Epic Systems (MyChart)

0:00 The answer is somewhere in the middle. Well, you texted me last night that you've made it to Singapore. I mean it's Singapore, yes. Anytime you are researching anything in US healthcare, you know it is time to stop your research process and start the episode once you've found Singapore.

0:18 Uh Alright, let's do it. 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

0:31 Me down Stay straight! Another story on Welcome to the Spring 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. And we are your hosts. Listeners, today's episode is about a quiet company in rural Wisconsin.

0:52 That plays an enormous role in our lives. Epic systems. Indeed, whether you know it or not. Yes. You probably know them from their medical patient software My Chart. That

1:02 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.

1:17 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 treehouse, a barn, a replica of New York's Grand Central Station. and an eleven thousand seat auditorium underground.

1:41 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. 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.

1:59 They lost one customer once. For six months. And then that custom came back six months later. Yes. The company's founder, Judith Faulkner, is undoubtedly one of the great founders of our time.

2:10 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.

2:38 Yes, we heard all sorts of stories about companies epic over the years trying to buy the GE, Microsoft, Google, you know, everybody you would imagine wants to buy this company. And It's never gonna happen. Yeah.

2:51 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. Almost undoubtedly. Well.

3:07 All right, then spoiler alert listeners. We'll discuss that at the end. So much wrong with the American health care system. That isn't. incontrovertible fact. There's nobody that's gonna tell you, Oh, actually

3:21 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. 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. Yep. And if you want to understand the system, you have to understand Epic.

3:46 Yeah. Well, listeners, if you want to 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 acquire.fm slash 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.

4:09 in the medical ecosystem. hanging out in the acquired Slack. That's acquired.fm slash 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 ACQ two in any podcast player.

4:30 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 the show is for information and entertainment purposes only. David. Take us in. All right. Well

4:44 We start our journey. In August nineteen forty three when Duty Today, Faulkner. Then

4:50 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. That's true. And Taylor Swift. And Taylor Swift, that's right. Fertile ground for entrepreneurs there. Uh

5:08 Delaware River. And DuPont so much great American entrepreneurship in that area. 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,

5:25 Just up the road, a little ways from Terry Hill in Murray Hill, New Jersey. William Shockley and his colleagues would invent The transistor at Bell Labs. Yeah. Enable

5:36 Microsoft and Epic. Intel and All of this. And for a long time. The early pioneers of electronic health care records.

5:45 were hardware companies. Yes. Locky G Siemens Yes Lockheed was a vendor to hospitals. Incredible. But for the moment.

5:55 Judy probably didn't know anything about this because her family is not in the tech industry growing up. Her father, Lou It's a small town entrepreneur. He runs a local pharmacy and soda fountain there in Earlton called Lose. Louis Soda Fountain. And perhaps this is where Judy would later get her own entrepreneurial bent from. Could be.

6:14 So That's Judy's father. No. Judy's mother, Dell Greenfield, wasn't Absolute freaking

6:21 Dynamo. She graduated high school at age fifteen. And she worked First as a secretary and then she worked with Lou at the store pharmacy and soda fountain.

6:31 And then Later. got really involved in peace advocacy during and after the Vietnam War. Hm. Which I assume was not typical for her generation that lived through World War Two.

6:42 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.

6:58 In nineteen eighty five This group. In partnership with a broader international group called wins the Nobel Peace Prize.

7:09 Judy Faulkner's mom. was part of a group that won the Nobel Peace Prize in nineteen eighty five. 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. Nobody knows this. This is not cited anywhere. So how did you find your way to it? I was Curious. I was trying to learn more about Judy's family growing up and I was trying to learn about

7:33 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, so the company actually confirmed this to us.

7:46 Yes. Judy's mom. Wanna share the Nobel Peace Prize in nineteen eighty five. Incredible. So cool. All right. So you've got entrepreneurial DNA. You've got sort of Peace oriented, divergent thinking DNA. Yeah.

8:01 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

8:12 A number theory problem. Of course, probably didn't frame it as a number theory problem. But ask the class. Why is it that numbers that are divisible by three If you add up all the digits of that number.

8:25 That number that is the sum of its digits is also divisible by three. This is like a law of number theory. So Judy hears this problem and it's just like My future is in math. So in nineteen sixty one Judy graduates high school, she goes to Dickinson College to major in math. And while she's there

8:45 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 sixties.

8:59 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.

9:11 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. Yeah.

9:19 And Programming at a time when Programming wasn't a thing. The field of software engineering was not a field. These are math people.

9:28 taking programming languages and using them, but there are very few of those people in the world. Universities didn't have computer science departments. Until this point in time. Judy is intertwined with The beginning of computer science as a

9:41 Field. Make sense. 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.'Cause she has an artistic side too.

10:01 For as mathy as she is. She also has a hyper creative streak. Totally. And Obviously Her story is very different and she is a very different person than him, but

10:13 The echoes that you're seeing here in Judy in What she's exposed to as a kid, how she thinks How she operates as an entrepreneur. You should be getting some Bill Gates vibes here. I thought you were gonna say Steve Jobs with the peacetime orientation around. her upbringing and sort of the I don't wanna say hippie for Judy, but almost hippie esque movement too.

10:34 Yeah, that's actually a good point. Well jobs and gates well the reason I said gates is to sort of Foreshadow some Microsoft DNA and analogies that come into Epic here. And they're contemporaries. She is going to build her company in almost the exact same timeframe that Apple and Microsoft were built. Totally. So when Judy gets back to Dickinson to college

10:55 She decides that she's gonna apply to grad schools and math. So she applies to five PhD programs. She of course gets into all of them. And on her C V she lists her Rochester experience and her Fortran.

11:07 Programming experience. So two of the schools she applied to Stanford and the University of Wisconsin. are just starting their computer science departments. When she applied, they didn't have computer science departments and then the interim They started them and so they

11:22 Saw Judy's application, like obviously this is a brilliant person who we want here at the university, we're starting these C S departments. They unilaterally Shift her applications. To their new C S schools. And so Judy's like

11:35 Oh. I didn't even realize I could go get a PhD in computer science. Like amazing. This is what I'm gonna do. So she ends up choosing Wisconsin. goes off to Madison, Wisconsin to start her PhD in computer science, which As we shall see, she never finishes.

11:49 But she also never leaves. What a sliding door moment. If Judy had gone to Stanford instead, we would probably still be telling this story about her, but it would be a very different story. For sure. She would have been indoctrinated by a very different type of DNA and what computers are for and What?

12:06 types of companies you should be building with computers if she was in the Silicon Valley at that point. Totally. So While she's at Wisconsin. Judy takes a class.

12:16 called Computers in Medicine. Taught by a faculty member from the Wisconsin Medical School named Doctor Warner Slack. And probably this is the first course of its kind. Anywhere in the world. I mean computer science departments themselves are new, the idea of applying

12:34 Computer science and computers too. The practice of medicine is new. Yep. It had to be one of the first classes of its kind because mainframes were really becoming a thing in the sixties period. I think any ac was Only fifteen, twenty years before. Yeah, right. It's a good point.

12:51 This is the first time. Anybody could use computers for anything outside of government and the defense industry, right? Yep. So Judy takes this class from Dr Warner Slack. And as you might expect, she's the star student in the class.

13:06 Afterwards. Doctor Slack asks her to Work on writing a program for use in the hospital in the medical school. to optimize the on call schedules for doctors. You know, doctors have to have on call schedules, and so optimizing that like

13:21 perfect thing that a computer application could do. Yeah. So Judy says, Yeah it's great. She starts working on it and this is, you know, a part time job for her. As a grad student. She's getting paid five dollars an hour for her programming time, trading time for money here. And apparently the story goes that Her programming was So good and she was so

13:39 efficient at writing these applications'cause she would go on to lots of departments. in the hospital would ask her to write, you know, various applications for them. That she actually didn't make that much money because She just wrote them so fast and she was getting paid by the hour. They gave her a raise at one point. They doubled her salary to ten bucks an hour and Still make that much. Anyway. So

13:59 As she's going around throughout the Wisconsin Medical departments working with Psychiatry and Obi Gyne and rehab and inpatient in hospital in the intensive care unit.

14:11 Starts to get these requests from All the different doctors and the different practices. A big problem we have is We're seeing these patients. Other departments are also seeing the same patients, but there's no way for us to know what's happening to those patients in

14:28 other departments across the hospital as they're being seen. Like we really would love If there was a Single database. That could keep records on every patient that we have across the whole longitudinal course of their care here at

14:43 the University of Wisconsin. Medical center. And this is the origin of epic. Before we go further on what Judy does next.

14:56 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 sixties and Why is this idea of an electronic version of them so appealing?

15:08 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. And I think they had dated back to attempts at unifying them or creating standards all the way in to nineteen twelve. Yes, at Mass General. So

15:29 All of the efforts too standardized 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. 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. Exactly. So

15:54 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. Yeah, it would make sense that this is where a lot of sort of research is happening.

16:10 And like you said, in nineteen twelve. A few members of the Americas and the Americas. Get together there at Mass General in Boston. And they start working on can we create Some

16:23 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 nineteen nineteen, it takes them seven years to do this. They do finally

16:37 Introduce a standardized treatment diary, quote unquote. For distribution across the country. Now there's no incentive for doctors to actually use this. 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

16:56 How to design the notes that they take. 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. 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.

17:16 Telling me how to standardize what is going on with my patient probably seemed anathema at the time. I'm the doctor. I know best. I'll figure out what delivers the best care. Yep, exactly. So This continues for a while and then finally in nineteen twenty eight. The association

17:31 of health record librarians of North America. to standardized collection, storage, retrieval of Patient data. This is a fun callback.

17:41 I believe The Rockefeller Foundation was behind funding all this. Call back to our standard oil episodes. 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.

18:03 If not maybe the main goal of The Rockefeller Foundations was To improve the state of medical care. In America. Makes total sense that.

18:12 Oh. Here in the late twenties, early thirties, this is getting funded by them. So All this is great. But the reality is until this time in the nineteen sixties when computers

18:23 Start to arrive. Even the best intentions and 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 in a hospital to another.

18:43 God forbid you're trying to get to a different hospital or a different health system or a different state. It's a mess. 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. So then we finally get to the current moment in time that we're here.

18:59 In the mid nineteen sixties. And two really important things happen. And you can argue that they are both of equal importance. One. The arrival of the computer age.

19:09 Can now digitize this stuff. It's possible. Two. have portability and standardization and the dream can really be realized here. Yep. The other maybe more important thing that happens is in nineteen sixty five. Congress.

19:23 Creates. Social security and the Medicare and State based Medicaid. Programs.

19:31 In America. Ah yes. So we have so far given you the technological history. Of Medical records.

19:40 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.

19:50 All business structure in this industry is driven by What is the architecture of policy in America? So We rewind the clock again. to nineteen forty two.

20:03 Oh, all right. Educate me here. We're gonna catch up to Medicare here, but In nineteen forty two America is at war.

20:11 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.

20:24 Yeah, mostly the paradigm in healthcare is you pay for service. You go to the doctor, you pay the doctor. Right. 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.

20:40 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 want to be able to attract top talent.

20:52 So The way around the wage controls was to offer health insurance as a bonus. To work around the system. Markets always find a way. Yeah, right. So as soon as this happens. Unions go. Oh, this is awesome.

21:08 Our people can make more money? Amazing. We're gonna make capital pay for our Health plans now. Yeah. 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.

21:27 You can do this. Two. employers and the health insurance companies that are springing up. Then lobby. To say, hey, these health insurance premiums

21:37 Can we make these tax deductible? For the business. 'Cause the business They should have to P

21:43 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

21:58 shouldn't have it affect their income taxes, even though Clearly compensation. So this is where the whole origin of pre-tax stuff versus post-tax stuff in your paycheck comes from. Exactly it. So this sets it all in motion with incentives like that. Why would you want your healthcare any other way? What a dream. You can pay for your premiums with pre-tax dollars. And what a dream for employers that can now offer this benefit that was deductible. So at the end of the war in nineteen forty six, the percentage of Americans who had medical insurance was already up to thirty percent.

22:30 from that ten percent number just six years before. Flash forward a couple of decades, nineteen sixty four, it's now up to eighty percent. So of course it was going to run the table and become the default as soon as this regulatory framework was set up. And once we did this The US did not have a chance of implementing any other system. We were just going to end up with employers Primarily being responsible for health insurance.

22:52 and creating large insurance companies to provide it. Yep. And then of course that takes us to nineteen sixty five and Medicare and Medicaid because The big policy question is now what do you do about all the people who don't have jobs? What do you do about people who don't have jobs, which actually aren't that many, but what do you do about people who are old or poor? America needs a social safety net. That's what we're all about. Who also, by the way, are the highest consumers of healthcare. Yes.

23:16 So here we are at nineteen sixty five. David, you're exactly right. Medicare and Medicaid enter the picture as a part of the Social Security Act. How did we get here is sort of interesting. FDR, Truman, and Kennedy had all tried to pass a single payer system. the way that the UK did. Right after World War Two, the UK is in this moment of sort of great nationalistic pride. We all have to band together look after one another, they pass the national health system. The US

23:42 does not have the political will to do it. And so we don't. Do you sort of have this coverage gap? to your point earlier, of all these people who are not currently in the workforce. So The compromise is we will create Medicare for those over 65 and Medicaid if you have a low income or other special situations.

23:59 And we can't really fund Either exactly right, so we'll sort of figure out how to fund Medicare. out of the federal government. And Medicaid, let's make that the state's responsibility. We'll help, but we'll federate that out to the states. Yeah.

24:15 So All of that. is our system today. Private insurers, if you have a job. buying directly from the ACA Yeah.

24:24 You don't, but again still from private insurers. Medicare or Medicaid if you sort of fall outside those buckets. And the important thing to realize from all this is that the vast majority of patients do not feel the cost of their health care directly in the United States. Those costs are so laundered through private insurance companies and Medicare and Medicaid. That most people think about any given health encounter as being paid for by someone else, by a part of some system. If you're trying to unpack

24:52 How did our healthcare become 18% of GDP versus 11% of the UK GDP or a staggering six percent? Of Singapore's GDP, albeit at a much smaller scale. Why are we eighteen percent? A big thing you have to understand is psychologically every healthcare encounter is that the system is paying for it. I'm paying into the system, the system is paying for it.

25:14 But what does it cost? What do I actually pay? It's a big abstraction. Yeah. Okay. So In case it's not.

25:22 Glaringly obvious. Why is this so important? fledgling electronic medical record industry here. Well it's because now with these second and third party payers set up

25:34 You need documentation of what happened in order to get paid. So if you're a hospital or you're a doctor or you're a clinical practice Before this system, the You just see your patients and they pay you. Now after this system

25:48 You see your pace. And then you need to negotiate with the payer, whether that's the insurance company or the government. About getting paid for that. And the insurance companies and the government They're like, Well, hey, I need proof. I need documentation of what you

26:03 Did I'm not gonna pay you if you just tell me that you did this stuff. And I need it in like a really standardized form. Yeah. I need an official Standardized.

26:14 medical record. And so All of a sudden you start this Faustian bargain or slippery slope, if you will, for the medical profession of Okay, in order to Get paid.

26:28 And get paid more And more over time as my procedures that I'm doing become more and more complex. I need strictly codified and regulated and standardized documentation of what I Did

26:42 And I need really bulletproof. workflows and data flows between What's happening in the patient room. And then what bills? Get sent over to the pay.

26:54 And thus the existential need. For an electronic. Medical Record system. But really also and maybe more importantly.

27:02 An electronic medical billing system. Yep. And the realization that I think the whole industry kind of had early is insurance wants to pool together in a very large pool. So the pay are always gonna have a tremendous amount of leverage.

27:20 over individual physicians, small hospital systems. Even larger hospital systems. So you really need to be extremely buttoned up and extremely standardized and extremely auditable. Because you're negotiating with this large counterparty, whatever the given payer is, be it a government or a large insurance company, that's going to have leverage over you.

27:42 Yeah. And for the hospitals in terms of quote unquote. customers I mean they're not customers, they're payers. The reason they're called payers is They're not getting the delivery of care. They're just paying for it.

27:54 Medicare and Medicaid are the big gorillas because they're covering the elderly population who are consuming the vast majority of care and the vast majority of complicated care and expensive care in the country. Make sense. So Here we are.

28:08 In nineteen sixty six, 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.

28:23 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 and everything you would think in an electronic health record, but also critically. And interfacing with the payers. And development for that was funded by the National Institute of Health.

28:46 The technic requirements for creating this though. difficult, especially with programming languages.

28:55 available at the time, like Fortran or whatnot. This is a very Hi. Concurrency transaction system. A lot of users need to use this across a health system. Even then. Even then, yeah.

29:10 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

29:27 programming languages. couldn't really suit their needs to build what They're not. So they end up writing their own new programming language called the Massachusetts General Hospital Utility Multiprogramming System. Or

29:41 Mumps. Which is amazing that there's a medical oriented programming language called Mumps. Yes. And Epic still uses mumps today. Or actually it uses its Modern descendant cachet. But this is the standard.

29:57 programming language. For the industry. And database system for the industry. Uh, I don't know about the industry, but for epic. Oh yeah. Which I guess now for the industry. Yeah. Well, that's what I was gonna say. Many of Epic's competitors do not use this, but

30:10 Epic does, so uh kind of de facto the standard now. 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

30:21 Integrated. right there within the programming language is a database. Structure. And that makes it very computationally

30:30 Efficient for handling all these. high velocity and data intensive transactions that need to happen. Or at least efficient for the programmer because you're not switching over to write SQL queries in the middle of your program.

30:43 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

30:54 Read and written to Kinda nice for it to all just be one standard language. Yeah. And then the other thing that they design it for is for multiple simultaneous users. Imagine

31:05 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. Right. You don't want collisions to create data loss or something like that. This is people's lives we're dealing with. Exactly. Now The lead programmer.

31:26 of this group here at MGH at Mass Gen. That is creating Co star and mumps. was a recent MIT graduate. Named Neil Papalardo.

31:38 And being the young, enterprising MIT grad that he is. Couple years later, in nineteen sixty eight, Neil spins out and starts a company. Around this. To sell his software. Originally called Medical Information Technology, or

31:52 MIT. Name's taken. But soon he changes the name, perhaps at the request of the real MIT. To MetaTech. And for folks in the industry, that'll sound very familiar because Meditech Still in business today and is the number three player in the EMR space behind Epic and certain.

32:11 Yep. Pretty amazing. So Back to Judy now here. University of Wisconsin. She's working with Dr. Slack and the medical department there doing all these various application projects.

32:21 And then Doctor Slack moves to Harvard. Where he of course meets Neil and starts working with Banitech But

32:28 He and Judy keep in touch. Judy's part of this community of programmers and computer scientists. Building applications for the Healthcare systems. And Like we said earlier, what the people uh

32:38 Wisconsin really want. Is the same thing that the people at Harvard and MGH really want is this integrated system. where they could get longitudinal patient records across the continuum of care. And that they can use to build

32:50 The pairs. The Holy Grail. The Holy Grail. So Through this connection, Judy learns about Mumps and she goes and learns Mumps the programming language.

33:01 Starts working on this problem. And legend has it. That one day in the mid nineteen seventies, she's sitting in her living room and has An epiphany. About how she is gonna build

33:12 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.

33:27 And I remember running to the kitchen. Grabbing a pad of paper and just writing code, code, code, code. And that code. Became chronicles. Should call it chronicles. Chronicle of a

33:38 Patience. Care journey. And That code in that database is still The core.

33:45 Of epic to this very day. Is it actually the same code? No, I mean still 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

34:03 Pulls from directly talks to. 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 Storic for Obi Gine 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 nineteen seventies.

34:26 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.

34:37 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'cause we're still in the mainframe here. So

34:49 What the product is is this database. And then Different departments. in the Wisconsin Medical Center. Can write their own

34:58 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.

35:10 So these are Terminals. I mean these are eighty character wide text only terminals. Yes. Green screens Unix terminals. 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.

35:26 Yep. That's the product. Sweet. Long way to go. So

35:31 Just like the projects in Boston at M G H were the intention was to make the systems for use there at MGH. Judy at first, she's just making chronicles for

35:43 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

35:54 Other doctors. At other academic institutions about this great system called Chronicles. that they have. That this programmer that they employ, Judy Faulkner Has

36:04 written in 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? 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.

