David Rosenthal 2:21:38 Yep.

Ben Gilbert 2:21:39 So there's a great read called An Epic Dystopia, and I will say, this article presents kind of a one-sided view of things.

David Rosenthal 2:21:45 This is the American Prospect article?

Ben Gilbert 2:21:47 Yep. But there's a quote, "One doctor, for example, stated her supervisor regularly contacted her and said something like, 'That appointment was a two. Don't you think it might be a three?'" And obviously, in this case, a three could bill more to insurance than a two, or someone else gave me a quote, "Hey, if you did X, almost certainly you did Y in that appointment. If you use those codes, you could charge more." And if you have a system, a computer system, versus not having one, it's more likely that you are billing for more stuff. That would be the counterargument to this mass implementation of EHR's saving costs for the system.

David Rosenthal 2:22:24 Yep.

Ben Gilbert 2:22:25 Data interoperability, not really. The legislation was prescriptive about meaningful use. It really wasn't prescriptive about data standards, that people talked about that's a goal of the legislation, but it's not like there were incentives for data interoperability the way there were for meaningful use, and so people follow incentives. The data interoperability did not really happen, which was very convenient for Epic, who had a whole system that they made themselves, and they didn't really need to integrate with anyone to make the software suite useful. So again, as the leading player in the industry and the one that can kinda do everything themselves, they didn't need interoperability, and it wasn't explicitly rewarded, so customers didn't prioritize it either.

David Rosenthal 2:23:07 And there is a fact pattern that opens Epic up, certainly to criticism here, which is that Judy was on Obama's Health IT council through all of this, which was advising the Obama administration on the HITECH Act.

Ben Gilbert 2:23:21 And other competitors had people on other committees, too. It's not like she was the only one with a voice in government.

David Rosenthal 2:23:26 Right, I was gonna say, that is a convenient fact that gets left out by a lot of people making that argument or that all the competitors, Cerner, Allscripts, et cetera, they were all on those councils, too.

Ben Gilbert 2:23:36 Yep. But let's just look at the data interoperability thing. It didn't happen, but it's happening more now, fifteen years later, and so at least we have the foundation of digital records so that as pushes and shoves happen to make it more interoperable, without operability, you can't have interoperability.

David Rosenthal 2:23:56 And I think for me, that's kinda my takeaway of the HITECH Act and meaningful use here, at least when it comes to the industry of EHRs. Yeah, anytime you've got government coming in and distorting a market, you're gonna get weird stuff happening, and especially anytime you have government coming in and regulating how products are to be developed and used-

Ben Gilbert 2:24:19 Yes

David Rosenthal 2:24:19 ... in a market, you're gonna get really messy stuff happening.

Ben Gilbert 2:24:23 Okay, so there were two really bad side effects here. One, by literally defining what is meaningful use, Congress not only accidentally designed the software and specified the features, but they also accidentally told doctors how they needed to do their jobs. And so doctors are, like, running around now, clicking nine things that they never needed to click before, some of which are poor implementation by their hospital system, some of which is because the software is really complex, but a lot of it is, like, just making sure that-

David Rosenthal 2:24:52 This is what the legislation [chuckles] requires.

Ben Gilbert 2:24:54 Yes, complies with meaningful use, so that the hospital then doesn't come and get hit with a financial penalty.

David Rosenthal 2:25:00 Yeah, this is sort of the most unfortunate aspect of meaningful use, I think.

Ben Gilbert 2:25:04 I think it's the second most. I think the biggest one is they increase the regulatory burden of practicing medicine, period. So now, since hospitals can face big financial penalties, there's all these mandatory fields and workflows everywhere forever, even after the stimulus runs out, and so it just generally increased the operational overhead of the whole industry. The thing to optimize for now is hitting the MU definitions legally, rather than the spirit, which has helped doctors and patients get more out of the system. And you end up with things like health systems merging with other health systems because the cost of doing business is higher, which is a preexisting trend, but it's certainly an accelerant. There's more overhead, more burdensome regulation, just more crap in the system, more waste.

David Rosenthal 2:25:48 So all that, unquestionably bad. At the same time, what's the alternative? We're gonna be in the paper-based system? Like, that's not good. [chuckles] At least we have adoption here.

Ben Gilbert 2:25:57 "At least we have adoption here," is what a lot of people have sort of chalked this up to. It's definitely better to be digital. Is this the best form of digitization that could have happened? No. Is digitization overall good? [chuckles] Yes.

