EVERY SPOKEN WORD
150 min read · 30,055 words- 0:00 – 5:27
Epic Systems in a nutshell: the quiet giant behind MyChart
- BGBen Gilbert
The answer is somewhere in the middle.
- DRDavid Rosenthal
Well, you texted me last night that you've made it to Singapore.
- BGBen Gilbert
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.
- SPSpeaker
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?
- BGBen Gilbert
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.
- DRDavid Rosenthal
I'm David Rosenthal.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Indeed, whether you know it or not.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Almost undoubtedly.
- BGBen Gilbert
Well, all right then, spoiler alert, listeners. [laughing]
- DRDavid Rosenthal
[laughing] We'll discuss that at the end.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Ooh!
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yep, and if you wanna understand the system, you have to understand Epic.
- BGBen Gilbert
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.
- DRDavid Rosenthal
This is gonna be-
- BGBen Gilbert
A night of absurdity.
- DRDavid Rosenthal
An incredible night.
- BGBen Gilbert
Yes. All right, listeners, before we dive in, we want to briefly thank our presenting partner, J.P. Morgan Payments.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- 5:27 – 15:32
Judy Faulkner’s origins: math genius, early programming, and Wisconsin’s ‘Computers in Medicine’
- DRDavid Rosenthal
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.
- BGBen Gilbert
That's true, and Taylor Swift.
- DRDavid Rosenthal
And Taylor Swift, that's right. Fertile ground for entrepreneurs-
- BGBen Gilbert
[laughing]
- DRDavid Rosenthal
... there in the, uh, Delaware River.
- BGBen Gilbert
And DuPont. So much great American entrepreneurship in that area.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Yep
- DRDavid Rosenthal
... that would enable Microsoft, and Epic, Intel, and all of this.
- BGBen Gilbert
And for a long time, the early pioneers of electronic healthcare records were hardware companies.
- DRDavid Rosenthal
Yes, Lockheed, GE, Siemens.
- BGBen Gilbert
Yes, Lockheed was a vendor to hospitals.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Could be.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Hmm
- DRDavid Rosenthal
... 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]
- BGBen Gilbert
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-
- DRDavid Rosenthal
Nobody knows this
- BGBen Gilbert
... this is not cited anywhere. So how did you find your way to it?
- DRDavid Rosenthal
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.
- BGBen Gilbert
So cool. All right, so you've got entrepreneurial DNA. You've got sort of peace-oriented, divergent-thinking DNA.
- DRDavid Rosenthal
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?
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Universities didn't have computer science departments until this point in time. Judy is intertwined with the beginning of computer science as a field.
- BGBen Gilbert
Makes sense.
- DRDavid Rosenthal
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.
- BGBen Gilbert
'Cause she has an artistic side, too. For as mathy as she is, she also has a hyper-creative streak.
- 15:32 – 28:51
Why medical records became a software problem: paper chaos, standards, and Medicare/Medicaid
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
And I think they had dated back to attempts at unifying them or creating standards all the way into 1912.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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]
- BGBen Gilbert
Mm.
- DRDavid Rosenthal
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]
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
I'm the doctor. I know best. I'll figure out what delivers the best care.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Ah!
- DRDavid Rosenthal
... funding all this. Call back to our Standard Oil episodes.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Oh, all right! Educate me here.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yeah, mostly the paradigm in healthcare is you pay for service. You go to the doctor, you pay the doctor.
- BGBen Gilbert
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.
- DRDavid Rosenthal
[laughing] Markets always find a way.
- BGBen Gilbert
Yeah, right? So as soon as this happens, unions go, "Oh, this is awesome. Our people can make more money? Amazing."
- DRDavid Rosenthal
We're gonna make capital pay for our health plans now, yeah.
- BGBen Gilbert
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.
- DRDavid Rosenthal
So this is where the whole origin of pre-tax stuff versus post-tax stuff in your paycheck comes from.
- 28:51 – 32:57
The first EHR era: COSTAR, MUMPS, and MEDITECH’s foundational influence
- DRDavid Rosenthal
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-
- BGBen Gilbert
Billing
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
Even then.