36:22 Exactly. Again and again and again and so legend is finally she just Breaks down is like fine. I'll start a company. I'll be part time on it. We'll get some other people who are working with me. We'll be part time.

36:33 This will be a small little thing. And so thus Finally in nineteen seventy nine The company is born human. Services. Computing.

36:43 Amazingly generic. Epic systems. All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work.

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39:06 And just tell'em that Ben and David sent you. Alright, so David, Judy She starts. What is it? Human computer Human Services Computing. Human Services Computing. Really rolls off the tongue. Yes. She's not

39:22 planning up to 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? Well Before she does

39:32 Anything. She needs to raise some money. For not the least of which too. buy a computer to do this work on. Which wasn't it like seventy grand to buy a computer?

39:43 Yes. A computer being Yeah. Data general eclipse 16 bit mini computer, which is the size of like a washer dryer system and sits in the basement. That's right, because we're in this awkward era between mainframes and microcomputers. The microprocessor hasn't been invented yet. And so we have these quote unquote mini computers that are still, yeah, washing machine sized. Yeah, we're right before the PC era here.

40:06 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. Yeah. Many computers, they were like the netbooks of their time, you know? Yes. We talked about this a lot on our Microsoft episodes, but

40:26 The critical thing about mini computers and especially for duty here and fledgling epic was Like a consumer wouldn't buy these things, but small businesses could and small departments of big companies could. Like an IBM mainframe was gonna cost you A lot of money. Yeah.

40:45 A data general or deck mini computer. is gonna cost you about seventy thousand dollars. And Judy needs to buy one. And she also needs to fund the company. So

40:56 She goes to the bank. And she gets a bank loan. For seventy thousand dollars to finance. Going and buying the Data General Eclipse.

41:04 Mini computer. 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.

41:18 And together they all put in about seventy thousand dollars. They value. The company. At seventy thousand dollars. So pre money valuation of seventy thousand dollars. Another seventy thousand of new on top.

41:30 Yep. Post money of a hundred and forty thousand dollars. Taking fifty percent dilution from your seventy K fundraise, and then you also have this seventy thousand dollar Loan. Yeah. And those were the only primary investors. Ever. Did Epic.

41:46 Systems. And there's some really fun stories about what happened to those Shares that the other original investors. But over time the company has bought a lot of them.

41:56 Back, but not all of them. There are still some floating out there. There are some floating out. around there. We can't share all the stories that we heard in the research, but One fun thing is at a one point in time, I think this was probably The two thousands maybe?

42:10 A pretty good chunk of those shares. Made their way to Sequoia Capital. Yes. Sequoia did not put that one on their website. Almost the only way in which Epic intersected with Silicon Valley. in the entire company's history, but this is a crazy point. They do five point seven billion dollars in revenue today. They dominate an industry, at least here in the United States.

42:32 And in total. They raise seventy thousand of equity capital and seventy thousand of bank debt. Yes. And that's it. This is

42:39 IKEA all over again. Totally. And I think a huge part of what enabled this Building software. is not a uh necessarily a capital light activity. It is

42:52 really hard, especially in those days. to build great software. I think kinda like how Microsoft never really raised Primary capital either. It's because Judy was Good.

43:02 generational talent as a programmer. Mm I hadn't made that linkage. That's interesting. They had kind of a cornered resource as a startup, you know. Microsoft did in Bill Gates. And Paul Allen too. But Epic totally did too in Judy. Like she could write Really, really great software. They didn't need to go hire an army of programmers.

43:21 No, and the company stayed very, very small for a very long time. Hm. 'Cause as legend has it, it's three halftime people. in the basement of a building that started the company and I think they got pretty far on just that. I think so. And for years they didn't hire that many more.

43:37 People that would obviously change over time. Okay. I'm Ninety percent sure I'm gonna stump you on this one. You mentioned the basement of the building. So they get

43:45 Their first office space, Judy gets the company's first office space. In the basement of an apartment building, At twenty twenty University Avenue in Madison, Wisconsin. Do you know? What

43:57 Other than that. Great. American company. From Madison, Wisconsin. also started in that same office space and I believe overlapped. I think they were both in this same shared office space.

44:09 Concurrently. David, there's only so much material out there on this company. We were both gonna find this. Listeners, this is the American Girl Doll Company. Oh, I really thought I had you on this. And the person we were talking to was about to say this and I was like, No, don't say it. I wanna stump in on the episode. I did see it somewhere else, though. The crazy thing is I think when American Girl moved out, Epic bought some of their furniture. Yes, I think that's right. So listeners, what we're talking about is the American Girl Doll Company founded by Pleasant Roland. in Madison, Wisconsin. My sister had I think a few of these growing up.

44:48 Oh man. Jenny had so many of these and a lot of them have migrated now to our house and our girls have them and Already my three year old. Runs around our house. with the American Girl Doll magazine.

45:00 And she tells me on a weekly basis, these are the ones I want for my birthday. She's pointing at like a two hundred and fifty dollar doll. Yeah, incredible company. It actually ends up getting acquired by Mattel in the late nineties. It was a big part of Mattel for a long time. I'm so bummed I didn't stump you on this one. Okay.

45:20 Back to the epic story. Got the financing, she's got the computer. But she still doesn't know anything about building and running a company, you know, she's a software developer. So

45:30 Warner Slack says, Okay, come on out to Boston. I'm gonna set up a couple days for you to spend time with Neil and Meditech, and I'm gonna ask him To help you out. starting this company. I gotta say, this is a pivotal moment and not just for everything she learns from Meditech. Which I know you're gonna get into all these cool things that she brought over.

45:49 But Instead of I'm gonna introduce you to a business person. He says, I'm gonna teach you as a programmer everything you need to know about running a business. And it's Not

45:59 true, but it kind of rounds to true to say Epic basically never did hire any business people. It is Essentially a big gigantic company of programmers. Logicians. implementation people who could be programmers, who think like programmers.

46:15 That is the DNA of the company to this day. And it could have gone a super different direction of you need to go figure out a sales and marketing strategy and a business plan and That is just not What happened?

46:29 History turns on a knife point moment for Epic and Judy because The likelihood that she would get introduced to a business mentor who is also a software developer and not a business school graduate business guy. We're talking about the nineteen seventies here.

46:46 the you know, business playbook is you bring the grown ups in, right? Yep. Bring in the suits, bring in the business school graduates, you know, fire the founders. Well, that only happens if you raise capital. Well, right. Exactly. You wonder why Judy was so uh you know averse to venture capital. Everybody else she knew who was taking it. That era. Was getting fired. Swapped in for a business guy. Totally.

47:07 But yeah, Neil He came out MIT, he's a programmer. He was on the original Mubs team. So Judy goes out. Spends.

47:15 Three days with Neil and gets a Total crash course in Setting up and running a company in Ben, like you said. Neil ran MetaTech like a software developer. So all the processes were

47:26 Extremely standardized. He had like hardened APIs for running the company. He had manuals and documentation for everything. And he shared the manuals with Judy. This is How you set up a HR system. This is how you do Benefits, payroll.

47:41 How you do college hiring. How you promote internally. Well, Yes. Net attack. recruit from the universities there in Boston. They didn't

47:51 hire experienced programmers. They were hiring fresh college graduates. Totally natural that Judy's gonna do the same thing at Epic out of first the University of Wisconsin and then Other schools. But yeah, that was the playbook and that DNA runs

48:05 Right through. To this very day at Epic. It's mostly people from non medical majors. They're hiring from Midwestern schools from people with technical majors just operating under the assumption, ah, you can learn this healthcare thing. It's the same thing as Microsoft or Google or meta or what have you, they are going to

48:25 Universities, all departments and recruiting kids. On on campus recruiting at colleges. Yep. And she was doing this at a time when it wasn't the norm. I mean, I gotta keep drilling in how different the world was then in a bunch of different ways, but one of them was You didn't have these college career fairs where you would just assume you could get this amazing

48:44 high agency job right out of college. Microsoft was really On the frontier of hiring smart college grads and empowering them and letting them run free. Epic was doing the same thing, and this was not industry standard. And Microsoft wasn't even

49:00 Really doing it at this point in time. They had only just moved to Washington. They'd only just left Albuquerque. This is the time frame we're talking about. Yeah. What year are we in? We're in nineteen seventy nine. So Microsoft really isn't starting to ramp hiring yet. No. And to that point. There is no DOS yet. There is no real PC industry. Microsoft is still

49:21 Its main product is the basic interpreter. For Judy and the fledgling human services computing here. Yes, they have demand. From other large academic hospitals out there in medical systems.

49:33 that have mainframe set up that have university computing infrastructure that they can leverage and use. But your average hospital or medical clinic or outpatient clinic out there in America They don't have a mini computer. They don't have a mainframe. The market.

49:49 isn't really there for this kind of stuff yet in a big way, except at these university medical systems. Yeah. And part of what she is doing is going after a different segment than Meditech was doing. A little bit out of deference to Neil. and his company, they're kind of going after the small hospital market. She's gonna take the more sort of upmarket, enterprisey approach and go after the most complex institutions, these academic training hospitals, later on the IDNs or the integrated delivery networks, which are huge hospital systems, or children's hospitals. Again, the most complex Up market. enterprisey has the most possible needs for the most complex software, that is where she's about to point the company.

50:31 Yep. Which She has to for the Unix based product that she's making. 'Cause those are the only institutions that have Unix infrastructure. Right. That can afford these big computers. Yeah.

50:42 So Nineteen seventy nine. They start out with four initial Customers. Four years later in nineteen eighty three.

50:50 is when they rename the company to Epic Systems. Ben, why did they rename the company? Well, Aside from the first name just being an awful name. you can start to see Judy's quirkiness come through. I mean I think you saw it originally with Chronicles, her sort of abstract creative thought.

51:06 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.

51:20 Mm. Yep. Does that kinda j with your understanding? Yeah. It definitely was not a declaration of aspirations as a company. Because this was still a very, very small Business.

51:32 They started with four initial customers in nineteen eighty three when they changed the name. They only have nine customers. And in fact By the end of the company's first decade of existence, so end of nineteen eighty eight. 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.

51:51 That's the crazy thing. Unlike Microsoft. This was a small business from the get go. Right. It took um a decade to get to a million and a half dollars in revenue. Yes.

52:04 That's kind of a Slow growing startup. A great software business for a local entrepreneur in Madison, Wisconsin, I think is how you would describe that. Yep. So yeah, for the first ten years of the company, you know, yes, it's growing.

52:16 But It's not exactly setting the world on fire. And part of the reason is Computing infrastructure wasn't there at customers like we talked about.

52:25 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.

52:37 Until nineteen eighty seven. So for the first, you know, what is that call it, eight years of the company. They weren't addressing The actual critical problem in the hospitals, which is help us bill for this stuff. Right. If you can help them make more money, they're gonna be a lot more excited to buy your software, pay a lot more for your software. Yep, totally. So in nineteen eighty seven They launch a billing module called Resolute.

52:59 Again, on top of the chronicles. single core. Database. Which still today is the company's revenue cycle application.

53:08 For all their hospitals. And I know we've made this point a few times, but I really want to underline It is still just An application Built on top of the Chronicles database.

53:19 And Fast forward to today. I think that is actually the single biggest reason why Epic wins over their competitors. I would argue

53:30 There's two big reasons Epic wins today. One is reliability. Yeah. But the reliability also comes from the fact that it's all built on one database. You're not gluing multiple systems together.

53:42 all their competitors along the way, or almost all of them other than Meditech. became thirty other companies glued together through MA and take public, take private. crazy transactions. Epic's just been epic the whole time. So you get This system.

53:56 That When you buy it and they say it's gonna take X dollars and X time to implement. does and then you go live and it works. Which sounds crazy, but it does the thing that they say it's gonna do.

54:09 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

54:24 one code base working off of one data base. 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.

54:40 This is sort of the ideal architecture. for such a product. It's funny. I'm laughing as you were saying earlier of it sort of does what it's supposed to do as 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.

54:57 that ties what happens in your medical practice to your There is no if. That's all you're trying to do as a hospital. That is what you are looking for. That is the product. Yes. And Ben, like you said.

55:10 All the competitors out there except arguably Meditech In many cases The billing system is a separate An often separately acquired product. From

55:21 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

55:35 The work you're doing. Or even worse, maybe you're submitting documentation that is wrong, which is like a federal crime. 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

55:53 Data flowing in either direction that's bad is really, really bad. In this particular use case. So there's a great sub stack called Health API Guy, which I'm gonna reference a few times because it's just some of the best writing on Epic you'll find. He put it perfectly.

56:07 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 that makes it so that your

56:30 hospital records at one hospital are easily integrated and viewed in any other hospital that is, of course, also an epic customer. Yes. Okay, so after they launched Resolute.

56:42 And now we're in the late eighties into the early nineties. We're finally entering the PC era. It's now possible for Hospitals and health practices too. adopt computers for a few thousand dollars instead of a few tens of thousands of dollars. The market really

56:57 Starts to take off. Sure. Epic. And on the back of that in nineteen ninety two They launch

57:03 Epic care. Which I believe is the first graphical user interface like Windows based. EMR. application in the entire industry. Certainly. Epic definitely says that that is true.

57:15 Yep. So what does that mean? Go back to what Chronicles was originally. It was terminal access directly into a Unix based database on a mainframe or on a mini computer. This is not something that your average doctor or nurse or medical assistant is

57:30 Can I use. Now here in the nineties with Epic Care. They've created a Windows application. That Any PC user can fire up on their Windows machine and use a graphical interface

57:43 For their patient interactions and their EMR. And oh yeah, by the way It's tied directly into your building system for your hospital or your health practice. This is All of a sudden really compelling. 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.

58:02 But once you have billing, scheduling and Epicare handling the actual clinical part of it. And this is all ambulatory, right? We haven't gotten to impatient yet. Yes, so the initial launch of Epicare The gooey.

58:17 EMR application. was only for ambulatory, only for outpatient settings. Not overnight stays. Yes, not overnight stays in the hospital. Yeah.

58:26 As a non healthcare person, that's always how I define what impatient is. Yes. You hear ambulatory, you just hear non overnight stinks. Yes. Too confusing otherwise. But this is it. Scheduling, billing, and epic care on the clinical side for ambulatory. pretty amazing product that is trajectory changing for the company. It's now got enough functionality

58:47 That It's not gonna stay a small business for long. Yep. So by nineteen ninety five They hit. Eighteen million in revenue.

58:56 Up from One and a half million in nineteen eighty eight. So pretty phenomenal seven years there where they more than Ted Xed. So by most measures you'd look at this and be like business is going well.

59:08 Yes. No longer a small Madison Wisconsin business. Right. However, where we were comparing it before was Microsoft. You made the Bill Gates comparison. This company was started When was it? Seventy Seventy nine, so only a couple years after Microsoft. Four years after Microsoft. Yep. In nineteen ninety five

59:25 Epic did eighteen million dollars. In nineteen ninety five, Microsoft had gone public and shipped Windows ninety five and did six billion in revenue. Right. Very different trajectories. You know, the primary reason here is one is a small vertical focused healthcare company and one is creating the horizontal platform of the future. But

59:49 It's worth contextualizing businesses going well by making sure that we stop making the Microsoft comparison from here on out. Well, I think I wanna come back to it later in the episode and in analysis because Yes. Epic.

1:00:03 Is and always will be constrained by being a vertical software provider instead of a horizontal software provider like Microsoft or Google or Oracle or what have you. Vertical being one industry. Vertical being one industry.

1:00:16 However. The one industry that they operate in is eighteen percent of American GDP, so How big can this get is Well, it's a question we'll revisit. Yes. Okay, so then. Finally in two thousand one.

1:00:28 They launched. the inpatient version of Epicare. So yes, this is for inpatient hospital stays overnight. Now you finally have The holy grail.

1:00:39 You've got Epic care. Ambulatory. For all your outpatient clinics.

1:00:47 You've got epic care. Inpatient for all your inpatient activities. By the way, again, inpatient activities are probably gonna be your majority revenue stream,'cause that's where the most expensive, most complex care is happening. Kind of similar to Medicare is your

1:01:03 most important payer relationship because old people is where the most complex, most expensive care is happening. So you got that? And then you've got Resolute. The building system. All single database, all tied together, all built on top of it.

1:01:17 Yeah, if you're a hospital system administrator This is the best thing you could possibly imagine. And Epic is really starting to get religion around this point in our future is breadth. Our customer, these hospitals, do not want to buy piecemeal solutions. They want to buy everything from one vendor and they want that one vendor to provide the very best, most integrated experience possible. So we need to

1:01:41 continue to orient the company around that philosophy. Yeah. Now right around the same time, actually Before Epic care inpatient.

1:01:50 Launches. Epic also launches My chart. This is crazy. If you had asked me before doing research for this episode, When would I guess that my chart launched? This is a internet.

1:02:02 Based on the Consumer facing Medical records access uh interaction. platform on the web. In a high regulated, HIPAA regulated industry. Right. I would have guessed like I don't know.

1:02:17 Twenty ten maybe, mid two thousands at the earliest. No, Epic launched this in the year two thousand, which is wild. Right. right around the dot com bubble. Yeah. Crazy.

1:02:28 It's absolutely wild that they launched this and that There. customers launched this. Well, and it's incredibly innovative. I mean it is truly cutting edge. I mean it wasn't nineteen ninety four or like Amazon. But the fact that yeah, to your point, the medical record

1:02:43 thing was being surfaced on the web. It's pioneering. Yeah. That consumers had direct access to. Well, I want to come back in a minute too. How important this is for

1:02:53 Epic and their customers, but the origin story of My Tart is kinda fun. So It actually started As an outgrowth of what was called epic web.

1:03:04 in nineteen ninety seven. Which was a project that they were working on for remote access To the EMR to epic care for doctors at home.

1:03:14 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 want to check the medical records, maybe you want to update it. Yeah, exactly. Little did they know how much doctors would hate what we're saying here. But you want to be able to access remotely. From your home.

1:03:35 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. Sume it today as the president of Epic. And he goes to the then president of Epic, Carl Dvorak.

1:03:52 And says, Hey, you know, this is good that I'm working on this, but I'm kinda bored. Can you give me something hard to do? 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. Yes. And the president is running this patient web project. 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?

1:04:19 Yeah. Give me something more challenging. And out of that is born the initial idea for My chart. I think they started working on it in nineteen ninety eight and then launched it in the year two thousand.

1:04:30 So it becomes the first integrated patient portal and I mean truly and 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's clue Gee and all this stuff. Come on, my chart ninety nine is real cutting edge. People immediately got it. Once you could access your own medical records from home.

1:04:52 from your own computer directly without talking to anyone, you were never going back. the world changed overnight. It was a little bit like Zillow in real estate. Yes. 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. 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.

1:05:18 Well 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. 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

1:05:35 My chart especially when it first launches and even through to today. Is Managing family members care. You have elderly parents

1:05:44 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 my chart access to family members was Huge.

1:05:57 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

1:06:08 They add self scheduling into my chart. This becomes The greatest thing. Four.

1:06:16 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 my chart and self scheduling and

1:06:28 the wait list that my chart 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. Yep. And

1:06:41 Now you can automatically fill that in with another patient on the wait list. Yep. So We're foreshadowing this, but Everyone adopts this, basically. Today there are 191 million active users of my chart, and this is deduplicated. This is active, unique users of my chart today. Yeah.

1:06:58 So On the back of this, they launch My chart in two thousand. Epicarian patient in two thousand one. the company crosses fifty million in revenue.

1:07:08 They feel like okay. We're finally like ready for The big leagues. And just to contextualize that fifty million of revenue, they're up to eighty eight health systems now. So

1:07:18 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. Yep. So they're ready for the big leagues. And then in two thousand three.

1:07:30 Take it a call. Not just from The biggest player In the biggest league. Kaiser Permanente.

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1:09:24 That Ben and David sent you. All right. So David Kaiser Permanente, the biggest of big fishes. Comes knocking.

1:09:33 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.

1:09:45 And so what that means is that essentially they are both your health plan, your insurance. And your hospital system all in one. Be like if a Insurance provider

1:09:56 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. We control the whole system. Yeah. It's the closest thing that you can sort of have to a single pair. Here in the country. Hm.

1:10:13 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.

1:10:25 Gotcha. Now at the time here were in two thousand three. Kaiser was the largest single hospital system in the entire country. Thirty hospitals

1:10:36 Four hundred plus clinics, eleven thousand physicians, and eight and a half million patients. That are part of Kaiser here in two thousand three. And They decide. That they're gonna put out

1:10:48 An RFP. For a whole new Integrated Entire Kaiser System wide. EMR system.