David Rosenthal 2:26:12 [chuckles] And I think if you zoom way, way, way out, you give the most credit to the government and the legislators who created all of this. Was the goal actually a jobs program and an economic stimulus for the country? If that was the goal, A-plus. Lot of jobs got created because of this.

Ben Gilbert 2:26:32 Eighteen percent of our GDP's worth of jobs are in this field, so it's now a huge part of our society is people who work in medicine, for better or for worse.

David Rosenthal 2:26:43 And related fields to medicine, like IT administrators, you know, Epic administrators at hospitals. These are a lot of jobs, and these are a lot of good jobs.... And play it one step forward, these are all domestic American jobs, not dependent on imports, not dependent on manufacturing, that have created viable, great career paths for a lot of people in this country. From a policy standpoint, like, maybe not bad.

Ben Gilbert 2:27:11 Uh, uh, I hate it, David.

David Rosenthal 2:27:12 Oh, I'm not saying I love the idea of jobs programs. I'm just saying, if you zoom way out of what was the goal of government in doing this, did they succeed? If that was the goal, they succeeded.

Ben Gilbert 2:27:20 Yeah. It was good to create fiscal stimulus for that period of time where we really needed it. Should the government be in the business on a durable basis of using taxpayer funds to prop up industries and create and maintain a bunch of jobs in those industries? No, absolutely not. And so it's a very low bar, what you're saying. Did it stimulate the economy? I mean, mailing checks would have stimulated the economy. I look at this as like, yes, it stimulated the economy, and it had the free stapled coupon of we got some amount of electronic medical records, even though they're not interoperable, and even it's not the best system we possibly could hope for as a country, it's a better one than we would have had otherwise, and it kind of came for free with the stimulus checks.

David Rosenthal 2:28:02 Yep. So back to the Epic story here. [chuckles]

Ben Gilbert 2:28:06 Yeah. So what did Meaningful Use do for them? Well, interestingly, if you just take a step back and say: What is the byproduct of the government paying off a whole industry to adopt something new? What you're basically doing is pulling forward the future and saying, "This was all gonna happen eventually. We wanna make it all happen right now."

David Rosenthal 2:28:26 And to be clear, I think, especially after the Kaiser win, Epic was going to become the dominant player anyway, absent of Meaningful Use. They were starting to run the table on competition.

Ben Gilbert 2:28:37 So that's the question. They were starting to, but what you definitely do when you throw thirty-six billion dollars at the problem is you say, "We're gonna close the door on anyone that might become a dominant player after this." The current competitive set is now what we're dealing with, and we think the current competitive set is good enough, that this is shovel-ready enough, that we want the best ones to get implemented everywhere. These are stuck in there for multiple decades, so-

David Rosenthal 2:29:06 Yeah, the switching cost here is enormous.

Ben Gilbert 2:29:08 Yes, and, uh, that's a fair trade-off. I don't even think it was that intentional of a trade-off that they made by passing this legislation, but it is definitely true that a new EHR that may have been more theoretically innovative in some way, that could have come after HITECH, wasn't going to happen, at least for a long time.

David Rosenthal 2:29:28 Yep, because you pulled forward so many RFP processes to a single point in time.

Ben Gilbert 2:29:34 Yes.

David Rosenthal 2:29:34 And the majority of them chose Epic, which they probably would have anyway, but a lot of those processes would have happened in the future, at which point in time other competitors may have emerged.

Ben Gilbert 2:29:45 Right. There's no greenfield bidding for those theoretical future innovative competitors, that everyone's bidding against your current system.

David Rosenthal 2:29:54 I buy that.

Ben Gilbert 2:29:54 But that's kind of nitpicky, right? It's a little bit of like a, "For whom are we holding the door open?" So if you're looking for a smoking gun on regulatory capture, I think the right way to characterize this is as regulatory tailwind rather than regulatory capture. I don't think the folks at Epic loved it either. My impression is they felt like they were going to take this market, and now they had to do it in sort of this Frankenstein-style way.

David Rosenthal 2:30:21 Well, it definitely made the product worse.

Ben Gilbert 2:30:23 Yeah, it made the product worse. It increased burdens for everyone. You know, it made it more sure that they were gonna win the market because if something's gonna happen five years from now, or it could happen now, you'd rather it happen now, and it be certain.

David Rosenthal 2:30:36 But they certainly don't love it, that doctors have to check fifty-seven boxes on every patient visit.

