Epic Systems (MyChart)

What if we told you that the most important company in US healthcare was run from a farm in rural Wisconsin? And that farm contained the world’s largest subterranean auditorium, as well as Disneyland—style replicas of Hogwarts and the Emerald City? What if we told you that the person who started, runs and owns this establishment has legally ensured that it will never be sold, never go public and never acquire another company? And that this person, Judy Faulkner, is also likely the wealthiest and most successful self-made woman in history? Welcome to the story of Epic Systems, the software company that underpins the majority of the American healthcare system today. Epic isn’t “just” an electronic medical record (the category it’s usually lumped into), or an online patient portal (which is how most of the US population interacts with it via its MyChart application). It’s more akin to a central nervous system for hospitals and health clinics. Almost *everything* in a hospital — from patient interactions to billing, staffing, scheduling, prescriptions and even research — happens on Epic’s platform, and over 90% of American medical schools’ graduating doctors, nurses and health administrative staff are trained on it during their educations. Tune in as we dive into the almost-unbelievable story of how this epic company came to be! *Links:* - Epic’s Verona campus: https://www.epic.com/visiting/ - Worldly Partners’ Multi-Decade Epic Systems Study: https://worldlypartners.com/businesshistory - Episode sources: https://www.acquired.fm/episodes/epic-systems-mychart#sources *Carve Outs:* - Ken Block in San Francisco: https://youtu.be/LuDN2bCIyus?si=rHU8CjPAoeHck0uK - Nintendo Switch 2: https://www.nintendo.com/us/gaming-systems/switch-2/?srsltid=AfmBOoq-kZTYsNm0_if1ONE-8GV0k1x77Nv41aWbkSpgrqSU9zcyQAog - Knives Out: https://www.imdb.com/title/tt8946378/ - Brat by Charli xcx: https://open.spotify.com/album/2lIZef4lzdvZkiiCzvPKj7?si=bdGrTidgRIKMMBNvjHzbWQ - Music To Refine To: A Remix Companion to Severance by ODESZA: https://open.spotify.com/album/7bNj7hUkbRbZzn36MdyvUk?si=tL7uLI15QVasFLXuRaKkZQ *More Acquired:* - Get email updates https://www.acquired.fm/email and vote on future episodes! - Join the Slack http://acquired.fm/slack - Check out the latest swag in the ACQ Merch Store https://www.acquired.fm/store! _Note: Acquired hosts and guests may hold assets discussed in this episode. This podcast is not investment advice, and is intended for informational and entertainment purposes only. You should do your own research and make your own independent decisions when considering any financial transactions._

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  The answer is somewhere in the middle.

• 0:02David Rosenthal?

  Well, you texted me last night that you've made it to Singapore.

• 0:04Ben Gilbert?

  I made it to Singapore, yes. Anytime you're researching anything in US healthcare, you know it is time to stop your research process and start the episode once you've found Singapore.

• 0:19Ben Gilbert?

  All right, let's do it.

• 0:37Ben Gilbert?

  Welcome to the spring 2025 season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

• 0:45David Rosenthal?

  I'm David Rosenthal.

• 0:46Ben Gilbert?

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

• 0:56David Rosenthal?

  Indeed, whether you know it or not.

• 0:57Ben Gilbert?

  Yes, you probably know them from their medical patient software, MyChart, that, if you're listening to this, you most likely use. Epic is a very unusual company in so many ways. They do no marketing. They basically don't do any sales either. They often say no to potential customers who approach them. They don't negotiate, they don't discount. They never raised any venture capital, and they've never done any acquisitions in their 47 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 wizard's academy, a treehouse, a barn, a replica of New York's Grand Central Station, and an 11,000-seat auditorium underground. They have the majority of the US's

• 1:42Ben Gilbert?

  major hospital systems using their software, and of their over 600 customers, they have never lost a single one.

• 1:50David Rosenthal?

  Yeah, that is the craziest thing to me about this company is 47 years old. They have never lost a customer. Actually, we found out that's not totally true. They lost one customer once for six months and then that customer came back six months later.

• 2:04Ben Gilbert?

  Yes. The company's founder, Judith Faulkner, is undoubtedly one of the great founders of our time. You probably don't know much about her or the company because the company is still privately held and Judy and her family foundation own about half of it. Despite being large, and I think at this point they're close to $6 billion in revenue and over 14,000 employees, they have a stated goal to never go public and never be acquired. And Judith, at age 81, has created a succession plan and a trust structure for her voting shares to ensure that that will stay true forever.

• 2:38David Rosenthal?

  Yes, we heard all sorts of stories about companies sniffing around 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 going to happen.

• 2:50Ben Gilbert?

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

• 3:05David Rosenthal?

  Almost undoubtedly.

• 3:06Ben Gilbert?

  Well, all right, then spoiler alert listeners.

• 3:10David Rosenthal?

  We'll discuss that at the end.

• 3:11Ben Gilbert?

  Yes. So the healthcare industry, there is so much wrong with the American healthcare system. That is an incontrovertible fact. There's nobody that's going to tell you, oh, actually, it's pretty good. It's not pretty good. It's a disaster. Runaway costs, burdens of administration, so much excess and waste causing, I think, healthcare costs are now 18% of our GDP.

• 3:32David Rosenthal?

  Ooh.

• 3:32Ben Gilbert?

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

• 3:42David Rosenthal?

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

• 3:45Ben Gilbert?

  Yep. 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 acquired.fm/email. After this episode, come join the Slack, talk about it with us and the entire Acquired community afterwards. I bet there's a ton of people in the medical ecosystem hanging out in the Acquired Slack. That's acquired.fm/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 ACQ2 in any podcast player.

• 4:30Ben Gilbert?

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

• 4:42David Rosenthal?

  All right. Well, we start our journey in August 1943, when Judy, today Faulkner, then Judy Greenfield, is born in Earleton, 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.

• 5:02Ben Gilbert?

  That's true. And Taylor Swift.

• 5:04David Rosenthal?

  And Taylor Swift, that's right. Fertile ground for entrepreneurs there in the Delaware River.

• 5:09Ben Gilbert?

  And DuPont. So much great American entrepreneurship in that area.

• 5:12David Rosenthal?

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

• 5:34Ben Gilbert?

  Yep.

• 5:35David Rosenthal?

  That would enable Microsoft and Epic, Intel and all of this.

• 5:40Ben Gilbert?

  And for a long time, the early pioneers of electronic healthcare records were hardware companies.

• 5:46David Rosenthal?

  Yes. Lockheed, GE, Siemens.

• 5:49Ben Gilbert?

  Yes. Lockheed was a vendor to hospitals.

• 5:53David Rosenthal?

  Incredible. But for the moment, Judy probably didn't know anything about this because her family is not in the tech industry. Growing up, her father Lou is a small-town entrepreneur. He runs a local pharmacy and soda fountain there in Earleton called Lou's, Lou's Soda Fountain. And perhaps this is where Judy would later get her own entrepreneurial bent from.

• 6:13Ben Gilbert?

  Could be.

• 6:14David Rosenthal?

  So that's Judy's father. Now Judy's mother, Del Greenfield, was an absolute freaking dynamo. She graduated high school at age 15 and she worked first as a secretary and then she worked with Lou at the store pharmacy and soda fountain. And then later got really involved in peace advocacy during and after the Vietnam War. Which I assume was not typical for her generation that lived through World War II. She ends up becoming the director of the South Jersey Peace Center. And then later in life, after the kids were gone, she and Lou moved to Portland, Oregon, where Del became the executive director of an organization called Oregon Physicians for Social Responsibility,

• 6:57David Rosenthal?

  which, get this, in 1985, this group, in partnership with a broader international group called Physicians for the Prevention of Nuclear War, wins the Nobel Peace Prize. Judy Faulkner's mom was part of a group that won the Nobel Peace Prize in 1985.

• 7:15Ben Gilbert?

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

• 7:23David Rosenthal?

  Nobody knows this.

• 7:25Ben Gilbert?

  This is not cited anywhere. So how did you find your way to it?

• 7:28David Rosenthal?

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

• 7:52Ben Gilbert?

  So cool. All right. So you've got entrepreneurial DNA. You've got sort of peace-oriented, divergent-thinking DNA.

• 8:00David Rosenthal?

  Yep. Then you've got Judy. And at this point in time, growing up, she's mostly just interested in math. So she loves to tell the story about how when she was in seventh grade, a teacher asked the class a number theory problem. Of course, probably didn't frame it as a number theory problem. But asked the class, "Why is it that numbers that are divisible by 3, if you add up all the digits of that number, that number that is the sum of its digits is also divisible by 3?" This is like a law of number theory. So Judy hears this problem and is just like, "My future is in math."

• 8:36David Rosenthal?

  So in 1961, Judy graduates high school. She goes to Dickinson College to major in math. And while she's there, she gets a summer job one year at the University of Rochester, just a little bit farther north, in their particle physics lab. And for the work that she had to do over the summer, she needed to learn computer programming. This is in the early, mid 60s. And so like, oh, you gotta learn FORTRAN for the work that we're doing here and running these experiments over the summer. So they give her a book, like a manual on FORTRAN, and Judy teaches herself FORTRAN in a week and becomes one of the best programmers in the lab. If you're not getting the picture here, like Judy is a genius. She is an incredibly talented person.

• 9:18Ben Gilbert?

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

• 9:33David Rosenthal?

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

• 9:42Ben Gilbert?

  Makes sense.

• 9:43David Rosenthal?

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

• 9:59Ben Gilbert?

  Because she has an artistic side, too. For as mathy as she is, she also has a hyper creative streak.

• 10:06David Rosenthal?

  Totally. And obviously, her story is very different and she is a very different person than him. But the echoes that you're seeing here in Judy, in what she's exposed to as a kid, how she thinks, how she operates as an entrepreneur, you should be getting some Bill Gates vibes here.

• 10:22Ben Gilbert?

  I thought you were going to say Steve Jobs with the peacetime orientation around her upbringing and sort of the... I don't want to say hippie for Judy, but almost hippie-esque movement, too.

• 10:33David Rosenthal?

  Yeah, that's actually a good point. Well, Jobs and Gates. Well, the reason I said Gates is to sort of foreshadow some Microsoft-y in DNA and analogies that come into Epic here.

• 10:43Ben Gilbert?

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

• 10:51David Rosenthal?

  Totally. So when Judy gets back to Dickinson, to college, she decides that she's going to apply to grad schools in math. So she applies to five PhD programs. She, of course, gets into all of them. And on her CV, she lists her Rochester experience and her Fortran programming experience. So two of the schools she applied to, Stanford and the University of Wisconsin, are just starting their computer science departments. When she applied, they didn't have computer science departments and in the interim, they started them. And so they saw Judy's application, like, obviously, this is a brilliant person who we want here at the university. We're starting these CS departments. They unilaterally shift her applications to their new CS schools. And so Judy's like, oh,

• 11:36David Rosenthal?

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

• 11:59Ben Gilbert?

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

• 12:11David Rosenthal?

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

• 12:38Ben Gilbert?

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

• 12:50David Rosenthal?

  Yeah, right. It's a good point. This is the first time anybody could use computers for anything outside of government and the defense industry, right?

• 12:57Ben Gilbert?

  Yep.

• 12:58David Rosenthal?

  So. Judy takes this class from Dr. Warner Slack. And as you might expect, she's the star student in the class. Afterwards, Dr. Slack asks her to work on writing a program for use in the hospital, in the medical school, to optimize the on-call schedules for doctors. You know, doctors have to have on-call schedules. And so optimizing that, like, perfect thing that a computer application could do. Yep. So Judy says, yes, great. She starts working on it. And this is, you know, a part-time job for her as a grad student. She's getting paid $5 an hour for her programming time. Trading time for money here. And apparently, the story goes that her programming was so good and she was so efficient at writing these applications, because she would go on, you know, lots of departments

• 13:43David Rosenthal?

  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 $10 an hour and still didn't make that much. Anyway, so as she's going around throughout the Wisconsin Medical Departments, she's working with psychiatry and OB-GYN and rehab and inpatient in the hospital and the intensive care unit, she 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

• 14:27David Rosenthal?

  in other departments across the hospital as they're being seen. Like, we really would love if there was a single database that could keep records on every patient that we have across the whole longitudinal course of their care here at the University of Wisconsin Medical Center. You know, an electronic sort of health record for these patients, you might say. And this is the origin of Epic. But before we go further on what duty does next, I think it's worth taking a step back and talking about what are health records? What are medical records? What was the state of them in America here in the mid 60s? And why is this idea of an electronic version of them so appealing?

• 15:08David Rosenthal?

  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.

• 15:20Ben Gilbert?

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

• 15:27David Rosenthal?

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

• 15:47Ben Gilbert?

  Right. Or if you have to see a different doctor for the same thing, it'd be great if they're calling the same condition, the same condition.

• 15:53David Rosenthal?

  Exactly. So all of the efforts around standardization in the country really go back to Massachusetts General Hospital in Boston, which Mass Gen or MGH is the main and largest teaching hospital of Harvard Medical School. It would make sense that this is where a lot of sort of research is happening. And like you said, in 1912, a few members of the American Medical Association and the American Hospital Association get together there at Mass General in Boston. And they start working on, can we create some standard entry practices for physicians that we can distribute across the country that physicians can use as their patient diaries, as they're known back in the day. So in 1919, it takes them seven years to do this.

• 16:36David Rosenthal?

  They do finally introduce a standardized treatment diary, quote unquote, for distribution across the country. Now, there's no incentive for doctors to actually use this. And doctors, as we shall see, are notoriously sort of an independent-minded group and profession and don't like being told what to do or how to design the notes that they take.

• 16:59Ben Gilbert?

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

• 17:07David Rosenthal?

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

• 17:21Ben Gilbert?

  I'm the doctor. I know best. I'll figure out what delivers the best care.

• 17:25David Rosenthal?

  Yep, exactly. So this continues for a while. And then finally, in 1928, the Association of Health Record Librarians of North America gets set up as an official body to standardize collection, storage, retrieval of patient data. This is a fun callback. I believe the Rockefeller Foundation was behind funding all of this. A callback to our Standard Oil episodes.

• 17:48Ben Gilbert?

  I believe that because wasn't our conclusion on Standard Oil that the Rockefeller Foundation is the initial funder of the nation's medical schools?

• 17:58David Rosenthal?

  Yes.

• 17:58Ben Gilbert?

  Or sort of kicked off the movement of having real medical schools?

• 18:01David Rosenthal?

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

• 18:44David Rosenthal?

  hospital, or a different health system, or a different state. It's a mess.

• 18:47Ben Gilbert?

  Not to mention, paper doesn't lend itself well to structuring data because at the end of the day, you can write on paper however you'd like to.

• 18:56David Rosenthal?

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

• 19:16Ben Gilbert?

  Yep.

• 19:17David Rosenthal?

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

• 19:32Ben Gilbert?

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

• 20:03David Rosenthal?

  Oh, all right. Educate me here.

• 20:06Ben Gilbert?

  We're going to catch up to Medicare here. But in 1942, America is at war. There is something passed called the Stabilization Act that imposed wage and price controls. An interesting thing to note, at this point in time, only 10% of Americans have health insurance. Period.

• 20:24David Rosenthal?

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

• 20:30Ben Gilbert?

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

• 21:01David Rosenthal?

  Markets always find a way.

• 21:02Ben Gilbert?

  Yeah, right. So as soon as this happens, unions go, oh, this is awesome. Our people can make more money. Amazing.

• 21:10David Rosenthal?

  We're going to make capital pay for our health plans now. Yeah.

• 21:13Ben Gilbert?

  Exactly. Increase wages for workers. This is what we're all about. They lobby to make it explicitly legal, since it was kind of a gray area from the wage controls. And so the National War Labor Board makes it official. You can do this. Two, employers and the health insurance companies that are springing up then lobby to say, hey, these health insurance premiums, can we make these tax deductible for the business? Because the business, they shouldn't have to pay taxes on this money if they're going out and buying health plans for their employees with it. And on top of that, even though it's a form of compensation, can we make that not taxable as income?

• 21:54Ben Gilbert?

  That would be really great. The businesses can deduct it and the individuals shouldn't have it affect their income taxes, even though clearly compensation.

• 22:03David Rosenthal?

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

• 22:08Ben Gilbert?

  Exactly. So this sets it all in motion. With incentives like that, why would you want your health care 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 1946, the percentage of Americans who had medical insurance was already up to 30% from that 10% number just six years before. Flash forward a couple of decades, 1964, it's now up to 80%. 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

• 22:51Ben Gilbert?

  for health insurance and creating large insurance companies to provide it.

• 22:55David Rosenthal?

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

• 23:03Ben Gilbert?

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

• 23:11David Rosenthal?

  Who also, by the way, are the highest consumers of health care.

• 23:15Ben Gilbert?

  Yes. So here we are at 1965. David, you're exactly right. Medicare and Medicaid enter the picture as a part of the Social Security Act. How did we get here is sort of interesting. FDR, Truman, and Kennedy had all tried to pass a single payer system the way that the UK did. Right after World War II, the UK is in this moment of sort of great nationalistic pride. We all have to band together, look after one another. They passed the national health system. The US does not have the political will to do it, and so we don't. You sort of have this coverage gap, to your point earlier, of all these people who are not currently in the workforce. So the compromise is we will create Medicare for those over 65 and Medicaid if you have a low income or other special situations.

• 23:59Ben Gilbert?

  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. Yep. So all of that is our system today. Private insurers, if you have a job, buying directly from the ACA. If you don't, but again, still from private insurers, Medicare or Medicaid if you sort of fall outside those buckets. And the important thing to realize from all this is that the vast majority of patients do not feel the cost of their health care directly in the United States. Those costs are so laundered through private insurance companies and Medicare and Medicaid

• 24:43Ben Gilbert?

  that most people think about any given health encounter as being paid for by someone else, by a part of some system. If you're trying to unpack, how did our health care become 18% of GDP versus 11% of the UK GDP or a staggering 6% of Singapore's GDP, albeit at a much smaller scale? Why are we 18%? A big thing you have to understand is psychologically, every health care encounter is that the system is paying for it. I'm paying into the system, the system is paying for it, but what does it cost? What do I actually pay? It's a big abstraction.

• 25:19David Rosenthal?

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

• 26:03David Rosenthal?

  I'm not going to pay you if you just tell me that you did this stuff.

• 26:06Ben Gilbert?