1:10:57 And this is when he You really should start To think okay, EMRs are not just Medical records. Or medical records tied to billing and scheduling.

1:11:07 This is the operating system for this industry. Someone described it to me as the nervous system for A healthcare system. You know, you've got twenty hospitals, bunch of doctors, 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

1:11:30 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. Calling it an operating system is taking it too lightly. It's like your operating system

1:11:47 Plus your ERP system. Plus your applications on top of your operating system. It's your everything. 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.

1:12:06 Yes. So In two thousand three. Kaiser puts out an RFP for a new Again, quote unquote D H R, but really new nervous system. Yeah. For all of Kaiser.

1:12:16 An epic. wins the deal. And Epic was a little company just a few years before they were a fifty million dollar company. Yes, and after they signed Kaiser. They go to a hundred and sixty two.

1:12:28 million in annual revenue. So Transformative. Probably more than doubled their revenue overnight. Yeah. Interestingly, let's talk prices for a second.

1:12:37 The headline number, as everyone reports it. It's a four billion dollar deal. They call it a four billion dollar three year project. And that epics portion is around four hundred million.

1:12:51 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 subscription, but at this point it's licensing. to use the software. It's just funny to see these headlines'cause the four billion number

1:13:08 Not only do they capture many years of the deal and the implementation. But they also roll in their the head count. of the hospital employees that have to do the work. And they roll in their

1:13:21 The potential lost productivity from all doctors across the health system who have to sort of ramp on the new software. Which is a real economic impact, by the way. For sure. But it's not like Epic got four billion dollars. No, and I always chuckle because every single one of these numbers looks huge. Multi billion dollar. Oh Even if it's small health system, three hundred million dollar 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. Yeah, it's funny. We should start talking about the size of acquired and you know, like uh fourth and fifth degree uh tertiary impacts. We are a billion dollar business.

1:14:00 Just think about all the business that our customers do when acquired listeners. But to your point, it is actually fair. If Kaiser is gonna engage in switching their central nervous system over several years it's going to be net four billion dollars of impact to them. Yes.

1:14:19 So the story of how this goes down is Wild. Uh The time. Kaiser's two main

1:14:26 centers of gravity were Northern California and Southern California. And they were Almost like separate companies under the Kaiser umbrella. had different systems, had their own EMRs, different management.

1:14:40 Of course, talk to each other and part of the same parent organization. almost like cousin organization that was Northwest. Yes. Like this the stepchild. So they had I don't know if it was just Northwest or they had maybe some other smaller regional operations at the time, but they had a Pacific Northwest. Small region based in Portland, Oregon. Today actually Kaiser has large regions through a large part of the country. They've grown a lot sin.

1:15:05 But this small little Portland region. They had started using Epic. for their ambulatory clinics. So like not even inpatient stuff in the hospital, but their outpatient clinics. And at the time. The Northern California and Southern California

1:15:21 Big factions. We're battling each other. And they're each trying to develop their own proprietary EMR systems with software consultants with like Accenture and stuff. Yeah, there was this era where hospitals thought that EMRs should be their IP that they develop and have sort of a

1:15:39 competitive advantage over other hospitals because their EMR was better. I don't know what the thinking was, but people wanted to own their own EMRs. I I think there may even have been some pipe dreams of like, Oh, we're gonna commercialize this and sell it to other Hospitals uh it seems like not a core competency that hospitals should be doing. Anyway.

1:15:58 Within the Kaiser system, though, there was a fairly high degree of rotatability of physicians, of doctors. So if you were a doctor And Portland with Kaiser Pacific Northwest. and you wanted to move or your family had to move down to California You could transfer pretty easily to Northern or Southern California. Kaiser.

1:16:17 So this was happening. And as physicians from the North West started coming down to California, they feel like Man. What are you guys doing? You're spending all this money with Accenture and you know, blah, blah, blah, all these consultants and try to roll your own, like

1:16:30 We've got this thing called epic. Up in Portland. That we're not even using it at the hospital. It's way better. Than the stuff that you're trying to build. Yeah.

1:16:40 So Finally, after a year or two of This battle between North and South. They finally agree, like Alright. Ceasefire. It's come to a truce.

1:16:49 We're gonna ditch our competing projects and we're gonna bid this out. Vendors. So They hold

1:16:56 An RFP for a new EMR for all of Kaiser, one integrated system. And they pick. IBM. IBM's gonna come in and do this big four billion dollar project. For Kaiser.

1:17:08 Nobody gets fired for buying IBM. We're on like the end of that era, but it's still a little that era. I mean this is only two thousand three here. This bid might have even happened before two thousand three. So IBM comes in. And the project Fails. Doesn't work.

1:17:22 And this is Not Uncommon. Especially think about ERP, the number of times you've heard oh failed ERP implementation, and some CEO is explaining on Entering's call. Yeah, we'd

1:17:33 lost uh hundreds of millions or billions of dollars and we actually didn't even switch systems. This sort of thing Does happen in the hospital world too. And Epic has bet the whole company on having a reputation for we don't have failed implementations. And that Wins deals. Totally. I mean I think this is one of the

1:17:51 Most important reasons why their customers love them. And we're gonna say this a bunch of times on the episode. Their customers love them. When we say customer, we mean hospital CEO, CIO, the chief information officer. And CFOs. When we refer to their customers, that's who we're talking to. Obviously the chief medical officer and all of the physicians and nurses and care folks

1:18:12 Are a part of that. But A part of my research has revealed The customer. is the hospital administration.

1:18:19 I doubt that's even like a controversial statement, probably at epic. I think they consider it. The customer to be The CEO, CIO and CFO of

1:18:29 Their customers. Yep. So The IBM project fails. And maybe it's worth another word on that too. It's not like

1:18:38 This doesn't impact The physicians. And the staff at the hospitals and Poor performance for the hospital. As is in the case of this failed IBM implementation.

1:18:49 Massive detriment to the physicians. This must have really, really sucked for them. Like they want stability too. And the physicians provide the value at hospitals and so therefore You need to make the physicians happy to retain your administration job. They have the leverage in the organization'cause they provide the core competency, but still

1:19:08 You're not going in and pitching the doctors when you're going in and trying to land a customer. You could think of a hospital almost like a media company. Yeah. Doctors and the nurses and the clinicians. They're the on air talent. Yeah. The on air talent are not the ones, you know, at Disney or

1:19:24 universal or wherever who are making the business decisions. Right. And in this case, the medical staff is involved, but they're not the decision maker. Yeah. So okay. Kaiser's now got to rebid this project. And by this point in time enough Portland doctors had come down to California and sung Epic's praises that they're like, All right.

1:19:41 We should take this little company. Seriously. So they start the R F And it comes down To epic.

1:19:47 And their big main rival, Serner. Now we haven't really talked about Center so far in this episode. Cerner was a much bigger company. Yeah.

1:19:58 Interestingly started right around the same time, right? Yeah, wow. I think it was started The same year is epic, right? Nineteen seventy nine? Yep, by Neil Patterson. By Neil Patterson in Kansas City, Missouri. Unlike Epic.

1:20:10 Which took the no venture capital. No acquisitions, single platform, stay private forever out. Cerner took the Lots of acquisitions.

1:20:21 Raise capital, go public. Get big. Right. Which Could have worked too. It did work too. It did work for a long time.

1:20:29 Yep. At this point in time. Cerner is almost a billion dollar a year revenue business. They're a public company. Way, way, way bigger. They're international. Et cetera.

1:20:39 So the R F Comes down to the two of them. But it's worth saying before they were acquired by Oracle. was a merger of twenty four different companies. Put a nice little wrapper on it and call it Cerner.

1:20:50 But a lot of companies along the way. Yes. A different path than the one Judy took, let's say. Yes. But that's not to knock it. Yeah. is and especially back then was a good really competitive product.

1:21:01 The obvious choice for Kaiser here in two thousand three would have been Go with Cerner. And they actually try to go with Sir, so supposedly at one point. They come. To both companies, to Cerner and Epic.

1:21:13 They say look. Soner. We want to go with you for inpatient in the hospital, since that's your bread and butter. This is the most important thing. This is the big business. We trust you, you've been around forever. An epic, hey, you've got impatient now, but you only just launched that in two thousand one. Like you're new at this, you are good at

1:21:30 Ambulatory at outpatient. You're doing a really good job for us in Portland. We want to split the baby here. And do One

1:21:38 System With Epic for our outpatient clinics and one system with Cerner for our inpatient clinics. Oh yeah, that always works. And Judy Says no. That is a bad choice. That is the wrong choice to make.

1:21:51 And I don't care if you go with us or them, but to do the right thing for your patients and for your whole system and to make billing work and have this all function correctly and have patient records transfer between your ambulatory clinics and your hospitals, which you really, really need. You should just pick one of us. Now. This was a little self serving on Judy's part because

1:22:11 Cerner was not good at ambulatory. It's a calculated high risk decision. However, definitely super ballsy to do this. But she knew that. Epic.

1:22:22 had a good product in both. The problem was just that their impatient product was still new. And so didn't have trust yet in the marketplace. Yeah. But she's still a Pip squeak. I mean Cerner's a billion in revenue at Epic is like somewhere slightly north of fifty million at this point in time. So they go a little further in the process. And at one point.

1:22:41 There's a technical due diligence meeting. where Kaiser asks both companies to come in and present to them. about how their systems are gonna handle All the volume of concurrent data transactions that Kaiser has. Remember, eight and a half million patients, eleven thousand physicians. It's a high volume system here. Yes.

1:23:01 And listeners, this is a great story. This is kind of the eleventh hour of the deal. This is hey. We're pretty close to a decision, but we haven't made it yet.

1:23:09 Can you both come to the same building and sit in different conference rooms and And throughout the day, we're gonna bounce back and forth and keep spending an hour with each of you, formulate some questions from hearing the other pitch. And then come back and ask you those questions. And so if you're on one team or the other You can kinda Learn.

1:23:28 Through the questions. what is being pitched in the other room and why am I suddenly being grilled on this new topic? So The epic team is doing their planning, you know, getting ready for all the preparation for this really big meeting. And

1:23:42 The team had decided that The way they were gonna handle this question was to do a theoretical presentation about how epic's architecture worked. The single system and Theoretically how much load

1:23:54 Could the system handle. All at once. And the story is that Carl Devorak, the president Flew in To California.

1:24:03 The night before the pitch meets with the team, sees this plan and is like Guys. No. We need to model out in Excel.

1:24:13 Exactly. What Kaiser's transaction flow. in the system and how our system will process it.

1:24:22 And prove to them that we have far in excess bandwidth capability to handle their system and it'll never go down. But Carl knew that

1:24:35 Epic had the advantage here that they actually could if they played it all the way out and really built out the spreadshew. Actually we're gonna be more performant for you. Yep.

1:24:47 Pull an all nighter the night before the presentation. I don't know if Judy was there as well. I assume she was too. Come in. And they show the model. During these meetings.

1:24:55 that Kaiser is having back and forth between the two teams. And as the day's going on. It becomes really clear that Cerner. Has not.

1:25:04 done a similar level of modeling and can't actually prove. To Kaiser that their system is gonna be able to handle the transaction flow. I think this is The moment when the tide turned and Epic was like oh Yeah, we're gonna win this thing.

1:25:15 But it still wasn't obvious right away. I think they earned big points there. But My understanding is that Kaiser still went to Cerner and And said we're interested.

1:25:27 Can we do an equity deal on top of this. Can we take part of the company In exchange for basically giving you this big deal. I think Cerner said yes. Yeah.

1:25:38 The story. As we heard it at least, is that At the last minute, then right before the decision. Yeah, Kaiser Came to both companies. And said, Hey, we'd really like warrants in your company.

1:25:49 We're the biggest health system in America. This is the biggest contract you're gonna get. We want some equity in your companies for working with us. And apparently Cerner Did offer them ten percent of the company. for this deal. That's how important this was. So then they come to Epic and they say and they're like, Well What do you have to say about that?

1:26:08 Um Judy's like no. We're not gonna do it. We're not gonna do it for you. We're not gonna do it for anybody. And it's the wrong thing to do. If we did it for you, we'd have to do it for all our big customers, and then that would turn out poorly for you too. So absolutely not. And

1:26:22 They still picked Epic. In the end. Through that through the architecture bake off. And through The

1:26:31 No, you have to pick one of us. Epic still one out. Yeah. And stuck to their guns all the way through that negotiation. Which I think really should just tell you

1:26:41 How Important the stability and continuity of the system across Inpatient, outpatient and billing.

1:26:51 Is 'Cause is the only one that can offer that. Yeah. By the way, earlier when I said twenty four different companies merge together to create Cerner. I forgot that this chart that I'm looking at

1:27:02 Pre dates. when Cerner then bought Siemens. So then there's another twelve companies that had merged together to become Siemens. That merged also in Discer.

1:27:11 Yep. We're gonna come back to the Siemens acquisition in a minute. I think that was twenty fourteen. When that happened. Yeah. This is key. This is why Epic wins. Yeah.

1:27:21 So They win the deal. Basically doubles or triples revenue overnight. The LA Times writes about the deal when it gets announced. Quote.

1:27:29 Because of its scope, the The Kaiser Epic System. could become the model T of its industry. Not the first of its kind, but But the first to reach masses of people.

1:27:40 Once this happens. Epic. gets elevated to the new gold standard. If you're a hospital system, if you're a CIO A CEO

1:27:50 looking to rebid your EMR. Well Kaiser, the biggest system in the world, just chose epic. And they chose it over all of these reasons not to, there must be something really good in there. Like of course you're now gonna consider epic. And of course Epic is gonna perform.

1:28:05 Really well. In these evaluations. Yeah. It helped a little bit at first, but after the go live a few years in, after the whole implementation took place and they didn't tip over and it did go well, that was really when the floodgates opened, sort of in that two thousand six, seven, eight time frame. Yep. So by two thousand seven. Epic has hit five hundred million in revenue, so

1:28:26 Another three X. what they were doing once they added Kaiser. And like eight X what they were before Kaiser, almost ten X what they were. Before Kaiser. They're

1:28:37 really starting to transform into a big company. I spoke with one former employee and I was asking what were the inflection points in the company. And This employee said, Oh, after we won the Kaiser deal, we had been hiring like ten kids a month out of college. And it now felt like hundreds a month were just flowing into the doors so we could scale. Which

1:28:56 Well bring us in a minute to Epic's Epic, shall we say? Verona. Wisconsin campus. Yeah. And one thing just for our

1:29:05 storytelling narrative there we kind of skipped over was there's another thing that happened in the early two thousands That Reads a little bit as a sort of alternate history for what could have happened at Epic.

1:29:17 Imagine you're a small company and a big company comes to you and says, Can we co-develop a new product together? You can distribute it to your customers. We'll distribute it to our customers, you know, under our brand name and everything. But you get some of that revenue and we'll sort of build this with you and it really will charge your business up. And if you don't know any better.

1:29:36 And you've never Done it. It kinda sounds appealing. Maybe we should do that. And There are many instances of it working.

1:29:44 So you know, that's extra tempting. My favorite weird example of this in history of it not really working is The HP iPod. Do you remember this? Oh yeah, that's right. I do remember this. I think I might have had one. No, I have one of the U two iPods, the red and black one.

1:29:59 listeners Google it, it's this really odd thing. It's an HP brand on the back of an iPod. That tells you all you need to know about what a weak position Apple was in at the time, that they were willing to let HP put their brand on something entirely created by Apple to get HP's distribution and get some cut of that. revenue. And of course it would have bootstrapped their ecosystem since it used iTunes and all that. But That's basically what happened here. So Phillips The Dutch company.

1:30:24 comes to epic. And says we want to do something focused on the radiology segment. You do a lot of the development work. We have the customer relationships and distribution. Right, because they're probably selling the machines. Yes. We Phillips will get a license to Epic's whole IT system. Everything that you already sell, we want to sell also. Oh wow. And we're gonna market that. as Phillips Eternity Enterprise.

1:30:49 to our customers. You're going to buy a fill up branded version of Epic. Mm, interesting. And I imagine Phillips probably has a lot of customers not in America too, like in Europe. So this is a way to go international. Right.

1:31:02 So Epic starts hiring people in the Netherlands, they build up this team, they spend multiple years or at least a year building it out. I think they even launch it. The whole thing ends up folding. And

1:31:15 Within a year or two of coming out. It was a really expensive detour. And the company develops this intense scar tissue for partnerships. partnerships at this era to the epic team. means A Stuff I can't control outside my organization.

1:31:30 Big risk. see never in our history do we have an example of it working. This is an uncontrollable dependency. And they sort of internalize this scar tissue as Stay focused on what we can control, go directly to the customer. Don't try to do any fancy partnership integration stuff with other people.

1:31:49 And that's oversimplifying it, but I think it's still reasonable to say that some of the DNA of what Epic would become And they would take tons of arrows for this, this closed, not interoperable, blah blah blah. Some of it stems from this Failed partnership. With Phillips. Yeah.

1:32:06 Totally. They're now partnering again. Finally. But yeah, like fifteen, twenty years later. Yes. And thanks to Health API guy for the tip on that.

1:32:15 Yeah. 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.

1:32:31 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?

1:32:40 Uh, 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. Yes.

1:32:54 So they're sort of Two stories of how the Campus came to be. First is Judy's son.

1:33:01 Yeah. is actually working at Microsoft in Redmond. As a developer. And Judy and Carl had always been inspired by Microsoft's

1:33:12 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.

1:33:20 We're thinking about expanding, we're outgrowing our space. We wanna see what it's like there. And she's really impressed by Redmond, as I think anybody who goes there would be. Yeah. Especially in this era. It was sort of pre Google Plex, it was kind of the fairy tale tech campus. Yes, it was Google before Google. Yep. And she's like, This is like a college campus here, the atmosphere that you've got. Sports field and Tons of buildings and all of them are pretty short, two, three, four stories.

1:33:47 Lotta outdoor space, walking space. Everyone gets an office. This perfect. So Judy comes back and Basically copies the

1:33:57 Campus strategy of Microsoft almost exactly. They had been in that renovated schoolhouse. I mean, if you think about where they came from than sort of what they now have the opportunity to build. They had renovated the schoolhouse to be nice. But

1:34:10 Yeah, that was well before they were a half a billion dollar a year revenue company. Yes. Exactly. So she goes out and buys a thousand acres. Of farmland. In Verona, Wisconsin, which just like Redmond

1:34:23 is a kind of bucolic looking suburb about half an hour outside the city in Madison. Or I guess maybe Redmond was bucolic before Microsoft but he got it built up, but Just like Microsoft kinda owns Redmond. Epic owns Verona spiritually.

1:34:39 So they build this incredible campus there. 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

1:34:51 fairy tale whimsical thing that you can kinda see in their product names. But David, what was the story we heard about the schoolhouse fireplace? Yeah. Okay, so this is the second story of the epic campus.

1:35:04 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.

1:35:14 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. Yes. Like a Wisconsin Lodge. Yes. And I don't even know if the designers did that, but I think Judy and the

1:35:28 company were like, Well, this kinda 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 a axe that they put on the wall and stuff. And it ends up becoming

1:35:42 the most popular room in the building and any time customers are coming to Madison, they always want to meet in the lodge conference room. And so Now they're building this new camp institute. He's like, Oh well Let's take the lodge idea and really blow it out. Maximize it. Yeah, so

1:35:59 They inject this Fairy talenness. times ten when they're building out the new campus. They hire the same firm.

1:36:09 That did the Disneyland California Adventure renovation in two thousand and eight. I think it's even more on the nose on that. They hired two architecture firms. One is that. Uh huh. And then they also hire the firm that built a lot of the Redmond campus for Microsoft. Oh, is it really? Yep. Wow.

1:36:27 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 of the show notes too. It's Bananas. But It is extremely attractive to

1:36:43 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

1:36:54 Two sided culture. that seem to play well together somehow. This goofy, whimsical fairy tale thing. And this hard driving

1:37:05 Wit 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. Yes.

1:37:19 A hundred percent. That is Completely spot on. I had in my script here the question if all this is why. On the campus. And That is exactly why.

