Transcript: This is Robin "Roblimo" Miller from NewsForge. We're on the phone with Dr. Scott Shreeve, M.D., a founder of Medsphere, and Dr. Larry Augustin, whose doctorate is a PhD (in electrical engineering) and is now, as of the 25th of January, the chairman of the board for Medsphere, and is also coming in as Medsphere gets a large round -- $7.5 million worth -- of venture financing. And so, good afternoon, gentlemen.... Download the original audio -- .
Scott: Thanks Robin, it's good to be with you.
Larry: Good afternoon, Robin. Hey Robin, just to clarify, I'm coming in as CEO of the company and...
NewsForge: Coming in as CEO of the company...
Larry:Coming in as CEO of the company, and our chairman here is Dr. Ken Kizer.
NewsForge: Ah okay.
Larry: And Dr. Kizer is the former undersecretary of Health at the Veterans Administration.
NewsForge: And he joined the company?
Larry: And Scott, he's been with the company for a while.
Scott: Yeah, he's been with the company since the founding...
NewsForge: Okay. Well, Scott Shreeve... Scott and I met... well, Scott and I met when Medsphere was just a gleam and a couple of guys and an incipient office.
Scott: (laugh) Is that right?
NewsForge: And yet you folks are working with, as far as I know, the oldest, most mature current open source project, are you not?
Scott: That's correct! VistA actually had its origin in the MUMPS database language which actually had its origin in the late 60s. VistA was started as a project in the late 70s, actually in Oklahoma City, when it got its birth, and it was first endorsed by the V.A. in 1982.
NewsForge: So wait a minute. Back in the 60s when Richard Stallman and I were both still in high school?
Scott: When you were just a gleam in the open source world's eye, that was it.
NewsForge: And not even free software had been invented.
NewsForge: And it's running what, 170 VA hospitals now?
Scott: Yeah, currently it's about 170 VA medical centers, about 850 associated clinics and another 500 or so related healthcare facilities, about 1300 in total.
NewsForge: So that would make it not just open source's, but the world's most used medical practice and hospital management software, wouldn't it?
Scott: Arguably it would be. The Veterans Administration is the largest health care organization in the United States and arguably the world, and this software is deployed uniformly throughout the VA system.
NewsForge: Not only that, it's spreading worldwide. Last week, I was talking with people who are doing MyVistA from Malaysia so it's spreading there, as well.
Scott: That's correct! This application obviously has worldwide implications developed in a government setting. And as you know, Robin, governments throughout the world, governments are primarily involved with healthcare delivery in other nations, and so nations like Finland actually adopted VistA before the VA did throughout their system. It's also been deployed in Egypt, translated in Arabic, in Germany, and in several other smaller deployments in Nigeria and throughout that part of the world.
NewsForge: And Medsphere is doing what? You're working as the installer, as the consultant, the ISV as it were?
Scott: Yes, since we... you know, Medsphere has taken this public domain-slash-open source project, this code base that has been out there for 20 years and actually put together the expertise and experience as you create a commercially viable product that's supported by our team and staff, both in the deployment and also in the ongoing maintenance and support.
NewsForge: Where was your first actual Medsphere installation?
Scott: Our first implementation is actually in the Midwest. There was a state organization that came to us, interested in improving the quality of care they provided for their patients. There were some patient-safety issues, there were standardization of care issues, and they were looking for a healthcare application that could help them improve in all those areas. Given the nature of this organization, they are chronically underfunded. And as they went out to look at healthcare information systems, they were struck by the fact that while the technology is out there, it was just way outside their grasp, given the financial dynamics of the current market offerings.
NewsForge: I was hearing last week that just a billing module -- a billing module for the most popular proprietary hospital management system -- just a billing module runs $700,000 in licensing. Is that about right?
Scott: That would be accurate. That's correct.
NewsForge: And your licensing fee is?
Scott: We actually don't have a licensing fee, as part of the initial offering...
NewsForge: So, so wait a minute. You're telling me that just on the billing alone, because these people were talking about 5 and 6 million dollars in licensing for a minimal small hospital package in Malaysia, they were talking about... So you're saying that's a saving right off the top.
Scott: Yes. That's one of the great benefits of open source... that obviously some of those costs that traditionally had to be recouped in the R&D can actually be displaced and not borne by the customer.
NewsForge: How do your installation and maintenance fees compare to your proprietary competitors?
Scott: What we've actually done on the installation and maintenance is that, that actually requires a certain number of bodies and expertise and knowledge to continue to support, not only at the customer help desk level but also in the ongoing maintenance of the code, in terms of versioning, patch management and so forth. And so our fees to charge for that service are actually slightly less than the market competitors but not dramatically reduced as is our licensing fee structure.
NewsForge: What about reliability? What about utility? Obviously, you have a proven product. Have you had any comparables or questions, or have you had any comparison installations?
Scott: What's interesting is that as people first take a look, just to step back a little bit, if you look at health care IT in general, there has been a groundswell of interest and movement and momentum within healthcare IT, from dynamics related to patient safety, healthcare quality, clinical efficiency and so forth.