  And I need it in like a really standardized form.

• 26:10David Rosenthal?

  Yep. I need an official standardized 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 and get paid more and more over time, as my procedures that I'm doing become more and more complex, I need strictly codified and regulated and standardized documentation of what I did. And I need really bulletproof workflows and data flows between what's happening in the patient room and then what bills get sent over to the payers.

• 26:53David Rosenthal?

  And that's the existential need for an electronic medical record system, but really also, and maybe more importantly, an electronic medical billing system.

• 27:04Ben Gilbert?

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

• 27:41David Rosenthal?

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

• 28:05Ben Gilbert?

  Makes sense.

• 28:06David Rosenthal?

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

• 28:39Ben Gilbert?

  Billing.

• 28:40David Rosenthal?

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

• 29:08Ben Gilbert?

  Even then?

• 29:09David Rosenthal?

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

• 29:43Ben Gilbert?

  Which is amazing that there's a medical oriented programming language called MUMPS.

• 29:47David Rosenthal?

  Yes. And Epic still uses MUMPS today, or actually it uses its modern descendant, Cachet. But this is the standard programming language for the industry and database system for the industry.

• 30:01Ben Gilbert?

  I don't know about the industry, but for Epic.

• 30:03David Rosenthal?

  Oh, yeah.

• 30:04Ben Gilbert?

  Which I guess now for the industry.

• 30:05David Rosenthal?

  Yeah, well, that's what I was gonna say. Many of Epic's competitors do not use this, but Epic does. So it's 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 are integrated. Right there within the programming language is a database structure. And that makes it very computationally efficient for handling all these high velocity and data intensive transactions that need to happen.

• 30:35Ben Gilbert?

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

• 30:59David Rosenthal?

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

• 31:17Ben Gilbert?

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

• 31:22David Rosenthal?

  Exactly. Now, the lead programmer of this group here at MGH at MassGen that is creating CoStar and Mumps was a recent MIT graduate named Neil Papalardo. And being the young enterprising MIT grad that he is, a couple of years later, in 1968, Neil spins out and starts a company around this to sell his software, originally called Medical Information Technology, or MIT. Got it? Name's taken. Hey. 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 MetaTech is still

• 32:05David Rosenthal?

  in business today and is the number three player in the EMR space behind Epic and Cerner. Yep, pretty amazing. So, back to Judy now here at the University of Wisconsin. She's working with Dr. Slack and the medical department there, doing all these various application projects. And then Dr. Slack moves to Harvard, where he, of course, meets Neil and starts working with MetaTech. But he and Judy keep in touch. Judy's part of this community of programmers and computer scientists, building applications for healthcare systems. And like we said earlier, what the people at Wisconsin really want is the same thing that the people at Harvard and MGH really want, is this integrated system where they can get longitudinal patient records across the continuum of care and that they can use

• 32:50David Rosenthal?

  to bill the payers. The holy grail. The holy grail. So through this connection, Judy learns about Mumps and she goes and learns Mumps, the programming language, starts working on this problem. And legend has it that one day, in the mid 1970s, she's sitting in her living room and has an epiphany about how she is going to build a great system, a single database that can do all of this. And her quote on this is, "The sun was shining. I was disattentive. I was just sitting there. And suddenly, it all came to me. Here's how you build it, the integrated system. And I remember running to the kitchen, grabbing a pad of paper and just writing code, code, code, code. And that code became Chronicles.

• 33:35David Rosenthal?

  She called it Chronicles. It's a chronicle of a patient's care journey." And- That code in that database is still the core of Epic to this very day.

• 33:46Ben Gilbert?

  Is it actually the same code?

• 33:48David Rosenthal?

  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 pulls from.

• 34:03Ben Gilbert?

  Directly talks to.

• 34:05David Rosenthal?

  It directly talks to whether it's the clinical side for EMRs, whether it's the billing side with the Resolute module that Epic has, whether it's Cosmos, whether it's Storik for Obegyn, or Beans for Kidney, or whatever application that Epic makes of their hundreds, it all pulls from one single database in Chronicles. And that's what Judy writes here in the 1970s.

• 34:26Ben Gilbert?

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

• 34:37David Rosenthal?

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

• 35:10Ben Gilbert?

  So these are terminals? I mean, these are 80-character-wide, text-only terminals?

• 35:15David Rosenthal?

  Yes, green screens, Unix terminals.

• 35:17Ben Gilbert?

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

• 35:26David Rosenthal?

  Yep, that's the product.

• 35:28Ben Gilbert?

  Sweet. Long way to go.

• 35:30David Rosenthal?

  So, just like the projects in Boston at MGH were, the intention was to make the systems for use there at MGH, Judy, at first, she's just making Chronicles for the Wisconsin Medical System. She's just a programmer employee of the Medical Center. But the doctors at UW, they're going to academic conferences all around the country and they start telling other doctors at other academic institutions about this great system called Chronicles that they have, that this programmer that they employ, Judy Faulkner, has written and demand for it starts to spread virally and Wisconsin gets calls and Judy gets calls from all of these other health systems around the country that are like, oh, hey, can you write this for me, too?

• 36:14Ben Gilbert?

  Doesn't she get asked to start a company several times? And she's like, no, I just made it this one instance. We don't need to build a whole company around this thing.

• 36:22David Rosenthal?

  Exactly. And this happens 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 will be part time. This will be a small, little thing. And so thus, finally, in 1979, the company is born. Human Services Computing.

• 36:42Ben Gilbert?

  Amazingly generic.

• 36:44David Rosenthal?

  The future Epic Systems.

• 36:46Ben Gilbert?

  All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 37:06David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature or someone writes in a new model without telling IT and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote unquote "shadow AI" running with no security review at all.

• 37:27Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes and cuts the time that you'd spend on vendor assessments in half.

• 37:49David Rosenthal?

  In half. Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor and Snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 38:07Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V A N T A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. All right. So David, Judy leaves her job. She starts, what is it? Human computer?

• 38:42David Rosenthal?

  Human services computing.

• 38:43Ben Gilbert?

  Human services computing.

• 38:45David Rosenthal?

  Really rolls off the tongue.

• 38:46Ben Gilbert?

  Yes. She's not planning up till this point to be the founder of a company and yet for the next 47 years of her life, she would be. How does that go?

• 38:55David Rosenthal?

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

• 39:04Ben Gilbert?

  Which wasn't it like 70 grand to buy a computer?

• 39:08David Rosenthal?

  Yes. A computer being a Data General Eclipse 16 bit mini computer, which is the size of like a washer dryer system and sits in the basement.

• 39:18Ben Gilbert?

  That's right. Cause we're in this awkward era between mainframes and microcomputers. The microprocessor hasn't been invented yet. And so we have these quote unquote mini computers that are still, yeah, washing machine sized.

• 39:29David Rosenthal?

  Yeah, we're right before the PC era here.

• 39:31Ben Gilbert?

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

• 39:42David Rosenthal?

  Yeah. Mini computers, they were like the netbooks of their time, you know?

• 39:46Ben Gilbert?

  Yes.

• 39:48David Rosenthal?

  We talked about this a lot on our Microsoft episodes, but the critical thing about mini computers, and especially for Judy here in 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 system was going to cost you a lot of money.

• 40:10Ben Gilbert?

  Yep.

• 40:10David Rosenthal?

  A Data General or DEC mini computer is going to cost you about $70,000. And Judy needs to buy one, and she also needs to fund the company. So she goes to the bank and she gets a bank loan for $70,000 to finance going and buying the Data General Eclipse 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. And together, they all put in about $70,000. They value the company at $70,000, so pre-money valuation of $70,000.

• 40:52Ben Gilbert?

  Another $70,000 of new on top.

• 40:55David Rosenthal?

  Yep, post-money of $140,000.

• 40:58Ben Gilbert?

  Taking 50% dilution from your 70K fundraise. And then you also have this $70,000 loan.

• 41:05David Rosenthal?

  Yep, and those were the only primary investors ever in Epic Systems. And there's some really fun stories about what happened to those shares that the other original investors bought over time. The company has bought a lot of them back, but not all of them.

• 41:23Ben Gilbert?

  There are still some floating out there.

• 41:24David Rosenthal?

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

• 41:40Ben Gilbert?

  Yes.

• 41:41David Rosenthal?

  Sequoia did not put that one on their website.

• 41:43Ben Gilbert?

  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 $5.7 billion in revenue today. They dominate an industry, at least here in the United States. And in total, they raised 70,000 of equity capital and 70,000 of bank debt.

• 42:02David Rosenthal?

  Yes. And that's it.

• 42:04Ben Gilbert?

  This is IKEA all over again.

• 42:06David Rosenthal?

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

• 42:30Ben Gilbert?

  Hmm. I hadn't made that linkage. That's interesting.

• 42:33David Rosenthal?

  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.

• 42:43Ben Gilbert?

  They didn't need to go hire an army of programmers.

• 42:46David Rosenthal?

  No, and the company stayed very, very small for a very long time.

• 42:49Ben Gilbert?

  Hmm. Because as legend has it, it's three half-time people in the basement of a building that started the company. And I think they got pretty far on just that.

• 42:58David Rosenthal?

  I think so. And for years, they didn't hire that many more people. That would obviously change over time. Okay, I am 90% sure I'm going to stump you on this one. You mentioned the basement of the building. So they get their first office space. Judy gets the company's first office space in the basement of an apartment building at 2020 University Avenue in Madison, Wisconsin. Do you know what other great American company from Madison, Wisconsin, also started in that same office space? And I believe overlapped. I think they were both in this same shared office space concurrently.

• 43:35Ben Gilbert?

  David, there's only so much material out there on this company. We were both going to find this.

• 43:38David Rosenthal?

  Ah.

• 43:39Ben Gilbert?

  Listeners, this is the American Girl Doll Company.

• 43:43David Rosenthal?

  Oh, I really thought I had you on this. You know, Ben and I don't do our research calls together. We do most of them separately, but we were on one together. And the person we were talking to was about to say this. And I was like, no, don't say it. I want to stump Ben on the episode.

• 43:56Ben Gilbert?

  I did see it somewhere else, though. The crazy thing is, I think when American Girl moved out, Epic bought some of their furniture.

• 44:03David Rosenthal?

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

• 44:11Ben Gilbert?

  My sister had, I think, a few of these growing up.

• 44:13David Rosenthal?

  Oh, man. Jenny had so many of these, and a lot of them have migrated now to our house, and our girls have them. And already, my three-year-old runs around our house with the American Girl Doll magazine, and she tells me on a weekly basis, "These are the ones I want for my birthday." She's pointing at like a $250 doll. Yeah, incredible company. It actually ends up getting acquired by Mattel in the late 90s. It was a big part of Mattel for a long time. I'm so bummed I didn't stump you on this.

• 44:44David Rosenthal?

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

• 45:06Ben Gilbert?

  I gotta say, this is a pivotal moment, and not just for everything she learns from MetaTech, which I know you're gonna get into, all these cool things that she brought over. But instead of, "I'm gonna introduce you to a business person," he says, "I'm gonna teach you, as a programmer, everything you need to know about running a business." And it's not true, but it 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. That is the DNA of the company to this day, and it could've gone a super different direction of, "You need to go figure out a sales and marketing strategy and a business plan," and

• 45:51Ben Gilbert?

  that is just not what happened.

• 45:53David Rosenthal?

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

• 46:15Ben Gilbert?

  Yep.

• 46:15David Rosenthal?

  Bring in the suits, bring in the business school graduates, you know, fire the founders.

• 46:19Ben Gilbert?

  Well, that only happens if you raise capital.

• 46:20David Rosenthal?

  Well, right. Exactly. You wonder why Judy was so averse to venture capital. Everybody else she knew who was taking it in that era was getting fired.

• 46:30Ben Gilbert?

  Swapped in for a business guy.

• 46:31David Rosenthal?

  Totally. But yeah, Neil, he came out of MIT. He's a programmer. He was on the original Mumps team. So Judy goes out, spends three days with Neil and gets a total crash course in setting up and running a company. And Ben, like you said, Neil ran MetaTech like a software developer. So all the processes were extremely standardized. He had 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.

• 47:06Ben Gilbert?

  How you do college hiring, how you promote internally.

• 47:10David Rosenthal?

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

• 47:33Ben Gilbert?

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

• 47:44David Rosenthal?

  It's the same thing as Microsoft or Google or Meta or what have you. They are going to universities, all departments and recruiting kids on campus recruiting at colleges.

• 47:54Ben Gilbert?

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

• 48:23David Rosenthal?

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

• 48:32Ben Gilbert?

  Yeah. What year are we in?

• 48:34David Rosenthal?

  We're in 1979.

• 48:35Ben Gilbert?

  So Microsoft really isn't starting to rap hiring yet.

• 48:38David Rosenthal?

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

• 49:19Ben Gilbert?

  Yeah. And part of what she is doing is going after a different segment than MetaTech was doing. It's a little bit out of deference to Neil and his company. They're kind of going after the small hospital market. She's going to take the more sort of up-market, enterprisy 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, enterprisy, has the most possible needs for the most complex software. That is where she's about to point the company.

• 49:56David Rosenthal?

  Yep. Which she has to for the Unix-based product that she's making, because those are the only institutions that have Unix infrastructure.

• 50:05Ben Gilbert?

  Right. That can afford these big computers.

• 50:07David Rosenthal?

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

• 50:20Ben Gilbert?

  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. 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.

• 50:45David Rosenthal?

  Hmm. Yep.

• 50:46Ben Gilbert?

  Is that kind of jive with your understanding?

• 50:48David Rosenthal?

  Yeah. It definitely was not a declaration of aspirations as a company, because this was still a very, very small business. They started with four initial customers in 1983, when they changed the name. They only have nine customers. And in fact, by the end of the company's first decade of existence, so end of 1988,

• 51:10David Rosenthal?

  They only have 24 customers and it's only doing one and a half million dollars in revenue. And they've got like a handful of employees. That's the crazy thing. Unlike Microsoft, this was a small business from the get go.

• 51:23Ben Gilbert?

  Right. It took them a decade to get to a million and a half dollars in revenue.

• 51:28David Rosenthal?

  Yes.

• 51:29Ben Gilbert?

  That's kind of a slow growing startup.

• 51:31David Rosenthal?

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

• 51:37Ben Gilbert?

  Yep.

• 51:37David Rosenthal?

  So yeah, for the first 10 years of the company, you know, yes, it's growing, but it's not exactly setting the world on fire. And part of the reason is the computing infrastructure wasn't there. Customers like we talked about. The other big reason why they weren't getting crazy customer adoption is they actually were only doing the clinical medical record stuff at this point in time. They weren't doing the really important stuff of the billing system until 1987. So for the first, you know, what is that called 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.

• 52:13Ben Gilbert?

  Right. If you can help them make more money, they're going to be a lot more excited to buy your software and pay a lot more for your software.

• 52:19David Rosenthal?

  Yep, totally. So in 1987, they launch a billing module called Resolute, again, on top of the Chronicle's single core database, which still today is the company's revenue cycle application 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 Chronicle's database. And fast forward to today, I think that is actually the single biggest reason why Epic wins over their competitors.

• 52:52Ben Gilbert?

  Hmm. I would argue there's two big reasons Epic wins today. One is reliability.

• 52:59David Rosenthal?

  Yep.

• 53:00Ben Gilbert?

  But the reliability also comes from the fact that it's all built on one database. You're not gluing multiple systems together. All their competitors along the way, or almost all of them, other than MetaTech, became 30 other companies glued together through M&A and take public, take private, crazy transactions. Epic's just been epic the whole time. So you get this system that when you buy it and they say it's going to take X dollars and X time to implement, it does. And then you go live and it works, which sounds crazy, but it does the thing that they say it's going to do on time and on budget, or as good as anyone does in this industry. And then the second reason, in addition to reliability, David, as you're alluding

• 53:41Ben Gilbert?

  to, is the fact that the clinical side and the billing side are completely stitched together in one code base, working off of one database. It is perfect harmony. You don't have information dropped when one system is talking to another. If your goal is to adopt a system that keeps track of everything in your hospital and makes sure that you can make money from it for your organization, this is sort of the ideal architecture for such a product.

• 54:09David Rosenthal?

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

• 54:28Ben Gilbert?

  That's all you're trying to do as a hospital.

• 54:30David Rosenthal?

  That is what you are looking for. That is the product.

• 54:33Ben Gilbert?

  Yes.

• 54:34David Rosenthal?

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

• 55:07Ben Gilbert?

  Right. Or even if it's bad in the other direction, then it's not just that your billing system is not making it into clinical. You're potentially causing patient harm and costing lives. Any data flowing in either direction that's bad is really, really bad in this particular use case. So there's a great Substack called Health API Guy, which I want to reference a few times because it's just some of the best writing on Epic you'll find. He put it perfectly. "Epic becomes the natural choice for enterprise decision makers precisely because of its integrated system architecture. Rather than managing multiple vendors and systems, buyers get a comprehensive platform with a single database, unified workflows and built-in operability through Care Everywhere",

• 55:49Ben Gilbert?

  which we'll talk about later, but Care Everywhere is the magical button that makes it so that your hospital records at one hospital are easily integrated and viewed in any other hospital that is, of course, also an Epic customer.

• 56:03David Rosenthal?

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

• 56:38Ben Gilbert?

  Certainly. Epic definitely says that that is true.

• 56:40David Rosenthal?

  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 gonna use. Now here in the 90s with Epicare, they've created a Windows application that any PC user can fire up on their Windows machine and use a graphical interface for their patient interactions and their EMR. And oh yeah, by the way, it's tied directly into your billing system for your hospital or your health practice. This is all of a sudden really compelling.

• 57:19Ben Gilbert?

  We're approaching holy grail here. If you're a hospital administrator, especially with scheduling in addition to billing, their scheduling thing is called cadence. But once you have billing, scheduling and Epicare handling the actual clinical part of it, and this is all ambulatory, right? We haven't gotten to inpatient yet.

• 57:38David Rosenthal?

  Yes. So the initial launch of Epicare, the GUI EMR application was only for ambulatory, only for outpatient settings.

• 57:47Ben Gilbert?

  Not overnight stays.

• 57:48David Rosenthal?

  Yes, not overnight stays in the hospital.

• 57:50Ben Gilbert?

  Yeah. As a non-healthcare person, that's always how I define what inpatient is.

• 57:55David Rosenthal?

