Dave Souerwine, President, McKesson Provider Technologies, Chapter 1

McKesson recently made a big splash when the company announced it was reorganizing its Horizon and Paragon product lines with major emphasis on the latter. In the same breath, the company stated it would invest $1 billion over the next two years in research and development of IT products as part of an initiative called Better Health 2020. In this interview, David Souerwine, president of McKesson Provider Technologies, takes us behind the curtain by discussing the goals of the new strategy, what factored into the decision to shift away from Horizon, the advantage he feels that McKesson now offers its customers, and the challenges involved in managing customer perceptions.

Chapter 1

• McKesson “Better Health 20/20”
• The reorg
• The new Horizon/Paragon paradigm
• “We didn’t feel like we could develop for growth two very complex product suites”
• Can Paragon scale?
• Horizon’s future

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Bold Statements

Risk is definitely shifting toward the hospital and to the provider, and so in that environment of uncertainty, all these customers are looking to somebody like McKesson that has broad capabilities and can help with accountable care, healthcare reform—whatever it is that they need.

We didn’t feel like we could adequately continue to develop and support growth for a very complex product suite. I came to the realization over the past year or so that regardless of our efforts on the Horizon Clinical development, it’s never going to be the fully integrated product that I think our customers want.

We made a decision not to rewrite Horizon Emergency Care and not to do incremental investment in Horizon Ambulatory Care, because we can get there quicker and give the customer a fully integrated experience on Paragon than we would’ve been able to do on the Horizon platform.

I think part of that has grown out of this notion that Oracle databases are much more capable and that Microsoft technology can’t scale. My first answer to that always is that the airline reservation system and NASDAQ run on Microsoft systems. So there’s certainly a way to scale them.

I believe that there’s zero downside into a customer learning what Paragon is and where we believe we can take it in a relatively short period of time. They will then be better informed as to Paragon as a possible choice for them to switch to, or they can decide that Horizon better meets their needs and they can stay on that.

Guerra:  Good morning, Dave. Thanks for joining me to talk about some news with McKesson Provider Technologies.

Souerwine:  Thank you, it’s nice to be here.

Guerra:  I think a lot of people probably have an idea, but why don’t you go ahead and tell us what it’s all about.

Souerwine:  Okay, the first thing I would say is that you positioned your very first question as news at Provider Technologies. This is really around a broad McKesson strategy called Better Health 2020 and so it encompasses a lot more than MPT for your listeners who may not realize that MPT is a collection of six businesses which grew up as software and device business aimed at the hospital market as the settings of care across healthcare have continued to blur. And now it’s important for us to think about all of the providers as well as all of the settings where a patient could potentially get care. There’s been an increased amount of capability added to what is now known as McKesson Technology Solutions. I am the President of the Provider Technologies business. We also have payer businesses, physician businesses, and a number of different connectivity businesses. Better Health in 2020 encompasses all of those things, and Better Health is an agenda that encompasses the broad planks of better business, better care, and better connectivity, and then underneath those, we wrap in a lot of different elements of our offering across the market.

The announcement letter that we sent to customers on December 9th included four things. One was to capture the value of core clinical and revenue cycle IT systems; secondly, cost reduction and customer operations through best-of-class pharmacy automation, supply chain analytics, and performance management solutions; third, better care coordination through connectivity across the ecosystem of diverse stakeholders and IT systems; and fourth, the ability to manage increasing complexity and risk, bundled payment and changing structural relationships through superior payment solution. So those are the four broad things that we talked about. A lot of those are addressed by businesses outside of MPT, though one that we have a specific interest in the second one, which was cost reduction and performance management. We stood up a separate division at the end of last year called Health Systems Performance Management which encompasses a broad array of cost reduction tools and also all of our analytics products. We believe we have a market-leading position in analytics. A lot of our competition actually uses our analytics solution to overlay their cores systems.

The specific changes that related to MPT really relate to the first plank, which is to capture the value of core clinical and revenue cycle IT systems. And the announcement that we made was to dramatically increase our investment in Paragon Health IT platform. We’ve shifted our strategy for building advanced fully integrated revenue cycle and clinical capabilities to deliver them on Paragon’s contemporary Microsoft platform. Secondly, which is related to that shift toward Paragon and continued development of revenue cycle on the Microsoft platform, we have stopped development of Horizon enterprise revenue management. So we remain committed to building out an advanced revenue cycle product, and we’re going to be shifting it on to Microsoft platform, and I’ll come back and can talk more about why we’ve done that if you’re interested.

And then lastly, we’re focusing our investments in the areas that our customers will need to navigate the complexities of health reform. So a big message here, and the reason we’re calling it Better Health 2020, is we know that there is an incredibly uncertain environment in healthcare reform that is facing customers. I think everybody is looking for some guidance on what should they be doing. They know that reimbursement is going to start to drift towards Medicare levels of reimbursement. There is a shortage of people, there’s pressure on cost. Risk is definitely shifting toward the hospital and to the provider, and so in that environment of uncertainty, all these customers are looking to somebody like McKesson that has broad capabilities and can help with accountable care, healthcare reform—whatever it is that they need to go in the direction that they want to head, to try to both stay financially healthy and also hit better financial and clinical endpoints within their hospital.