- DRDavid Rosenthal
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]
- BGBen Gilbert
[chuckles] Which is amazing that there's a medical-oriented programming language called MUMPS.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Uh, I don't know about the industry, but for Epic-
- DRDavid Rosenthal
Oh, yeah
- BGBen Gilbert
... which I guess now for the industry.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Right. You don't want collisions to create data loss or something like that. This is people's lives we're dealing with.
- DRDavid Rosenthal
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?
- BGBen Gilbert
Name's taken.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep. Pretty amazing.
- 32:57 – 37:07
Chronicles is born: Judy’s ‘single database’ epiphany and Epic’s core architecture
- DRDavid Rosenthal
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.
- BGBen Gilbert
The Holy Grail.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Is it actually the same code?
- DRDavid Rosenthal
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-
- BGBen Gilbert
Directly talks to.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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?
- DRDavid Rosenthal
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.
- BGBen Gilbert
So these are terminals. I mean, these are eighty-character wide, text-only terminals.
- DRDavid Rosenthal
Yes. Green screens, Unix terminals.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yep, that's the product.
- BGBen Gilbert
Sweet. Long way to go.
- DRDavid Rosenthal
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?
- BGBen Gilbert
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"?
- 37:07 – 51:28
Founding Human Services Computing (1979): tiny capital, no VC, and the MEDITECH playbook
- DRDavid Rosenthal
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.
- BGBen Gilbert
Amazingly generic.
- DRDavid Rosenthal
The future Epic Systems. But before we tell the story of how Human Services Computing became Epic-
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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]
- DRDavid Rosenthal
Human Services Computing.
- BGBen Gilbert
Human Services Computing.
- DRDavid Rosenthal
Really rolls off the tongue.
- BGBen Gilbert
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?
- DRDavid Rosenthal
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.
- BGBen Gilbert
Which wasn't it, like, seventy grand to buy a computer?
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yeah, we're right before the PC era here.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yeah. Minicomputers, they were like the Netbooks of their time, you know? [laughing]
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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]
- BGBen Gilbert
Another seventy thousand of new on top.
- DRDavid Rosenthal
Yep, post-money of $140,000. [chuckles]
- BGBen Gilbert
Taking fifty percent dilution from your seventy K fundraise, and then you also have this $70,000 loan.
- DRDavid Rosenthal
Yep, and those were the only primary investors ever in- [chuckles]
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
There are still some floating out there.
- 51:28 – 1:02:31
From Epic’s name to real traction: Resolute billing + EpicCare GUI change the game
- DRDavid Rosenthal
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?
- BGBen Gilbert
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.
- DRDavid Rosenthal
Mm-hmm. Yep.
- BGBen Gilbert
Does that kinda jive with your understanding?
- DRDavid Rosenthal
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.
- BGBen Gilbert
Right. It took, um, a decade to get to a million and a half dollars in revenue.
- DRDavid Rosenthal
Yes.
- BGBen Gilbert
That's kind of a slow-growing startup.
- DRDavid Rosenthal
A great software business for a local entrepreneur in Madison, Wisconsin, I think is how you would describe that.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Mm
- DRDavid Rosenthal
... 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."
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Hmm. I would argue there's two big reasons Epic wins today. One is reliability.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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!
- BGBen Gilbert
That's all you're trying to do as a hospital. [chuckles]
- DRDavid Rosenthal
That is what you are looking for. That is the product.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
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]
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Certainly. Epic definitely says that that is true.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yes. So the initial launch of EpicCare, the GUI EMR application, was only for ambulatory, only for outpatient settings.
- BGBen Gilbert
Not overnight stays.
- 1:02:31 – 1:10:28
MyChart arrives shockingly early (2000): the patient portal that goes viral
- DRDavid Rosenthal
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.
- BGBen Gilbert
Right.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Right. Right around the dot-com bubble.
- DRDavid Rosenthal
Yeah. Crazy! It's absolutely wild that they launched this and that their customers launched this. [chuckles]
- BGBen Gilbert
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.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Mm
- DRDavid Rosenthal
... 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.
- BGBen Gilbert
Some foreshadowing here of how doctors are gonna spend their time in the future. [chuckles]
- DRDavid Rosenthal
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]
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yes, and the president is running this patient web project.