  Yes. You hear ambulatory, you just hear non-overnight stays.

• 57:58Ben Gilbert?

  Yes.

• 57:59David Rosenthal?

  Too confusing otherwise.

• 58:00Ben Gilbert?

  But this is it. Scheduling, billing and Epicare on the clinical side for ambulatory, pretty amazing product that is trajectory changing for the company. It's now got enough functionality that it's not going to stay a small business for long.

• 58:15David Rosenthal?

  Yep. So by 1995, they hit 18 million in revenue, up from one and a half million in 1988.

• 58:24Ben Gilbert?

  So pretty phenomenal seven years there where they more than 10xed. So by most measures, you'd look at this and be like, business is going well.

• 58:33David Rosenthal?

  Yes. No longer a small Madison, Wisconsin business.

• 58:36Ben Gilbert?

  Right. However, where we were comparing it before was Microsoft. You made the Bill Gates comparison. This company was started, when was it? 70?

• 58:44David Rosenthal?

  79, so only a couple of years after Microsoft.

• 58:47Ben Gilbert?

  Four years after Microsoft.

• 58:48David Rosenthal?

  Yep.

• 58:48Ben Gilbert?

  In 1995, Epic did $18 million. In 1995, Microsoft had gone public and shipped Windows 95 and did $6 billion in revenue.

• 58:59David Rosenthal?

  Right. Very different trajectories.

• 59:02Ben Gilbert?

  You know, the primary reason here is one is a small, vertical focused healthcare company and one is creating the horizontal platform of the future. But it's worth contextualizing businesses going well by making sure that we stop making the Microsoft comparison from here on out.

• 59:21David Rosenthal?

  Well, I think I want to come back to it later in the episode and in analysis because, yes, Epic is and always will be constrained by being a vertical software provider instead of a horizontal software provider like Microsoft or Google or Oracle or what have you.

• 59:38Ben Gilbert?

  Vertical being one industry.

• 59:39David Rosenthal?

  Vertical being one industry. However, the one industry that they operate in is 18% of American GDP. So how big can this get is, well, it's a question we'll revisit.

• 59:49Ben Gilbert?

  Yes.

• 59:50David Rosenthal?

  Okay, so then finally in 2001, they launch the inpatient version of Epicare. So yes, this is for inpatient hospital stays overnight. Now you finally have the holy grail. You've got Chronicles as the one single database. You've got Epicare ambulatory for all your outpatient clinics. You've got Epicare inpatient for all your inpatient activities. By the way, again, inpatient activities are probably going to be your majority revenue stream because that's where the most expensive, most complex care is happening. Kind of similar to Medicare is your most important payer relationship because old people is where the most complex, most expensive care is happening. So you've got that. And then you've

• 1:00:35David Rosenthal?

  got Resolute, the billing system, all single database, all tied together, all built on top of it. Yeah, if you're a hospital system administrator, this is the best thing you could possibly imagine.

• 1:00:48Ben Gilbert?

  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 continue to orient the company around that philosophy.

• 1:01:09David Rosenthal?

  Yep. Now, right around the same time, actually before Epicare inpatient launches.

• 1:01:16David Rosenthal?

  Epic also launches MyChart. This is crazy. If you had asked me before doing research for this episode, when would I guess that MyChart launched? This is a internet-based, consumer-facing, medical records access and interaction platform on the web in a highly regulated, HIPAA-regulated industry.

• 1:01:39Ben Gilbert?

  Right.

• 1:01:40David Rosenthal?

  I would have guessed like, I don't know, 2010, maybe? Mid 2000s at the earliest. No, Epic launched this in the year 2000, which is wild.

• 1:01:49Ben Gilbert?

  Right, right around the dot com bubble.

• 1:01:52David Rosenthal?

  Yeah, crazy. It's absolutely wild that they launched this and that their customers launched this.

• 1:01:58Ben Gilbert?

  Well, and it's incredibly innovative. I mean, it is truly cutting edge. I mean, it wasn't 1994 like Amazon, but the fact that, yeah, to your point, the medical record thing was being surfaced on the web, that's pioneering.

• 1:02:12David Rosenthal?

  Yeah, that consumers had direct access to. Well, I want to come back in a minute to how important this is for Epic and their customers. But the origin story of MyChart is kind of fun. So it actually started as an outgrowth of what was called EpicWeb in 1997, which was a project that they were working on for remote access to the EMR, to EpicCare, for doctors at home. So the idea was like, oh, you're a doctor, you go home, you wake up in the middle of the night, you're thinking about a case, and you want to check the medical records, maybe you want to update.

• 1:02:48Ben Gilbert?

  Some foreshadowing here of how doctors are going to spend their time in the future.

• 1:02:52David Rosenthal?

  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 the medical records of your patients, so they start working on EpicWeb. And a young, right out of college programmer is working on this by the name of Sumit Rama. Sumit today is the president of Epic. And he goes to the then president of Epic, Carl DeVorec, and says, hey, you know, this is good that I'm working on this, but I'm kind of bored. Can you give me something hard to do?

• 1:03:23Ben Gilbert?

  Which this says a lot about the culture of Epic. This is a early career programmer going directly to the president. And that says enough on its own.

• 1:03:32David Rosenthal?

  Yes, and the president is running this patient web project.

• 1:03:35Ben Gilbert?

  Right, is kind of a computer architecture person himself. And the conversation is about, I want a more interesting project. Can you give me something more cutting edge to work on?

• 1:03:44David Rosenthal?

  Yeah, give me something more challenging. And out of that is born the initial idea for MyChart. I think they started working on it in 1998 and then launched it in the year 2000.

• 1:03:55Ben Gilbert?

  So it becomes the first integrated patient portal. And I mean, truly, this is a very fair thing to say. This is insanely innovative. For as many reasonable barbs get thrown at the company, some around, oh, old technology and oh, the UI is kluge and all this stuff. Come on, MyChart 99 is real cutting edge. People immediately got it. Once you could access your own medical records from home, from your own computer directly without talking to anyone, you were never going back. The world changed overnight.

• 1:04:23David Rosenthal?

  It was a little bit like Zillow and real estate.

• 1:04:25Ben Gilbert?

  Yes.

• 1:04:26David Rosenthal?

  As soon as you can look up how much homes in your neighborhood and your friends and neighbors' homes sold for, you're never going to go back to not being able to do that.

• 1:04:34Ben Gilbert?

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

• 1:04:50David Rosenthal?

  Oh, records used to have to get faxed back and forth when you moved or changed providers. It was brutal. But the other really compelling use case for MyChart, especially when it first launches and even through to today, is managing family members' care. You have elderly parents who are using the health system as you do as you get older. And you need to help manage that, but you don't live in the same city. Or even if you do, having MyChart access to family members was huge. And starts this whole patient side virality now for the company. And then for their customers, I imagine initially it was very scary to roll this out. Once they add self scheduling into MyChart.

• 1:05:37David Rosenthal?

  This becomes the greatest thing for hospitals. I mean, the workflow savings of calls that had to happen to scheduling appointments are huge. The other big thing is no-shows. Before MyChart and self-scheduling and the waitlist that MyChart manages for patients, if a patient no-showed, that was lost revenue for you as a hospital system. That was a big hole in your daily revenue operations.

• 1:06:04Ben Gilbert?

  Yep.

• 1:06:05David Rosenthal?

  And now you can automatically fill that in with another patient on the waitlist.

• 1:06:09Ben Gilbert?

  Yep, so we're foreshadowing this, but everyone adopts this, basically. Today, there are 191 million active users of MyChart, and this is deduplicated. This is active, unique users of MyChart today.

• 1:06:22David Rosenthal?

  Yep. So on the back of this, they launch MyChart in 2000, Epicare Impatient in 2001. The company crosses 50 million in revenue. They feel like, okay, we're finally like ready for the big leagues.

• 1:06:37Ben Gilbert?

  And just to contextualize that 50 million of revenue, they're up to 88 health systems now. So they really are starting to penetrate the market, just going one by one by one by one to all these different hospital systems and selling them their software.

• 1:06:50David Rosenthal?

  Yep, so they're ready for the big leagues. And then in 2003, they get a call not just from the biggest player in the biggest league, Kaiser Permanente in California.

• 1:07:04Ben Gilbert?

  All right, listeners, now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is no longer the hard part.

• 1:07:18David Rosenthal?

  Yeah, the hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making. AI security for an enterprise at scale is not a small concern. Like, the risks are real.

• 1:07:32Ben Gilbert?

  Exactly, and the challenge with AI is governing it, securing it, measuring it, and making sure that it actually delivers value. That is why ServiceNow built the AI control tower.

• 1:07:42David Rosenthal?

  Yep. AI Control Tower gives enterprises a single place to see, manage, govern, and optimize AI across the entire business. And it works with any AI, not just theirs. Every device on your network, every permission across every system, every AI agent, visible and secure in one place.

• 1:07:59Ben Gilbert?

  And ServiceNow can do this because they've spent more than 20 years building the operational backbone of the enterprise. The workflows, governance, approvals, security controls, and institutional knowledge that power how work actually gets done across IT, HR, customer service, finance, and security.

• 1:08:15David Rosenthal?

  ServiceNow already runs more than 100 billion workflows annually and trillions of transactions for more than 85% of the Fortune 500. So when companies need a place to govern AI at enterprise scale, they're building on a platform at the center of how their business already operates.

• 1:08:32Ben Gilbert?

  And in a future that isn't going to be one AI, it's going to be thousands of AI agents working across every function of the company. But the question is, who's managing them all?

• 1:08:41David Rosenthal?

  So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely, at scale, go check out servicenow.com/acquired and tell them that Ben and David sent you.

• 1:08:52Ben Gilbert?

  All right. So David, Kaiser Permanente, the biggest of big fishes, comes knocking.

• 1:08:58David Rosenthal?

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

• 1:09:31Ben Gilbert?

  Yep.

• 1:09:31David Rosenthal?

  It's the closest thing that you can sort of have to a single payer here in the country. 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.

• 1:09:51Ben Gilbert?

  Gotcha.

• 1:09:52David Rosenthal?

  Now, at the time, here we're in 2003, Kaiser was the largest single hospital system in the entire country. 30 hospitals, 400-plus clinics, 11,000 physicians, and 8.5 million patients that are part of Kaiser here in 2003. And they decide that they are going to put out an RFP for a whole new, integrated, entire Kaiser system-wide EMR system.

• 1:10:23Ben Gilbert?

  And this is when you really should start to think, okay, EMRs are not just medical records or medical records tied to billing and scheduling.

• 1:10:33David Rosenthal?

  This is the operating system

• 1:10:34Ben Gilbert?

  Yes.

• 1:10:35David Rosenthal?

  for this industry.

• 1:10:36Ben Gilbert?

  Someone described it to me as the nervous system for a healthcare system. You know, you've got 20 hospitals, a bunch of doctors, a bunch of administration people. The whole thing is tied together by this unbelievably complex, tentacles-everywhere piece of software with thousands of different screens and levels of authorization and authentication and roles and permissions. And I mean, it is incredibly hairy and is the single nervous system that the entire organization runs on.

• 1:11:07David Rosenthal?

  Calling it an operating system is taking it too lightly. It's like your operating system plus your ERP system plus your applications on top of your operating system. It's your everything.

• 1:11:20Ben Gilbert?

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

• 1:11:32David Rosenthal?

  Yes. So in 2003, Kaiser puts out an RFP for a new, again, quote unquote, EHR, but really new nervous system for all of Kaiser. And Epic wins the deal.

• 1:11:44Ben Gilbert?

  And Epic was a little company just a few years before they were a $50 million company.

• 1:11:49David Rosenthal?

  Yes, and after they signed Kaiser, they go to 162 million in annual revenue. So transformative, probably more than doubled their revenue overnight.

• 1:11:59Ben Gilbert?

  Yep. Interestingly, let's talk prices for a second. The headline number, as everyone reports it, it's a $4 billion deal. They call it a $4 billion, three-year project, and that Epic's portion is around 400 million. Of course, not all in one year, but the way these things work is there's a big implementation that costs a bunch of money upfront, and then there's the ongoing license that I think eventually would transition to a subscription, but at this point it's licensing to use the software. It's just funny to see these headlines because the $4 billion number, not only do they capture many years of the deal and the implementation, but they also roll in there the headcount

• 1:12:42Ben Gilbert?

  of the hospital employees that have to do the work, and they roll in there the potential lost productivity from all doctors across the health system who have to sort of ramp on the new software.

• 1:12:54David Rosenthal?

  Which is a real economic impact, by the way.

• 1:12:56Ben Gilbert?

  For sure.

• 1:12:57David Rosenthal?

  But it's not like Epic got $4 billion out of this.

• 1:13:00Ben Gilbert?

  No, and I always chuckle because every single one of these numbers looks huge. Multi-billion dollar, oh, even if it's a small health system, $300 million project, and it 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.

• 1:13:16David Rosenthal?

  Yeah, it's funny. We should start talking about the size of acquired and, you know, like.

• 1:13:21Ben Gilbert?

  Fourth and fifth degree tertiary impacts.

• 1:13:23David Rosenthal?

  We are a billion-dollar business.

• 1:13:25Ben Gilbert?

  Just think about all the business that our customers do when acquired listeners.

• 1:13:32Ben Gilbert?

  But to your point, it is actually fair. If Kaiser is going to engage in switching their central nervous system over several years, it's going to be net $4 billion of impact to them.

• 1:13:44David Rosenthal?

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

• 1:14:09Ben Gilbert?

  Wasn't there like a, almost like cousin organization that was Northwest?

• 1:14:12David Rosenthal?

  Yes.

• 1:14:13Ben Gilbert?

  Like this stepchild?

• 1:14:14David Rosenthal?

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

• 1:14:56Ben Gilbert?

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

• 1:15:12David Rosenthal?

  I think there may even have been some pipe dreams of like, oh, we're going to commercialize this and sell it to other hospitals. It seems like not a core competency that hospitals should be doing. Anyway. Within the Kaiser system, though, there was a fairly high degree of rotatability of physicians, of doctors. So if you were a doctor in Portland with Kaiser Pacific Northwest, and you wanted to move, or your family had to move down to California, you could transfer pretty easily to Northern or Southern California Kaiser. So this was happening. And as physicians from the Northwest started coming down to California, they'd be like, man, what are you guys doing? You're spending all this money with Accenture and, you know, blah, blah, blah, all these consultants to try to roll your own.

• 1:15:55David Rosenthal?

  Like, we've got this thing called Epic up in Portland that we're not even using at the hospital, and it's way better than the stuff that you're trying to build.

• 1:16:04Ben Gilbert?

  Yeah.

• 1:16:05David Rosenthal?

  So finally, after a year or two of this battle between North and South, they finally agree like, all right, ceasefire, let's come to a truce. We're going to ditch our competing projects, and we're going to bid this out to third-party vendors. So they hold an RFP for a new EMR for all of Kaiser, one integrated system, and they pick IBM. IBM is going to come in and do this big $4 billion project for Kaiser.

• 1:16:34Ben Gilbert?

  Nobody gets fired for buying IBM. We're on like the end of that era, but it's still little, that era.

• 1:16:38David Rosenthal?

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

• 1:16:47Ben Gilbert?

  And this is not uncommon, especially, think about ERP, the number of times you've heard, oh, failed ERP implementation. And some CEOs explaining on an earnings call, yeah, we lost 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.

• 1:17:14David Rosenthal?

  Totally. And I think this is one of the most important reasons why their customers love them.

• 1:17:19Ben Gilbert?

  And we're going to say this a bunch of times on the episode, their customers love them. When we say customer, we mean hospital CEO, CIO, the Chief Information Officer, and CFOs. When we refer to their customers, that's who we're talking to. Obviously, the Chief Medical Officer and all of the physicians and nurses and care folks are a part of that. But a part of my research has revealed the customer is the hospital administration.

• 1:17:45David Rosenthal?

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

• 1:17:55Ben Gilbert?

  Yep.

• 1:17:56David Rosenthal?

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

• 1:18:21Ben Gilbert?

  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 because they provide the core competency. But still, you're not going in and pitching the doctors when you're going in and trying to land a customer.

• 1:18:38David Rosenthal?

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

• 1:18:46Ben Gilbert?

  Yeah.

• 1:18:46David Rosenthal?

  The on-air talent are not the ones, you know, at Disney or Universal or wherever, who are making the business decisions.

• 1:18:53Ben Gilbert?

  Right. And in this case, the medical staff is involved, but they're not the decision maker.

• 1:18:57David Rosenthal?

  Yep. 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, we should take this little company seriously. So they start the RFP, and it comes down to Epic and their big, main rival, Cerner. Now, we haven't really talked about Cerner so far in this episode, part of Oracle today, as we will get into later. Cerner was a much bigger company.

• 1:19:23Ben Gilbert?

  Yep. Interestingly, started right around the same time, right?

• 1:19:26David Rosenthal?

  Yeah, wow. I think it was started the same year as Epic, right? 1979?

• 1:19:30Ben Gilbert?

  Yep, by Neil Patterson.

• 1:19:31David Rosenthal?

  By Neil Patterson in Kansas City, Missouri. Unlike Epic, which took the no venture capital, no acquisitions, single platform, stay private forever route, Cerner took the lots of acquisitions, raise capital, go public, get big route.

• 1:19:50Ben Gilbert?

  Which could have worked, too.

• 1:19:52David Rosenthal?

  It did work, too.

• 1:19:53Ben Gilbert?

  It did work for a long time.

• 1:19:54David Rosenthal?

  Yep. At this point in time, Cerner is almost a billion dollar a year revenue business. They're a public company, way, way, way bigger. They're international, et cetera. So the RFP. Comes down to the two of them.

• 1:20:07Ben Gilbert?

  But it's worth saying, before they were acquired by Oracle, was a merger of 24 different companies. Put a nice little wrapper on it and call it Cerner, but a lot of companies along the way.

• 1:20:17David Rosenthal?

  Yes, a different path than the one Judy took, let's say.

• 1:20:20Ben Gilbert?

  Yes.

• 1:20:21David Rosenthal?

  But that's not to knock it. It is, and especially back then, was a good, really competitive product. The obvious choice for Kaiser here in 2003 would have been go with Cerner. And they actually tried to go with Cerner. So supposedly, at one point, they come to both companies, to Cerner and Epic. And they say, look, Cerner, 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. And Epic, hey, you've got inpatient now, but you only just launched that in 2001. Like, you're new at this. You are good at ambulatory, at outpatient. You're doing a really good job for us in Portland. We want to split the baby here and do one system with Epic for our outpatient clinics

• 1:21:06David Rosenthal?

  and one system with Cerner for our inpatient clinics.