Ben Gilbert 2:30:42 Right. So all this compliance burden and the software being, frankly, hard to use once it's-

David Rosenthal 2:30:48 Legislated. [chuckles]

Ben Gilbert 2:30:49 Yeah.

David Rosenthal 2:30:49 Product development by legislation, which, to be clear, isn't just Epic, it's all of them.

Ben Gilbert 2:30:54 And also just the complexity of software of this magnitude, with this many different screens and participants and all that. A big criticism is that it takes time away from patients. There was a 2016 study that showed that entering data into EHRs consumes about two hours of doctor time for every one hour spent providing hands-on patient care. There's all this other research around doctors now work eleven, twelve hours a day. They're, like, constantly responding to messages, which, again, is a hospital configuration thing. There's a way to triage messages.

David Rosenthal 2:31:26 Another downside to the HITECH Act and Meaningful Use is that before digitization and moving all this activity from hospitals into the EHR, there were a lot of regulations and guidelines that maybe weren't always followed, and that was sort of for the best in the hospital. So things like, it's supposed to be doctors themselves who put in orders for pharmacy, for meds, or for scans or stuff like that. But in the old world, before everything moved into the EHR, doctors were supposed to do it, but they would have their medical assistants do it. If you're seeing twenty patients a day, and a whole bunch of them need scans or meds or whatever, you can just be like, "Hey, medical assistant, do all this," and they can do it during the day.

Ben Gilbert 2:32:10 Yeah. "I'll sign them all later."

David Rosenthal 2:32:12 Exactly. But now once everything's digitized and in the EHR, that means that the rules have to be followed because they're tracked, right? And so that means that all of a sudden, doctors don't have as much help and slack in the system as they used to.

Ben Gilbert 2:32:26 Yeah, it's interesting. So this is the sort of thing that ends up contributing to doctor burnout.

David Rosenthal 2:32:31 Yep.

Ben Gilbert 2:32:31 But you do have to compare it to how it used to be. There was a great old study from 1970 that found that communications activities, such as managing physical records, accounted for thirty-five to thirty-nine percent of total hospital operating costs. That's not the doctor's time, but especially in the paper world, it was always a huge amount of cost and time from the hospital.

David Rosenthal 2:32:52 Right. You're shifting around the burden of this a little bit and creating more burden through all the Meaningful Use regulations, but this is not a new problem.

Ben Gilbert 2:32:59 ... You know who else doesn't love it? So in 2017, Obama himself told Vox that he felt that the high-tech legislation did not live up to what he wanted, and here's his quote: "The fact that there are still just mountains of paperwork, and the doctors still have to input stuff, and the nurses are spending all their time on this administrative work, we put a big slug of money into trying to encourage everyone to digitize, to catch up with the rest of the world, and that's been harder than we expected." The quote, I actually don't think it was at all about catching up with the rest of the world on digitization. I think we were a leader there, but if the hope was that we could somehow downgrade our costs to be in line with the rest of the world, that would've been great, and that did not happen.

David Rosenthal 2:33:36 Yep. One of the CIOs I talked to had a great quote on this. [chuckles] He said that, "Meaningful Use and the HITECH Act wildly succeeded at digitization of the industry. It did absolutely nothing on digital transformation of the industry." [chuckles]

Ben Gilbert 2:33:53 Hmm.

David Rosenthal 2:33:54 We digitized, but we didn't transform in the way that I think people were optimistically hoping for.

Ben Gilbert 2:34:01 That's interesting. And the good news is, that can still come. Now that all the records are digital-

David Rosenthal 2:34:07 Yes, now that we've digitized, yes.

Ben Gilbert 2:34:10 You actually can do interesting things with the data that you couldn't have done before.

David Rosenthal 2:34:14 And we'll talk about when we get to the end of the story in a couple minutes, the promise, at least right now, of AI and ambient AI in making a lot of this onerous process just disappear for humans. [chuckles]

Ben Gilbert 2:34:26 Yes.