- BGBen Gilbert
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?"
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
It was a little bit like Zillow in real estate.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
... And now you can automatically fill that in with another patient on the wait list.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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."
- BGBen Gilbert
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.
- DRDavid Rosenthal
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-
- BGBen Gilbert
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.
- DRDavid Rosenthal
Like healthcare.
- BGBen Gilbert
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.
- 1:10:28 – 1:33:12
Kaiser Permanente’s RFP (2003): the deal that makes Epic the gold standard
- DRDavid Rosenthal
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."
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
It's the closest thing that you can sort of have to a single payer here in the country.
- BGBen Gilbert
Hmm.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Gotcha.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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."
- DRDavid Rosenthal
This is the operating system-
- BGBen Gilbert
Yes
- DRDavid Rosenthal
... for this industry.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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]
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yes. So in two thousand and three, Kaiser puts out an RFP for a new, again, quote, unquote, "EHR," but really new nervous system-
- BGBen Gilbert
Yep
- DRDavid Rosenthal
... for all of Kaiser, and Epic wins the deal.
- BGBen Gilbert
And Epic was a little company. Just a few years before, they were a fifty-million-dollar company.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Which is a real economic impact, by the way.
- BGBen Gilbert
For sure.
- DRDavid Rosenthal
But it's not like Epic got $4 billion out of this.
- BGBen Gilbert
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.
- DRDavid Rosenthal
[chuckles] Yeah, it's funny. We should start talking about the size of Acquired and, you know, like, uh, [chuckles] this-
- BGBen Gilbert
Fourth and fifth degree, uh, tertiary impacts.
- DRDavid Rosenthal
We are a billion-dollar business.
- BGBen Gilbert
Just think about-
- DRDavid Rosenthal
Yeah. [chuckles]
- BGBen Gilbert
... all the business that our customers do-
- 1:33:12 – 1:52:15
The Verona campus and the ‘software factory’ culture: whimsy + ruthless execution
- BGBen Gilbert
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?
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yes.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yep, especially in this era. It was sort of pre-Googleplex. It was kind of the fairy-tale tech campus.
- DRDavid Rosenthal
Yes, it was Google before Google.
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
And she's like: "This is like a college campus here, the atmosphere that you've got."
- BGBen Gilbert
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.
- DRDavid Rosenthal
So Judy comes back and basically copies the campus strategy of Microsoft almost exactly.
- BGBen Gilbert
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-
- DRDavid Rosenthal
Yeah, that was well before they were a half-a-billion-dollar-a-year revenue company.
- BGBen Gilbert
Yes, exactly.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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?
- DRDavid Rosenthal
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.
- BGBen Gilbert
Yes, like a Wisconsin lodge.
- DRDavid Rosenthal
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] -
- BGBen Gilbert
Yes
- DRDavid Rosenthal
... conference room. And so now they're building this new campus, and Judy's like: "Oh, well, let's take the lodge idea and-
- BGBen Gilbert
Really blow it out
- DRDavid Rosenthal
... maximize it."
- BGBen Gilbert
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.
- DRDavid Rosenthal
I think it's even more on the nose on that. They hire two architecture firms. One is that.
- BGBen Gilbert
Uh-huh.
- DRDavid Rosenthal
And then they also hire the firm that built a lot of the Redmond campus for Microsoft.
- BGBen Gilbert
Oh, is it really?
- DRDavid Rosenthal
Yep. [chuckles]
- BGBen Gilbert
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.
- DRDavid Rosenthal
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]
- 1:52:15 – 2:12:21
Customer obsession as strategy: dedicated support teams, ‘BFFs,’ and standardization leverage
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yep. Customers are, like, always number one, everything. [chuckles]
- BGBen Gilbert
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?
- DRDavid Rosenthal
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]
- BGBen Gilbert
Wow, that's crazy.
- DRDavid Rosenthal
Yes. I've never heard of any other company that does stuff like this.
- BGBen Gilbert
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.
- DRDavid Rosenthal
And we're happy to wait.
- BGBen Gilbert
We're happy to wait until you're ready to work with us, and they actually have the leverage to pull that off now.