• 1:21:09Ben Gilbert?

  Oh, yeah, that always works.

• 1:21:10David Rosenthal?

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

• 1:21:40Ben Gilbert?

  It's a calculated, high-risk decision.

• 1:21:42David Rosenthal?

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

• 1:21:55Ben Gilbert?

  Yep.

• 1:21:56David Rosenthal?

  But she's still a pipsqueak. I mean, Cerner's a billion in revenue and Epic is like somewhere slightly north of 50 million at this point in time. So they go a little further in the process. And at one point, there's a technical due diligence meeting where Kaiser asks both companies to come in and present to them about how their systems are going to handle all the volume of concurrent data transactions that Kaiser has. Remember, eight and a half million patients, 11,000 physicians is a high-volume system here.

• 1:22:25Ben Gilbert?

  Yes. And listeners, this is a great story. This is kind of the 11th hour of the deal. This is, hey, we're pretty close to a decision, but we haven't made it yet. Can you both come to the same building and sit in different conference rooms? And throughout the day, we're going to 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 kind of learn through the questions, what is being pitched in the other room? And why am I suddenly being grilled on this new topic?

• 1:23:01David Rosenthal?

  So the Epic team is doing their planning and getting ready for all the preparation for this really big meeting. And the team had decided that the way they were going to handle this question was to do a theoretical presentation about how Epic's architecture worked, the single system, and theoretically, how much load could the system handle all at once. And the story is that Carl DeVorec, the president, flew in to California the night before the pitch, meets with the team, sees this plan and is like, guys, no. We need to model out in Excel exactly what Kaiser's transaction flow is going to be

• 1:23:43David Rosenthal?

  throughout the day in the system and how our system will process it and prove to them that we have far in excess bandwidth capability to handle their system and it'll never go down.

• 1:23:55Ben Gilbert?

  Because I think they had done it at sort of a theoretical formula level, but Carl knew that Epic had the advantage here, that they actually could, if they played it all the way out and really built out the spreadsheet, show, actually, we're going to be more performant for you.

• 1:24:10David Rosenthal?

  Yep. So he and the team pull an all-nighter the night before the presentation. I don't know if Judy was there as well. I assume she was too. Come in and they show the model during these meetings that Kaiser is having back and forth between the two teams. And as the day is going on, it becomes really clear that Cerner has not done a similar level of modeling and can't actually prove to Kaiser that their system is going to be able to handle the transaction flow. I think this was the moment when the tide turned that Epic was like, oh, yeah, we're going to win this thing.

• 1:24:41Ben Gilbert?

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

• 1:25:03David Rosenthal?

  Yeah, the story, as we heard it at least, is that at the last minute, then right before the decision, yeah, Kaiser came to both companies and said, hey, we'd really like warrants in your company. We're the biggest health system in America. This is the biggest contract you're going to get. We want some equity in your companies for working with us. And apparently Cerner did offer them 10% of the company for this deal. That's how important this was.

• 1:25:28Ben Gilbert?

  So then they come to Epic and they say-

• 1:25:29David Rosenthal?

  They come to Epic and they're like, well, what do you have to say about that? And Judy's like, no, we're not going to do it. We're not going to do it for you. We're not going to do it for anybody. And it's the wrong thing to do. If we did it for you, we'd have to do it for all our big customers and then that would turn out poorly for you too. So absolutely not. And they still picked Epic in the end.

• 1:25:50Ben Gilbert?

  Through that, through the architecture bake off and through the no, you have to pick one of us, Epic still won out.

• 1:26:01David Rosenthal?

  Yeah.

• 1:26:01Ben Gilbert?

  And stuck to their guns all the way through that negotiation.

• 1:26:04David Rosenthal?

  Which I think really should just tell you how important the stability and continuity of the system across inpatient outpatient and billing is because Epic is the only one that can offer that.

• 1:26:20Ben Gilbert?

  Yeah. By the way, earlier when I said 24 different companies merged together to create Cerner, I forgot that this chart that I'm looking at predates when Cerner then bought Siemens. So then there's another 12 companies that had merged together to become Siemens that merged also into Cerner.

• 1:26:37David Rosenthal?

  Yep. We're going to come back to the Siemens acquisition in a minute. I think that was 2014 when that happened. But yeah.

• 1:26:44David Rosenthal?

  This is key. This is why Epic wins.

• 1:26:46Ben Gilbert?

  Yep.

• 1:26:47David Rosenthal?

  So they win the deal, basically doubles or triples revenue overnight. The LA Times writes about the deal when it gets announced. Quote, because of its scope, the Kaiser Epic system could become the Model T of its industry. Not the first of its kind, but the first to reach masses of people. Once this happens, Epic gets elevated to the new gold standard. If you're a hospital system, if you're a CIO or a CEO looking to rebid your EMR. Well, Kaiser, the biggest system in the world, just chose Epic. And they chose it over all of these reasons not to. There must be something really good in there, like, of course, you're now going to consider Epic.

• 1:27:28David Rosenthal?

  And of course, Epic is going to perform really well in these evaluations.

• 1:27:33Ben Gilbert?

  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 2006, 7, 8 timeframe.

• 1:27:47David Rosenthal?

  Yep. So by 2007, Epic has hit 500 million in revenue. So another 3X what they were doing once they added Kaiser. And like 8X what they were before Kaiser, almost 10X what they were before Kaiser. They're really starting to transform into a big company.

• 1:28:05Ben Gilbert?

  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 10 kids a month out of college. And it now felt like hundreds a month were just flowing into the doors so we could scale.

• 1:28:21David Rosenthal?

  Which will bring us in a minute to Epic's Epic, shall we say, Verona, Wisconsin campus?

• 1:28:28Ben Gilbert?

  Yeah. And one thing, just for our storytelling narrative there, we kind of skipped over, was there's another thing that happened in the early 2000s that reads a little bit as a sort of alternate history for what could have happened at Epic. Imagine you're a small company and a big company comes to you and says, can we co-develop a new product together? You can distribute it to your customers. We'll distribute it to our customers, you know, under our brand name and everything. But you get some of that revenue and we'll sort of build this with you. And it really will charge your business up. And if you don't know any better, And you've never done it, it kind of sounds appealing. Maybe we should do that. And there are many instances of it working. So, you know, that's extra tempting.

• 1:29:11Ben Gilbert?

  My favorite weird example of this in history of it not really working is the HP iPod. Do you remember this?

• 1:29:17David Rosenthal?

  Oh yeah, that's right. I do remember this. I think I might have had one. No, I have one of the U2 iPods, the red and black one.

• 1:29:24Ben Gilbert?

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

• 1:29:59David Rosenthal?

  Right, because they're probably selling the machines.

• 1:30:02Ben Gilbert?

  Yes. We Philips will get a license to Epic's whole IT system. Everything that you already sell, we want to sell also.

• 1:30:08David Rosenthal?

  Oh, wow.

• 1:30:09Ben Gilbert?

  And we're going to market that as Philips Eternity Enterprise to our customers. They're going to buy a Philips branded version of Epic.

• 1:30:19David Rosenthal?

  Hmm, interesting. And I imagine Philips probably has a lot of customers not in America, too, like in Europe. So this is a way to go international.

• 1:30:27Ben Gilbert?

  Right. So Epic starts hiring people in the Netherlands. They build up this team. They spend multiple years, or at least a year, building it out. I think they even launch it. The whole thing ends up folding. And within a year or two of coming out, it was a really expensive detour. And the company develops this intense scar tissue for partnerships. Partnerships at this era to the Epic team means, A, stuff I can't control outside my organization, B, big risk, C, never in our history do we have an example of it working. This is an uncontrollable dependency. And they sort of internalize this scar tissue as, stay focused on what we can control,

• 1:31:08Ben Gilbert?

  go directly to the customer, don't try to do any fancy partnership integration stuff with other people. And that's oversimplifying it, but I think it's still reasonable to say that some of the DNA of what Epic would become, and they would take tons of arrows for this, this closed, not interoperable, blah, blah, blah. Some of it stems from this failed partnership.

• 1:31:30David Rosenthal?

  With Phillips. Yep, totally. They're now partnering again, finally, but yeah, like 15, 20 years later.

• 1:31:38Ben Gilbert?

  Yes. And thanks to Health API Guy for the tip on that.

• 1:31:41David Rosenthal?

  Yeah.

• 1:31:42Ben Gilbert?

  So at this point in the late 2000s, Epic is eyes on the prize. We're building everything ourselves. We can get big customers on our own. We can stand firm and not negotiate, not have to give up pieces of our company. The price is the price and we know that we're going to deliver. And so it's time to invest in our future. How do they invest in the future?

• 1:32:06David Rosenthal?

  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.

• 1:32:19Ben Gilbert?

  Yes.

• 1:32:20David Rosenthal?

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

• 1:32:53Ben Gilbert?

  Yep. Especially in this era. It was sort of pre-Googleplex. It was kind of the fairy tale tech campus.

• 1:33:00David Rosenthal?

  Yes, it was Google before Google.

• 1:33:02Ben Gilbert?

  Yep.

• 1:33:02David Rosenthal?

  And she's like, this is like a college campus here, the atmosphere that you've got.

• 1:33:07Ben Gilbert?

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

• 1:33:19David Rosenthal?

  So Judy comes back and basically copies the campus strategy of Microsoft almost exactly.

• 1:33:25Ben Gilbert?

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

• 1:33:35David Rosenthal?

  Yeah, that was well before they were a half a billion dollar a year revenue company.

• 1:33:39Ben Gilbert?

  Yes, exactly.

• 1:33:40David Rosenthal?

  So she goes out and buys a thousand acres of farmland in Verona, Wisconsin, which, just like Redmond, is a kind of bucolic looking suburb about half an hour outside the city in Madison. Or I guess maybe Redmond was bucolic before Microsoft, everybody got it built up, but. Just like Microsoft kind of owns Redmond, Epic owns Verona spiritually. So they build this incredible campus there.

• 1:34:06Ben Gilbert?

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

• 1:34:25David Rosenthal?

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

• 1:34:47Ben Gilbert?

  Yes, like a Wisconsin lodge.

• 1:34:50David Rosenthal?

  Yes. And I don't even know if the designers did that, but I think Judy and the company were like, well, this kind of feels like a Wisconsin Lakes lodge. So 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 the most popular room in the building. And anytime customers are coming to Madison, they always want to meet in the lodge.

• 1:35:14Ben Gilbert?

  Yes.

• 1:35:14David Rosenthal?

  Conference room. And so now they're building this new campus. And Judy's like, oh, well, let's take the lodge idea and

• 1:35:21Ben Gilbert?

  Really blow it out.

• 1:35:22David Rosenthal?

  Maximize it.

• 1:35:23Ben Gilbert?

  Yeah, so they inject this fairy tale-ness time 10 when they're building out the new campus. They hire the same firm that did the Disneyland California Adventure renovation in 2008.

• 1:35:41David Rosenthal?

  I think it's even more on the nose on that. They hired two architecture firms. One is that.

• 1:35:45Ben Gilbert?

  Uh huh.

• 1:35:46David Rosenthal?

  And then they also hired the firm that built a lot of the Redmond campus for Microsoft.

• 1:35:50Ben Gilbert?

  Oh, is it really?

• 1:35:50David Rosenthal?

  Yep.

• 1:35:51Ben Gilbert?

  Wow. And it's crazy. I mean, it's Alice in Wonderland stuff. It's Harry Potter inspired stuff. It's Wizard of Oz inspired stuff. Just Google pictures of the Verona campus for Epic. And we'll link to some of the show notes, too. It's bananas, but it is extremely attractive to new hires coming out of college who want to kind of feel like they're still in college and want to go work for a company that seems fun and interesting. And Epic is this sort of two-sided culture that seemed to play well together somehow. This goofy, whimsical fairy tale thing and this hard-driving, win-at-all-costs, performance-oriented, fierce competitor.

• 1:36:36Ben Gilbert?

  And it just is both. To understand the company, you have to hold in your head that the DNA is both of those things concurrently. And I think it's because that's what Judy is.

• 1:36:44David Rosenthal?

  Yes, 100%. That is completely spot on. I had in my script here, the question of all this is why on the campus? And that is exactly why. We are hiring super smart, young, hungry, new college grads. How are we going to attract them to Verona, Wisconsin? Well, we are going to create a paradise for them.

• 1:37:07Ben Gilbert?

  Yes. So some interesting stats. It's 1,700 acres, 410 of them are the campus. The rest is the farm. It now covers 89 buildings. There are four indoor auditoriums with 18,000 seats total. The big one, Deep Space, is the world's largest subsurface auditorium. There are 11,400 seats. This is an auditorium. This is two Radio City Music Halls full of people smashed together in one giant auditorium underground on a corporate campus. The number of seats is much closer to a Chase Center. It's much closer to a basketball arena than it is to any other auditorium that I can think of.

• 1:37:52Ben Gilbert?

  It goes down 74 feet beneath the surface. I mean, the whole logic behind it is when they built it, they thought, oh, we'll never grow to 11,400 people. We can have our all hands in here. Or 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. 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.

• 1:38:28David Rosenthal?

  Yep. All right. I think now is the right time while we're talking about the campus and epic culture to really talk about epic culture.

• 1:38:35Ben Gilbert?

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

• 1:39:05David Rosenthal?

  That's funny. Apparently she was just ahead of her time with.

• 1:39:07Ben Gilbert?

  The AI factories.

• 1:39:08David Rosenthal?

  Was Nvidia and Dell are calling, you know, yeah, AI factories now. Yeah.

• 1:39:11Ben Gilbert?

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

• 1:39:23David Rosenthal?

  Yep. So while we're on culture here, one of the most amazing things about the campus is Epic has a list of 10 commandments. It's the Epic 10 commandments is like, you know, Moses in the Bible here. They have them posted in every bathroom 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 10 commandments in the bathrooms there. The 10 commandments are number one, do not go public. Number two, do not acquire or be acquired.

• 1:39:58Ben Gilbert?

  By the way, those first two things, you don't need to communicate that to employees. Only the CEO can do either of those things. So it's just funny to put it as commandments. That shows how deeply Judy feels it needs to run in all of the employees.

• 1:40:10David Rosenthal?

  And I think the other big motivation for doing this is then having it there in the bathrooms is every customer who comes to visit, it's right there to the customers too.

• 1:40:18Ben Gilbert?

  Right.

• 1:40:18David Rosenthal?

  We will never go public. We will never be acquired and we will never acquire another company. You can trust this is one system forever.

• 1:40:25Ben Gilbert?

  Yep.

• 1:40:26David Rosenthal?

  Yep. Okay, so that's one and two. Number three, software must work. Number four, reality equals expectations. Number five, keep commitments, even the unspoken ones. Number six, focus on competency, do not tolerate mediocrity. Number seven, have standards, be fair to all. Number eight, have courage, what you put up with is what you stand for. Number nine, teach philosophy and culture. And number 10, be frugal, do not take on debt for operations.

• 1:40:55Ben Gilbert?

  Zero of those pertain to healthcare.

• 1:40:58David Rosenthal?

  Yes.

• 1:41:00Ben Gilbert?

  When I was looking at them, I kept thinking, oh, I'm going to find something here about every life is important, or the patient is at the center of everything, or no, this is how to run a company. This is my opinion on how to run a company, period.

• 1:41:12David Rosenthal?

  Yep. And I think specifically to your point, this is a pretty good way to run a software factory.

• 1:41:18Ben Gilbert?

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

• 1:41:33David Rosenthal?

  Yeah, it's like the wedding march, you know? Dun, dun, dun, dun. Like, that's their version of like ringing the gong.

• 1:41:38Ben Gilbert?

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

• 1:42:18David Rosenthal?

  Probably going all the way back to Neil and MetaTech and

• 1:42:21Ben Gilbert?

  Yeah.

• 1:42:21David Rosenthal?

  the three days in Boston.

• 1:42:22Ben Gilbert?

  This is the best way to do this, period. And so we're just going to teach everybody the best way to do everything. And everybody is going to be like reasonably robotic. We can sort of trust that once we squeeze you through the Epic system, when you come out the other side, you are able to operate in a way that works really, really, really well in our machine, where people can really trust each other. So because of that high level of trust, there's very few middle managers. You understand the system that everybody else works within, and you don't have to corral chaos. Most of the people they're hiring are right out of school, so they've been there for a long time. They don't have budgets, which you can kind of only do when you have a high-trust environment like this. I mean, there's some financial controls, of course, but Judy's got

• 1:43:06Ben Gilbert?

  this great story that 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 going to push it next year. She's like, that's stupid. Or they would tell her, can we squeeze this in this year? Because if I don't spend this money, I'm going to lose it in my budget. And she would say, well, that's also stupid. So at my company, we're not going to have budgets like that. 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.

• 1:43:46David Rosenthal?

  Yep. I think when you start, you have to do five of them, and then you do more every year.

• 1:43:51Ben Gilbert?

  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 when startups internalized as doctrine. But every person in the company spending time in medical settings, talking to customers, hugely valuable. On the developer side, there's a super prescriptive software methodology that they use to minimize bugs. So you go through this intensive training for six months when you join. And then when you start programming, the whole system is designed around minimizing the number of hours between when a line of code is written and then when it is tested.

• 1:44:30Ben Gilbert?

  So if a bug is found, then you drop everything as the original developer and you fix it so that you still have the whole context fresh in your head. You don't sort of go months and then the system gets tested and bugs aren't allowed to compound into bigger problems this way. They get caught right away.

• 1:44:48David Rosenthal?

  And I believe the rule, right, is that every developer must fix their own bugs.

• 1:44:52Ben Gilbert?

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

• 1:45:12David Rosenthal?

  Yep. Well, I think the reasons are twofold. One, it absolutely is right that lives are on the line. If a order for the amount of dose in a prescription gets messed up because of a bug, a lot of people are going to die.

• 1:45:23Ben Gilbert?

  Yep.

• 1:45:24David Rosenthal?

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

• 1:45:44Ben Gilbert?

  Yep. Great point. So that means you need a-

• 1:45:47David Rosenthal?

  Highly robust system.

• 1:45:49Ben Gilbert?