We’ve committed to investing a billion dollars in research and development across our technology businesses. And that’s not an investment in Paragon—we’ve gotten that question back, ‘Are you investing a billion dollars in Paragon?’ It encompasses all of the technology businesses across McKesson. There is still a higher investment in Horizon going forward than there is in Paragon, even though we’ve increased the investment quite a bit in the Paragon solutions. I think some people are probably still somewhat confused and questioning whether we are sunsetting. We’re not sunsetting any of our products, including Horizon Clinicals. We’ve given our customers choice in staying exactly where they are and working through the upcoming short-term regulatory requirements—ICD-10 and trying to get through the early stages of Meaningful Use. If they want to migrate to Paragon now, they can do so. If they want to wait for the development platform and the roadmap to mature somewhat, they can do that and switch at a later date, or they can just continue to stay on Horizon which we’re continuing to support as well as make workflow changes to. I’ll just pause there because that encompassed a lot, and see how you want to divide this up and talk further.

Guerra:  Sure. I’m trying to think of this from the standpoint of most of my readers and listeners, and I would say they are CIOs at hospitals that are using Horizon. For those that are McKesson customers, they’re using Horizon and they’re at bigger facilities. And so first off, you said Horizon Clinicals is not going anywhere. You said you going to continue to support it but I guess my question is how robustly are you going to continue supporting it? Is there a general trend to convert to Paragon and that should be at the back of people’s minds? Or is Horizon Clinicals going to go forward and you’ll take care all of their needs and continue to develop their product?

Souerwine:  A big basis of the decision here was that we didn’t feel like we could adequately continue to develop and support growth for a very complex product suite. I came to the realization over the past year or so that regardless of our efforts on the Horizon Clinical development, it’s never going to be the fully integrated product that I think our customers want. Paragon has been developed natively from the ground up over the past 11 years. So the difference in approach was that on the Horizon side, when the development started intensively about 8, 9, 10 years ago, the market was really looking for best-of-breed applications that were very functionally rich. Because of that, we actually purchased a lot of the capability from outside companies and put them into the Horizon suite. Because of the way a lot of those products were acquired, they ended up having different databases in some cases, or duplicate tables. And over time, not all of that has been rationalized, so we’re not going to get to a fully integrated experience.

We’re finding today that customers want lower total cost of ownership and full integration above much better feature function. That said, that over the past several years, we’ve been trying to take the same specifications that we’ve been using to develop the Horizon product suite and we’ve been using those to develop our own ongoing Paragon capability. So I think a lot of customers, when they look at what Paragon is today and the roadmap that we have constructed to continue to develop Paragon, they’re going to find that it’s a lot more feature-rich than they expect and that it’s a very capable system. That said, we’ll continue to not only support Horizon, but we will continue to address workflow problems where they exist. I think the two big sore points that Horizon customers have are Horizon Ambulatory Care and Horizon Emergency Care. We made a decision not to rewrite Emergency Care and not to do incremental investment in Ambulatory Care, because we can get there quicker and give the customer a fully integrated experience on Paragon than we would’ve been able to do on the Horizon platform.

That’s the same rationale around ERM. We actually compared the feature function and capability of Paragon a year ago today and what’s in their development roadmap against where Horizon ERM was going to arrive, and it’s probably two years out, and decided that we could get customers there more quickly with the integrated lower total cost of ownership on one database then we were going to be able to do on the Horizon ERM, so we just stopped that project. So we’re still committed to Horizon. We don’t want to strand any customers or have them feel like they’re in a position where they need to make an immediate decision to migrate to anything.

Guerra:  So if I’m one of CIO customers on Horizon and I’m hearing your message, I’m thinking, ‘Well, let me take a look at Paragon.’ And the perception there had been, at least this was a way I divided it up until recently, that Horizon was for the big organizations and Paragon for the smaller ones. But then more recently, the messaging had been that Paragon is what you’re looking for in a complete integrated system and Horizon is what you’re looking for if you need a more piecemeal or best-of-breed solution. It sounds like you certainly saying that Paragon can scale up. So what would your message be to CIO customers at large Horizon shops who are concerned that Paragon can’t substitute for Horizon because it has some sort of size limitation?

Souerwine:  The first thing I would say is that I think part of that perception exists because McKesson created it. When Paragon first started, it was definitely positioned as a system for critical access or community hospitals. I think some of that was done so that we were able to divide up our own marketing and sales efforts by size of hospital. That’s become less true going forward for all the reasons you just pointed out. I’m not sure where the concern around scaling came from.