1:37:29 We are hiring Super smart. Young Hungry new college grads. How are we going to

1:37:37 Attract them to Verona, Wisconsin. Well, we are gonna create a paradise for them. Yes. So some interesting stats. It's seventeen hundred acres. Four hundred and ten of them are the campus. The rest is the farm. It now covers eighty-nine buildings. There are four indoor auditoriums with eighteen thousand seats total. The big one, deep space. is the world's largest subsurface auditorium.

1:38:01 There are eleven thousand four hundred seats. This is an auditorium. This is Two radio city music halls full of

1:38:10 People. Smash together. In one giant auditorium underground on a corporate campus. The number of seats is much closer to A

1:38:20 Chase Center. It's much closer to a basketball arena than it is to any other auditorium that I can think of. It goes down seventy four feet beneath the surface. I mean the whole logic behind it is When they built it, they thought oh we'll never grow to eleven thousand four hundred people. We can have our all hands in here, no brainer, but this can also be the place where we have all of our customers and our whole ecosystem can come here. Of course, now they don't actually fit in there because they've outgrown it.

1:38:45 Not even all their employees can come to all hands there. The logic for building it was that they had a movie theater that they used to do their monthly all hands meeting and they wanted to sort of have this opportunity to do it on their new campus too. It's wild. I mean, when you look at it, you just can't believe the scale of this building. Yeah. All right, I think now is the right time.

1:39:06 While we're talking about the campus and epic culture to really talk about Epic culture. Yeah, because the first thing that you have to understand is Judy refers to it as a software factory. When you keep looking at it and you're like Why is it so weird? The biggest takeaway is

1:39:20 In Judy's mind. since they don't ever go by any other companies and they don't have any competencies at the company other than making software. What they are is a factory that church out software. They take in software developers and they turn that into software for the medical industry. That's funny.

1:39:40 Apparently she was just ahead of her time with the AI factories. Yeah. Absolutely. And so It starts to click and make more sense when you think, Well, what would a factory for turning developers into medical code and medical applications look like? Well, Verona, Wisconsin. Yep. So

1:39:58 While we're on culture here. One of the most amazing things about The campus. Is Epic.

1:40:05 has a list of ten commandments. It's the epic ten commandments of like, you know, Moses in the Bible here. They have them Posted. In every bathroom.

1:40:16 And in every break room across the entire campus. And so any visitor who goes there and it's open to the public, you can just go in and See the Ten Commandments in the bathrooms there. The ten commandments are number one. Do not go public.

1:40:29 Number two. Do not acquire or be acquired. By the way, those first two things You don't need to communicate that to employees. Only the CEO can do either of those things. So it's funny to put it as commandments. That shows how deeply Judy feels it needs to run in all of the employees.

1:40:44 And I think The other big motivation for doing this is and having it there in the bathrooms is every customer who comes To visit. It's right there to the customers too. Right. We will Never go public. We will never be acquired and we will never acquire another company. You can trust this is one system.

1:40:59 Forever. Yep. Yeah. Okay, so that's one and two. Number three. Software must work.

1:41:05 Number four. Reality. Equals expectations. Number five, keep commitments, even the unspoken ones. Number six, focus on competency. Do not tolerate mediocrity. Number seven, have standards, be fair to all.

1:41:18 Number eight, have courage. What you put up with is what you stand for. Number nine, teach philosophy and culture. And number ten Be frugal. Do not take on debt. For operations.

1:41:29 Zero of those pertain to healthcare. Yes. When I was looking at them, I kept thinking, Oh, I'm gonna find something here about Every life is important or the patient is at the center of everything or No, this is

1:41:42 how to run a company. This is my opinion on how to run a company, period. Yeah. And I think specifically to your point. This is a pretty good way to run a software factory. Yes. So these hang in the bathroom. Other interesting things about the campus, they have wedding bells.

1:41:58 that will play campus wide when a new client is signed, just showing that that's the type of commitment that this is. It's a We've now married this client for the rest of our lives. Yeah, it's like the wedding march, you know. Like that's their version of like ringing the gong. Yes. And I think We haven't really talked that much about

1:42:17 what it is like to be an employee there. So this is a probably a good time to do that. This is an insanely awesome training ground if you are a smart, ambitious person out of college. People accuse them of being cult like. But there are ways in which that's a good thing. I mean, they take you fresh out of your career and they teach you everything. And when I say everything, I mean how to take notes.

1:42:38 There is an epic way to take notes. on a yellow legal pad. There is an epic way to write emails. And These are like hardened practices over the years that they just believe

1:42:49 through iteration, through testing, through data probably going all the way back to Neil and Meditech and the three days in Boston. This is the best way to do this period. And so we're just gonna teach everybody the best way to do everything And everybody is gonna be like Reasonably robotic. we can sort of trust that once we squeeze you through the epic system, when you come out the other side.

1:43:10 you are able to operate in a way that works really, really, really well. in our machine where people can really trust each other. So because of that high level of trust There's very few middle managers. You understand the system that everybody else works within, and you don't have to corral chaos.

1:43:28 most of the people they're hiring are right out of school, so they've been there for a long time. They don't have budgets. Which you can kind of only do when you have a high trust environment like this, I mean there's some financial controls, of course. But Judy's got this great story that

1:43:42 She used to go see customers and they'd say Oh, this is the right thing to do. I just don't have the budget for it this year. So we're gonna push it next year. She's like, that's stupid. Or they would tell her. Can we squeeze this in this year? Cause if I don't spend this money, I'm gonna lose it in my budget. And she would say, Well, that's also stupid. So at my company, we're not gonna have budgets like that.

1:44:01 They're super light on titles. You might have a business card, whether you've been there 20 years or six months that says implementation. that you hand to a customer when you go and do an engagement. Everyone does immersion trips. where the software developers, I mean everyone, is required to spend time in clinical settings like operating rooms to directly observe workflows. Yeah.

1:44:21 I think when you start you have to do five of them. And then you do more every year. Wow. Why Combinator preaches, go talk to your customers, spend time with customers. Epic's been doing this forever. This is the epic way that I think the rest of the world sort of woke up to and startups internalized as doctrine. But

1:44:39 Every person in the company Spending time In medical settings, talking to customers. Hugely valuable. On the developer side, there's a super prescriptive software methodology that they use.

1:44:51 to minimize bugs. So you go through this intensive training for six months when you join. And then when you start programming, the whole system is designed around minimizing the number of hours between when a line of code is written. And then when it is tested, So if a bug is found. then you drop everything as the original developer.

1:45:10 And you fix it. So that you still have the whole context fresh in your head. You don't sort of go months and then the system gets tested and Bugs aren't allowed to compound into bigger problems this way. They get caught right away. And I believe the rule right is that Every

1:45:25 Developer must fix their own bugs. That's my understanding too. It's this method of software engineering. that places way more importance on a zero bug environment. Because lives are on the line.

1:45:37 Then other one. So you're not necessarily gonna ship software the fastest way. You may not even ship the most innovative, clever, amazing cutting edge. You're just gonna make sure that you're shipping bug free software. Yeah. Well I think the reasons are twofold. One, it absolutely is right that lives are on the line. If uh

1:45:53 order for a the amount of dose in a prescription gets messed up'cause of a bug, a lot of people are gonna die. Yep. And also the complexity required for the revenue cycle and billing for your customers.

1:46:05 Is Of paramount importance. You cannot have bug there either. Or At best the hospital's gonna lose a lot of revenue opportunity. At worst they're gonna get sued for

1:46:16 Federal crimes. For medical fraud. Yep. Great point. So that means you need a highly robust system. Yes. The work done as an implementation person at the company is insane. It's like military level logistics. You're handling multiple customers, all of which are Among the most complex systems on earth.

1:46:37 Peter Drucker famously referred to hospitals as the most complex form of human organization that we have ever attempted to manage. You have to understand all these dependencies at the customer. and the status of a dozen interrelated things on a daily basis. You really are in this high adrenaline.

1:46:56 high stakes. Leadership. role as a really young person. You can work ten, twelve hours a day. But a lot of them love it'cause you're winning.

1:47:06 You're doing really big things right out of school. You're doing it with other really bright people. So they really try to get high IQ, high EQ Often like very sweet midwestern kids. to take these customer facing roles. Yeah. And I think also'cause the flat organization, like you're also doing it alongside

1:47:24 Other senior people. And learning from them directly. Like the story about Carl and Summit. It's a young programmer working on a project. with Carl the president, who's also a a programmer leading yeah the team. Like that happens.

1:47:38 If you're in ambitious career focused person. There is nothing more fun than than winning in a high stakes environment with other high performers as a team. That plus the whimsy encapsulates pretty well the epic

1:47:52 Culture. And the result of that is it becomes the number one thing in your life. If you talk to a lot of these people who spent time there or still work there, You're all in.

1:48:02 And you're in the middle of nowhere. This is the other job the campus does. You're not really getting exposed to other things you could leave and go do. They make it very easy for your whole life to become epic. Yeah, you could drive to the big city of Madison. Yes.

1:48:16 I know we keep making the comparison and it's a direct one with the campus here too, but The company that this reminds me the most of is those early days of Microsoft. This is exactly what being at Microsoft in the eighties and nineties was like when we talked to people doing that research. And I heard from some people too when I was researching for this, two or three times Palantir came up.

1:48:36 of these sort of bright eyed, bushy tailed, smart young people. where you're deployed into these really intense environments, but you know your stuff, you've been through the training, you've been through the process, you're armed with good tools, and you're gonna go make it happen. Yeah. So The other side of this is

1:48:52 It is up or out. They aggressively trim bottom whatever percent of performers and they work you really, really hard. And so with the vast amounts of new hires, they're trying to figure out if you're gonna cut it. And it's more cost effective to replace you than keep you as dead weight. And so you have lots of attrition in the first few years, but you know that once someone's been there for a while.

1:49:12 They're good. You can count on them. Yep. Their method of hiring is crazy. And this is more common now to give out programming tests as a part of the hiring process. Uh.

1:49:22 This story is so good. Can I tell? Yes, please. So We mentioned that Judy Sun. It was programmer it.

1:49:29 Microsoft and That's how. She went to visit him part of the inspiration for the campus. His involvement in the company actually predates. him becoming a programmer at Microsoft or even an adult

1:49:40 In the Late eighties. Judy was hiring software developers and found that Interviewing them just wasn't that predictive of whether they were gonna be

1:49:50 Great. Software developers are not. Meanwhile her son I think was in like seventh grade or something like that. And was doing these programming competitions. Around the state.

1:49:59 And She was talking to him, I was like, Well You do these programming competitions and there are these tests and then you're winning some of them and that's a pretty good judge of whether you're a good Programmer or not. They're reasonably predictive. Do you think you could write

1:50:12 One of these Types of tests. For me and I can use it at Epic and test software developers as we're hiring them and see if they're any good. And for eighteen years, listeners, that was how they tested it to determine if someone should work at Epic. And many, many times, I don't know if the number is close to a hundred percent or but some large percent of the time, they just don't interview you. They believe that their tests

1:50:35 are predictive enough that that's it. You can get a job offer. You come visit campus and all that, but like you get a job offer. After scoring high on this test. And it's not just that test now, there's other tests. There's a Rembrandt test. They've got a bunch of tests.

1:50:48 It's all systemized and cataloged. And everybody takes one on the way in. For every role in the company. Yeah. The culinary team, we heard. takes not full software developer tests, but logic tests. On the way in. Yeah.

1:51:01 Amazing. But yeah. Judy's teenage son wrote the first test that is now no longer being used. I think the answers have gotten out on the internet, but for a long time was used. And it's a funny story, but This was in the eighties. This was way before Google was doing this kind of stuff. This was

1:51:17 really out there. hiring practices at the time. Yeah. 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.

1:51:29 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 Gotney, the chief information officer for Rush University System for Health.

1:51:42 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.

1:51:54 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. Yep. Customers are like always number one. Everything.

1:52:07 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.

1:52:18 as a way for figuring out what are we gonna do next. 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.

1:52:34 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 tech goal specialists. That's the whole company. The technical specialists are the biggest group in the company.

1:52:55 Every single customer of the six hundred and seven whatever hospital system customers that Epic has. Every single customer has their own Technical specialists.

1:53:06 Yeah. For every single product. That they use. So like if you're a hospital system, you have your On

1:53:13 technical specialist team for your Epicare MR, for my chart, 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.

1:53:26 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

1:53:37 Are successful. With their products. So this means they do things like They grade you. As a customer.

1:53:45 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.

1:53:56 To your CEO, CIO, and CFO. And they will grade you one through five. On a bunch of dimensions. And then they will show you benchmark data. Against

1:54:07 other customers at your pierce set of like relative similar size hospital systems. How are you doing? Wow. That's crazy. Yes. I've never heard of any other company that does stuff like this.

1:54:17 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.

1:54:33 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

1:54:45 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

1:55:00 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

1:55:17 we're gonna focus elsewhere this year because we're gonna pick up only ten to twenty, maybe thirty new customers. And we're happy to wait. We're happy to wait until you're ready to work with us. And they actually have the leverage to pull that off now. 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

1:55:38 Doing Either fully or mostly standard. I think there probably are some tears. Based on how standard your implementation is and the more you deviate from it, the more you have to pay.

1:55:50 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. Yep. So all of this sounds sort of Epic accruing. Power for Epic. There is also this almost altruistic

1:56:06 part of the company in there. Customer relationships. And I think this comes from Just Judy and who she is as a person. Altruistic capitalism does feel like ultra competitive. ultra value maximizing altruistic capitalism is kind of like how I would describe the company.

1:56:22 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.

1:56:34 But their average yearly increase is about two percent. Across the board. So below inflation. Compare that to lots of other software companies out there and they're not raising prices two percent.

1:56:45 Every year. They also do things like They have never in its entire history changed the price of my chart. 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.

1:57:04 Good point. 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

1:57:22 Risking downside. With the lowest risk possible. Yes. So that is why the customer is picking them. And what is Epic trying to do? Epic is trying to win deals.

1:57:32 And stay in forever. And Achieve world domination. So they do these very interesting things that feel very customer focused. And R

1:57:42 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.

1:57:56 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.

1:58:08 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 because it's gonna be two bare bones. But at some point it'll get good enough where you can say, Oh

1:58:23 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. Yep, you're totally right. 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.

1:58:41 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

1:58:57 ninety nine or something, some really old video. Yep. Epic is absolutely customer obsessed, again, CEO, CIO of hospital systems. Because if you deliver for them. You deliver for epic.

1:59:10 in the long run. Yeah. Well I mean that's Kind of like the goal of running a company. Theoretical underpinning of capitalism, right? Right. So

1:59:20 All that to say, it is a very fascinating Corporate. Culture. Yeah. Organization.

1:59:27 Yes. All right. So listeners, if you know anything about this industry. You know that we haven't gotten to the important part yet. We've gotten to the Kaiser deal. That was a big deal. Got into moving to Verona. It's the important part to understand the culture. And it's like this cutesy Thing that Most

1:59:43 journalists who write about the company kind of latch on to oh cool campus. Like I should go take some pictures and write a cool story about campus. There's a whole big crazy thing that happens. as a part of the great recession. And some legislation that gets passed. transformative for the industry.

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2:01:40 Who's managing them all? So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out service now.com slash acquired and tell them that Ben and David sent you. Okay, so we're coming through the two thousands here. We just got through the Verona campus. You know everything about Epic's culture now. Or at least everything that we could discern from the outside anyway. And

2:02:04 We're in this pretty interesting era. In two thousand six. We're in the Bush administration here in America. And Bush says in a state of the union.

2:02:14 For all Americans, we must confront the rising cost of care. strengthen the doctor patient relationship. and help people afford the insurance coverage they need. We will make wider use of electronic records and other health information technology to help control costs. and reduce dangerous medical errors.

2:02:35 Wide applause. This is one of the craziest things to me in doing the research. The narrative out there and certainly In as much as I knew or paid attention to any of this, Was that

2:02:47 Obamacare and The Obama administration were the ones Who really pushed. EMR adoption and meaningful use and all this stuff that we're really gonna get into. Totally bipartisan.

2:02:57 Totally started in the Bush administration. Yeah, and just to give you a little look into how much the window changes of which side represents which party The next paragraph George W Bush also says We will do more to make this coverage portable so workers can switch jobs without having to worry about their health insurance.

2:03:15 I mean, it's crazy. If you're a Republican during the Obama era, talking about having coverage that's portable across employers. That's a scary thing to be talking about just four years later. Yeah. So funny. So

2:03:29 You're starting to get these political winds of Hey everyone wants A good system for electronic medical records, we think. In the abstract, there'll be a lot of good that comes from it. Well, I think there's an even deeper motivation than that.

2:03:45 In two thousand six already. I think everybody knows in America The current healthcare system. Sucks. Yes, there are great things about it.

2:03:54 But overall. This is cost disease run rampant, huge portion of GDP, massively inefficient. We wanna try and fix it. How to fix it, we don't all agree on. How to fix it, we don't know, but this promise of digitizing it and Incentivising EMR adoption.

2:04:13 is held forth as a promise that can deliver us from this problem. Right. It feels like a step in the right direction. And at the time only Thirteen percent. Of healthcare facilities in America had an EHR system at all.

2:04:27 This is a massively not digitized industry here in the mid two thousands. Which I think there's some pushback on that thirteen percent. People would say, well, the definition of EHR just changed. So actually there were a lot more than thirteen percent that had it, but that's the best data that we have is that. Fair enough. Okay, now before we get to the actual legislation and what happened, there's one other concept. to sort of have in your mind, which is interoperability.

2:04:51 because this word comes up every time Epic comes up or any EHR comes up, and it's worth knowing sort of the buckets. So there's the first and easiest interoperability, which is epic to epic. at a different hospital. I wanna transfer my records from one hospital to another. They also have epic It's the same technology that

2:05:08 should transfer easily. Two is Epic to another EMR that's at a different hospital, epic to Cerner, epic to Meditech, epic to AllScripts, epic to some home rolled system. You can imagine V

2:05:22 Technical reasons why that would be harder. They've different architectures. All the other ones. Arguably except MetaTech don't have a single database, you know, et cetera. And standards have not been quite as standard in this industry as they are in SaaS software.

2:05:36 Easier B2B software mode. Now, before we get to the third category, let's just think about some of the incentives that are probably at play here. Epic transferring to themselves, fine. Easy. A hospital transferring to a different hospital? You can imagine

2:05:50 These places are competitors. They're businesses. They may not want to support that. unless it's really in the patient's interest, but they're at least gonna be sensitive to it. Epic to another EMR at another hospital. Well not only The hospitals maybe don't want that.

2:06:04 Maybe Epic doesn't love that either. Right. Interests are sort of aligned against this happening. Right. Epic doesn't want that. And the hospital doesn't want that. And you know, they talk about a lot of good reasons why actually we do want that, but let's just call a spade a spade and say there's no business reason why Epic would love for that. to happen. other than of course it's in the patient's interest and everybody really should do what's in the patient's interest. 'Cause we all get care from multiple places.

2:06:29 Then there's this third category. Epic to third party application. That wants to use data from Epic. Or sit on top of Epic. or interoperate somehow with Epic.

2:06:42 As a company. They have been very, very careful about this one over the years. And for good reason. I mean, you don't want patient data to leak. Epic has publicly referenced the fact that they have never had a Cambridge Analytica situation because they're very, very careful about sharing data with other application developers. But the result of this is that it's been much harder to integrate with Epic as an application developer than you would be used to in any other software category.

2:07:07 Yeah. And again. Very justifiable reasons why that should be the case. We're dealing with HIPAA data here. Yeah. Also massively in Epic's interest for that to be the case. It's very convenient as a strategy.

2:07:20 Yes. So as for that first scenario, epic to epic, it's actually awesome. They have this thing called Care Everywhere. Today there are twenty million patient records exchanged daily. I used it as a part of prepping for this episode to join all my my chart accounts across the three health systems I have in Seattle. It just seems to work pretty well. There's a great story of how it actually happened and how it came to be.

2:07:40 Judy made the call personally. that care everywhere wasn't a thing or shouldn't be a thing where their customers could pick and choose. If you were enabling it, it worked across All epic customers. even if they were your local competitor.

2:07:55 And so here's the story. One of the first customers to accept that new software that came with Care Everywhere. unknowingly agreed to the interoperability feature. And he later admitted that he would have declined it if he realized that it was included in the contract that he was signing. Yeah, this is the CEO of that health system later admitted that, yeah. Of that hospital. And Judy described it as pure luck that Epic was actually able to move ahead. And so after that win, they then made it mandatory for all of their customers.