So as people have gone up to look at implementing these systems they've been struck by the cost and the challenge of actually acquiring them. That's actually led people to look at alternatives, and obviously, people have turned to the VistA information system which is currently deployed at the largest healthcare organizations in the United States, and this software happens to be developed by the federal government and therefore has been in the public domain for about 20 years.
And so, again, what Medsphere has done is to take this and to create a commercially viable product. As we go out and install this application, we're finding that we're able to significantly we're able to put this at a price point that makes it extremely attractive to the customer, and to go ahead and continue to maintain and serve that. As people start to look at return on investment, its significant savings could be on an order of magnitude over the current proprietary products.
NewsForge: Order of magnitude.
NewsForge: Now, is this applicable only to hospitals and clinics? What about individual and group (medical) practices?
Scott: It's a great question. One of the interesting things about the VA system is that, not only is it the largest system, but it also has one of the greatest varieties, in terms of the queue care, ambulatory care, and long-term care settings. So, within the VA system, this application has been utilized at a single provider's practice all the way up to a 1500-bed academic medical center.
NewsForge: So the next time I'm talking to Dr. Craig Hoffman of Healthcare America, the internist I patronize all too frequently, and he says, "Well, what should I do as far as an open source and hopefully Linux-based solution for my practice?" Should I give him your phone number?
Scott: Our initial target market, Robin, is actually the small-, the medium-sized hospital market. As we've looked at the business model and the opportunity that we're pursuing, we felt that the most underserved area that was ready and prepared for this application was actually the small- to medium-sized hospital market. This is typically a hospital, a community hospital, often times in a rural setting, typically between a hundred to 500 beds and about half the hospitals in the United States fall in that category.
NewsForge: Do you think you'll ever be able to talk to somebody like Hoffman's group practice -- which has I believe about 30 physicians and a radiology and blood lab?
Scott: Yeah, absolutely. As I mentioned, our initial target focus is to go into that small-, medium-sized hospital market. We have to realize that that hospital, in those settings, typically is fed by all these varieties, different clinics in those community settings, whether it's a five percent physician group or a thirty percent physician group, they all feed into the hospital. So our thought is that if we can actually install the system and the software at that nexus of care at the hospital, that we would then have the opportunity to go back to the individual physicians who are using the system at the hospital and want it for their own clinical information system in their offices.
NewsForge: But what happens to that physician or group of physicians who just calls you, the hospital isn't on board. They just call you out of the blue. Are you ready for them yet?
Scott: Actually, we've chosen to be very selective about how we go to market and we've chosen to go after a certain size, small- to medium-sized hospital.
At this time we've chosen one office space project to go after to get experience in that marketplace, and this is a clinic system in the northeast part of the United States that actually has 23 different clinics, of varying sizes from 3 physicians up to 10 physicians, that we felt that this project was large enough that we could actually demonstrate the utility of OpenVistA in that setting as opposed to going to individual physician offices.
NewsForge: Okay. So you're still concentrating then on people with some scale.
Scott: Right. It's important to point out that, well, VistA can scale to the very smallest offices up to the largest, we made a business decision to concentrate as we kind of initially get a toe-hold in the market to go after the sweet spot -- which we again feel is the small- to medium-sized hospital.
NewsForge: Do you think other people should be repackaging -- I know VistA's highly modular -- should be repackaging or packaging some of the more practice-oriented and clinic-oriented modules for smaller practices?
Scott: Absolutely. Of interest, the federal government has also recognized the opportunity to work with VistA as a standard and a common foundation, I guess, which to bill from. CMS has been working with the VistA software to create what they're calling VistA Office EHR.
NewsForge: What is CMS?
Scott: CMS is the Center for Medicare and Medicaid Services. And they pay about... about 45 percent of all healthcare dollars flow through CMS. And as one of the largest payers of healthcare services, they wanted to, they want to exert their influence on the market.
NewsForge: So, wait a minute. What we're saying is, this is all compatible and your file formats and such are absolutely compatible with Medicare and the other big government reimbursers.
Scott: Well, one of the things that this project (CMS) is endeavoring to do is to actually take this standard, raw form of VistA and to package it up so that the small individual Dr. Hoffmans of the world would actually be able to take a CD, download it in their office and actually be able to use it. As part of that project, they're also incorporating some of the quality metrics and also some of the reimbursement technologies that are required to actually extract the clinical data to translate that into financial data that can then be billed out.
NewsForge: Back to Medsphere, I mean I would assume that for your hospital clients that you do have the reimbursement software integrated, correct?
Scott: Yeah, absolutely. One of the, again, the missions of Medsphere is to take this raw technology and to actually convert it into a commercially viable product. And one of those things that we have to do to make it a commercially viable product is to integrate it with the financial system. Most healthcare organizations they have to have a fairly robust financial system to stay in business, but what we're finding is about 90 percent of those same hospitals do not have anything on the clinical documentation side. So what we find that everywhere we go, is that most of these hospitals already have a financial system that needs to be integrated with the VistA system.