I think part of that has grown out of this notion that Oracle databases are much more capable and that Microsoft technology can’t scale. My first answer to that always is that the airline reservation system and NASDAQ run on Microsoft systems. So there’s certainly a way to scale them. As part of the work that we did against what our increased investment and roadmap should be, we did a lot of testing around scalability, and we do not believe that in the end there will be limitations on scaling.

Guerra:  Was there a temptation for you in terms of just simplicity to say, ‘let’s just sunset Horizon Clinicals. Let’s give people five or seven years, and let’s just go behind Paragon.’ Was there any temptation to do that?

Souerwine:  We didn’t want to do that because we really want to meet the commitments that we’ve made to our customers. What we are trying to do is both increase the amount of research and development funding that we’re investing against all of our technology solutions, but also try to get that funding more focused so that we can better meet the needs of customers. The more we bifurcate that investment or divide that between multiple solutions, the less effective it is for everybody.

It’s certainly the case that Cerner and Epic have enough scale. We have rough ideas of what’s being invested in R&D. We certainly know Cerner specifically since they’re public, but they’re investing entirely in HIS/CIS and the longer that we divided up our investment in that system, the further behind we’re going to get on a development point of view. So we’re trying to get the amount of money that we’re putting in to HIS/CIS more focused so that we can bring richer systems more quickly and also make sure that their lower total cost of ownership is integrated, which is definitely what the market is requiring at this point. Nobody is making best-of-breed decision at this time. They’re buying based on integration, and over time their financial and their clinical decision will merge.

Guerra:  Would you say your position to your Horizon customers is, ‘Take a look at Paragon. Let us walk you through what we can do, and let’s talk through a possible migration.’ And think about it, is that a fair assessment of your position—that you would like to encourage customers to at least check it out?

Souerwine:  I believe that there’s zero downside into a customer learning what Paragon is and where we believe we can take it in a relatively short period of time. They will then be better informed as to Paragon as a possible choice for them to switch to, or they can decide that Horizon better meets their needs and they can stay on that. It’s going to take I think several years before we get through the already identified regulatory ICD-10 and Meaningful Use requirements that have been laid out by the government. In that ensuring three, four, five years, there is going to be a lot of water under the bridge on the Paragon development side, which is already a capable system today. So yes, I would like Horizon customers to at least entertain learning more about what that system is and looking at their track record for development and what the capabilities are today and in the future.

Guerra:  You make a good point. I mean, you can think of it as going 100 miles an hour in a car is maybe not the best time to ask them to switch vehicles. Maybe let them get through this phase as you continue to develop Paragon, if you want to address that. And are there any specific points that you’re looking to beef up Paragon over the next couple of years that might make it more attractive to big customers that are a little hesitant?

Souerwine:  We are in the process of both completing and rolling out ambulatory and emergency care, which we know are pinch points under Horizon side, so that should certainly please a lot of Horizon customers that they’ll have better working capability in those two areas. And there are a lot of larger IDNs or complex Horizon customers that talk about capability in multi-entity. That needs to be built out. I would also tell you though that today Paragon is able to handle multi-entity hospitals; it depends on how the hospital actually wants to be able to execute against that, but that is an area that’s on our roadmap, as well as some technology uplift and platform improvements that, in reasonably short period of time, should get us closer to mobility solutions as well as software-as-a-service/cloud capability. All of that is on the Paragon roadmap.

Guerra:  How would you describe how big a deal this announcement or news is? It’s significant, but I guess you don’t want to make it too significant that it scares people. How would you sort of describe what’s happened?

Souerwine:  It was a hard decision internally, just from the standpoint of any time you stop a whole project, you’re affecting work groups. We had to make a public filing. There were 174 people that were impacted by that decision on the frontend. That said, this week we’re actually running a redeployment fair because we have more openings across our technology businesses. And those 174 people who had their assignments end because of their Horizon ERM decision—and we believe a lot of them will be replaced if they want to be. So they have the option of leaving the company, or they can reapply for any of those positions. We’ve got outside firms that we brought in to help them create resumes and help them with interviewing techniques, and we’ll have hiring managers on site this week and actually make all those decisions by this Friday. So we’re trying to handle the people side of it as best we can, but it’s always I think difficult decisions for leadership when you’re impacting work groups, and this one is pretty large.

So that was hard. In terms of the extent of the decision, we know that this is going to raise questions for every single Horizon customer. We’re in the process of getting to them. We tried to get everybody and we got almost everybody on Thursday and Friday last week. The remaining calls are happening today. There was an associated letter that went to our customers at the end of last week, and our next goal is to set up a face-to-face meeting with them to further answer their questions. Everybody wants to know what this means for them financially. We need to take care of that—go through it with them based on what they’ve purchased in their current situation and what their upgrade path is, and then show them what the financial benefits would be of staying with Horizon or switching over some time period to Paragon.

Chapter 2