  Yes. The work done as an implementation person at the company is insane. It's like military-level logistics. You're handling multiple customers, all of which are among the most complex systems on earth. Peter Drucker famously referred to hospitals as the most complex form of human organization that we have ever attempted to manage. You have to understand all these dependencies at the customer and the status of a dozen interrelated things on a daily basis. You really are in this high adrenaline, high stakes, leadership role as a really young person. You can work 10, 12 hours a day, but a lot of them love it because you're winning, you're doing really big things right out of school, you're doing it with

• 1:46:34Ben Gilbert?

  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.

• 1:46:45David Rosenthal?

  Yep. And I think also because of the flat organization, like you're also doing it alongside other senior people and learning from them directly. Like the story about Carl and Sumit, you know, Sumit is a young programmer working on a project with Carl, the president, who's also a programmer leading the team. Like that happens.

• 1:47:04Ben Gilbert?

  If you're an ambitious, career focused person, there is nothing more fun than winning in a high stakes environment with other high performers as a team. That plus the whimsy encapsulates pretty well the epic culture. And the result of that is it becomes the number one thing in your life. If you talk to a lot of these people who spent time there or still work there, you're all in and you're in the middle of nowhere. This is the other job 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.

• 1:47:38David Rosenthal?

  Yeah, you could drive to the big city of Madison.

• 1:47:40Ben Gilbert?

  Yes.

• 1:47:41David Rosenthal?

  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.

• 1:47:57Ben Gilbert?

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

• 1:48:14David Rosenthal?

  Yep.

• 1:48:15Ben Gilbert?

  So the other side of this is it is up or out. They aggressively trim bottom, whatever percent of performers and they work you really, really hard. And so with the vast amounts of new hires, they're trying to figure out if you're going to 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, they're good. You can count on them.

• 1:48:40David Rosenthal?

  Yep.

• 1:48:40Ben Gilbert?

  Their method of hiring is crazy. And this is more common now to give out programming tests as a part of the hiring process.

• 1:48:47David Rosenthal?

  Oh, this story is so good. Can I tell it?

• 1:48:49Ben Gilbert?

  Yes, please.

• 1:48:50David Rosenthal?

  So we mentioned that Judy's son was a programmer at Microsoft and that's how she went to visit him, part of the inspiration for the campus. His involvement in the company actually predates him becoming a programmer at Microsoft or even an adult. In the late eighties, Judy was hiring software developers and found that interviewing them just wasn't that predictive of whether they were going to be great software developers or not. Meanwhile, her son, I think was in like seventh grade or something like that and was doing these programming competitions around the state. And she was talking to him, it 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.

• 1:49:34Ben Gilbert?

  They're reasonably predictive.

• 1:49:36David Rosenthal?

  Do you think you could write one of these types of tests for me? And I can use it at Epic and test software developers as we're hiring them and see if they're any good?

• 1:49:45Ben Gilbert?

  And for 18 years, listeners, that was how they tested to determine if someone should work at Epic. And many, many times, I don't know if the number is close to 100% or, but some large percent of the time, they just don't interview you. They believe that their tests are predictive enough that that's it. You can get a job offer, you come visit campus and all that, but like you get a job offer after scoring high on this test. And it's not just that test. Now, there's other tests. There's a Rembrandt test. They've got a bunch of tests. It's all systemized and cataloged and everybody takes one on the way in.

• 1:50:18David Rosenthal?

  For every role in the company? Yeah.

• 1:50:20Ben Gilbert?

  The culinary team, we heard, takes not full software developer tests, but logic tests on the way in.

• 1:50:26David Rosenthal?

  Yeah, 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 80s. This was way before Google was doing this kind of stuff. This was really out there hiring practices at the time.

• 1:50:46Ben Gilbert?

  Yep. So we've talked a lot about the internal culture. The most important thing that we haven't really dove into yet is how it touches the outside world. The Epic culture is completely customer obsessed. And I mean that the way we talked about customer before, there's a great quote from Jeff Gotney, the Chief Information Officer for Rush University System for Health. He says, "You get what you pay for 100% of the time, despite Epic being, quote, 'not cheap.'" You kind of see that echoed over and over and over again in these customer conversations as reliable. It worked. They didn't overpromise on something. It is fully integrated. At this point, no one gets fired for buying Epic, the same way it used to be true about IBM.

• 1:51:29David Rosenthal?

  Yep. Customers are like always number one. Everything.

• 1:51:33Ben Gilbert?

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

• 1:51:47David Rosenthal?

  Totally. There are basically only three roles at the company. There's software developer, project manager, who are the implementations managers doing the new active implementations for new customers. And then there are technical specialists who do ongoing customer support. There's not a sales or marketing department. There are eight or so "salespeople," quote unquote, in the company who only react to inbound requests and they all came from either project management or technical specialists. That's the whole company. The technical specialists are the biggest group in the company. Every single customer of the 607 whatever hospital system customers that Epic has, every single customer has their own technical specialist

• 1:52:31David Rosenthal?

  teams for every single product that they use. So like if you're a hospital system, you have your own technical specialist team for your Epicarey MR, for MyChart, for Resolute, for Cosmos, for, you name it, anything you use, you have your own dedicated team for that. And then on top of that, Every customer has their own dedicated BFF, best friend forever, like BFF, who is a single person within Epic. And their sole job, their only job, is to make sure that you, as a customer, are successful with their products. So this means they do things like they grade you as a customer every year, benchmarked relative to what other customers are doing

• 1:53:16David Rosenthal?

  and how you're doing with the Epic tools. So they will send separate report cards every year to your CEO, CIO, and CFO. And they will grade you one through five on a bunch of dimensions. And then they will show you benchmark data against other customers at your peer set of like relative similar sized hospital systems, how you're doing.

• 1:53:38Ben Gilbert?

  Wow, that's crazy.

• 1:53:40David Rosenthal?

  Yes, I've never heard of any other company that does stuff like this.

• 1:53:43Ben Gilbert?

  Well, they have a lot of leverage in the customer relationship. I think at this point in history, you know, 2025, when the customer wants to do something a certain way and Epic wants to do something a certain way, ultimately Epic is customer focused. So they will do whatever the customer wants. But they're going to lay out very compelling convincing arguments why their way is the correct way. And what this leads to is things like a standard package. A lot of times when people are setting up Cerner, every implementation looks completely different. Epic is highly opinionated. Please use as much standard stuff as you can so that we can easily push out updates or we can easily add in new modules for you

• 1:54:27Ben Gilbert?

  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, ah, I think you should do it this way. Because at some point, they may choose to just say, you know what, I don't think you're ready to be a customer yet. I think we're going to focus elsewhere this year because we're going to pick up only 10 to 20, maybe 30 new customers.

• 1:54:48David Rosenthal?

  And we're happy to wait.

• 1:54:49Ben Gilbert?

  We're happy to wait until you're ready to work with us. And they actually have the leverage to pull that off now.

• 1:54:54David Rosenthal?

  To your point about the standard implementations, I believe this is the only way that you can get discounts on pricing with Epic is by. Doing either fully or mostly standard. I think there probably are some tiers based on how standard your implementation is. And the more you deviate from it, the more you have to pay.

• 1:55:15Ben Gilbert?

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

• 1:55:22David Rosenthal?

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

• 1:55:38Ben Gilbert?

  Altruistic capitalism does feel like ultra competitive, ultra value maximizing altruistic capitalism is kind of like how I would describe the company.

• 1:55:47David Rosenthal?

  Yeah, I think that's how you sum up Epic. And this altruistic piece is despite certainly being expensive, they basically never raise prices. Once you're a customer, they do, but their average yearly increase is about 2% across the board. So below inflation. Compare that to lots of other software companies out there. They're not raising prices 2% every year. They also do things like they have never in its entire history changed the price of my chart.

• 1:56:18Ben Gilbert?

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

• 1:56:30David Rosenthal?

  Good point.

• 1:56:31Ben Gilbert?

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

• 1:56:49David Rosenthal?

  With the lowest risk possible.

• 1:56:50Ben Gilbert?

  Yes. So that is why the customer is picking them. And what is Epic trying to do? Epic is trying to win deals and stay in forever and achieve world domination. So they do these very interesting things that feel very customer focused and are, but are also very valuable for Epic. Like they'll recommend alternative third-party new pieces of software to their customers. Some new thing comes out. Oh, it's 2020 telehealth suddenly is really important. Here's a HIPAA compliant way to do Zoom. By the way, we're going to 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 going to be free to you. You're already a customer.

• 1:57:35Ben Gilbert?

  It's just going to be free to you. So you're certainly not going to go around shopping for some new thing when you know that it's just going to come for free to you. And you're not going to take it right away because it's going to be too bare bones. But at some point, it'll get good enough where you can say, oh, yeah, I'll just adopt the Epic version now. Part of my enterprise wide agreement. It's this kind of amazing bundling strategy that certainly reminds me of the Microsoft episode.

• 1:57:58David Rosenthal?

  Yep, you're totally right.

• 1:57:59Ben Gilbert?

  I think that's the right way to look at it. They're customer obsessed because in the long term, that is the right thing to do for Epic also. And this is not a new realization. There is a Jeff Bezos quote, and I just thought of it. I don't have it in my notes, but it's something about in the long run, there is no difference between what the customer wants and what Amazon wants. And I distinctly remember him saying this in like 99 or something, some really old video.

• 1:58:26David Rosenthal?

  Yep.

• 1:58:27Ben Gilbert?

  Epic is absolutely customer obsessed. Again, CEO, CIO of hospital systems, because if you deliver for them, you deliver for Epic in the long run.

• 1:58:37David Rosenthal?

  Yep. Well, I mean, that's kind of like-

• 1:58:39Ben Gilbert?

  That's like the goal of running a company.

• 1:58:40David Rosenthal?

  Theoretical underpinning of capitalism, right?

• 1:58:43Ben Gilbert?

  Right.

• 1:58:44David Rosenthal?

  So all that to say, it is a very fascinating corporate culture and organization.

• 1:58:52Ben Gilbert?

  Yes. All right. So listeners, if you know anything about this industry, you know that we haven't gotten to the important part yet. We've gotten to the Kaiser deal. That was a big deal. Gotten to moving to Verona. It's important part to understand the culture. And it's like this cutesy thing that most 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 and causes a whole bunch of good and a whole bunch of bad to happen. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired,

• 1:59:36Ben Gilbert?

  Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:59:43David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:59:59Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 2:00:14David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 2:00:38Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 2:00:57David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 2:01:27Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you. Okay, so we're coming through the 2000s here. We just got through the Verona campus. You know everything about Epic's culture now, or at least everything that we could discern from the outside, anyway. And we're in this pretty interesting era in 2006. We're in the Bush administration here in America.

• 2:02:10Ben Gilbert?

  And Bush says, "In a State of the Union, for all Americans, we must confront the rising cost of care, strengthen the doctor-patient relationship, and help people afford the insurance coverage they need. We will make wider use of electronic records and other health information technology to help control costs and reduce dangerous medical errors." Wide applause.

• 2:02:36David Rosenthal?

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

• 2:02:59Ben Gilbert?

  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." 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.

• 2:03:26David Rosenthal?

  Yep. So funny.

• 2:03:28Ben Gilbert?

  So you're starting to get these political winds of, hey, everyone wants a good system for electronic medical records. We think in the abstract, there will be a lot of good that comes from it.

• 2:03:42David Rosenthal?

  Well, I think there's an even deeper motivation than that. In 2006 already, I think everybody knows in America, the current healthcare system sucks. Yes, there are great things about it, but overall, this is cost disease run rampant, huge portion of GDP massively inefficient. We want to try and fix it.

• 2:04:03Ben Gilbert?

  How to fix it, we don't all agree on.

• 2:04:04David Rosenthal?

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

• 2:04:16Ben Gilbert?

  Right. It feels like a step in the right direction.

• 2:04:19David Rosenthal?

  And at the time, only 13% of healthcare facilities in America had an EHR system at all. This is a massively not digitized industry here in the mid 2000s.

• 2:04:31Ben Gilbert?

  Which I think there's some pushback on that 13%. People would say, well, the definition of EHR just changed. So actually, there were a lot more than 13% that had it. But that's the best data that we have is that.

• 2:04:42David Rosenthal?

  Fair enough.

• 2:04:43Ben Gilbert?

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

• 2:05:25David Rosenthal?

  They have different architectures. All the other ones, arguably except Meditech, don't have a single database, you know, et cetera.

• 2:05:31Ben Gilbert?

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

• 2:06:07David Rosenthal?

  Right. Interests are sort of aligned against this happening.

• 2:06:09Ben Gilbert?

  Right.

• 2:06:10David Rosenthal?

  Epic doesn't want that and the hospital doesn't want that.

• 2:06:12Ben Gilbert?

  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 because we all get care from multiple places. Then there's this third category. Epic to third-party application that wants to use data from Epic or sit on top of Epic or interoperate somehow with Epic. As a company, they have been very, very careful about this one over the years. And for good reason, I mean, you don't want patient data to leak. Epic has publicly referenced the fact that they have never had a Cambridge Analytica

• 2:06:53Ben Gilbert?

  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.

• 2:07:07David Rosenthal?

  Yep. And again, very justifiable reasons why that should be the case. We're dealing with HIPAA data here.

• 2:07:14Ben Gilbert?

  Yeah.

• 2:07:14David Rosenthal?

  But also massively in Epic's interest for that to be the case.

• 2:07:18Ben Gilbert?

  It's very convenient as a strategy.

• 2:07:20David Rosenthal?

  Yes.

• 2:07:20Ben Gilbert?

  So as for that first scenario, Epic to Epic, it's actually awesome. They have this thing called Care Everywhere. Today, there are 20 million patient records exchanged daily. I used it as a part of prepping for this episode to join all my MyChart accounts across the three health systems I have in Seattle. It just seems to work pretty well. There's a great story of how it actually happened and how it came to be. Judy made the call personally that Care Everywhere wasn't a thing or shouldn't be a thing where their customers could pick and choose. If you were enabling it, it worked across all Epic customers, even if they were your local competitor. And so here's the story. One of the first customers to accept that new software that came with Care Everywhere unknowingly agreed to the interoperability feature.

• 2:08:05Ben Gilbert?

  And he later admitted that he would have declined it if he realized that it was included in the contract that he was signing.

• 2:08:10David Rosenthal?

  Yeah, this is the CEO of that health system later admitted that, yeah.

• 2:08:13Ben Gilbert?

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

• 2:08:44David Rosenthal?

  Yeah, they talk about, hey, we are the biggest sharer of medical record data of anybody.

• 2:08:49Ben Gilbert?

  Right. So coming into 2008, that's sort of the historical baggage that you should know about in Epic land of they believe they're doing a lot of interoperability in the way that they like to do it. Almost no one is great at interoperability. I saw some transcripts of talking with hospital administrators who 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.

• 2:09:21David Rosenthal?

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

• 2:09:48Ben Gilbert?

  Even though it's customer friendly to do so?

• 2:09:49David Rosenthal?

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

• 2:10:01Ben Gilbert?

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

• 2:10:43David Rosenthal?

  Well, that kind of describes the whole healthcare industry.

• 2:10:46Ben Gilbert?

  Right.

• 2:10:46David Rosenthal?

  Make no mistake, this is definitely a for-profit industry.

• 2:10:49Ben Gilbert?

  Yes.

• 2:10:50David Rosenthal?

  And it's highly regulated and there's all these issues.

• 2:10:53Ben Gilbert?

  Yep. Okay, so we're into the meat. 2008, 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.

• 2:11:14David Rosenthal?

  But one element of pulling out of it, just like during COVID, is the government said, "All right, we need..."

• 2:11:21Ben Gilbert?

  Stimulus, baby.

• 2:11:22David Rosenthal?

  Stuff. "We need stimulus. We need programs that we can throw money at the economy."

• 2:11:27Ben Gilbert?

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

• 2:11:36David Rosenthal?

  And there's the monetary policy stuff of interest rates to zero, but there was also the fiscal policy stuff of, "We need to helicopter money into the economy."

• 2:11:43Ben Gilbert?

  So the question is, when you're going to helicopter money into the economy, you could mail everyone checks. And that happened during COVID.

• 2:11:49David Rosenthal?

  Yep. Not a ideal way to do it.

• 2:11:52Ben Gilbert?

  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 kind of all agree on are good ideas for the country that should happen? And let's just pass some legislation that rewards the crap out of people with money, with free money, for doing the things that we think are a good idea anyway." The hope is, you get this double whammy. You get the money distributed, which is just a goal. You're just trying to create jobs, trying to create economic motion, and you get something accomplished that is widely agreed upon to be a good idea.

• 2:12:34Ben Gilbert?

  Oh my gosh, a shovel-ready project right here. Electronic medical records. Let's do it. Let's just figure out how to finally make that a thing. So the goals. One, fiscal stimulus to stimulate the economy after the Great Recession. Two, promote the adoption of electronic health records. Three, promote the use, which is different, the actual use-

• 2:13:00David Rosenthal?

  The meaningful use.

• 2:13:01Ben Gilbert?

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

• 2:13:23David Rosenthal?

  The 2009 Health Information Technology for Economic and Clinical Health Act.

• 2:13:30Ben Gilbert?

  I love how they name these things.

• 2:13:31David Rosenthal?

  I know, which gets folded into the almost trillion-dollar American Recovery and Reinvestment Act.

• 2:13:37Ben Gilbert?

  Yes. So the mechanics. In 2009, when the bill was passed, there is $27 billion available in direct incentive payments to hospitals that implemented electronic medical records. And if you include broader incentives, other health IT projects, data exchanges, training, the total actually comes to $36 billion. 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.

• 2:14:16David Rosenthal?

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

• 2:14:41Ben Gilbert?

  Yes, carrot and stick. So specifically, it amounted to $44,000 to $64,000 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.

• 2:14:58David Rosenthal?

  Yeah, so imagine a huge system like Kaiser with 11,000 physicians. It's a lot of money.

• 2:15:03Ben Gilbert?

  Yes. High tech contained the phrase meaningful use, which is this crazy phrase where if you say meaningful use, or you even say MU to anyone, it is a triggering term in this industry. First, meaningful use was a carrot and then as a stick. So after the stimulus ran out, David, as you were saying, after about five years, health systems would face meaningful financial penalties for not meaningfully using health IT software like EHRs. There's a 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 $36

• 2:15:47Ben Gilbert?

  billion injection that it jumped in line." As Rusty France, CEO of EHR vendor NextGen Healthcare, put it, and NextGen is one of the top 10 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 going to do that." For everyone that wants to just think this was the most amazing thing ever for Epic, yes, it was obviously net very good. They had to do a bunch of hoop jumping through to make sure that it was exactly the thing that the bill was going to 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.