2:08:24 And they retrofitted old versions of the software to support care everywhere. So every epic customer in the US. has it and can share with every other epic customer in the US. So this is kind of their talking point of Hey, actually we have lots of interoperability. We launched this thing called Care Everywhere. It shares

2:08:41 millions and millions of records all the time. Yeah, they talk about hey, we are the biggest sharer of Medical record data of anybody. Right. So

2:08:51 Coming into two thousand and eight. That's sort of the historical baggage that you should know about. in Epic Land. Of

2:08:59 They believe they're doing a lot of interoperability. in the way that they like to do it. Almost no one is great at interoperability. I saw some transcripts of talking with hospital administrators who were like Interoperability in this industry is just laughable, period. No one's incentivized to share with each other unless they absolutely have to, and it's not easy. And these are incredibly complicated systems and there's lots of risk.

2:09:21 One CIO put it to me in a interesting way when I was chatting about this with him. Because it's patient data and health data. There's this sort of we feel like Interoperability. Should be a thing. You should be able to share your data everywhere. And like Sure. Of course you should.

2:09:36 I don't want to discount that whatsoever. However, he was like Imagine this were a different industry. Imagine this were the airline industry. Does United share their customer data with Delta?

2:09:48 Even though it's customer friendly to do so? You know, even though it's the customers' data. No. Of course not. They never would. So do I feel great about sharing my patient's data with my competitor down the street? No, of course not. Right. This is where you really start to feel the friction.

2:10:05 I'm sure you're listening to this and you're emotionally getting charged up at this point because You're feeling your inner capitalist. Think. Well, it's a business. They should do the things that make sense for them as a business.

2:10:18 And you're feeling your inner human being who is part of a society that has your own health needs. Thinking.

2:10:26 Well, maybe but this thing shouldn't be subject to the bad parts of capitalism. Maybe this thing should function differently. And business interests. It feels yucky to me. that business interests are governing the way that things get done. You should feel that tension because this is one of those bothies.

2:10:43 Well, that kinda describes the whole healthcare industry. Right. Make no mistake, this is definitely a for profit industry. Yes. And It's highly regulated and there's all these Issues.

2:10:54 Yeah. Okay. So We're into the meat. Two thousand eight.

2:10:58 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 we pulled out of it and it was amazing. Took some time, but we pulled out of it. But one element of pulling out of it.

2:11:17 Just like during Covid. is the government said we need stuff. We need stimulus. We need programs that we can throw money. At the economy. 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. And there's the monetary policy stuff of interest rates to zero, but there's also the fiscal policy stuff of we need to helicopter money into the economy. So the question is when you're gonna helicopter money into the economy.

2:11:46 You could mail everyone checks. And That happened during Covid. Yeah. Not a ideal way to do it.

2:11:52 A more productive thing to do that calls all the way back to the civilian conservation corps in the FDR sort of New Deal era is We want to look for shovel ready projects. What are things that we Just kinda all agree on are good ideas for the country. That should happen.

2:12:09 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

2:12:21 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.

2:12:34 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.

2:12:46 Fiscal stimulus. Two Stimulate the economy after the great recession. Two. Promote the adoption.

2:12:53 of electronic health records. Three promote the use Which is different. The actual use of electronic healthcare records. Not only do we want people to become Users in your system that never log in. We want'em.

2:13:08 Logging in all the time using the stuff. And promote the adoption of Interoperable standards. So that providers could share patient data.

2:13:18 nationwide. These are the goals of the high tech act. The two thousand nine health information technology For economic and clinical.

2:13:28 Health. Act. I love how they name these things. I know. Which gets folded into the almost trillion dollar American Recovery and Reinvestment Act.

2:13:37 Yes. So the mechanics in two thousand nine when the bill was passed. There are 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.

2:13:55 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.

2:14:16 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 this money for And you must use this money for

2:14:29 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. Yes.

2:14:41 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. Yeah. So imagine a huge system like Kaiser with eleven thousand physicians.

2:15:02 It's a lot of money. Yes. High tech contained the phrase meaningful use. Which is this crazy phrase where if you say meaningful use or you even say MU It is a triggering term in this industry.

2:15:16 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 DHRs.

2:15:32 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$2 billion industry. griped at the litany of requirements, but stood to gain so much from the government's thirty six billion dollar injection. Then it jumped in line. As Rusty France, CEO of EHR vendor Nextgen Healthcare put it, and NextGen is one of the top ten.

2:15:56 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.

2:16:11 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 high tech was saying that it needed to be. Yeah.

2:16:31 It's more nuanced than This is really good for Epic. Of course it was really good for Epic. But really it's the this was really good for the entire EMR industry. The competitive dynamics within the industry

2:16:43 Are almost like a separate kind of question. Well, okay. So Who's it going to benefit the most? Probably the most reliable one. If I wasn't gonna do this before and now I'd 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.

2:17:00 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. Yeah, right. It's effectively free. 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.

2:17:22 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 Birken bag. And they're all free. And it's not exactly like that, but it rounds to that. It also is interesting because 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

2:17:44 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 high tech actually do? We'll go through sort of each of the goals.

2:17:56 Did it accelerate usage? Absolutely. Market penetration of electronic health care records went from nine percent of hospitals in 2009 to 95% 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?

2:18:15 uh certain categories of software during the pandemic. Yeah, that's a good point. I would imagine maybe Zoom during the pandemic is the Closest thing. I mean to be an epic employee at this moment. Where suddenly your category is just

2:18:30 Free for all your potential customers. It's crazy. And digitization was great for patients, even though like a lot of doctors will complain about it. It is totally amazing to be able to message your doctor about something and pull up your own records electronically. As we talked about with my chart. Schedule your own appointment, yep, all of the above. Manage your family's care. Yes.

2:18:49 Absolutely. Okay, so then the next goal, cost reduction. There are stats both ways on if EHRs generally reduce costs. We found one stat that claimed that costs in hospitals went down by 10% with the introduction of EHRs. There's also arguments that the adoption of EHRs may actually have accelerated the ordering of unnecessary care

2:19:09 as well as increased billing codes for either more codes or higher dollar codes. for the same procedures. So that's sort of the counter argument to did it decrease costs in the system. Done. Critics of EHRs say that

2:19:23 Basically. more stuff is getting ordered from exam rooms for the exact same procedures. than was happening before. And frankly. That's the goal.

2:19:34 Of of hospital. buying an EHR. I mean part of it is revenue maximization. Right. Again, these are Commercial. Entities.

2:19:43 maybe nonprofit organizations or part of a university system or what have you. At the end of the day. This is revenue being generated by a hospital. with a management team and with its Primary staff being doctors and nurses.

2:19:59 Who? Like to make money. The reason you go to medical school to be a doctor or a nurse is to get a good job and B A good living.

2:20:07 And the prestige of it and you want to help people, but it's a high paying job. Yeah. So there's a great read called An Epic Dystopia, and I will say this article presents kind of a one sided view of things. This is the Americ article. Yeah. But there's a quote.

2:20:20 One doctor, for example, stated her supervisor regularly contacted her and said something like That appointment was a two. Don't you think it might be a three? And obviously in this case a three. could bill more to insurance than a two. Or someone else gave me a quote.

2:20:36 Hey, if you did X, almost certainly you did Y in that appointment. If you use those codes, you could charge more. And if you have a system, a computer system versus not having one. It's more likely that you are

2:20:48 Billing for more stuff. That would be the counter argument to this mass implementation of EHR's saving costs for the system. Yeah. Data interoperability.

2:20:59 Not really. The legislation was prescriptive about meaningful use. It really wasn't prescriptive about data standards. The people talked about that's a goal of the legislation. But It's not like there were incentives for data interoperability the way there were for meaningful use. And so

2:21:16 People follow incentives. the data interoperability did not really happen. Which was very convenient for Epic. who had a whole system that they made themselves and they didn't really need to integrate with anyone to make the software suite useful. So again, as the leading player in the industry and the one that can kinda do everything themselves.

2:21:33 They didn't need interoperability and it wasn't explicitly rewarded, so customers Didn't prioritize it either. And there is a fact pattern that opens Epic up certainly to criticism here, which is that Judy was on Obama's health IT. Council through all this.

2:21:49 Which was advising the Obama administration on The high tech act. And other competitors had people on other committees too. It's not like she was the only one with a voice in government. I was gonna say that is a a convenient gets left out by a lot of people making That argument or that.

2:22:03 All the competitors. Cerner, all scripts, et cetera. They were all on those councils too. Yeah. But Let's just look at the data interoperability thing. It didn't happen.

2:22:14 But It's happening more now, fifteen years later. And so at least we have the foundation of digital records so that As pushes and shov to make it more interoperable. Without operability, you can't have interoperability.

2:22:28 And I think for me that's kinda My takeaway of The high tech act in meaningful use here. At least when it comes to the industry of EHRs.

2:22:39 Yeah, any time you've got government coming in and distorting a market You're gonna get weird stuff happening. And especially any time you have government coming in and regulating how products are to be developed and used in a market, you're gonna get Really?

2:22:54 Messy stuff happening. Okay. So there were two really bad side effects here. One, by literally defining what is meaningful use, Congress not only accidentally designed the software and specified the features. But they also accidentally told doctors how they needed to do their jobs. And so Doctors are like running around now clicking nine things that they never needed to click before.

2:23:16 Some of which are poor implementation by their hospital system. Some of which is because the software's really complex, but a lot of it is like just making sure that this is what the legislation requires. Yes, complies with meaningful use so that the hospital then doesn't come and get hit with a financial penalty. Yeah, this is sort of the most unfortunate aspect of meaningful use, I think. I think it's the second most. I think the biggest one is they increase the regulatory burden of practicing medicine, period. So now since hospitals can face

2:23:45 big financial penalties. There's all these mandatory fields and workflows everywhere forever, even after the stimulus runs out. And so It just generally increased the operational overhead of the whole industry. The thing to optimize for now is hitting the MU definitions legally rather than the spirit, which is help doctors and patients get more out of the system.

2:24:05 And you end up with things like Health. systems merging with other health systems because the cost of doing business is higher, which is a pre existing trend, but it's certainly an accelerant. There's more overhead, more burdensome regulation. Just more Crap in the system.

2:24:19 More waste. So All that. Unquestionably bad. At the same time, what's the alternative? We gonna be in the paper based system? Like that's not good.

2:24:28 At least we have adoption here. At least we have adoption here is what a lot of people have sort of chalked this up to. It's definitely better to be digital. Is this the best form of digitization that could have happened? No. Is digitization overall Good. Yes.

2:24:45 If you zoom way, way, way out, you give the most credit to the government and the legislators who created all this. Was the goal actually a jobs program and an economic stimulus for the country? If that was the goal. A plus. Lot of jobs got created.

2:25:03 Because of this. Eighteen percent of our GDP's worth of jobs are in this field. So It's now a huge part of our society as people who work in medicine. For better or for worse. And related fields to medicine, like

2:25:17 IT administrators, you know, epic administrators. At hospitals. These are a lot of jobs and these are a lot of good jobs. And play it one step forward. These are all domestic American jobs.

2:25:29 Not dependent on imports. Not dependent on manufacturing. That have created viable great career paths for a lot of people in this country. From a policy standpoint, like

2:25:41 Maybe not bad. Yeah. Uh I hate it, David. Oh, I'm not saying I love the idea of jobs programs. I'm just saying if you zoom way out of what was the goal of government in doing this, did they succeed? If that was the goal, they succeeded. Yeah. It was good to create fiscal stimulus for that period of time where we really needed it, should the government be in the business on a durable basis of using taxpayer funds. Two

2:26:04 prop up industries and create and maintain a bunch of jobs in those industries? No, absolutely not. And so It's a very low bar, what you're saying. Did it stimulate the economy? I mean, mailing checks would have stimulated the economy. I look at this as like, yes, it stimulated the economy. And it had the free stapled coupon of we got some amount of electronic medical records, even though they're not interoperable, and even it's not the best system we possibly could.

2:26:28 hope for as a country. It's a better one than we would have had otherwise. And it kinda came for free with the stimulus checks. Yeah. So

2:26:37 Back to the epic story here. Yeah. So what did meaningful use do for them? Well, Interestingly. If you just

2:26:44 take a step back and say, what is the byproduct of the government? paying off a whole industry to adopt something new. What you're basically doing is pulling forward the future. and saying this was all gonna happen eventually. We want to make it all happen right now.

2:26:58 And to be clear, I think Especially after the Kaiser win. Epic was going to become the dominant player anyway. Absent of meaningful use. They were starting to run the table on competition. So that's the question. They were starting to. But what you definitely do when you throw thirty six billion dollars at the problem is you say

2:27:17 We're gonna close the door on anyone that might become a dominant player after this. The current competitive set. is now what we're dealing with. And we think the current competitive set is good enough. That this is shovel ready enough. That

2:27:33 We want the best ones to get implemented everywhere. These are stuck in there for multiple decades. So Yeah, the switching cost here is enormous. Yes. And that's a fair trade off. I don't even think it was that intentional of a trade off that they made by passing this legislation, but it is definitely true that a new EHR that may have been more theoretically innovative in some way that could have come after High tech.

2:27:56 Wasn't going to happen, at least for a long time. Yeah. Because you pulled forward so many R F P processes.

2:28:05 To a single point in time. Yes. And the majority of them chose Epic, which they probably would have anyway. But a lot of those processes would have happened. In the future, at which point in time.

2:28:15 Other competitors may have emerged. Right. There's no greenfield bidding for those theoretical future innovative competitors that everyone's bidding against your current system. How about that? But that's kinda nitpicky, right? It's a little bit of like a for whom are we holding the door open. So if you're looking for a smoking gun on regulatory capture, I think the right way to characterize this is as regulatory tailwind.

2:28:40 rather than regulatory capture. I don't think the folks at Epic loved it either. my impression is they felt like they were going to take this market and now they had to do it. In sort of this. Frankenstein style way. Well definitely made the product worse.

2:28:55 Yeah, it made the product worse. it increased burdens for everyone. You know, it made it more sure that they were gonna win the market because if something's gonna happen five years from now where it could happen now. You'd rather it happen now and it be certain. But they certainly don't love it that doctors have to check.

2:29:11 fifty seven boxes on. Every patient visit. Right. So all this compliance burden and the software Being frankly hard to use once it's legislated. Yeah. Product development by legislation. Which to be clear isn't just epic. It's

2:29:26 All of them. And also just the complexity of software of this magnitude with this many different screens and participants and all that. A big criticism is that It takes time away from patients. There was a twenty sixteen study that showed that entering data into EHRs consumes about two hours of doctor time for every one hour spent providing hands-on patient care. There's all this other research around doctors now work 11, 12 hours a day. They're like constantly responding to messages, which again

2:29:54 Is a hospital configuration thing. There's a way to triage messages. Another downside to the high tech egg and meaningful use. Is that Before digitization and moving all this activity from hospitals into the EHR. There were a lot of

2:30:10 regulations and guidelines that Maybe weren't we? always followed and that was sort of for the best in the hospital. So things like it's supposed to be doctors themselves who put in orders for pharmacy for meds or for scans or stuff like that.

2:30:26 But in the old world before everything moved into the EHR it doctors were supposed to do it, but they would have their medical assistants do it. If you're seeing twenty patients a day And a whole bunch of them need scans or meds or whatever. You can just be like, Hey, medical assistant.

2:30:41 Do all this and they can do it during the day. Yeah, I'll sign them all later. Exactly. But now. Once everything's digitized and in the Yeah. That means that the rules have to be followed because they're tracked, right? And so that means that

2:30:52 All of a sudden Doctors don't have as much. help and slacken the system as they used to. Yeah, it's interesting. So this is the sort of thing that ends up Contributing to Doctor Burnout.

2:31:03 Yeah. But you do have to compare it to how it used to be. There's a great old study from nineteen seventy That found that communications activities such as managing physical records accounted for thirty five to thirty-nine percent of total hospital operating costs. That's not the doctor's time, but Especially in the paper world.

2:31:21 It was always a huge amount of cost and time from the hospital. Right. You're shifting around the burden of this a little bit and creating more burden through all the meaningful use regulations, but this is not a new problem. You know who else doesn't love it? So in twenty seventeen, Obama himself told Vox that he felt that the high-tech legislation did not live up to what he wanted. And here's his quote. The fact that there are still just mountains of paperwork and the doctors still have to input stuff and the nurses are spending all their time on this administrative work, we put a big slug of money into trying to encourage everyone to digitize.

2:31:51 To catch up with the rest of the world. And that's been harder than we expected. The quote I actually don't think it was at all about catching up with the rest of the world on digitization. I think we were a leader there. But if the hope was that we could somehow downgrade our costs to be in line with the rest of the world, that would have been great and that did not happen.

2:32:08 Yep. One of the CIOs I talked to had a great quote on this. He said that Meaningful use and the high tech act. wildly succeeded at digitization of the industry. It did.

2:32:21 Absolutely nothing on digital transformation. Of the industry. Hm. We digitized. But we didn't Transform.

2:32:30 In the way that I think people were optimistically hoping for. That's interesting. And The good news is that can still come. Now that All the records are digital. Yes.

2:32:40 Now that we've digitized, yes. You actually can do interesting things with the data that you couldn't have done before. And we'll talk about when we get to the end of the story in a couple minutes. The promise, at least right now, of AI and ambient AI. In

2:32:54 Making a lot of this onerous process just disappear for humans. Yes. So On the back of all of this. Epic.

2:33:03 continues to Win epically. In twenty eleven they hit a billion dollars in revenue. They keep winning All the big systems that come up for R FP.

2:33:13 Johns Hopkins, Cedar 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. Yeah.

2:33:29 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 all together as a suite and Epic's advantage just becomes all the more pronounced. So two thousand eight. All scripts merges with MySys.

2:33:46 Two thousand ten, that new all scripts entity then merges again with Eclipsis. They keep on acquiring more smaller players today. That company is called Veradime. Twenty eleven, Meditech acquires LSS data systems. And then in August twenty fourteen, one of the big ones that we've already alluded to happens. Cerner buys.

2:34:06 Siemens health. For one point three billion dollars. Which that starts the downward spiral for Surter. That's my understanding. Yes, I heard in the research that

2:34:16 Even today in twenty twenty five customers will still refer to themselves as either Siemens customers or Cerner customers. It's still not fully integrated. Meanwhile, I think post Oracle acquisition, Oracle's trying to rewrite it all anyway. Right. And that's uh Not going well, which we'll come to later.

2:34:35 Yeah. So This leads us right into The Department of Defense contract. The mother load of all

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2:35:47 to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. Okay, David. The DOD debacle. The twenty fifteen DOD debacle. So

2:36:07 The Department of Defense decides that they're gonna bid out a global EHR contract. for all of their hospital and health care across all branches of the military. Now this is

2:36:19 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 twenty fifteen. Is

2:36:33 Up until this moment in time, the biggest healthcare IT contract of all time. It ends up being a four point three billion dollar deal. So even bigger than the Kaiser deal. It remains the biggest. Until two years later. When the VA contract does go out.

2:36:49 That is a ten billion dollar deal. 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. 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.

2:37:12 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 the with the US government.

2:37:22 Yeah, 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.

2:37:38 So Drama aside. Cerner ends up winning both of these contracts. The D O D and the VA. And

2:37:46 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.

2:37:59 So the DOD system, the active duty system Only just fully went live late last year in twenty twenty four. This contract got bid out in twenty fifteen. Says he Nine gear.

2:38:12 implementation process. The VA system is way worse. It is nowhere near fully live today. And Cerner won both of these? Cerner won both of these.

2:38:24 As a subcontractor, won both of these. The VA system was bid out in twenty seventeen. The latest announcement from the VA. About this project. Is that it will be live.

2:38:34 At all VA sites by this is a direct quote. As early as twenty thirty one. What? So even the most optimistic scenario that they're saying, which Seems very unlikely.

2:38:46 Is this a 14 year project. The latest I had seen is that it's still not live. They actually gave an as early as 2031. Now it is live at a few sites. It's not like nothing has happened over the last decade, but Oh my God. I mean if as a American citizen or watcher of America You were disgusted by the whole meaningful use thing. If you're an American taxpayer

2:39:11 This is just beyond disgusting. So why? What took so long? Or what made it so expensive? I don't really know. I think it's a combination of a lot of things. Or I guess what are the incentives?