David Rosenthal 2:34:27 So on the back of all of this, Epic continues to win epically. In 2011, they hit a billion dollars in revenue. They keep winning all the big systems that come up for RFP: Johns Hopkins, Cedars-Sinai, UCSF. List goes on, and on, and on. For Epic's competitors, they had always been merging, and consolidation had always been happening, but now with Meaningful Use being in place, consolidation really picks up. Which again, all of which is just gonna accrue to Epic's advantage because consolidation in this space means the products get more complex. They don't work as well altogether as a suite, and Epic's advantage just becomes all the more pronounced. So 2008, Allscripts merges with Mysys. 2010, that new Allscripts entity then merges again with EclipseSky. They keep on acquiring more smaller players. Today, that company is called Veradigm. 2011, Meditech acquires LSS Data Systems, and then in August 2014, one of the big ones that we've already alluded to happens, Cerner buys Siemens Health for one point three billion dollars.

Ben Gilbert 2:35:37 Which that starts the downward spiral for Cerner. That's my understanding.

David Rosenthal 2:35:42 Yes, I heard in the research that even today, in 2025, customers will still refer to themselves as either Siemens customers or Cerner customers. [chuckles] It's still not fully integrated.

Ben Gilbert 2:35:54 Meanwhile, I think post-Oracle acquisition, Oracle's trying to rewrite it all anyway.

David Rosenthal 2:35:59 Right, and that's, uh, not going well, which we'll come to later. [chuckles]

Ben Gilbert 2:36:03 Yep.

David Rosenthal 2:36:04 So this leads us right into the Department of Defense contract. [chuckles]

Ben Gilbert 2:36:10 The motherlode of all opportunities if you are an EMR.

David Rosenthal 2:36:14 VA contract. [chuckles] Oh, boy. The motherlode of all opportunities, or if you are an American taxpayer, the motherlode of everything that is wrong with governmental waste-

Ben Gilbert 2:36:25 Yep

David Rosenthal 2:36:25 ... in America. But before we get into that story, we have some happier and better news to tell you. [laughing]

Ben Gilbert 2:36:31 [chuckles] Yes.

David Rosenthal 2:36:32 And that is to thank longtime friends of the show, Crusoe.

Ben Gilbert 2:36:36 Yes. Thank you, Crusoe, for giving us a moment of levity here and a moment of excitement and optimism looking to the future. Crusoe is not just an AI cloud platform. They are actually reimagining how AI infrastructure gets physically built from the ground up.

David Rosenthal 2:36:50 Yep. In the past, we've talked about Crusoe's climate-aligned approach, powering their GPU data centers with stranded energy, but what's truly unique about Crusoe is that they're a fully vertically integrated AI infrastructure business. So Crusoe's founders, Chase and Cully, realized early on that in order to become the best AI cloud platform, you actually need to build the entire stack, from sourcing the energy to building the data centers and ultimately providing the end AI cloud service layer.

Ben Gilbert 2:37:16 So the best example of this is the giant one point two gigawatt AI data center that they are building in Abilene, Texas. They broke ground in just June of 2024 on an empty field, and now, within a year, they are about to turn on the first few buildings. Bringing on new capacity of this size in less than a year is crazy fast for the industry.

David Rosenthal 2:37:36 Yep, and to put that one point two gigawatts in perspective, if you take the entire data center capacity located in northern Virginia today, so where, like, seventy percent of the world's internet traffic flows through, all of that is only four point five gigawatts. So Crusoe's single AI factory in Abilene will be more than a quarter the size of what powers a huge portion of the internet today, and that's just one of their locations.

Ben Gilbert 2:38:01 Yeah. Crusoe handles all of the incredible complexity of building physical AI capacity so that their customers can just focus on innovation, not infrastructure, and they just announced two new services to do that. Their Managed Inference service frees developers from managing servers, and their AutoClusters service eliminates the operational burden of model training.

David Rosenthal 2:38:23 Yep. So when you're thinking about where to run your AI workloads, make sure you consider Crusoe. Because they operate and innovate at every single layer of the physical stack, Crusoe delivers unmatched price to performance, speed to market, and a platform that customers can rely on for years to come. It's an incredible company, and Ben and I are excited to be investors in their recent funding round, alongside NVIDIA, Founders Fund, and a whole slate of other great investors, too.

Ben Gilbert 2:38:46 That we are. To learn more, head on over to crusoe.ai/acquired. That's C-R-U-S-O-E dot A-I slash acquired, or click the link in the show notes, and when you get in touch, just tell them that Ben and David sent you. Okay, David, the DoD debacle.