• 2:16:31David Rosenthal?

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

• 2:16:45Ben Gilbert?

  Well, okay, so who's it going to benefit the most? Probably the most reliable one. If I wasn't going to do this before and now I just have a check dangling in front of me as a hospital to implement an EHR, I want the one with the integration that's 100% going to work. I'm taking no risk. And also, that Epic one, I think someone told me before that was an expensive one. Well, I guess it doesn't matter that it's expensive anymore because it's free, so I'm just going to buy the good one.

• 2:17:09David Rosenthal?

  Yeah, right. It's effectively free.

• 2:17:11Ben Gilbert?

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

• 2:17:21David Rosenthal?

  Yeah, that's a great point. It's like you're getting a stimulus to buy a handbag and you could get the Target one or you could get the Birkin bag and they're all free.

• 2:17:31Ben Gilbert?

  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 you're not going to 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. Did it accelerate usage? Absolutely. Market penetration of electronic healthcare records went from 9% 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?

• 2:18:14David Rosenthal?

  Certain categories of software during the pandemic.

• 2:18:19Ben Gilbert?

  Yeah, that's a good point.

• 2:18:20David Rosenthal?

  I would imagine maybe Zoom during the pandemic is the closest thing.

• 2:18:24Ben Gilbert?

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

• 2:18:44David Rosenthal?

  Schedule your own appointments, you have all of the above, manage your family's care.

• 2:18:48Ben Gilbert?

  Yes, absolutely. Okay, so then the next goal, cost reduction. There are stats both ways on if EHRs generally reduce costs. We found one stat that claimed that costs in hospitals went down by 10% with the introduction of EHRs. There's also arguments that the adoption of EHRs may actually have accelerated the ordering of unnecessary care, as well as increased billing codes for either more codes or higher dollar codes for the same procedures. So that's sort of the counterargument to, did it decrease costs in the system? The critics of EHRs say that basically more stuff is getting ordered from exam rooms for the exact same procedures than was happening before.

• 2:19:31Ben Gilbert?

  And frankly, that's the goal of a hospital buying an EHR. I mean, part of it is revenue maximization.

• 2:19:38David Rosenthal?

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

• 2:20:07Ben Gilbert?

  And the prestige of it, and you want to help people, but it's a high paying job.

• 2:20:10David Rosenthal?

  Yep.

• 2:20:11Ben Gilbert?

  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.

• 2:20:17David Rosenthal?

  This is the American Prospect article?

• 2:20:19Ben Gilbert?

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

• 2:20:56David Rosenthal?

  Yep.

• 2:20:57Ben Gilbert?

  Data interoperability, 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 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 kind of do everything themselves, they didn't need interoperability, and it wasn't explicitly rewarded. So customers didn't prioritize it either.

• 2:21:39David Rosenthal?

  And there is a fact pattern that opens Epic up certainly to criticism here, which is that Judy was on Obama's Health IT Council through all of this, which was advising the Obama administration on the High Tech Act.

• 2:21:53Ben Gilbert?

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

• 2:21:58David Rosenthal?

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

• 2:22:08Ben Gilbert?

  Yep. But let's just look at the data interoperability thing. It didn't happen, but it's happening more now, 15 years later. And so at least we have the foundation of digital records so that as pushes and shoves happen to make it more interoperable, without operability, you can't have interoperability.

• 2:22:28David Rosenthal?

  And I think for me, that's kind of my takeaway of the high tech act and meaningful use here, at least when it comes to the industry of EHRs. Yeah, anytime you've got government coming in and distorting a market, you're going to get weird stuff happening. And especially anytime you have government coming in and regulating how products are to be developed and used in a market, you're going to get really messy stuff happening.

• 2:22:55Ben Gilbert?

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

• 2:23:24David Rosenthal?

  This is what the legislation requires.

• 2:23:26Ben Gilbert?

  Yes, complies with meaningful use so that the hospital then doesn't come and get hit with a financial penalty.

• 2:23:32David Rosenthal?

  Yeah, this is sort of the most unfortunate aspect of meaningful use, I think.

• 2:23:36Ben Gilbert?

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

• 2:24:20David Rosenthal?

  So all that unquestionably bad.

• 2:24:24David Rosenthal?

  At the same time, what's the alternative? We're going to be in the paper-based system? Like, that's not good. At least we have adoption here.

• 2:24:30Ben Gilbert?

  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.

• 2:24:44David Rosenthal?

  And I think if you zoom way, way, way out, you give the most credit to the government and the legislators who created all of this. Was the goal actually a jobs program and an economic stimulus for the country? If that was the goal, A+. Lot of jobs got created because of this.

• 2:25:04Ben Gilbert?

  18% of our GDP's worth of jobs are in this field. So it's now a huge part of our society is people who work in medicine, for better or for worse.

• 2:25:15David Rosenthal?

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

• 2:25:42Ben Gilbert?

  Yeah, I hate it, David.

• 2:25:44David Rosenthal?

  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.

• 2:25:52Ben Gilbert?

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

• 2:26:35David Rosenthal?

  Yep. So back to the Epic story here.

• 2:26:38Ben Gilbert?

  Yeah. So what did meaningful use do for them? Well, interestingly, if you just take a step back and say, what is the byproduct of the government paying off a whole industry to adopt something new? What you're basically doing is pulling forward the future and saying, this was all going to happen eventually. We want to make it all happen right now.

• 2:26:58David Rosenthal?

  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.

• 2:27:09Ben Gilbert?

  So that's the question. They were starting to. But what you definitely do when you throw $36 billion at the problem is you say, we're going to close the door on anyone that might become a dominant player after this. The current competitive set is now what we're dealing with. And we think the current competitive set is good enough, that this is shovel ready enough, that we want the best ones to get implemented everywhere. These are stuck in there for multiple decades. So.

• 2:27:38David Rosenthal?

  Yeah, the switching cost here is enormous.

• 2:27:40Ben Gilbert?

  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 wasn't going to happen, at least for a long time.

• 2:28:00David Rosenthal?

  Yep. Because you pulled forward so many RFP processes to a single point in time.

• 2:28:06Ben Gilbert?

  Yes.

• 2:28:06David Rosenthal?

  And the majority of them chose Epic, which they probably would have anyway. But a lot of those processes would have happened in the future, at which point in time other competitors may have emerged.

• 2:28:17Ben Gilbert?

  Right. There's no greenfield bidding for those theoretical future innovative competitors. That everyone's bidding against your current system.

• 2:28:26David Rosenthal?

  I buy that.

• 2:28:27Ben Gilbert?

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

• 2:28:53David Rosenthal?

  Well, it definitely made the product worse.

• 2:28:55Ben Gilbert?

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

• 2:29:09David Rosenthal?

  But they certainly don't love it that doctors have to check 57 boxes on every patient visit.

• 2:29:14Ben Gilbert?

  Right. So all this compliance burden and the software being frankly, hard to use once it's

• 2:29:20David Rosenthal?

  legislated.

• 2:29:21Ben Gilbert?

  Yeah.

• 2:29:22David Rosenthal?

  Product development by legislation, which to be clear, isn't just Epic, it's all of them.

• 2:29:26Ben Gilbert?

  And also just the complexity of software of this magnitude with this many different screens and participants and all that. A big criticism is that it takes time away from patients. There was a 2016 study that showed that entering data into EHRs consumes about two hours of doctor time for every one hour spent providing hands-on patient care. There's all this other research around doctors now work 11, 12 hours a day. They're like constantly responding to messages, which again, is a hospital configuration thing. There's a way to triage messages.

• 2:29:58David Rosenthal?

  Another downside to the high-tech act and meaningful use is that before digitization and moving all this activity from hospitals into the EHR, there were a lot of regulations and guidelines that maybe weren't always followed and that was sort of for the best in the hospital. So things like, it's supposed to be doctors themselves who put in orders for pharmacy for meds or for scans or stuff like that. But in the old world, before everything moved into the EHR, doctors were supposed to do it, but they would have their medical assistants do it. If you're seeing 20 patients a day and a whole bunch of them need scans or meds or whatever, you can just be like, hey, medical assistant, do all this and they can do it during the day.

• 2:30:43Ben Gilbert?

  Yeah, I'll sign them all later.

• 2:30:44David Rosenthal?

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

• 2:30:58Ben Gilbert?

  Yeah, it's interesting. So this is the sort of thing that ends up contributing to Dr. Burnout.

• 2:31:03David Rosenthal?

  Yep.

• 2:31:03Ben Gilbert?

  But you do have to compare it to how it used to be. There's a great old study from 1970 that found that communications activities such as managing physical records accounted for 35 to 39% of total hospital operating costs. That's not the doctor's time, but especially in the paper world, it was always a huge amount of cost and time from the hospital.

• 2:31:24David Rosenthal?

  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.

• 2:31:31Ben Gilbert?

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

• 2:32:08David Rosenthal?

  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 absolutely nothing on digital transformation of the industry.

• 2:32:25Ben Gilbert?

  Hmm.

• 2:32:26David Rosenthal?

  We digitized, but we didn't transform in the way that I think people were optimistically hoping for.

• 2:32:33Ben Gilbert?

  That's interesting. And the good news is that can still come. Now that all the records are digital.

• 2:32:39David Rosenthal?

  Yes. Now that we've digitized, yes.

• 2:32:42Ben Gilbert?

  You actually can do interesting things with the data that you couldn't have done before.

• 2:32:46David Rosenthal?

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

• 2:32:58Ben Gilbert?

  Yes.

• 2:32:59David Rosenthal?

  So on the back of all of this, Epic continues to win epically. In 2011, they hit $1 billion in revenue. They keep winning. All the big systems that come up for RFP, 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 being in place, consolidation really picks up, which again, all of which is just going to 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.

• 2:33:42David Rosenthal?

  So 2008, Allscripts merges with Mises. 2010, that new Allscripts entity then merges again with Eclipse. They keep on acquiring more smaller players. Today, that company is called Veridime. 2011, MetaTech acquires LSS Data Systems. And then in August 2014, one of the big ones that we've already alluded to happens. Cerner buys Siemens Health for $1.3 billion.

• 2:34:09Ben Gilbert?

  Which that starts the downward spiral for Cerner. That's my understanding.

• 2:34:14David Rosenthal?

  Yes, I heard in the research that even today in 2025, customers will still refer to themselves as either Siemens customers or Cerner customers. It's still not fully integrated.

• 2:34:26Ben Gilbert?

  Meanwhile, I think post Oracle acquisition, Oracle's trying to rewrite it all anyway.

• 2:34:31David Rosenthal?

  Right, and that's not going well, which we'll come to later.

• 2:34:35Ben Gilbert?

  Yep.

• 2:34:36David Rosenthal?

  So this leads us right into the Department of Defense contract.

• 2:34:42Ben Gilbert?

  The motherload of all opportunities, if you are an EMR.

• 2:34:46David Rosenthal?

  VA contract. Oh, boy. The motherload of all opportunities, or if you are an American taxpayer, the motherload of everything that is wrong with governmental waste in America. All right, listeners, now is a great time to talk about one of our favorite companies, Statsig.

• 2:35:05Ben Gilbert?

  Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale.

• 2:35:16David Rosenthal?

  Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next.

• 2:35:36Ben Gilbert?

  This is where StatsSig comes in. It brings experimentation, feature flags and product analytics into one unified system. So teams can ship safely, test rigorously and directly link what they changed to how users actually behaved.

• 2:35:49David Rosenthal?

  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/acquired to get started.

• 2:36:00Ben Gilbert?

  Okay, David, the DoD debacle.

• 2:36:02David Rosenthal?

  The 2015 DoD debacle. So the Department of Defense decides that they're going to bid out a global EHR contract for all of their hospital and healthcare across all branches of the military. Now, this is, at the beginning, just active duty US military. So separate from the VA system, which comes later, the Veterans Administration, all the veterans of the US military. This deal in 2015 is, up until this moment in time, the biggest healthcare IT contract of all time. It ends up being a $4.3 billion deal, so even bigger than the Kaiser deal. Woo!

• 2:36:44David Rosenthal?

  It remains the biggest until two years later, when the VA contract does go out. That is a $10 billion 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.

• 2:37:02Ben Gilbert?

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

• 2:37:22David Rosenthal?

  Yes, so they each choose their partners and there's all sorts of drama around this. Basically, the knives come out on all sides. As we shall see with Cerner, if you win one or both of these contracts, I mean, this will keep your company going for years and years and years. So drama aside, Cerner ends up winning both of these contracts, the DOD and the VA. And sadly, in what will perhaps not shock you at all, both of these projects, despite being huge at the bidding phase, go massively over time and budget. It's really, really bad. So the DOD system, the active duty system, only just fully went live late last year in 2024.

• 2:38:07David Rosenthal?

  This contract got bid out in 2015. So there's a nine-year implementation process. The VA system is way worse. It is nowhere near fully live today.

• 2:38:21Ben Gilbert?

  And Cerner won both of these?

• 2:38:23David Rosenthal?

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

• 2:38:40Ben Gilbert?

  What?

• 2:38:41David Rosenthal?

  So even the most optimistic scenario that they're saying, which seems very unlikely, is this is a 14-year project.

• 2:38:50Ben Gilbert?

  The latest I had seen is that it's still not live. They actually gave an "as early as 2031."

• 2:38:55David Rosenthal?

  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 an American citizen or watcher of America, you were disgusted by the whole meaningful use thing. If you're an American taxpayer, this is just beyond disgusting.

• 2:39:13Ben Gilbert?

  So why? What took so long? Or what made it so expensive?

• 2:39:17David Rosenthal?

  I don't really know. I think it's a combination of a lot of things.

• 2:39:21Ben Gilbert?

  Or I guess what are the incentives?

• 2:39:23David Rosenthal?

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

• 2:39:37Ben Gilbert?

  Oh, because as long as the contract doesn't end and you're still implementing, you can still keep finding more costs?

• 2:39:44David Rosenthal?

  You can still keep getting paid. Now, I think it would be unfair to blame Cerner for this. I mean, maybe some of the blame lives on them, but they are a subcontractor to...

• 2:39:56David Rosenthal?

  Big government primes that are the GC here. I mean, we talked about this on the Lockheed episode. This is just how the military industrial complex works now. So you've got the compounding layers of bureaucracy of the government, the military, EMRs generally, as we've talked about, like this is just like a rat's nest of awfulness of bureaucracy. And you know, you've got these multi-decade now projects with many billions of dollars of taxpayer dollars going into this. Still not live, just freaking brutal.

• 2:40:30Ben Gilbert?

  Do you think Epic is glad they didn't win?

• 2:40:32David Rosenthal?

  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.

• 2:40:39Ben Gilbert?

  Cause even the $10 billion initial price tag before the overruns is twice Epic's revenue today. This transformative for your business in the best case.

• 2:40:49David Rosenthal?

  Yes, kind of like Kaiser was transformative for Epic back in the day.

• 2:40:53Ben Gilbert?

  Yeah.

• 2:40:54David Rosenthal?

  That said, talking to Epic customers and CIOs and the research, they are like down on their hands and knees thankful that Epic did not win this deal.

• 2:41:03Ben Gilbert?

  Cause Cerner just got dragged so into the process.

• 2:41:07David Rosenthal?

  So into the muck here. And there were a lot of other compounding factors happening here, like Cerner, like we've talked about already was now post Siemens. What'd you say, 36 companies that had been acquired to

• 2:41:19Ben Gilbert?

  Yeah.

• 2:41:19David Rosenthal?

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

• 2:41:52Ben Gilbert?

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

• 2:42:04David Rosenthal?

  We're hardcore about our software engineering and our product architecture.

• 2:42:08Ben Gilbert?

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

• 2:42:20David Rosenthal?

  Yep. So after the DOD deal, Epic wins Partners Healthcare in Boston, which is the sort of new entity of Harvard and Mass General, MGH, and like the original big research institution. They win all of the Mayo Clinic, all of their hospitals. That's one of the biggest contracts, again, outside the DOD craziness. They win Cambridge in the UK. They win Intermountain Health. Recently, they win Common Spirit Health. The list goes on and on and on. 2018, Epic hits 2.7 billion in revenue. They announced that they have all 20 of the top academic hospitals in the US News and World Report rankings, which is critical for them because winning the top academic hospitals means that all the new doctors and nurses that are coming through, getting minted by these

• 2:43:05David Rosenthal?

  institutions and trained are all trained on Epic.

• 2:43:09Ben Gilbert?

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

• 2:43:23David Rosenthal?

  I'm sure that's right, but also a huge part of medical education is practicing in the hospital.

• 2:43:27Ben Gilbert?

  And I think now 90% of med school students train on Epic.

• 2:43:32David Rosenthal?

  Yes, that is the current statistic. 2019, Epic hits 3.2 billion in revenue. And then finally, December 2021, as we've been alluding to, Cerner gets bought by Oracle for $28 billion. So Cerner, as we talked about, was and still is a big company. I mean, they've acquired all these companies over the years. There's a lot of revenue there, and they're big international, and they have the DOD and VA contracts ongoing, which is a lot of money coming in. So they're doing, maybe call it five and a half billion a year in revenue, maybe a little more. But that's been flat to declining since 2018. Oracle, I can acquire them in 2021.

• 2:44:13David Rosenthal?

  Oracle now no longer reports Cerner's financials as a separate segment within the company. And they talk about Cerner and Oracle Health being a quote unquote headwind to overall growth and profitability for the company. There've been a lot of layoffs within Oracle Health. You know, maybe it's too early to tell, but I think this is probably one of Oracle's worst acquisitions of all time.

• 2:44:37Ben Gilbert?

  Hmm.

• 2:44:38David Rosenthal?

  You'd be hard pressed to find an analyst who would say that this was a great acquisition by Oracle, shall we say.

• 2:44:44Ben Gilbert?

  Yes, to put it lightly.

• 2:44:45David Rosenthal?

  Meanwhile, this is all just great for Epic and totally reinforces Judy's whole thesis of company building in this space and her whole story to customers of one single integrated platform that is hardcore about software development, that is 100% 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.

• 2:45:12Ben Gilbert?