2:39:23 Well It's really unfortunate, but There's an old saying that You make more money on failed government contracts than successful ones. And I

2:39:32 Think that's probably the incentives that are applying here. Oh,'cause as long as the contract doesn't end and you're still implementing, you can still keep Finding more costs. You can still keep

2:39:45 Getting paid. Now I think it would be unfair to blame Cerner for this. I mean, maybe some of the blame lies on them, but They are a subcontractor to

2:39:56 Big government primes that are the G C here and I mean, we talked about this on the Lockheed episode. This is just how the military industrial complex works now. So you got the comboing layers of bureaucracy of the government. The military

2:40:10 EMRs generally, as we've talked about. Like this is just like a Rat's nest of Awfulness of bureaucracy. And you know, you've got these multi decade now projects with Many billions of dollars of taxpayer.

2:40:25 Dollars going into this. Still not live. Just freaking. Brutal. Do you think Epic is glad they didn't win?

2:40:32 Well, so here's the thing. Epic, of course, was part of this process. bit on the RFPs and I'm sure would have loved to have won them. 'Cause even the ten billion dollar initial price tag before the overruns is twice Epic's revenue today. This transformative for your business in the best case.

2:40:49 Yes. Kinda like Kaiser was transformative for. Epic back in the day. Yeah. That's it, talking to epic customers and CIOs in the research. They are like down on their hands and knees thankful that

2:41:01 Epic did not win this deal. 'Cause Cerner just got dragged so into the process. So into the muck here. And there were a lot of other compounding factors happening here. Like Cerner, like we've talked about. already was Now post Siemens, would you say thirty six companies that had been acquired to get pulled together to make Cerner.

2:41:21 Neil Patterson, the Founder and CIO and longtime leader, right around this time he gets cancer and then he passes away in twenty seventeen. So your founder and your leader is Passing away in the midst of this very complex process.

2:41:36 After that Cerner cycles through a whole bunch of different leaders over the next few years. And meanwhile, Epic, kinda unburdened by this VA Shit show for lack of a better word.

2:41:48 They just keep winning. Deal after deal in the large. System providers. And in their own way. I mean this is a testament to how Judy thinks a company should be run. We're gonna stay extremely focused. We have a very particular playbook, we listen to customers.

2:42:02 We meet our promises. We're hardcore about our software engineering and our customers find new use cases, we develop that software to She runs a company in an unconventional way and that unconventional way is proving to be the right way to win this market.

2:42:20 Yeah. So after the D O D deal, Epic wins partners healthcare in Boston, which is the sort of new entity of Harvard and Mass General, MG H and like the original. Big.

2:42:31 Research institution. They win all of the Mayo Clinic, all of their hospitals. That's one of the biggest contracts. Again, outside the DOD craziness. They win Cambridge in the UK, they win Intermountain Health. recently they went common spirit health.

2:42:45 The list goes on and on and on. Twenty eighteen Epic hits two point seven billion in revenue. They announced that they have all twenty of the top academic hospitals in the US News and World Report. Rankings. What is

2:42:58 critical for them because winning the top academic hospitals means that All the new doctors and nurses that are coming through getting minted by these institutions and trained. Are all trained on. Epic. I think they sell them a separate educational license too. I think they treat the university hospital and the academic classroom as separate

2:43:18 I mean, I'm sure it helps to be in the hospital, but I think you also buy it as a school. I'm sure that's right, but also a huge part of medical education is practicing in the hospital. And I think now ninety percent of med school students train on Epic. Yes. That is the current statistic. Twenty nineteen Epic hits three point two billion in revenue.

2:43:37 And then finally. December twenty twenty one, as we've been alluding to. Center gets bought by Oracle for twenty eight billion dollars. So Cerner, as we talked about was and still is a big company. I mean they've acquired all these companies over the years. There's a lot of revenue there in there.

2:43:53 Big international and they have the DOD and VA contracts ongoing, which was a lot of money coming in. So they're doing Maybe call it five and a half billion a year in revenue, maybe a little more. But that's been flat to declining since twenty eighteen.

2:44:10 Oracle again acquired them in twenty twenty one. Oracle now no longer reports Cerner's financials as a separate segment within the company. And they talk about Cerner and Oracle Health being a quote unquote headwind to overall growth and profitability for the company.

2:44:27 There have been a lot of layoffs. within Oracle Health. You know, maybe it's too early to tell, but I Think this is probably one of Oracle's worst acquisitions of all time.

2:44:38 You'd be hard pressed to find an analyst who would say that This was a great acquisition by Oracle, shall we say. Yes, to put it lightly. Great for epic and totally reinforces Judy's

2:44:50 whole thesis of company building in this space and her whole story to customers of One Single. Integrated platform. That is hardcore about software development. That is

2:45:01 one hundred percent customer focused. that will never acquire another company, never go public, never get acquired. You can see why it's just this. warm hug embrace to their customers out there. Yeah.

2:45:12 it becomes more and more different. than everyone else in the market the longer time goes on. And the lesson here Which is really interesting is They started slow.

2:45:22 They started really slow and they did things In a way where they almost Built up momentum. For the future. in a way that would pay off twenty, thirty years down the road.

2:45:34 Rather than inorganically trying to take shortcuts. and pull the future too far forward into today. The first twenty years kinda looks like an unimpressive company.

2:45:46 because they were sort of just building strength, building muscle. growing the way that you need to grow in order to be as bulletproof as they are today. That's such a good point. And I was trying to square in my mind earlier when we were telling the meaningful use story.

2:46:02 How? On the one hand, it really was obviously. good for Epic and an accelerant and it further cemented the market dynamics where they were already emerging as the leader. On the other hand, when you talk to people within Epic,

2:46:14 They're very mixed on meaningful use. Yeah, and I could never figure out if that was like lip service of oh it didn't help us that much. But when you look at the graphs of customer counts and of revenue It was going great. Yes. It did pull forward some growth, but the trend lines were gonna get here anyway. It's not like it was some big massive step function in two years. That is not how the graphs look. As we told the story.

2:46:37 They had the better product. They had the better customer offering. They were on the way to winning. Anyway. I think to your point here about they've always been just philosophically allergic to artificial

2:46:50 Growth. To the extent they are serious about really being ambivalent about meaningful use, that's the reason why. Yeah, they want to win slowly. They absolutely want to win. And they're gonna win, but they wanna do it slowly because it will help them win harder in the long run if they win slowly. Yes. Yes. So Meanwhile for them, I mean I think

2:47:13 Things have never looked brighter, basically. I mean, there's some risks that we'll talk about, but They're now starting to sell international and build that as a real market. It's Not huge, but it's you know, call it Ten to fifteen percent of the business now.

2:47:28 Twenty twenty three, they went live at London's Guys and St. Thomas's NHS Trust, which was I Think they're biggest ever single implementation. And happening.

2:47:39 In the UK. The UK is becoming a real market for them. Interesting. You know, there's another big tailwind that's happening for them. And like you've probably been hearing from me over the course of this whole episode. There are tailwinds that don't make you feel good, but they're still tailwinds for Epic's business.

2:47:55 the acceleration of the trend where hospital systems are merging and rolling up all the smaller local practices. Oh totally. It's just an excuse to rebid. Yes, there's a bunch of reasons this is happening. But one of them is the Affordable Care Act. that also increased the compliance burden of practicing medicine.

2:48:13 which was already really heavy from all the regulations over the years. Including high tech adding big penalties for HIPAA for violating HIPAA. That's another thing we didn't talk about in high tech. That was one of the things that sort of came staepled onto it. was even more strict oversight on hipa. So you now require scale.

2:48:31 as a local medical practitioner to be able to afford The compliance burden. And what that means if you play it out is all health care or most health care gets provided by these mega giant hospital systems rather than community clinics.

2:48:47 which really benefits Epic,'cause their strategy from thirty years ago of going over the biggest and most complex health systems. now looks totally genius because those are the only customers really left standing. Yep. Totally. I actually think this is one of the most messed up things in the US healthcare system.

2:49:04 Aside from The really big, hard to negotiate with private health insurers. who have gotten a lot of power over the ecosystem. You now have also really big

2:49:15 local pseudo monopoly hospital systems. And so This consolidation's not good. This consolidation will not lead to prices coming down. Let's just put it that way. Yeah.

2:49:25 But you see why it's been happening. You and I entered doing this episode expecting to be like Ah, the hospitals are really the bad guys. They're charging so much money and I don't think the hospitals make very much money. They don't make much money at all. They're barely surviving, which is why they're merging. Right. And any money that the very successful ones are making, they tend to plow back into growth because like we've been talking about, hospitals kinda need scale.

2:49:48 in this day and age. And so it's new buildings, it's acquiring other Practices locally. Everyone is just chasing scale. because they constantly are having to do business with other scale players, so they need to size up to do that. Yeah.

2:50:04 So That Brings us to the other. Big, I think, potential growth factor for Epic going forward that they're absolutely pursuing is they have enough scale on the

2:50:16 Provider side now. That they can start going to The other big players in the system, the payers And then also the biotech and pharmacide. And say

2:50:27 We actually have ways that we We can work with you guys now and offer compelling products. To you. So they call this the system of connectedness or the quote unquote grid of care that you might sometimes Here from Epic, but this is building products for and working with

2:50:41 Payers, the insurers. And pharma companies and other stuff like home health companies or post acute rehab, et cetera. But really the big opportunities are Payers and Pharma. One example of this

2:50:53 Is Prior authorizations. Yep. Prior authorization, sorry. Huge problem. in the American healthcare system. This is

2:51:02 When A patient. needs or a doctor thinks that a patient needs. Either a medicine or a procedure. That

2:51:09 The payer. The insurance company says, Well You can't just go do that. It's expensive enough that you need to ask us first on a case by case basis if we'll cover it for this person. Yeah, exactly. We need to prior authorize this. Epic now has enough data and enough scale on the hospital side.

2:51:26 that they can go to the payers and say, Hey, prior off Our customers don't like it. You don't like it. We have all the data. We can just automate this for you.

2:51:36 I would argue this is an area where You are seeing One of Epic's favorite business strategies. Which is We sell the main thing to a hospital system.

2:51:46 We see what other vendors they're using. we figure out if they should also buy that from us if we have some competitive advantage other than just single vendor to be able to do it. Sometimes just being a single vendor with the same offering is enough. But then they try to figure out if they can also do that and include it in their enterprise agreement.

2:52:05 They want to sell everything. And be the single IT vendor. You know, the hospitals do still buy

2:52:12 Other than the other. IT services. So The epic playbook is go from selling a hospital one thing to figure out how to then sell the hospital everything. And then once you've sort of exhausted that, then figure out who else you can sell.

2:52:26 Stuff too. And that's why they're looking into payers and that's why they're looking into pharma companies. It's How can we leverage the asset that we have? To then Now that we sort of saturated.

2:52:36 this market sell to other customers too. Fair point. All right. So That basically brings us to today. If you're in this ecosystem, you're gonna say, There's fifty things that Epic does that you didn't talk about. That is true. There's no chance that we could talk about all of that on this episode.

2:52:52 But there is one really cool, interesting thing that they are doing right now that we do want to talk about. as we catch up to today. And then we'll give you the stats on the business today and we'll talk about the future and then we'll do our analysis. They launched something a few years ago called Cosmos. Yeah. This is pretty cool.

2:53:09 Awesome. So They've realized okay. There is data on patients.

2:53:14 that is owned by patients in hospitals, not by us. That lives on a bunch of different servers. Some are on prem at hospitals, some are in our cloud, some are on AWS, some are on Azure. But either way, there's all this interesting structured patient data. Stored in Epic hair instances. Can we anonymize that?

2:53:33 And Get it all in an epic hosted. Instance. Of something Very queryable.

2:53:40 and very useful for a bunch of activities. They did it. It's called Cosmos. And Cosmos has two hundred and ninety five million patients worth of data in it.

2:53:53 All anonymized. Yep. And I think that Across those two hundred and ninety five. Million patients.

2:53:59 There's data from fifteen billion individual patient encounters. Yes. So like structured data. From a doctor encounter.

2:54:10 Fifteen billion times with patients. It's crazy. So we were asking the question earlier Do EMRs or EHRs really benefit patients? And there's some arguments that

2:54:19 Aside from how awesome it is to just access your records at home, there's a bunch of stats around yes, it benefits patients. It's patient safety, it's patient ease. There's studies that say 45% of patients reported Improved quality of care with EHRs while only six notice a decline. Epic has a stat in 2023, its system prevented 66 million potential adverse drug interactions and 250,000 potential surgical errors. All of this seems very plausible. If you're tracking all this stuff digitally

2:54:48 You can do intelligent things. That improve care. But on top of that More interestingly.

2:54:55 What if all of the data was actually in one place? And you could do stuff with it. What is the value of having something digital versus paper? This is sort of like the utopian dream that people have always had and uh The Bush administration and the Obama administration. Had. Epic is finally doing it.

2:55:12 Yes. And One very clear interesting illustrative example is Imagine there's something wrong in the water supply. But

2:55:22 All the records are on paper. So unless you're going and pulling individual files. And then looking at some specific test result. across a whole bunch of people, which you probably need a research grant to do to actually go and sit down and pull all these individual files. you're not gonna find it.

2:55:38 But if you have a whole database full of information and you can quickly and easily look horizontally Across a whole bunch of records. This is Flint, Michigan. This is how they figured out there was a water problem in Flint, Michigan, and you would not have found it in a paper-based world. Cosmos is that on steroids.

2:55:55 What can you figure out about the whole world if you have two hundred ninety-five million patients worth of data? In an anonymized accessible database. And it's accessible to any institution for free that contributes data in. So of all the epic customers.

2:56:12 Anyone who opts in gets ticked. access and query it for research or cool stuff like I have a really unique patient. who has some crazy condition I've never heard of. Has this ever happened to anyone else in the world and what was the result? Yeah.

2:56:26 This is what's really cool. They've Productize this and made it free that any of their customers can just turn it on. So Ben, exactly like you're talking about. I'm a doctor, I have a patient.

2:56:38 There's something going on. Cosmos can Surface to me. Hey, here are other examples of similar cases anonymized. They call them lookalikes, I think. Yeah, look alike patients.

2:56:50 Throughout the history of everybody that's ever been on Epic. And here are the doctors who treated those patients. So This is already happening.

2:57:00 Quite a Bit, I think, with rare diseases and crazy cases. I think so too. It'll be useful for clinical trials. It'll be useful for research. I do think it's free right now, which is pretty interesting.

2:57:12 We'll have to see how they price and package it in the coming years. But Yeah, you're right. This is like the utopian dream of wouldn't it be cool if we had all this data in one place. Yep. And then

2:57:23 That really presages something we're gonna talk a lot about in analysis, which is Wow, imagine what you can do with AI with this data. Yeah. But we will get to that in a minute. All right, so the business today. Let's just

2:57:34 Make sure we're all on the same page on where things stand. They have six hundred and seven customers. With thirty two hundred hospitals in between them. As you know, they've never lost a single one, which is insane. They add ten to twenty five new health systems as customers each year.

2:57:51 Their customers represent five hundred and ninety thousand physicians. And four hundred ninety five thousand staffed beds. And that's across three hundred and twenty five million patients. Worldwide. Yep. Two hundred and eighty million of which are in the US. Yep.

2:58:06 So basically almost all of America. gets seen in some part of their health care. Bye. Epic system. Yes, that is correct.

2:58:15 In revenue, last year in 2024, they did five point seven billion dollars, which grew thirteen percent year over year over the last five years. And sixteen percent. last year from four point nine billion to five point seven billion. David, I wanted to bring something up with you. They actually do less revenue than I would have figured.

2:58:35 Yes. And for people that are like five point seven billion's a lot, what are you talking about? If you divide it by their number of customers, it comes out around ten million dollars a year, a customer. If you live in the enterprise software world. That's not crazy. This is the Central nervous system.

2:58:50 Of these giant Health systems. This is what everything else relies on. They run their entire business on this. It costs a lot of money because there's all these people administering it. I talked to someone in a mid sized health system. that said there's a hundred full time employees

2:59:06 administering epic at her hospital system. But Epic actually only captures about$10 million a year. of the value created. Dichotomy of

2:59:17 Yes, it's a lot of spend. But the minority of it actually goes to epic. Yeah. It is this element of I I know I said altruistic earlier when talking about the company

2:59:28 You're right. It's not altruistic. But I think it's really, really important to understand. It's very long term orientation. They could charge their customers a lot more money.

2:59:41 They definitely could. I think I mean they didn't used to be able to. I think they used to saturate willingness to pay. Now that they're this sort of dominant, they probably could There's so many costs that get paid out to the consultants, the Accenture, Deloitte, IBM, Nordic, the post implementation people, the optimization people. The headcount internally The lost revenue from doing the switch. And taking that downtime

3:00:05 I mean this costs health systems a lot. Epic actually just doesn't. capture that much of it. I'm not as convinced that they have room to take price as much as I'm surprised They don't capture more of the overall value.

3:00:20 of a central nervous system for a hospital system. they could probably capture some more and as we get further and further in the future and they get more and more dominant they certainly will gain more pricing power. I think they could. I mean again, to your point of On average ten million dollar a year cost for

3:00:36 a piece of software that is so absolutely vital to your business. I think they could capture more. And I think part of the reason they don't Is They never want to give a customer any kind of incentive to Rebid or consider another.

3:00:54 Solution. It's kinda like the Jeff Bezos quote about AWS in the early days that he wanted to be like an irrational and irresponsible decision not to use AWS. Oh, to pick someone else. Yeah. Yeah. I think they want it to be an irrational and irresponsible decision. For a healthcare system not to use Epic.

3:01:13 Yeah. Yeah, I think that's right. And just one other number to throw out to analyze this on a different vector. When I said five point seven billion top line isn't that big of a number. In healthcare. United Healthcare.

3:01:25 Which owns an insurance company and a hospital system. Does four hundred billion dollars A year. in revenue. It's

3:01:34 Wildly apples to oranges because they're actually administering care in the case of their hospital system. So it's a different thing. But That company does thirty five billion dollars in EBITDA. United Healthcare's profit dollars are six times Epec's entire revenues.

3:01:51 So Epic has become this incredibly important and powerful linchpin in the system. Despite Not actually having that big of a profit pool in the industry.

3:02:02 Yeah. Or even maybe better put, of having that big of a revenue pool in the industry. I came into this episode expecting to be like, My God, this company just mint money and is such a for how much people talk about it. as a part of the healthcare system, I just expected it to have more cash moving through it.

3:02:18 All right. Other quick stats, fourteen thousand employees today, the market share. is only forty two percent of hospitals, but it's the largest and most successful hospitals. So they actually have a bigger share of all care performed. Fifty eight percent of ambulatory physicians now use Epic.

3:02:36 seventy nine percent of the US ends up using Epic in one way or another. In terms of profit, we heard a few different estimates. There are EBITDA margins somewhere between thirty and thirty five percent. So just to be conservative, we'll take that at the low end and say About one point seven billion dollars in EBITDA, if those estimates are correct. So

3:02:56 Then that kind of brings us to what is epic worth. Which is sort of a silly question, because if you own shares, it would be very difficult to ever sell shares to anyone other than the company itself. So what's the point of valuing something that you can't own and what's the point of owning something that'll never provide a financial return? Yeah, there's never going to be a liquidity event for your shares. Right. But it's worth doing. So

3:03:17 We started this episode talking about Judy's one of the most successful, if not the most successful, female founder of all time. Forbes has a list of this of the most wealthy self-made women. I think their estimate is silly low. Yeah. Wildly wrong.

3:03:31 And twenty twenty one. Forbes estimates her net worth to be seven point six billion. implying that the company is worth What, fifteen billion? That is a ludicrous valuation for Epic.

3:03:43 If you do the very conservative thing of looking at Cerner's EBITDA multiple Of thirty times when Oracle bought them. And you assume conservatively again a thirty percent EBITDA margin at Epic. That would give you A number of fifty one billion.

3:03:59 Valuing Epic at fifty-one billion. But come on, Epic's revenue streams are way more durable than Cerner's. And Epic is growing. Well, Serner was going through a hard time. You could get to a similar number of that fifty ish billion if you just slap a nine X revenue multiple, which is a reasonable public market software comp.

3:04:18 But this company has insane durability. Yeah. It's missing the point that I think this is maybe the most durable software company in history. Yes. My guess. Is if this is public, which it never will be investors would value it somewhere in the hundred billion dollar neighborhood.