Of interest, the VA has not had to bill like a private sector hospital. Therefore, they've never really started with a financial system, they started first and focused on the actual clinical information system. Of interest, about 90, 80 percent of all physicians in the United States rotate through VA at some point during their training. And that's exactly how I was exposed to the system and given that breadth of exposure. As we take this out to market, many people are familiar with the VistA system.
NewsForge: So that cuts a lot of training both in the public, smaller public hospitals and also in private hospitals, I would assume.
Scott: Yeah. What's interesting is, again, the whole concept is to reuse what's already there, whether that be the software itself or the actual experience of the users. Essentially, we have a huge installed base in terms of knowing the number of facilities using this application, also the number of physicians who have been exposed to this. This latent group of physicians who have been seeded throughout the country, with exposure and knowledge of VistA.
And what's of greatest interest and importance is that, almost uniformly, if you ask those physicians about their experience with VistA, it'll be a positive one. There are several interesting articles documenting the ability of these physicians to quickly grasp the technology to work with it and then to actually have it help them improve the care they provide their patients.
NewsForge: Let's talk about money for a minute now. Obviously, the press release you've recently sent out, the headline says, "Medsphere raises $7.5 million in latest round of venture financing."
That's exciting. Somebody, apparently, as your capital partners and your existing investors, Thomas Weisel Venture Partners and Wasatch Venture Fund, believe that there is money to be made here. I assume you do too since (laughter) you've been working on this as I recall, originally with no salary (laughter). I remember... I remember, wasn't I buying you drinks because you (laughter) were worried about your expenses at one point? (laughter)
Scott: Robin, your memory serves you too well I think in this case. But yeah. What's interesting again is that this whole rise of open source, I mean there are so many convergence of trends that are enabling this opportunity.
First of all, within healthcare: The fact that there's a drive towards improved quality. And that's coming about because of a result of some patient safety issues that were becoming more apparent. There's the total waste and ineffiencies in healthcare also driving these improvements. And people view healthcare IT as an enabler of change to get to that goal of quality. At the same time, we're having this whole convergence on the technology infrastructure side with Linux rising to a standard of acceptability and the model of open source coming into prominence, and companies like Red Hat and MySQL actually developing sustainable business models.
And what we found was interesting, Robin, is because of our unique experiences of being physicians and also people who are involved in technology... is that there's a lot of parallels between open source and healthcare. You know, the drive for standards; there's a drive for interoperability; there's a drive for peer review; there's a drive for high need for security. And as these parallels started to play out we really saw an opportunity to take this proven technology, create a robust product, provide the services necessary to deliver it, which has never been done before in the private sector, and then to partner with organizations that can help us deliver an end-to-end solution.
That's really the opportunity that we're pursuing and we appreciate the fact that our capital partners recognize that there is an opportunity to not only provide a great service and deliver better care, but also to have a financially robust company to work with.
NewsForge: Of course with Larry Augustin, who, I'd better insert this disclaimer someplace, is also the chairman of the board for VA Software, which owns OSTG, which employs me, so we both now, I guess, work for Larry, don't we?
Scott: (laughing) Sounds like it!
NewsForge: And of course he knows how to build investment capital and how people do and don't. I know Larry not only from work but also from the long-running free software business, email, discussion lists. So Larry, obviously you're staking a lot of your personal reputation on this, are you not?
Larry: Well yes I am Robin, and I'll tell you, I'll give you another example. I was talking to a CIO of a small hospital just last week. And that CIO was telling me that a year and a half ago he was looking for VistA. He saw it out there, he thought, "Gee, this would be a great thing to bring in."
But his problem was, he couldn't find anyone to support it. And many of these hospitals have very, very minimal IT staff. They don't have a lot of people, they don't have the expertise to go out and bring in this code and just install it. They need help. And it's a great market. There are a lot of them out there.
I think Scott said, as you look out the market, small and medium hospitals, 90 to 95 percent of them don't have this kind of integrated clinical, comprehensive clinical system that we can give them with VistA.
NewsForge: And you're getting ready to bring it to them and hopefully make a few dollars in the process, right? (laughter)
Larry: That's right, that's right.
Scott: You know, what's interesting Robin, is that you know, we've sometimes in the past been compared to you know, Red Hat, which takes, you know Linux, and packages and delivers and services that. What's interesting with VistA is that it's such a comprehensive application. It has over a hundred modules, it covers all the clinical, financial and administrative needs of the healthcare organization. It's designed to work in the ambulatory, acute care and long-term care settings. It's just, the depth and breadth of this application is just massive.
And so in order for organizations to actually realize the full benefit of this, it takes significant expertise, and knowledge and experience to deploy, maintain and support that.
What Medsphere has done as part of this is to really productize this, to actually enable customers to actually use this technology. It's been out there for twenty years. I mean, there's a reason why it hasn't been delivered to date, and we think that one of the primary drivers is that there's never been an organization that can actually create a product and deliver that product to healthcare organizations.
NewsForge: Well I'm glad there is one now, and gentlemen, I thank you so much for your time.