  Yep. It becomes more and more different than everyone else in the market the longer time goes on. And the lesson here, which is really interesting, is they started slow. They started really slow and they did things in a way where they almost built up momentum for the future in a way that would pay off 20, 30 years down the road, rather than inorganically trying to take shortcuts and pull the future too far forward into today. The first 20 years kind of looks like an unimpressive company 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.

• 2:45:55David Rosenthal?

  That's such a good point. And I was trying to square in my mind earlier when we were telling the meaningful use story. 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, they're very mixed on meaningful use.

• 2:46:17Ben Gilbert?

  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.

• 2:46:26David Rosenthal?

  Yes, it did pull forward some growth, but the trend lines were gonna get here anyway.

• 2:46:31Ben Gilbert?

  It's not like it was some big, massive step function in two years. That is not how the graphs look.

• 2:46:36David Rosenthal?

  As we told the story, 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 growth. I wonder if that's part of why, to the extent they are serious about really being ambivalent about meaningful use, that's the reason why.

• 2:46:57Ben Gilbert?

  Yeah, they want to win slowly.

• 2:46:58David Rosenthal?

  They absolutely want to win.

• 2:47:00Ben Gilbert?

  And they're gonna win, but they want to do it slowly because it will help them win harder in the long run if they win slowly.

• 2:47:06David Rosenthal?

  Yes.

• 2:47:09David Rosenthal?

  So meanwhile, for them, I mean, I think 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 10 to 15% of the business now. 2023, they went live at London's guys and St. Thomas's NHS Trust, which was, I think, their biggest ever single implementation and happening in the UK. The UK is becoming a real market for them.

• 2:47:43Ben Gilbert?

  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 there's still tailwinds for Epic's business. The acceleration of the trend where hospital systems are merging and rolling up all the smaller local practices.

• 2:48:02David Rosenthal?

  Oh, totally. It's just an excuse to rebid.

• 2:48:04Ben Gilbert?

  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 practice. Practicing medicine, 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 stapled onto it was even more strict oversight on HIPAA. So you now require scale as a local medical practitioner to be able to afford the compliance burden. And what that means, if you play it out, is all healthcare or most healthcare gets provided by these mega giant hospital systems rather than community clinics,

• 2:48:47Ben Gilbert?

  which really benefits Epic because their strategy from 30 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.

• 2:48:58David Rosenthal?

  Yep, totally.

• 2:49:00Ben Gilbert?

  I actually think this is one of the most messed up things in the US healthcare system. 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 local pseudo monopoly hospital systems. And so this consolidation is not good. This consolidation will not lead to prices coming down. Let's just put it that way.

• 2:49:24David Rosenthal?

  Yep, 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.

• 2:49:33Ben Gilbert?

  I don't think the hospitals make very much money.

• 2:49:35David Rosenthal?

  They don't make much money at all. They're barely surviving, which is why they're merging.

• 2:49:39Ben Gilbert?

  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 kind of need scale 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.

• 2:50:03David Rosenthal?

  Yep, so that brings us to the other.

• 2:50:08David Rosenthal?

  Big, I think, potential growth vector for Epic going forward that they're absolutely pursuing is they have enough scale on the provider side now that they can start going to the other big players in the system, the payers, and then also the biotech and pharma side and say, we actually have ways that 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 hear from Epic. But this is building products for and working with 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

• 2:50:50David Rosenthal?

  and pharma. One example of this is prior authorizations.

• 2:50:56Ben Gilbert?

  Yep.

• 2:50:56David Rosenthal?

  Prior authorizations are a huge problem in the American healthcare system. This is when a patient needs or a doctor thinks that a patient needs either a medicine or a procedure that the payer, the insurance company says, well, you can't just go do that.

• 2:51:14Ben Gilbert?

  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.

• 2:51:19David Rosenthal?

  Yeah, exactly. We need you to prior authorize this. Epic now has enough data and enough scale on the hospital side that they can go to the payers and say, hey, prior auth, our customers don't like it, you don't like it, we have all the data, we can just automate this for you.

• 2:51:36Ben Gilbert?

  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, 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. They want to sell everything to the hospital and be the single IT vendor. You know, the hospitals do still buy other IT services. So the Epic playbook is go from selling a hospital one thing to figure out how to then sell

• 2:52:20Ben Gilbert?

  the hospital everything. And then, once you've sort of exhausted that, then figure out who else you can sell stuff to. 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 this market, sell to other customers to?

• 2:52:38David Rosenthal?

  Fair point.

• 2:52:39Ben Gilbert?

  All right. So that basically brings us to today. If you're in this ecosystem, you're going to say, there's 50 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. 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 that 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.

• 2:53:06David Rosenthal?

  Yeah, this is pretty cool.

• 2:53:08Ben Gilbert?

  This is awesome. So they've realized, okay, there is data on patients that is owned by patients and 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 Epicare instances. Can we anonymize that and get it all in an Epic hosted instance of something very queryable and very useful for a bunch of activities? They did it.

• 2:53:45Ben Gilbert?

  It's called Cosmos and Cosmos has 295 million patients worth of data in it, all anonymized.

• 2:53:54David Rosenthal?

  Yep. And I think that across those 295 million patients, there's data from 15 billion individual patient encounters.

• 2:54:05Ben Gilbert?

  Yes.

• 2:54:05David Rosenthal?

  So like structured data from a doctor encounter.

• 2:54:10David Rosenthal?

  15 billion times with patients.

• 2:54:12Ben Gilbert?

  It's crazy. So we were asking the question earlier, do EMRs or EHRs really benefit patients? And there's some arguments that 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 noticed 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, you can do intelligent things that improve care. But on top of that, more interestingly,

• 2:54:55Ben Gilbert?

  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?

• 2:55:02David Rosenthal?

  This is sort of like the utopian dream that people have always had and that the Bush administration and the Obama administration had. Epic is finally doing it.

• 2:55:12Ben Gilbert?

  Yes, and one very clear, interesting illustrative example is, imagine there's something wrong in the water supply, but 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 going to find it. 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.

• 2:55:55Ben Gilbert?

  What can you figure out about the whole world if you have 295 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, anyone who opts in gets to 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?

• 2:56:25David Rosenthal?

  Yep. This is what's really cool. They've productized 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, there's something going on. Cosmos can surface to me, hey, here are other examples of similar cases, anonymized.

• 2:56:46Ben Gilbert?

  They call them lookalikes, I think.

• 2:56:48David Rosenthal?

  Yeah, lookalike patients 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 quite a bit, I think, with rare diseases and crazy cases.

• 2:57:03Ben Gilbert?

  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. 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?

• 2:57:21David Rosenthal?

  Yep. And then that really presages something we're going to talk a lot about in analysis, which is, wow, imagine what you can do with AI with this data.

• 2:57:30Ben Gilbert?

  Yep.

• 2:57:30David Rosenthal?

  But we will get to that in a minute.

• 2:57:32Ben Gilbert?

  All right. So the business today, let's just make sure we're all on the same page on where things stand. They have 607 customers with 3,200 hospitals in between them. As you know, they've never lost a single one, which is insane. They add 10 to 25 new health systems as customers each year. Their customers represent 590,000 physicians and 495,000 staffed beds.

• 2:57:58David Rosenthal?

  And that's across 325 million patients?

• 2:58:02Ben Gilbert?

  Worldwide, yep. 280 million of which are in the US.

• 2:58:05David Rosenthal?

  Yep. So basically, almost all of America gets seen in some part of their healthcare by a Epic system.

• 2:58:13Ben Gilbert?

  Yes, that is correct. In revenue last year, in 2024, they did $5.7 billion, which grew 13% year-over-year over the last five years and 16% last year, from $4.9 billion to $5.7 billion.

• 2:58:30Ben Gilbert?

  David, I wanted to bring something up with you. They actually do less revenue than I would have figured.

• 2:58:35David Rosenthal?

  Yes.

• 2:58:36Ben Gilbert?

  And for people, they're like, 5.7 billion's a lot. What are you talking about? If you divide it by their number of customers, it comes out around $10 million a year a customer. If you live in the enterprise software world, that's not crazy. This is the central nervous system 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 at a mid-sized health system that said there's 100 full-time employees administering Epic at her hospital system. But Epic actually only captures about $10 million a year of the value created. So there's this sort of interesting dichotomy of, yes, it's a lot of spend,

• 2:59:20Ben Gilbert?

  but the minority of it actually goes to Epic.

• 2:59:23David Rosenthal?

  Yeah, it is this element of, I know I said altruistic earlier when talking about the company. 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. They definitely could.

• 2:59:42Ben Gilbert?

  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 are 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. 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 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

• 3:00:27Ben Gilbert?

  and they get more and more dominant, they certainly will gain more pricing power.

• 3:00:31David Rosenthal?

  I think they could. I mean, again, to your point of, on average, $10 million a year cost for 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 solution. It's kind of 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.

• 3:01:02Ben Gilbert?

  Oh, to pick someone else. Yeah.

• 3:01:04David Rosenthal?

  Yeah. I think they want it to be an irrational and irresponsible decision for a healthcare system not to use Epic.

• 3:01:13Ben Gilbert?

  Yeah, I think that's right. And just one other number to throw out to analyze this on a different vector. When I said 5.7 billion, top line isn't that big of a number in healthcare. United Healthcare, which owns an insurance company and a hospital system, does $400 billion a year in revenue. It's 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 $35 billion in EBITDA. United Healthcare's profit dollars are six times Epic's entire revenues. So Epic has become this incredibly important and powerful linchpin in the system despite

• 3:01:58Ben Gilbert?

  not actually having that big of a profit pool in the industry.

• 3:02:02David Rosenthal?

  Yep.

• 3:02:02Ben Gilbert?

  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 mince 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. All right. Other quick stats, 14,000 employees today. The market share is only 42% of hospitals, but it's the largest and most successful hospitals. So they actually have a bigger share of all care performed. 58% of ambulatory physicians now use Epic. 79% of the US ends up using Epic in one way or another. In terms of profit, we heard a few different estimates. Their EBITDA margin's somewhere between 30 and 35%.

• 3:02:47Ben Gilbert?

  So just to be conservative, we'll take that at the low end and say about $1.7 billion in EBITDA, if those estimates are correct. So 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?

• 3:03:10David Rosenthal?

  Yeah, there's never going to be a liquidity event for your shares.

• 3:03:13Ben Gilbert?

  Right, but it's worth doing. So 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.

• 3:03:29David Rosenthal?

  Yeah, wildly wrong.

• 3:03:31Ben Gilbert?

  In 2021, Forbes estimates her net worth to be 7.6 billion, implying that the company is worth, what, 15 billion? That is a ludicrous valuation for Epic. If you do the very conservative thing of looking at Cerner's EBITDA multiple of 30 times when Oracle bought them, and you assume conservatively, again, a 30% EBITDA margin at Epic, that would give you a number of 51 billion, valuing Epic at 51 billion. But come on, Epic's revenue streams are way more durable than Cerner's. And Epic is growing while Cerner was going through a hard time. You could get to a similar number of that 50-ish billion if you just slap a 9x revenue multiple,

• 3:04:14Ben Gilbert?

  which is a reasonable public market software comp. But this company has insane durability.

• 3:04:21David Rosenthal?

  Yeah, it's missing the point that I think this is maybe the most durable software company in history.

• 3:04:27Ben Gilbert?

  Yes, my guess is if this is public, which it never will be, investors would value it somewhere in the $100 billion neighborhood, giving Judy's shares a value of about $50 billion 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 150 or so companies in the world, right along with Shopify, ARM, Lockheed Martin, and Starbucks.

• 3:04:57David Rosenthal?

  Yep. Another thought exercise to kind of come at this question is if, in some alternate universe,

• 3:05:07David Rosenthal?

  Microsoft or Google or Amazon or, I don't know, maybe even Berkshire Hathaway, maybe Apple. If they could acquire this company, how much would they be willing to pay for it? I think $100 billion is on the very, very low end of that spectrum.

• 3:05:23Ben Gilbert?

  That's 4% of Apple or Microsoft. Of course, they'd be willing to pay 4% of themselves for this.

• 3:05:29David Rosenthal?

  There's the market, there's the durability of the revenue and the profits.

• 3:05:33Ben Gilbert?

  Oh, I see. You're arguing that on a financial basis alone, yes, and also the strategic value on top of that.

• 3:05:40David Rosenthal?

  And the strategic value, 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, 15 billion patient interactions. You think Google or Microsoft or whomever wouldn't pay a lot of money to own that? Like, of course they would.

• 3:06:06Ben Gilbert?

  Part of me is like, ooh, thank God Judy's putting it in a trust.

• 3:06:08David Rosenthal?

  All that to say, this is never going to happen. So, final chapter of the story here is Judy's 81 years old. What is going to happen at some point in the future, 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 100% of the voting shares. She has been transferring her non-voting shares into her foundation called Roots 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.

• 3:06:50David Rosenthal?

  Judy has announced that upon her death, all of her voting shares, so the 100% voting control that she has of the company, will transfer into a quote unquote "purpose trust" that will be administered by three constituencies. One, her family, her husband, if he's still alive, Gordon, and their three children. Two, a set of five longtime senior managers from Epic. And three, I believe three customer CEOs, CEOs of big customers. And that group will manage the trust. And in the trust bylaws...

• 3:07:31David Rosenthal?

  Are several things. One, the company can never be sold or taken public. Ironclad, that can never happen. Two, the next CEO of Epic must meet two criteria.

• 3:07:44Ben Gilbert?

  Oh, be a software developer, right?

• 3:07:45David Rosenthal?

  Yes, one must be a longtime Epic employee and two must be a software developer.

• 3:07:51Ben Gilbert?

  Ah, 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 30 plus years. Nike's heyday was when a guy who started in sneaker design ended up running the company, Mark Parker. There's sort of a beauty to when that happens.

• 3:08:18David Rosenthal?

  There is a playbook to this.

• 3:08:20Ben Gilbert?

  Yes. One last thing to know about Epic today, looking forward. We talked a lot about interoperability and their notorious lack of partnership or ability to access their data or integrate with them in the past. A lot has changed, 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 it, integrating with Epic than you could have 10 or 20 years ago.

• 3:08:59David Rosenthal?

  All right. That's our Epic story. Shall we move into analysis?

• 3:09:03Ben Gilbert?

  Let's do it. 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, 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, 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, do you have one for the takeoff phase? Do you feel like you can analyze why in the takeoff phase they gained power?

• 3:09:48David Rosenthal?

  Well, it's funny, they didn't take off for quite a while.

• 3:09:52Ben Gilbert?

  Right. And I might argue they didn't actually have any power during the takeoff phase.

• 3:09:57David Rosenthal?

  Yeah, I don't think so. I mean, ultimately, 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. There wasn't that much computing adoption among hospitals generally. So like, didn't really matter.

• 3:10:18Ben Gilbert?

  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 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, or you launch an application on a platform that somebody else built similarly because you're in a dynamic changing market. And Epic's market was developing slowly over a long period of time, and they were willing to run a small

• 3:11:03Ben Gilbert?

  business for a long period of time and then sort of grow into building all the functionality for the eventual huge market that wanted all the functionality tied together.

• 3:11:14David Rosenthal?

  Yep.

• 3:11:15Ben Gilbert?

  Okay, so then what powers do they have today as the scale incumbent?

• 3:11:18David Rosenthal?

  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 ever.

• 3:11:30Ben Gilbert?

  Oh, that's interesting. Is that true? Do you think it's bigger than people's ERP instance?

• 3:11:34David Rosenthal?

  For sure. This is like an ERP on steroids. This is the most important nervous system for your entire business. Oh, yeah. And by the way, if things go wrong or it goes down, people die.

• 3:11:44Ben Gilbert?

  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. Are there any ERP or CRM implementations that cost a billion, five billion, $10 billion?

• 3:12:00David Rosenthal?

  Maybe. But I don't think any that are so core to everything about your customer's business.

• 3:12:09Ben Gilbert?

  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.

• 3:12:17David Rosenthal?

  Right. It's so much more than a medical record. Yes.

• 3:12:20Ben Gilbert?

  Yes. 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.

• 3:12:34David Rosenthal?

  Yep.

• 3:12:34Ben Gilbert?

  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 the scale economies also. I mean, they just develop a lot of software 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.

• 3:12:58David Rosenthal?

  Yep.

• 3:12:59Ben Gilbert?

  If you're trying to start a new EMR today, you have to write a lot of software to be competitive.

• 3:13:04David Rosenthal?

  Yep.

• 3:13:05Ben Gilbert?

  And that's scale economies.

• 3:13:06David Rosenthal?

  Yep. Network economies. Yep.

• 3:13:08Ben Gilbert?

  You bet.

• 3:13:09David Rosenthal?

  You betcha.

• 3:13:10Ben Gilbert?

  They hit this interesting tipping point where they could win just on we're the best, most reliable platform 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. It's like a icing on the cake.

• 3:13:38David Rosenthal?

  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?

• 3:13:48Ben Gilbert?

  Right. Pick the standard.

• 3:13:50David Rosenthal?

  Yes. Well, what do they know how to use and what are they trained on? Epic? Great.

• 3:13:55Ben Gilbert?

  Yeah, that's true. It's a second network economy in addition to the 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. I don't know why that one hospital is still on Cerner.

• 3:14:20David Rosenthal?

  Yeah, it's really annoying to you, isn't it?

• 3:14:21Ben Gilbert?

  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.

• 3:14:30David Rosenthal?

  Yeah, it's kind of amazing that they have built a network economy business. Like, who would have thought? Medical, software.

• 3:14:36Ben Gilbert?

  There is value to every participant in the system, from the other hospitals to me as a patient, to doctors. If that one holdout hospital that for some reason is on Cerner just switches to Epic. It's the definition of network economy. I think they also have branding. They're the most trusted by all the most prestigious institutions. So at this point, if they had no other powers and they just came in at identical bids on the table, 100% of the time, people say Epic because it's going to work. Like, I know your brand.

• 3:15:03David Rosenthal?

  Don't get fired for buying IBM. Yep, exactly.

• 3:15:06Ben Gilbert?

  Yep.

• 3:15:07David Rosenthal?

  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, MyCharger. But no, no, you're totally right. They totally have branding.

• 3:15:13Ben Gilbert?

  That is in part why they built that massive auditorium to bring the whole universe of Epic together every few months.

• 3:15:20David Rosenthal?