3:04:36 giving Judy's shares a value of about fifty billion dollars and making her the wealthiest self-made woman in the world. And one of the most successful entrepreneurs, period. And that would put Epic in One of the most valuable hundred and fifty or so companies in the world, right along with Shopify, ARM, Lockheed Martin. And Starbucks.

3:04:57 Yeah. Another Thought exercise to kinda Is

3:05:04 If In some alternate universe. Microsoft or Google or Amazon or I don't know, maybe even Berkshire Hathaway, maybe Apple. If they could acquire this company.

3:05:16 How much would they be willing to pay for it? I think a hundred billion dollars is on the very, very low end of that spectrum. That's four percent of Apple or Microsoft. Of course they'd be willing to pay four percent of themselves for this There's the market. There's the durability of the revenue and the profits.

3:05:33 Oh I see. You're arguing that On a financial basis alone, yes. And also the strategic value on top of that. And The strategic value

3:05:44 Both in terms of becoming the most important partner to this huge industry to the biggest players in this huge industry in healthcare. But then also just the data in the AI world that we're in today. I mean My God, Cosmos, you know fifteen billion

3:05:58 Patient interactions. You think Google or Microsoft or whomever wouldn't pay a lot of money to own that. Like of course they would. Part of me is like, ooh, thank God Judy's putting it in a trust. All that to say This is never gonna happen. So final chapter of the story here is Judy's eighty one years old. What is gonna happen at Some point in the future.

3:06:19 Even if she's the next Warren Buffett here. We're still talking about in the next couple of decades, you know, there will have to be a transition. Like you said, Ben, she owns about half the company economically and one hundred percent of the voting shares. She has been transferring

3:06:34 her non voting shares into her foundation called Brutes and Wings. So she signed the giving pledge and is transferring her wealth into. The foundation. They then sell those shares back to the company at a price that changes every year and that funds the foundation.

3:06:50 Duty has announced that Upon her death, the All of her voting shares, so the hundred percent voting control that she has of the company. Will transfer into a quote unquote purpose trust. that will be administered

3:07:04 By three constituencies. One her family Her husband if he's still alive, Gordon. And their three children. Two.

3:07:13 A set of five longtime senior managers. From Epic. Mm-hmm. And three I believe three Customer CEOs.

3:07:23 CEOs of big customers. And uh that group will manage the trust. And in the trust by laws. are several things. One.

3:07:34 the company can never be sold or taken public. Ironclad, that can never happen. Two. The next CEO of Epic must meet two criteria. Oh, be a software developer, right? Yes. One, must be a longtime epic employee, and two must be.

3:07:50 Must be a software developer. I love the idea of the CEO being someone who came from the core skill of the company. It's very Costco, you know, you think about All the Costco CEOs have been people who were core to Costco's operations over the years and had worked there for like thirty plus years. Nike's heyday. was when a guy who started in sneaker design ended up running the company, Mark Parker.

3:08:15 There's sort of a beauty. to when that happens. There is a playbook to this. Yes. One last thing to know about Epic today looking forward. We talked a lot about interoperability.

3:08:26 And they're Notorious Lack of partnership or ability to access their data or integrate with them in the past. A lot has changed.

3:08:34 But there would be a whole nother four hour podcast on specifically how there are many programs, each with different methods of integration, different names. different standards. They've all evolved over the years. They come with things like revenue shares back to epic. And if it is the rare true partnership, they can also come with warrants to own a chunk of your company. But the bottom line is you actually can do a lot more building on top of and integrating with Epic.

3:08:57 than you could have ten or twenty years ago. All right. That's our epic story. Should we move into analysis? Let's do it.

3:09:05 So The first part of analysis is a section called power. Which we have shamelessly ripped from Hamilton Helmer's book. Seven powers. The question is

3:09:15 What is it about any given business that allows them to achieve persistent differential returns? Or to be more profitable than their closest competitor. on a sustainable basis. And there's seven of these. There's counter positioning, scale economies, switching costs.

3:09:30 Network economies, process power, branding, and cornered resource. And as usual. We have to separate the takeoff phase. from the phase that they're in today. David, I'm curious

3:09:41 Do you have one for the takeoff phase? Do you feel like you can analyze why in the takeoff phase they gained power? Well, it's funny. They didn't take off for quite a while. And I might argue they didn't actually have any power during the takeoff phase. Yeah, I don't think so. I mean ultimately

3:10:01 Their biggest point of differentiation being the Single platform Didn't matter that much in that phase. Because everybody else was starting up new and they hadn't built that much of it out at There wasn't that much computing adoption among

3:10:16 hospitals generally, so like didn't really matter. I think what was happening is they had this kind of nascent market. in the proto EHR world. where they were able to sell something small enough at enough of a profit to be self sustaining while they bided their time and built out.

3:10:32 the bigger suite. Which they were able to basically use time as a resource that most people don't flex. Most entrepreneurs want to do something in a short period of time, usually because their capital structure demands it. And so you launch a platform and try to get other people to build the applications because you're in a really, really dynamic, fast changing market.

3:10:52 Or you launch an application on a platform that somebody else built. Similarly because you're at a dynamic changing market. an epics market. was developing slowly over a long period of time, and they were willing to run a small business for a long period of time. And then sort of grow into

3:11:08 building all the functionality for the eventual huge market that wanted all the functionality tied together. Yeah. Okay, so then what powers do they have today as the scale incumbent? Yeah. A lot is the answer. A lot. A lot. I mean the most obvious one is switching costs. I mean, this is the biggest switching cost piece of software.

3:11:29 Ever. Ooh, that's interesting. Is that true? Do you think it's bigger than people's ERP instance? For sure. This is like an ERP on steroids. This is the most important

3:11:38 nervous system for your entire business. Oh yeah, and by the way, if things go wrong or it goes down, people die. That's a very good point. So people spend You know, including all the opportunity costs and everything, hundreds of millions or billions to put this in.

3:11:53 Are there any ERP or CRM implementations that cost A billion, five billion, ten billion dollars. Maybe. But I don't think any that are so

3:12:06 core to everything about your customers' business. You're right. Even if it was really expensive to put it in, you're still more likely to swap out one of those systems than you are. your EMR at this point. Right. It's so much more than a medical record. Yes. Yes.

3:12:21 So that's definitely true. Scale economies is definitely true. to the thing we were talking about a minute ago. You can't make the investments in product breadth. without having the scale that you have today.

3:12:34 Yeah. You also can't do their clever bundling in a bunch of free stuff that you might want to use in the future. Unless you have to scale economies also. I mean they just develop a lot of software.

3:12:47 that they either throw in for free or offer to you in the future. And the only way you can develop that much software is have a huge number of customers to amortize it across. Yep.

3:12:59 If you're trying to start a new EMR today, you have to write a lot of software to be competitive. Yep. And that scale economies. Yeah. Network economies, yep.

3:13:08 You bet. You betcha. They hit this interesting tipping point where They could win just on were the best most reliable Platform.

3:13:20 for a long time. And then at some point it hit some tipping point where there was a second value proposition, which is Most other hospitals are also on Epic. So your patients and your doctors will all appreciate it. if you adopt Epic to make it easier to interop with the records at all those other hospitals.

3:13:36 It's like a icing on the cake. Oh, you're talking about interop. I mean there's interop, but there's also Do you think you will need to hire more doctors in the future? Either to grow or as your existing doctors retire. Right. Pick the standard.

3:13:50 Yes. Well what are they know how to use and what are they trained on. Epic? Great. Yeah, that's true. It's a second network economy in addition to The

3:14:00 Care everywhere. concept of being able to share my records across institutions. There's one institution in Seattle that I go to for my son's food allergies. They're on Cerner. I have three institutions that I've gone to over the years for various other stuff that are all on Epic.

3:14:17 I don't know why that one hospital is still on Cerner. Yeah, it's really annoying to you, isn't it? I'm sure everyone else in Seattle is like, Why don't you just do the thing that all the other big hospitals do so that it's all the same platform. That's network economies. Yeah, it's kind of amazing that they have built a network economy business. Like who would have thought medical Software. There is value to every participant in the system, from the other hospitals to me as a patient to doctors, if that one hold out hospital that for some reason is on Cerner just switches to epic. It's definition of network economy.

3:14:48 I think they also have branding. They're the most trusted by all the most prestigious institutions. So at this point that they had no other powers and they just came in at identical bids on the table. A hundred percent of the time people say epic'cause it's gonna work. Like I know your brand.

3:15:03 Don't get fired for buying IBM. Yep, exactly. Yep. I didn't think about that. I was like, Oh no, they don't have branding. It's not really a consumer brand, you know, my charger, but no, no, you're totally right. They totally have branding. That is in part why they built that massive auditorium to bring the whole universe of Epic together.

3:15:19 Every few months. Yeah. And then I think you could argue that they do have process power, like is the last one I would say. In there. development process and the

3:15:30 language that they use and it being kinda unique. Tapic. This is more of a defensive one? I think it's about the training of young employees, the way that they sort of make them The epic way. Well, interesting. There's the epic way

3:15:45 I buy that generally. But I think specifically you can point to their software developers who they are hiring out of college mostly Building on cache and mumps and they don't don't develop transferable skills.

3:16:01 easily then go work at Cerner. Right. And I mean, sure you could. Like if you're a great software developer, you can learn other languages and other frameworks, but if you spent your whole career All developing in this sort of proprietary epic system. Proprietary is the wrong word. They don't make mumps or cache. A separate company called Inter Systems makes them and they license it from them.

3:16:21 But most of the rest of the industry does not operate. on that. It is a bit of a process power. Yep, I think that's fair. All right, that does it for power. Great. Do you have any playbook themes?

3:16:32 Yes, I do. The One that jumped right out at me. was the heavy spend on research and development. And this one is from friend of the show, Arvin Navarotnam at Worldly Partners. in the always excellent write up that he does associated with these episodes that we'll link to in the show notes.

3:16:49 Epic. Of course builds, as we've talked about a million times, their whole systems from scratch and they Don't buy companies. It's all in house development. The result of that Is

3:16:59 thirty five percent of their operating expenses are spent on R D. If you compare this to Athena Health, a competitor, that's ten percent. Or Oracle all up. is twenty three percent. Or if you look outside this industry.

3:17:13 It's actually equivalent to Apple at thirty six percent of their operating expenses of R and D. Amazon's twenty eight percent. So thirty five percent is quite meaningful. It's quite high, yeah. The only one that beats them is Google at forty five percent. And think about all the money that Google is just dumping into R D for all these sort of future looking projects and

3:17:33 You know, they're a core technology company. So On the one hand, duh,'cause Epic doesn't really buy other companies or spend any money on sales and marketing and they keep their G and A low. So What are their other expenses? Of course it's gonna be high on R and D. Yes, unlike most companies, they spend zero on sales and marketing. Right.

3:17:50 If they classify those eight people that they employ as quote unquote salespeople as you know headcount, maybe they spend I don't know. Not much. Yes, small. But I think to get to this point that we've been sort of hitting In a bunch of different ways, as long as you can win deals in the short term early days.

3:18:07 without sales and marketing spend. And you can just spend all of your costs or as much as possible on R and D. That R D does compound over time to give you a big competitive advanta later in life. that other forms of spend do not.

3:18:23 Yeah. Especially in software. Yes. My next one is about growth. So I was reading an article that said Faulkner once described her approach as climbing a mountain. not trying to see the entire mountain at once, but by focusing on the next hill in front of her.

3:18:38 And it reminded me of something I've read before. Does this remind you of anything? Hm. Uh drawn a blank. Go for it. Okay. So in Paul Graham's legendary twenty twelve essay, Startups Equal Growth. He's talking about how the whole thing you need to do as a startup is focus on next week's growth.

3:18:57 In theory, this sort of hill climbing could get a startup into trouble. They could end up at a local maximum. But in practice, that never happens. Having to hit a growth number every week forces a founder to act. And acting versus not acting is the high bit of succeeding. Nine times out of ten, sitting around strategizing is just a form of procrastination, whereas founders' intuition about which hill to climb are usually better than they realize.

3:19:21 Plus the maxima in the space of startup ideas. are not spiky and isolated, most good ideas are adjacent to even better ones. I just thought I don't know, it just jumped off the page at me. That

3:19:33 Judy, who has almost certainly never read any of Paul Graham's writings, had the same insight. I don't try to see the entire mountain at once. I just try to focus on the hill right in front of me. And that hill is adjacent to a bigger and more interesting hill. Uh. I'm so glad you brought this up.

3:19:50 I was thinking about Duty is This incredible software developer. Who became a founder of a company and this incredible business person.

3:19:59 And didn't follow any of the, you know. MBA roles except that she did. She just discovered them all for herself in Wisconsin. Well right. And I was thinking about it, I was like, Man Her story in this company kinda reminds me of Paul Graham and Y Combinator and there's so many

3:20:14 Residence is here, but they're also kinda like a different world. If Y Combinator Weren't about funding companies and being a venture capital firm. And instead Was

3:20:25 Espousing to founders instead of raising money. build your companies independently without capital. We would have a lot more epic systems running around out there. Well But you know, she also built this in a different era where you could do this without capital. Yeah.

3:20:38 I think that's right. But The distance between Judy Faulkner and Paul Graham is actually not nearly as far as you would think. Yeah.

3:20:46 It's applying computer science principles. And Common sense ways. of running a company. that are like obvious to you, but contrarian to the way that most people seem to run companies.

3:20:58 And just being a programmer turn business person to its logical extreme. Yeah. Okay, one that we did not talk about is their litigation strategy. It's worth just touching this so people are aware.

3:21:11 They are aggressive on defending IP. And as they would put it on defense against patent trolls. They're also extremely aggressive on employment practices law. They have non competes to keep secret secret and they enforce them. They are also why employers can force their employees into arbitration. They want a landmark case.

3:21:32 around forced arbitration. Yeah, went to the Supreme Court, I believe. Yep. They're embroiled in lawsuits with other health IT companies trying to use Epic software in a way that Epic believes violates terms of service. There's not one of these. There's a bunch of these. Including an antitrust lawsuit. Yes.

3:21:50 A big one with a startup called Particle Health. That is at a really pivotal point right now. Yes, David, they are being accused of violating the Sherman Antitrust Act. Yep. And that suit is ongoing. Yep.

3:22:02 We just put this out there to say This company. Is Seemingly not shy. about using the law to protect things that they believe are

3:22:10 theirs and to deepen their moat. Interestingly, though, they have never been in a lawsuit or even in mediation with a customer. there's a sacredness to that customer relationship that they hold really dear. It comes back to when we were talking about the company culture. Everything at the company is about customers.

3:22:26 Yeah. Alright. The next one is one I call Enterprise sales on steroids. So

3:22:33 Normally in enterprise sales, you have a bunch of things. Long sales cycles. Stuff where the buyer is not the user, so you end up with Clue G UI. And it's not just because people don't care, but the breadth of enterprise software is really, really wide. So it takes forever to write everything. And so you're not gonna keep updating it every time there's new UI trends.

3:22:54 And on top of that A million screens look really similar for different users for different use cases. So they all just kind of end up looking like dropdowns and buttons. hard to blame someone specifically for that. There's tons of customization, long implementation times. This is enterprise sales. and enterprise software generally, not in healthcare.

3:23:14 And then in healthcare, here comes the steroids. You have the added layer of regulation from HIPAA. And other medical system compliance stuff. And data sensitivity. And

3:23:25 Lies are on the line. And so In most industries. when you're a startup looking down the end of the barrel and you're like, all right, I am not doing this top down enterprise sales thing. I'm gonna do product led growth. I'm gonna get some bottoms up adoption. We'll play the Slack or the Figma or you name it. But HIPAA makes product led growth much harder. So from the great substack health API guy.

3:23:47 Under HIPAA regulations, a business associate agreement typically needs to be signed by someone with the proper authority to legally bind the organization, not individual providers or employees. So David, this is something I kept thinking Why doesn't one doctor or one practice adopt something and then get bottoms up adoption? And that's how we'll get the next EHR in the future. No. These are all CIO sales.

3:24:10 Because they all need to be. Right. You can't have the typical Oh, a small team within a big company is gonna buy this on a credit card. Nope.

3:24:18 Not gonna happen. And there's some exceptions. I know there's some PLG that happens in healthcare, but it's way, way harder to figure out how to do that than normal B2B SAS. Yeah. And my last one. Judy is a wacky Wacky founder.

3:24:33 And so is every truly great entrepreneur that we study. She is truly N of one. I mean she has stated That it is more likely that she'll die than retire. Just like Warren Buffett always jokes.

3:24:47 She is singularly focused on making Epic great. in her life. Just like Ingvar Comproad and IKEA. She's totally obsessed with rapidly incorporating feedback from customers, just like Jeff Bezos. And she believes correctly

3:25:01 that the nerds will prevail in the long run, at least correctly for her market her point of view, her industry. She is completely unique in the way that all the great founders we study are. Yep. You foreshadowed in the intro that

3:25:14 Judy is almost certainly the most successful, by any measure, female founder in history. I think that is actually true. I looked up to try and see. Who else might even come close? You could maybe make a case for Estee Lauder. However.

3:25:29 Despite Este Lauder reaching about a hundred billion dollar market cap during the pandemic. It's only worth about twenty today. I don't know what happened there. Taylor Swift and Oprah, which we've talked about and we did our Taylor Swift update at the Chase Center show last year, we think the enterprise of Taylor Inc. is only worth about eleven billion. I mean only, quote unquote. I love that you and I have a have like an ongoing Taylor Inc.

3:25:51 Calculator. Yeah, yeah, yeah. Oprah's less than that. Forbes currently thinks Diane Hendricks is the wealthiest female founder. In the world, or at least in America, she's the founder of ABC Supply, which is one of the largest roofing suppliers in the country. You know what's crazy? This means that the two most successful female founders in America are both based in Wisconsin. I know, isn't that amazing? I was gonna say that. I love that you found that too. It is a big and great company for sure.

3:26:19 However, ABC supply Does about twenty billion dollars a year in revenue. I assume Not at anywhere near Epic's margins. Yep. So I don't think it is worth the call it I think minimum hundred billion that I think Epic is worth.

3:26:34 Ooh, you're now up to a minimum hundred billion. Well, I'm going by my rubric of if somebody could acquire this company, what would they be willing to pay? Yes. That's kinda funny. If someone offered you shares in Epic right now at a hundred billion, would you Okay. Ooh, good question.

3:26:51 If I could Yeah. Profit. distributions from Epic. Yes, I would love to hold Epic shares for the rest of my life. I would for sure pay that. Yeah, I totally agree. If I were banking on a liquidity event, then

3:27:02 No. Yeah. But me personally, yeah, I would love to hold shares. Yeah. When people are speculating on the value of something, the interesting way to turn it around is always okay, are you buyer at that price? Like open your wallet. Makes it feel much more real. I would for sure buy shares of Epic at a hundred billion. There's no way I will ever be allowed to, but I would love to. That sounds like a standing offer, and the show is not investment advice.

3:27:27 In this category. Man, it is crazy how powerful founder continuity can be. I was thinking about this. How many other companies have had a single founder leader for 47 years? I mean Jensen's thirty one years into NVIDIA. Zuckerberg is twenty one years into Facebook.

3:27:48 Obviously there's a lot. running smaller companies. There's Berkshire Hathaway. Right. That's actually the exception. Buffett's been running Berkshire for over fifty years. But in Judy's case, having forty seven years to imbue the founder's personality into the organization as it's built all the way to this scale.

3:28:07 is really rare and really powerful. Yeah. And as you've alluded to, I mean she Really is like Jensen. She's still

3:28:15 running the company. She's still highly engaged. Yeah, absolutely. All right. Baron bull cases. Yep, let's do it.

3:28:23 All right. A few different things contributing to the bear case, if I were to make one. US customers had very big dollars they could pay. The market is big because one, the US economy and population are large, and two, unfortunately, healthcare is a large percent of that. So if the future is coming from international

3:28:40 that could be less fruitful, much lower willingness to pay in most countries for Healthcare administration stuff. So that's one sort of bear case element. The other would be If this particle suit ends up

3:28:54 getting actually picked up. And there's a material event that happens for Epic around antitrust and a violation of the Sherman Act. That's a huge, huge problem. And that is a company changing Thing.