David Rosenthal 2:39:01 The 2015 [chuckles] DoD debacle. So-... The Department of Defense decides that they are gonna bid out a global EHR contract for all of their hospital and healthcare across all branches of the military. Now, this is, at the beginning, just active duty US military, so separate from the VA system, which comes later, the Veterans Administration, all the veterans of the US military. This deal in 2015 is, up until this moment in time, the biggest healthcare IT contract of all time. It ends up being a $4.3 billion deal, so even bigger than the Kaiser deal. Whoo! It remains the biggest until two years later, when the VA contract does go out. That is a $10 billion- [chuckles] - deal. [laughing] Now, Epic, of course, bids on both of these contracts, and as you would expect, just like with Kaiser, it comes down to Epic and Cerner.

Ben Gilbert 2:40:01 But not directly, because just to add to the insanity of this system, it's basically impossible, unless you bid on government contracts all the time, to bid on a government contract directly. So you need to pony up with one of the companies that subcontract off of someone who makes their bread and butter all the time by contracting with the US government.

David Rosenthal 2:40:21 Yes, so they each choose their partners, and there's all sorts of drama around this. Basically, the knives come out on all sides. As we shall see with Cerner, if you win one or both of these contracts, I mean, this will keep your company going for years and years and years. So drama aside, Cerner ends up winning both of these contracts, the DoD and the VA. And sadly, in what will perhaps not shock you at all, both of these projects, despite being huge at the bidding phase, go massively over time and budget. It's really, really bad. So the DoD system, the active duty system, only just fully went live late last year in 2024. This contract got bid out in 2015, so that is a nine-year implementation process. The VA system is way worse. It is nowhere near fully live today.

Ben Gilbert 2:41:20 And Cerner won both of these?

David Rosenthal 2:41:21 Cerner won both of these. As a subcontractor, won both of these. The VA system was bid out in 2017. The latest announcement from the VA about this project is that it will be live at all VA sites by, this is a direct quote, "as early as 2031."

Ben Gilbert 2:41:39 What?

David Rosenthal 2:41:40 So even the most optimistic scenario that they're saying, which seems very unlikely-

Ben Gilbert 2:41:45 [scoffing]

David Rosenthal 2:41:45 ... is this is a 14-year project.

Ben Gilbert 2:41:49 The latest I had seen is that it's still not live. They actually gave an "as early as 2031"?

David Rosenthal 2:41:54 Now, it is live at a few sites. It's not like nothing has happened over the last decade, but [chuckles] oh, my God. I mean, if as an American citizen or watcher of America, you were disgusted by the whole meaningful use thing, if you are an American taxpayer, this is just beyond disgusting.

Ben Gilbert 2:42:12 So why? What took so long, or what made it so expensive?

David Rosenthal 2:42:16 I don't really know. I think it's a combination of a lot of things.

Ben Gilbert 2:42:19 Or I guess, what are the incentives?

David Rosenthal 2:42:21 Well, it's really unfortunate, but there's an old saying that you make more money on failed government contracts than successful ones, and I think that's probably the incentives that are applying here.

Ben Gilbert 2:42:36 Oh, 'cause as long as the contract doesn't end and you're still implementing, you can still keep finding more costs?

David Rosenthal 2:42:42 You can still keep getting paid. Now, I think it would be unfair to blame Cerner for this. I mean, maybe some of the blame lies on them, but they are a subcontractor to big government primes that are the GC here. And I mean, we talked about this on the Lockheed episode. This is just how the military industrial complex works now. So you've got the compounding layers of bureaucracy of the government, the military, [chuckles] EMRs generally, as we've talked about, like, this is just like a rat's nest of awfulness, of bureaucracy. And you know, you've got these multi-decade now projects with many billions of dollars of taxpayer dollars going into this, still not live. Just freaking brutal.

Ben Gilbert 2:43:28 Do you think Epic is glad they didn't win?

David Rosenthal 2:43:31 Well, so here's the thing. Epic, of course, was part of this process, bid on the RFPs, and I'm sure would've loved to have won them.

Ben Gilbert 2:43:37 'Cause even the $10 billion initial price tag before the overruns is twice Epic's revenue today. It's transformative for your business in the best case.

David Rosenthal 2:43:48 Yes, kinda like Kaiser was transformative for Epic back in the day.

Ben Gilbert 2:43:52 Yeah.

David Rosenthal 2:43:53 That said, talking to Epic customers and CIOs in the research [chuckles] they are, like, down on their hands and knees, thankful that Epic did not win this deal.

Ben Gilbert 2:44:02 'Cause Cerner just got dragged so into the process.