- DRDavid Rosenthal
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]
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Altruistic capitalism does feel like ultra-competitive, ultra value-maximizing, altruistic capitalism is kind of like how I would describe the company.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Good point.
- BGBen Gilbert
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.
- DRDavid Rosenthal
With the lowest risk possible.
- BGBen Gilbert
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]
- DRDavid Rosenthal
Yep, you're totally right.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yep.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yep. Well, I mean, that's kind of like-
- BGBen Gilbert
That's, like, the goal of running a company. [chuckles]
- DRDavid Rosenthal
... theoretical underpinning of capitalism, right? [laughing]
- BGBen Gilbert
Right. [laughing] Right.
- DRDavid Rosenthal
So all that to say, it is a very fascinating corporate culture and organization.
- BGBen Gilbert
Yes. All right, so listeners, if you know anything about this industry, you know that we haven't gotten to the important part yet.
- DRDavid Rosenthal
[laughing]
- 2:12:21 – 2:34:27
HITECH & Meaningful Use (2009): stimulus that digitizes healthcare—and creates backlash
- BGBen Gilbert
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.
- DRDavid Rosenthal
But one element of pulling out of it, just like during COVID, is the government said, "All right, we need-
- BGBen Gilbert
Stimulus, baby.
- DRDavid Rosenthal
-stuff. We need stimulus. We need programs that we can throw money at the economy."
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
So the question is, when you're going to helicopter money into the economy, you could mail everyone checks, and that happened during COVID.
- DRDavid Rosenthal
Yep. Not a ideal way to do it.
- BGBen Gilbert
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-
- DRDavid Rosenthal
The meaningful use!
- BGBen Gilbert
-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.
- DRDavid Rosenthal
The 2009 Health Information Technology for Economic and Clinical Health Act.
- BGBen Gilbert
I love how they name these things.
- DRDavid Rosenthal
I know. Which gets folded into the almost trillion-dollar American Recovery and Reinvestment Act.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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."
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yeah, so imagine a huge system like Kaiser with eleven thousand physicians. It's a lot of money.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
Yeah, right. It's effectively free.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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-
- BGBen Gilbert
[chuckles]
- DRDavid Rosenthal
-and they're all free.
- BGBen Gilbert
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?
- DRDavid Rosenthal
[chuckles] Uh, certain categories of software during the pandemic.
- BGBen Gilbert
Yeah, that's a good point.
- DRDavid Rosenthal
I would imagine maybe Zoom during the pandemic is the closest thing.
- 2:34:27 – 2:55:38
Post-MU consolidation and the government-contract contrast: Cerner’s DoD/VA quagmire vs Epic’s focus
- DRDavid Rosenthal
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.
- BGBen Gilbert
Which that starts the downward spiral for Cerner. That's my understanding.
- DRDavid Rosenthal
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.
- BGBen Gilbert
Meanwhile, I think post-Oracle acquisition, Oracle's trying to rewrite it all anyway.
- DRDavid Rosenthal
Right, and that's, uh, not going well, which we'll come to later. [chuckles]
- BGBen Gilbert
Yep.
- DRDavid Rosenthal
So this leads us right into the Department of Defense contract. [chuckles]
- BGBen Gilbert
The motherlode of all opportunities if you are an EMR.
- DRDavid Rosenthal
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-
- BGBen Gilbert
Yep
- DRDavid Rosenthal
... in America. But before we get into that story, we have some happier and better news to tell you. [laughing]
- BGBen Gilbert
[chuckles] Yes.
- DRDavid Rosenthal
And that is to thank longtime friends of the show, Crusoe.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
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.
- DRDavid Rosenthal
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.
- BGBen Gilbert
And Cerner won both of these?
- DRDavid Rosenthal
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."
- BGBen Gilbert
What?
- DRDavid Rosenthal
So even the most optimistic scenario that they're saying, which seems very unlikely-
- BGBen Gilbert
[scoffing]
- DRDavid Rosenthal
... is this is a 14-year project.
- BGBen Gilbert
The latest I had seen is that it's still not live. They actually gave an "as early as 2031"?
Episode duration: 3:57:01
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