3:29:09 comes to bear. So we'll have to watch the news on that. The third is there is legislation that happened in the last few years about information blocking. There's an act that passed called the Cures Act. That essentially says that an EHR or health system cannot block access to information.

3:29:27 So even though Epic makes the very reasonable argument around data privacy and security and in the long run, patient safety by locking down data, the Cures Act makes things like screen scraping or Chrome extensions or RPA legal as a means to extract data from epic. And there's nothing they can do about it. That is required allowed. Interesting.

3:29:48 So at this point I don't know how that could really displace them. What also sort of begs the question of yeah, what would you do? Okay, you scrape epic data. You're not gonna Build epic.

3:29:59 Right. Epic has always been hyper sensitive about locking that stuff down for good reasons for their customers, but also for their own Durability reasons. And I think

3:30:09 this is gonna be a tiny crack in the armor. The fear is that someone deploys to like seventy percent of your customer base. They're all using some Chrome extension. They're all feeding the data into some nice UI. That nice UI is the thing everyone prefers to use. And then that UI vendor is like, oh, instead of using Epic on the back side, you could use my own home roll thing on the back side. But the probability of that happened is near zero.

3:30:32 Yeah, not gonna happen. So I'm not that worried about that. The other thing is maybe if interoperability comes to pass. In a bigger way. Then you could

3:30:44 kinda see the best of breed. applications becoming a more dominant paradigm versus the all integrated paradigm. Again. This feels pretty hand wavy to describe as the bear case. Yeah.

3:30:57 Well and should that happen, they still have The Microsoft Playbook, which they absolutely run. Okay, let's even say there are better best of breed Point applications out there. See.

3:31:08 Mrs or Mr. Hospital CIO. You could go pay money for those. Or you could just keep Buying your Epic Enterprise license where you get access to All of the

3:31:18 These point applications that you need. For one price. Yeah. And then the last one is paradigm shift. And this is always the bear case for any dominant company. Is AI gonna be such a dominant paradigm shift?

3:31:33 That Yeah. changes the needs of health systems. Or is value based care gonna be such a paradigm shift? Then it changes

3:31:43 What a health system is. Maybe you don't. go to the doctor most of the time. I have a hard time even imagining what it could be that you wouldn't need A system like Epic.

3:31:53 Maybe new care delivery models will make The old type of EMR is obsolete. This requires some imagination and again, it's very hand waving. Epic also has their eye on all of this, so it's hard to imagine any of those things being the My question to you is gonna be, okay, how much do you want to talk about AI here or how much do you wanna talk about it in the bull case? Yeah. It's probably more a bull case.

3:32:15 Alright, well let's do both case. Great. Alright, the bull case is they've successfully expanded from EMR plus billing to all these other specialties and modules.

3:32:26 The basically served all those same customers even more products. Those customers A will need more products in the future. B, there continues to be more health systems they can sell to, and now C, they are expanding. the customer base from just health systems to

3:32:44 Other types of companies Pharma payers, researchers. From this new dominant position that they're in. So they're sort of expanding to a whole new set of potential customers who could pay them because of their dominant position. I think that's extremely credible. Yep.

3:33:00 They could have an even larger business. I mean prior auth seems like the first and most obvious business opportunity for them here. In some ways hospitals are kind of crappy customers'cause they Don't generate much profit. Insurance companies are probably much better customers if you can figure out something really compelling for them.

3:33:17 Yeah. Unfortunately, again. I feel like every time I come up with some profit pool in healthcare. I'm like, Boy, I really wish that wasn't there. I'll have to sort of think philosophically on why I keep feeling that way. But I'm definitely I end up critical of any

3:33:30 thing that becomes too profitable in the healthcare system. Well Behind that though is that You as a consumer or we as consumers feel like Some of these entities are not in any way.

3:33:41 Providing value to us. Right. I feel like I'm getting ripped off. Yeah. I mean I saw a study that said thirty percent of spending in the healthcare

3:33:51 You know, in the eighteen percent of GDP goes to waste. Truly waste. And I saw another one that quantified it and said eight hundred billion dollars. Of waste. is in the system.

3:34:00 the entire GDP of Switzerland's worth of waste. Exists. in our health care system. Yep. Sounds about right. Another interesting thing that someone brought up is they asked me how much I pay in premiums a year.

3:34:14 for health insurance for the family. And I was like, I don't know, I think somewhere in the neighborhood of twenty five, thirty thousand dollars. And their comment back was like in what world Are you ever going to use twenty five or thirty thousand? Don't like imagine what's on the bill because that's all made up. All the numbers are made up.

3:34:30 The top line, the negotiated rate. What I am covered for, they're all made up. Just imagine like Dollars out of your pocket. For health care.

3:34:37 And don't even just pick this year, pick a ten year period because Stuff might come up. You'll have surgeries in some years, but not others. What are you actually willing to pay and go out of your pocket dollars give a doctor for everything you need over the next ten years and compare that against everything You're paying into the system.

3:34:55 If you were to be paying your own Employer side, employee side. And All the out of pocket stuff. We're not getting a good deal.

3:35:03 We're just not, and we can all feel it. Yep. All right, continuing the bull case. So there's a whole category called ambient listening. And one of the biggest complaints that people have with EHRs is doctors spend too much time in front of the computers. They're typing in notes. They're

3:35:19 Clicky clicky on nine different drop down boxes and alerts. And sometimes that gets fixed by having someone in the room typing while the doctor is doctoring with you. But either way There's the scribe, but the doctor's like also at a computer. because they just need to read the medical records. So the doctor ends up in front of a screen, they're wasting a bunch of time typing, or they're hiring someone to type. Oh my God, AI would be amazing for this if only

3:35:44 there was an ambient listening AI scribe. that could be writing down and categorizing and structuring all the data that comes out of an interaction with a physician. Well, Good news. It's happening.

3:35:57 It is happening. And it works. So David, there's a few companies that are partners of Epic, right? Yep. That's right. So one is

3:36:06 Microsoft and Nuance. Microsoft bought a company called Nuance a few years ago. They used to do like dragon dictation. Yeah. So they've always been in kind of the voice space for Healthcare. So they now have an ambient AI product. And then there are two big startups, one called A Bridge, based out of Pittsburgh. And then another one called Sukey that have

3:36:26 Really good. ambient AI products that Plug into the Epic and Yeah, are an AI scribe and

3:36:35 People who use them, physicians who use them. Love them. She can just focus on the patient. And it describes it all. Yeah.

3:36:41 This would be a great solve to some of the doctor burnout and fatigue and That a lot of physicians are seeing. Yep. That's the bullcase for this.

3:36:51 These products are all partners of Epic and in some cases Epic. May have relationships or warrants with some of these companies. Or just revenue. You could also imagine Epic might want to

3:37:01 Build their own. product of this someday. It's a big opportunity. Epic is kinda the choke point of the industry at this point to decide what software innovations reach hospitals. I don't think it's overstating it to say if you're developing

3:37:16 new breakthrough software to be used by physicians in hospital systems. Epic's kind of the one that gets to decide. Are you gonna reach that customer or not? Yep, exactly. So I think the basic both case On

3:37:30 Ambient voice, ambient AI. Is this a Great new Product. Revenue opportunity.

3:37:37 The megaball case to borrow from our IPL episode here. Is one CIO is talking to me He's like, look, I don't have high confidence that this is gonna happen, but As ambient AI becomes better and better Is there a version of the future where the

3:37:52 EHR quote unquote itself just kinda fades into the background. And it's all just becomes an AI operating system. Like what is it primarily doing? The E H R.

3:38:04 It's capturing. About what happened. It's recording it, both for clinical uses and then importantly for billing purposes. And then what needs to happen with that for billing purposes. Well, that data needs to get shipped over to the payer, whether that's the government or an insurance company, and then needs to get judged and adjudicated and then payouts need to happen like

3:38:25 Is there any real reason why this can't All be done by AI. In the future. Why do we actually really need user facing? software here, or a lot of it.

3:38:35 Hm. So yeah, there may be some future where and this is you know a utopian type future, but a lot of the administrative bloat and costs in the system. Actually gets taken care of by Ambient AI sort of

3:38:49 Br just sucking it all up here. I'll believe it when I see it, but it sounds nice. Exactly. But a real CIO of a real big hospital system made this case to me. It's just so hard to believe Bloat ever goes away. Getting administrative costs down is so hard. What are you gonna do? put a whole bunch of people who have good administrative jobs at hospitals

3:39:09 Out? That is gonna be hard for our whole society. For sure. I mean this is the question about AI, right? But you're right. I think it's a bull case if you're a shareholder of Epic, though. Right, if Epic becomes that system. Yeah.

3:39:21 All that to say. Like every industry. A I Has Big potential here. Yep. I think that's fair. And that's on top of everything we've already talked about. And no one is switching off of them. Revenue from their install base will just continue to grow.

3:39:35 They've become the standard that everyone will switch to once they get a customer. They don't leave. Honestly, at this point, regulation is probably also a bull case. This is sort of what happens once you become an incumbent and regulation tends to shut out new entrants and entrench the older companies'cause the older companies are the ones that have the resources to comply.

3:39:56 So They've got their ear to the ground. They've got a ton of resources. So when new data interoperability stuff, like there's one called TEFCA. That is in the works. Epic can be the first to implement it well. And so that can

3:40:09 Further entrench them. As they're going to be able to do it comply correctly with new regulations and new compliance. Yep.

3:40:17 As we talked about. There's probably pricing headroom at this point. Which may or may not be great for their customers, but it's great for Epic, and they probably can start extracting more value if they wanted to pull forward some of the future into today. I would be really, really surprised if they do that. I would too. I don't think they will.

3:40:35 Then the last one is becoming a platform. They really haven't done this to date. They've built it all themselves. But I'm curious if they start platformizing a little bit more and They've always had little things here and there app Orchard, but I'd be curious if they

3:40:50 at some point make a real play to be a robust platform layer upon which other applications build on top of. To your point about vertical software, maybe that's just not the way this ends up playing out but They have the opportunity if they want it and think it would be more valuable than their current path.

3:41:05 Yep. All right. Should we do quintessence? The biggest question I have is Why did it uniquely work in this field to build the entire platform and all the applications yourself?

3:41:18 Any other time you get that pitched. Pass. I'm not investing in that. That's a stupid strategy. Why in this industry did it work?

3:41:25 So I sort of phrase this as a different question to myself, but I think it's the same thing. I asked why did Epic win? Mm. But I think it's the same question here.

3:41:35 And to me, it just smacked me in the head. This is vertical market software. This is the Correct. Playbook.

3:41:43 to win in vertical market software. And It is very different than building. horizontal market software. Hm.

3:41:52 That's interesting. Because in vertical market software You are only serving one category of user. the deeper and deeper and deeper you can go into Their business operations.

3:42:06 And solving Their problems. The better. Whereas if you're building Slack or

3:42:13 Salesforce. Let's pick a horizontal complex piece of software, Microsoft Office. Yeah, Microsoft Office. Great. Canonical example. Or Windows, actually. Right. You need to be really, really, really careful about

3:42:27 Going too far into one customer segment. And this goes all the way into product development. You hear all the time from really great product people and engineers at the big horizontal technology companies that The surest way to design bad products is to listen to your customers.

3:42:44 Right. You internalize the feedback and then you decide what the best feature would be based on their own experience. Or based on collecting all the different experiences. And that I think is generally right for building horizontal Software and products. However, when you're building vertical market software and products, you absolutely want to listen to your customers. And that is what Epic is really good at. That's interesting. And you want to build exactly what they want and you want to understand. Who your customer is and your customer is

3:43:10 The CIO and the CIO and the CFO. Of the hospital system. Right. I now agree with you. My answer it probably just layers on top of why it's healthcare specific, not just vertical specific.

3:43:23 It is all the We were talking about carrots and sticks earlier, all the sticks. in this industry. If your software is bad. They die.

3:43:32 So the right thing is one big integrated approach. rather than any risk at all. of discontinuity between different applications. So that's one.

3:43:43 Two is all the Compliance stuff. Again, if you have any data leak, whoa, it's catastrophically bad for HIPAA. If you don't function correctly. Oh, you get your Medicare, Medicaid subsidies.

3:43:58 crushed for violating, you know, meaningful use stuff. There's just all these sticks with any mistakes. And so in a situation where you can't make any mistakes The single vendor playbook is the right playbook.

3:44:10 Even if it's gonna take forty seven years to build the dominant company. Yeah. You should have to write a lot of software and it all has to work together really well. Yep. And

3:44:20 One other thing I was thinking about about this Idea of Epic as a Vertical market software company. I don't think we've ever really covered any other

3:44:31 Vertical market software companies on the show before? No, I don't think we have either. We sort of have and I was thinking about why is that? I'm like oh well That makes sense. Generally vertical market software companies are not gonna get that big. You're limited by your vertical market. This is a

3:44:45 rare case where because The market they operate in is So big. And it's something we all use. And it's something we all use and it's something that is so important.

3:44:57 you actually can get a really valuable company built serving just one And market. And then I was thinking about it and I was like Epic has gotta be the most valuable vertical market software company in the entire world. What else could possibly be up there? And so I started racking my brain. I was like, Bloomberg was the only one I could come up with that could plausibly maybe be as valuable. We gotta do a Bloomberg episode some day, but that'll be our second vertical market software company that we cover.

3:45:26 But then I was Googling and I was thinking about it and I was like, Well, people talk about Viva systems. Yeah, Viva. Which is also healthcare. They're probably the largest public company. But I was like, yep. They're definitely not worth as much as Epic, and they are also operating in healthcare. They're not worth as much as Epic?

3:45:41 No, it's about a twenty billion dollar market cap company. Oh wow. Yeah, I don't think so. You know, the only other company I could come up with in the vertical market software industry that's also in this kind of big league is constellation software, of course, you know.

3:45:54 Fan favorite, friend of ours. But they bundle together a bunch of different Verticals. Exactly. There. Roll up. And I think some of their biggest

3:46:04 Companies are Vertical market healthcare and healthcare IT. Companies within Constellation. Yeah. Mark Leonard, I'm sure, is a big epic fan.

3:46:14 Or maybe not fan,'cause he probably operates some competitors. Yeah. I'm sure he has respect for Judy. I am sure. I mean

3:46:21 She's got a gold medal in the capitalism Olympics. So you gotta respect it. All right. That winds it down. Should we do some carve outs? Let's do carve outs. Let's do something fun. All right.

3:46:32 I've got two. I've got a regular carve out, a today carve out, and then I have a preemptive carve out. Great. My today carve out. Is

3:46:41 A friend of mine turned me on to a Very, very popular OG YouTube video that I had never seen. Can block the rally car driver. Did

3:46:52 Uh YouTube video back in twenty twelve. Of San Francisco. They shut down the streets in San Francisco. Who and he did this incredible

3:47:02 Rally car. Ten minute long video. Through San Francisco. It's like watching the old movie Bullet with Steve McQueen and the iconic. Yeah, yeah. But it's like That with a six hundred horsepower rally car driven by one of the best in the world. I can't believe I've never seen this before. And it's like my sit up like Oh sh I know those blocks. I live there, you know. So cool.

3:47:22 Amazing video. And he sadly died recently in an accident, which is why I was kinda Back in the news. But I did some more research into him and I knew nothing about him before. He was one of the co founders of D C shoes, you know, like the skateboarding shoes. He was one of the two co founders.

3:47:38 Then after they sold it to Quicksilver He got into professional rally car. Driving. became one of the best professional rally car drivers. Filmed this whole series of amazing videos in cities.

3:47:49 Super awesome. I can't believe I've never seen it before. We'll link to it in the show notes. Huh. I don't know anything you just said, so I gotta go look it up because none of that made any sense to me. Right. It's a short enough, very impressive video. Very cool to watch. Sweet.

3:48:03 That's my main carve out. And then my preemptive carve out is I am so excited. For the switch too. Ah if it ships, if they start taking pre orders again. Uh yeah. Maybe by the time this comes out I'm not worried about it hitting the ship date. I think they gotta sort out the US price.

3:48:19 And everything but A it looks incredible. Basically everything on our Nintendo episodes. that we've hoped Nintendo would do with the successor system to the switch they're doing.

3:48:31 Full backwards compatibility, maintaining the online accounts. System looks incredible. Shipping with a new Mario Kart. It's gonna be Just awesome in and of itself. I can't wait to have one for me. Also, my older daughter, like I have been waiting since the day she was born to play video games with her. And by the time it comes out, like I'm Thinking she might finally be ready for Mario Kart and I'm just so excited. Sweet.

3:48:56 Oh, that'll be so fun. All right. Mine. Go for it. I just rewatch the movie Knives Out.

3:49:04 Oh yeah, good one. Daniel Craig. Extremely fun. So good. It's just pure popcorn. It's visually stunning. Everyone loves a who done it. Daniel Craig's awesome. The whole cast is great. So if you haven't seen that, you'll really enjoy.

3:49:17 Movie night. I must be the last person to discover this album. I have been listening to the album Brat by Charlie XCX. Is awesome.

3:49:28 Well, you're definitely not the last person because don't worry, Ben, I will always be behind you in discovering music. I just gotta say, like I'm The Oldest malest. And also the fact that this came out.

3:49:39 twenty twenty four. Everything about this is like a ridiculous carve out, but I was watching Charlie X E X at the Grammys and her performances there, and ever since I've just had the album on repeat and it's Amazing. It'll transport you to another and much more fun world. than the one you were currently sitting in in front of your computer. I love it. And then the my last one is Odessa just released An album called Music to Refine To.

3:50:03 And it is remixes from Severance. It's just good. Leave it on lo fi in the background while you're doing work. I love Odessa, I love Severance. It's my world colliding.

3:50:14 I'm grateful that all of us have you too. Keep us up to date on music here. My music is frozen in amber at like two thousand six. Uh, if you want to feel like you're at like a much cooler party than you've been invited to in twenty years, listen to Bratt. Great.

3:50:29 Uh, all right. Thank you to all the people who spent time with us on this one. We talked to Dozens of people. And I think we can probably Thank four or five of them specifically on air. As always, Arvin Navaratnam at Worldly Partners for his great write up.

3:50:43 linked in the show notes. Brendan Keeler, who writes the sub stack health API guy. He's awesome. Brian Lawrence is the founder of Oak Cliff Capital and was a great thought partner in this episode. Lakan Wang, a healthcare technology investor. and managing partner of JSL Health Capital. Scott Gaines, a longtime IT executive from Highland and Cover My Meds.

3:51:07 Patrick Wingo, the head of research at Elion, someone who has studied the health IT space very diligently and formally at Palantir. John Bertrand, the CEO of Digital Diagnostics, an advisor at A V C and a former Epic employee. He really helped me understand the culture and what a unique place it is. to sort of grow and develop there. And to Dr. Abed Mir, a Stanford physician and investor who used Epic firsthand. Before becoming an investor.

3:51:34 And was inspired to become an epic shareholder himself. David, I know you've got a few folks as well. Yeah. A whole number of Health system CIOs who I spoke with. Huge thank you to all of you.

3:51:46 One that I wanted to call out specifically was Mike Pfeffer, the CIO of Stanford Medicine. Two fun ones. Two of Jenny and my friends from our Princeton undergrad days. Who are now Doctor at big epic sites. So Molly Cantor, who's a doctor here at UCSF in San Francisco.

3:52:04 And Corine Davila, who is a doctor at MGH, at Harvard MGH in Boston. Nice. Got to speak with. Physician experience. Using. Epic.

3:52:15 And then Finally. We have a number of people to think at Epic itself. Since they're Really isn't any

3:52:23 canonical long form piece about the company out there. We thought We usually don't do this, but Let's just email Judy and see if we can chat. And she responded and we did. Thank you, Judy, for spending time with us and helping us understand. All the missing details we had. on Epic's company history.

3:52:40 And of course also to Carl Dvorak, Summit Rana, and Lee Lavon, also from Epic, who spent time with us and walked us through The history. Yeah. We really, really appreciate it. Yeah. Listeners, if you liked this episode, go check out anything else in the Acquired Back catalog. We should specifically call out Novo Nordisk, if you are into the healthcare space.

3:53:01 You've also got lots of interviews available on ACQ2. Our most recent one was a conversation with Bill McDermott, the CEO of ServiceNow. After you finish this episode, come discuss it with other smart acquired Slack members at acquire.fm slash Slack. And with that, listeners, we'll see you next time. We'll see you next time. Who got the truth? Is it you, is it you, is it you Who got the truth now? Huh?

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