David Rosenthal 2:44:06 So into the muck here, and there were a lot of other compounding factors happening here. Like Cerner, like we've talked about already, was now post-Siemens. What'd you say? Thirty-six companies that had been acquired to-

Ben Gilbert 2:44:18 Yeah

David Rosenthal 2:44:18 ... get pulled together to make Cerner. Neil Patterson, the founder and CIO and longtime leader, right around this time, he gets cancer, and then he passes away in 2017. So your founder and your leader is passing away in the midst of this very complex process. After that, Cerner cycles through a whole bunch of different leaders over the next few years, and meanwhile, Epic, kinda unburdened by this DoD and VA shit show, for lack of a better word, they just keep winning deal after deal in the large system providers.

Ben Gilbert 2:44:51 And in their own way, I mean, this is a testament to how Judy thinks a company should be run. We're gonna stay extremely focused. We have a very particular playbook. We listen to customers. We meet our promises.

David Rosenthal 2:45:03 We're hardcore about our software engineering and our product architecture.

Ben Gilbert 2:45:07 When our customers find new use cases, we develop that software to-... She runs a company in an unconventional way, and that unconventional way is proving to be the right way to win this market.

David Rosenthal 2:45:19 Yep. So after the DOD deal, Epic wins Partners Healthcare in Boston, which is the sort of new entity of Harvard and Mass General, MGH, and, like, the original big research institution. They win all of the Mayo Clinic, all of their hospitals. That's one of the biggest contracts, again, [chuckles] outside the DOD craziness. They win Cambridge in the UK, they win Intermountain Healthcare. Recently, they win CommonSpirit Health. The list goes on and on and on. Twenty eighteen, Epic hits two point seven billion in revenue. They announce that they have all twenty of the top academic hospitals in the US News and World Report rankings, which is critical for them because winning the top academic hospitals means that all the new doctors and nurses that are coming through, getting minted by these institutions and trained, are all trained on Epic.

Ben Gilbert 2:46:08 I think they sell them a separate educational license, too. I think they treat the university hospital and the academic classroom as separate-- I mean, I'm sure it helps to be in the hospital, but I think you also buy it as a school.

David Rosenthal 2:46:21 I'm sure that's right, but also a huge part of medical education is practicing in the hospital.

Ben Gilbert 2:46:26 And I think now ninety percent of med school students train on Epic.

David Rosenthal 2:46:30 Yes, that is the current statistic. Twenty nineteen, Epic hits three point two billion in revenue, and then finally, December twenty twenty-one, as we've been alluding to, Cerner gets bought by Oracle for twenty-eight billion dollars. [chuckles] So Cerner, as we talked about, was and still is a big company. I mean, they've acquired all these companies over the years. There's a lot of revenue there, and they're big international, and they have the DOD and VA contracts ongoing, which is a lot of money coming in. So they're doing, maybe call it five and a half billion a year in revenue, maybe a little more, but that's been flat to declining since twenty eighteen. Oracle, again, acquired them in twenty twenty-one. Oracle now no longer reports Cerner's financials as a separate segment within the company, and they talk about Cerner and Oracle Health being a, quote-unquote, "headwind to overall growth and profitability for the company." There've been a lot of layoffs within Oracle Health. You know, maybe it's too early to tell, but I think this is probably one of Oracle's worst acquisitions of all time.

Ben Gilbert 2:47:36 Hmm.

David Rosenthal 2:47:37 You'd be hard-pressed to find an analyst who would say that this was a great acquisition by Oracle, [both laughing] shall we say?

Ben Gilbert 2:47:42 Yes, to put it lightly.

David Rosenthal 2:47:44 Meanwhile, this is all just great for Epic and totally reinforces Judy's whole thesis of company building in this space, and her whole story to customers of one single integrated platform that is hardcore about software development, that is one hundred percent customer-focused, that will never acquire another company, never go public, never get acquired. You can see why it's just this warm hug embrace to their customers [chuckles] out there.

Ben Gilbert 2:48:11 Yep. It becomes more and more different than everyone else in the market, the longer time goes on. And the lesson here, which is really interesting, is they started slow. They started really slow, and they did things in a way where they almost built up momentum for the future in a way that would pay off twenty, thirty years down the road, rather than inorganically trying to take shortcuts and pull the future too far forward into today. The first twenty years kinda looks like an unimpressive company because they were sorta just building strength, building muscle, growing the way that you need to grow in order to be as bulletproof as they are today.

David Rosenthal 2:48:54 That's such a good point, and I was trying to square in my mind earlier