  Yep. And then I think you could argue that they do have process power, I think is the last one I would say.

• 3:15:25Ben Gilbert?

  Hmm.

• 3:15:26David Rosenthal?

  In their development process and the language that they use and it being kind of unique to Epic, this is more of a defensive one.

• 3:15:36Ben Gilbert?

  I think it's about the training of young employees, the way that they sort of make them the Epic way.

• 3:15:42David Rosenthal?

  Well, interesting. There's the Epic way. 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...

• 3:15:57Ben Gilbert?

  Don't develop transferable skills.

• 3:15:59David Rosenthal?

  You know, it's not like you can easily then go work at Cerner.

• 3:16:02Ben Gilbert?

  Right.

• 3:16:03David Rosenthal?

  And port that over. 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, and I should say proprietary is the wrong word. They don't make mumps or cache. A separate company called Intersystems makes them, they license it from them. But most of the rest of the industry does not operate on that. It is a bit of a process power.

• 3:16:26Ben Gilbert?

  Yep, I think that's fair. All right, that does it for power.

• 3:16:29David Rosenthal?

  Great.

• 3:16:30Ben Gilbert?

  Do you have any playbook themes?

• 3:16:32David Rosenthal?

  Yes, I do.

• 3:16:34Ben Gilbert?

  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, Arvind Navarathnam 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. 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 35% of their operating expenses are spent on R and D. If you compare this to Athena Health, a competitor, that's 10%. Or Oracle all up is 23%. Or if you look outside this industry, it's actually equivalent to Apple at 36% of their operating expenses of R and D.

• 3:17:18Ben Gilbert?

  Amazon's 28%. So 35% is quite meaningful.

• 3:17:22David Rosenthal?

  It's quite high, yeah.

• 3:17:24Ben Gilbert?

  The only one that beats them is Google at 45%. And think about all the money that Google is just dumping into R and D for all these sort of future-looking projects. And, you know, they're a core technology company. So on the one hand, duh, because 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 going to be high on R and D.

• 3:17:47David Rosenthal?

  Yes, unlike most companies, they spend zero on sales and marketing.

• 3:17:50Ben Gilbert?

  Right.

• 3:17:50David Rosenthal?

  If they classify those eight people that they employ as, quote, quote, "salespeople" as, you know, headcount, maybe they spend, I don't know, not much.

• 3:17:57Ben Gilbert?

  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, 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 and D does compound over time to give you a big competitive advantage later in life that other forms of spend do not.

• 3:18:23David Rosenthal?

  Yep, especially in software.

• 3:18:25Ben Gilbert?

  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. And it reminded me of something I've read before. Does this remind you of anything?

• 3:18:42David Rosenthal?

  Hmm. Uh, I've drawn a blank. Go for it.

• 3:18:45Ben Gilbert?

  Okay. So in Paul Graham's legendary 2012 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. He then says, "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 10, sitting around strategizing is just a form of procrastination, whereas founders' intuition about which hill to climb are usually better than they realize. Plus, the maxima in the space of startup ideas are not spiky and isolated. Most good ideas are adjacent to even better ones."

• 3:19:29Ben Gilbert?

  I just thought, I don't know, it just jumped off the page at me that Judy, who has almost certainly never read any of Paul Graham's writings, had this 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.

• 3:19:47David Rosenthal?

  Oh, I'm so glad you brought this up. I was thinking about Judy as this incredible software developer who became a founder of a company and this incredible business person and didn't follow any of the MBA rules.

• 3:20:01Ben Gilbert?

  Except that she did. She just discovered them all for herself in Wisconsin.

• 3:20:05David Rosenthal?

  Well, right. And I was thinking about it, and I was like, man, her story in this company kind of reminds me of Paul Graham and Y Combinator, and there's so many resonances here, but they're also kind of like a different world. If Y Combinator weren't about funding companies and being a venture capital firm and instead was 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.

• 3:20:33Ben Gilbert?

  Well.

• 3:20:34David Rosenthal?

  But she also built this in a different era where you could do this without capital.

• 3:20:38Ben Gilbert?

  Yeah, I think that's right.

• 3:20:39David Rosenthal?

  But the distance between Judy Faulkner and Paul Graham is actually not nearly as far as you would think.

• 3:20:45Ben Gilbert?

  Yep. 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, and just being a programmer turned business person to its logical extreme.

• 3:21:03David Rosenthal?

  Yep.

• 3:21:04Ben Gilbert?

  Okay, one that we did not talk about is their litigation strategy. It's worth just touching this so people are aware. 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 won a landmark case around forced arbitration.

• 3:21:34David Rosenthal?

  Yep, went to the Supreme Court, I believe.

• 3:21:36Ben Gilbert?

  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.

• 3:21:47David Rosenthal?

  Including an antitrust lawsuit.

• 3:21:49Ben Gilbert?

  Yes.

• 3:21:49David Rosenthal?

  A big one with a startup called Particle Health.

• 3:21:52Ben Gilbert?

  That is at a really pivotal point right now. Yes, David, they are being accused of violating the Sherman Antitrust Act.

• 3:21:59David Rosenthal?

  Yep, and that suit is ongoing.

• 3:22:01Ben Gilbert?

  Yep, 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 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.

• 3:22:21David Rosenthal?

  It comes back to when we were talking about the company culture. Everything at the company is about customers.

• 3:22:26Ben Gilbert?

  Yep. All right, the next one is one I call enterprise sales on steroids. So 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 kluge 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 going to keep updating it every time there's new UI trends. 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.

• 3:23:10Ben Gilbert?

  This is enterprise sales and enterprise software generally, not in healthcare. 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 lives 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 going to do product-led growth. I'm going to 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, under HIPAA regulations, a business associate agreement typically needs to be signed by someone with the proper authority to legally

• 3:23:53Ben Gilbert?

  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 because they all need to be.

• 3:24:11David Rosenthal?

  Right. You can't have the typical, oh, a small team within a big company is going to buy this on a credit card. Nope, not going to happen.

• 3:24:19Ben Gilbert?

  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 SaaS.

• 3:24:27David Rosenthal?

  Yep.

• 3:24:28Ben Gilbert?

  And my last one, Judy is a wacky, wacky founder. 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. She is singularly focused on making epic great in her life, just like Ingvar Komrod and IKEA. She's totally obsessed with rapidly incorporating feedback from customers, just like Jeff Bezos. And she believes correctly 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.

• 3:25:11David Rosenthal?

  Yep. You foreshadowed in the intro that 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, despite Estee Lauder reaching about $100 billion market cap during the pandemic, it's only worth about 20 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 11 billion. I mean, only, quote unquote.

• 3:25:47Ben Gilbert?

  I love that you and I have a, have like an ongoing Taylor, Inc. calculator.

• 3:25:52David Rosenthal?

  Yeah, yeah, yeah. Oprah's less than that. Forbes currently thinks that Diane Hendrix 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.

• 3:26:06Ben Gilbert?

  You know what's crazy? This means that the two most successful female founders in America are both based in Wisconsin.

• 3:26:13David Rosenthal?

  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. However, ABC Supply does about $20 billion a year in revenue. I assume not at anywhere near Epic's margins.

• 3:26:28Ben Gilbert?

  Yep.

• 3:26:29David Rosenthal?

  So I don't think it is worth the, call it, I think, minimum 100 billion that I think Epic is worth.

• 3:26:34Ben Gilbert?

  Ooh, you're now up to a minimum 100 billion.

• 3:26:37David Rosenthal?

  Well, I'm going by my rubric of if somebody could acquire this company, what would they be willing to pay?

• 3:26:42Ben Gilbert?

  Yes. It's kind of funny. If someone offered you shares in Epic right now at 100 billion, would you pay it?

• 3:26:49David Rosenthal?

  Ooh, good question. If I could get profit distributions from Epic, yes, I would love to hold Epic shares for the rest of my life. I would for sure pay that.

• 3:26:58Ben Gilbert?

  Yeah, I totally agree.

• 3:27:00David Rosenthal?

  If I were banking on a liquidity event, then no.

• 3:27:04Ben Gilbert?

  Yeah.

• 3:27:05David Rosenthal?

  But me personally, yeah, I would love to hold shares.

• 3:27:08Ben Gilbert?

  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.

• 3:27:16David Rosenthal?

  I would for sure buy shares of Epic at 100 billion dollars.

• 3:27:18Ben Gilbert?

  Hmm.

• 3:27:19David Rosenthal?

  There's no way I will ever be allowed to, but I would love to.

• 3:27:22Ben Gilbert?

  That sounds like a standing offer, and this show is not investment advice.

• 3:27:27Ben Gilbert?

  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 31 years into Nvidia. Zuckerberg is 21 years into Facebook. Obviously, there's a lot running smaller companies.

• 3:27:51David Rosenthal?

  There's Berkshire Hathaway.

• 3:27:53Ben Gilbert?

  Right, that's actually the exception. Buffett's been running Berkshire for over 50 years. But in Judy's case, having 47 years to imbue the founder's personality into the organization as it's built all the way to this scale is really rare and really powerful.

• 3:28:10David Rosenthal?

  Yep. And as you've alluded to, I mean, she really is like Jensen. She's still running the company. She's still highly engaged.

• 3:28:18Ben Gilbert?

  Yep, absolutely. All right, bear and bull cases?

• 3:28:22David Rosenthal?

  Yep, let's do it.

• 3:28:23Ben Gilbert?

  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, 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 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.

• 3:29:06Ben Gilbert?

  And that is a company-changing thing, if that 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. 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.

• 3:29:46David Rosenthal?

  Interesting.

• 3:29:48Ben Gilbert?

  So at this point, I don't know how that could really displace them.

• 3:29:52David Rosenthal?

  What also sort of begs the question of, yeah, what would you do? Okay, you scrape Epic data, you're not going to build Epic.

• 3:29:59Ben Gilbert?

  Right. Epic has always been hypersensitive about locking that stuff down for good reasons for their customers, but also for their own durability reasons. And I think this is going to be a tiny crack in the armor. The fear is that someone deploys to like 70% 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 backside, you could use my own home rolled thing on the backside. But the probability of that happen is near zero.

• 3:30:32David Rosenthal?

  Yeah, not going to happen.

• 3:30:34Ben Gilbert?

  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 kind of 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.

• 3:30:57David Rosenthal?

  Yep. 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. Great, 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 these point applications that you need for one price.

• 3:31:22Ben Gilbert?

  Yep. And then the last one is paradigm shift. And this is always the bear case for any dominant company. Is AI going to be such a dominant paradigm shift that it changes the needs of health systems? Or is value-based care going to be such a paradigm shift that it changes 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. Maybe new care delivery models will make the old type of EMRs 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-

• 3:32:06David Rosenthal?

  Yeah, right. My question to you is going to be, okay, how much do you want to talk about AI here? Or how much do you want to talk about it in the bull case?

• 3:32:12Ben Gilbert?

  Yeah, it's probably more a bull case.

• 3:32:15David Rosenthal?

  All right. Well, let's do bull case.

• 3:32:16Ben Gilbert?

  Great. All right. The bull case is they've successfully expanded from EMR plus billing to all these other specialties and modules. They 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 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.

• 3:32:59David Rosenthal?

  Yep.

• 3:33:00Ben Gilbert?

  They could have an even larger business-

• 3:33:01David Rosenthal?

  I mean, prior auth seems like the first and most obvious business opportunity for them here.

• 3:33:07Ben Gilbert?

  In some ways, hospitals are kind of crappy customers because they don't generate much profit. Insurance companies are probably much better customers if you can figure out something really compelling for them.

• 3:33:16David Rosenthal?

  Yep.

• 3:33:17Ben Gilbert?

  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 anything that becomes too profitable in the healthcare system.

• 3:33:33David Rosenthal?

  Well, behind that, though, is that you as a consumer, we as consumers, feel like some of these entities are not in any way providing value to us.

• 3:33:43Ben Gilbert?

  Right. I feel like I'm getting ripped off.

• 3:33:45David Rosenthal?

  Yeah.

• 3:33:45Ben Gilbert?

  I mean, I saw a study that said 30% of spending in the healthcare, you know, in the 18% of GDP goes to waste, truly waste. And I saw another one that quantified it and said $800 billion of waste is in the system. The entire GDP of Switzerland's worth of waste exists in our healthcare system.

• 3:34:07David Rosenthal?

  Yep. Sounds about right.

• 3:34:09Ben Gilbert?

  Another interesting thing that someone brought up is they asked me how much I pay in premiums a year for health insurance for the family. And I was like, I don't know, I think somewhere in the neighborhood of 25, $30,000. And their comment back was like, in what world are you ever going to use 25 or 30,000? Don't like imagine what's on the bill because that's all made up. All the numbers are made up. The top line, the negotiated rate, what I uncovered for, they're all made up. Just imagine like dollars out of your pocket for healthcare and don't even just pick this year. Pick a 10 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 10 years and compare that against everything

• 3:34:53Ben Gilbert?

  you're paying into the system? 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. We're just not. And we can all feel it.

• 3:35:05David Rosenthal?

  Yep.

• 3:35:06Ben Gilbert?

  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 clicky clicky on nine different dropdown 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 there was an ambient listening AI scribe that could be writing down and categorizing

• 3:35:50Ben Gilbert?

  and structuring all the data that comes out of an interaction with a physician. Well, good news. It's happening.

• 3:35:57David Rosenthal?

  It is happening and it works.

• 3:36:00Ben Gilbert?

  So David, there's a few companies that are partners of Epic, right?

• 3:36:03David Rosenthal?

  Yep, that's right. So one is Microsoft and Nuance. Microsoft bought a company called Nuance a few years ago.

• 3:36:10Ben Gilbert?

  They used to do like dragon dictation?

• 3:36:12David Rosenthal?

  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 Sukie that have really good ambient AI products that plug into Epic and

• 3:36:32David Rosenthal?

  Yeah, are an AI scribe and people who use them, physicians who use them, love them. You can just focus on the patient and it scribes it all.

• 3:36:40Ben Gilbert?

  Yep. This would be a great solve to some of the doctor burnout and fatigue and too much screen time that a lot of physicians are seeing.

• 3:36:49David Rosenthal?

  Yep. That's the bull case for this. 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 build their own product of this someday. It's a big opportunity.

• 3:37:04Ben Gilbert?

  Epic is kind of 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 new breakthrough software to be used by physicians in hospital systems, Epic's kind of the one that gets to decide, are you going to reach that customer or not?

• 3:37:26David Rosenthal?

  Yep, exactly. So I think the basic bull case on ambient voice, ambient AI, is this is a great new product revenue opportunity. The mega bull case, to borrow from our IPL episode here, is one CIO was talking to me, he's like, look, I don't have high confidence that this is going to happen, but as ambient AI becomes better and better, is there a version of the future where the EHR, quote unquote, itself just kind of fades into the background and this all just becomes an AI operating system? Like, what is it primarily doing, the EHR? It's capturing data about what happened. It's recording it both for

• 3:38:08David Rosenthal?

  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, 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?

• 3:38:35Ben Gilbert?

  Hmm.

• 3:38:36David Rosenthal?

  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 just sucking it all up here.

• 3:38:51Ben Gilbert?

  I'll believe it when I see it, but it sounds nice.

• 3:38:53David Rosenthal?

  Exactly. But a real CIO of a real big hospital system made this case to me.

• 3:38:58Ben Gilbert?

  It's just so hard to believe bloat ever goes away. Getting administrative costs down is so hard. What are you going to do? Put a whole bunch of people who have good administrative jobs at hospitals out? That is going to be hard for our whole society.

• 3:39:12David Rosenthal?

  For sure. I mean, this is the question about AI, right?

• 3:39:15Ben Gilbert?

  Very right. I think it's a bull case if you're a shareholder of Epic, though.

• 3:39:18David Rosenthal?

  Right. If Epic becomes that system.

• 3:39:20Ben Gilbert?

  Yep.

• 3:39:21David Rosenthal?

  All that to say, like every industry, AI has big potential here.

• 3:39:28Ben Gilbert?

  Yep, I think that's fair. And that's on top of everything we've already talked about. No one is switching off of them. Revenue from their install base will just continue to grow. 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 because the older companies are the ones that have the resources to comply. 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 Tefka that is in the works, Epic can be the first to implement it well.

• 3:40:07Ben Gilbert?

  And so that can further entrench them as they comply correctly with new regulations and new compliance.

• 3:40:16David Rosenthal?

  Yep.

• 3:40:17Ben Gilbert?

  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.

• 3:40:31David Rosenthal?

  I would be really, really surprised if they do that.

• 3:40:33Ben Gilbert?

  I would too. I don't think they will. 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 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.

• 3:41:05David Rosenthal?

  Yep. All right. Should we do quintessence?

• 3:41:09Ben Gilbert?

  The biggest question I have is, why did it uniquely work in this field to build the entire platform and all the applications yourself? 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?

• 3:41:25David Rosenthal?

  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? But I think it's the same question here. And to me, it just smacked me in the head. This is vertical market software. This is the correct playbook to win in vertical market software. And it is very different than building horizontal market software.

• 3:41:51Ben Gilbert?

  Hmm, that's interesting.

• 3:41:53David Rosenthal?

  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 and solving their problems, the better. Whereas if you're building Slack or Salesforce.

• 3:42:14Ben Gilbert?

  Let's pick a horizontal, complex piece of software, Microsoft Office.

• 3:42:18David Rosenthal?

  Yeah, Microsoft Office, great canonical example.

• 3:42:21Ben Gilbert?

  Or Windows, actually.

• 3:42:22David Rosenthal?

  Right. You need to be really, really, really careful about 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.

• 3:42:44Ben Gilbert?

  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.

• 3:42:51David Rosenthal?

  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.

• 3:43:04Ben Gilbert?

  That's interesting.

• 3:43:05David Rosenthal?

  And you want to build exactly what they want. And you want to understand who your customer is. And your customer is the CIO and the CIO and the CFO of the hospital system.

• 3:43:14Ben Gilbert?

  Right. I now agree with you. My answer, it probably just layers on top of why it's healthcare specific, not just vertical specific. 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. So the right thing is one big integrated approach, rather than any risk at all of discontinuity between different applications. So that's one. 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 crushed

• 3:43:59Ben Gilbert?

  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, even if it's going to take 47 years to build the dominant company.

• 3:44:14David Rosenthal?

  Yep.

• 3:44:15Ben Gilbert?

  You should have to write a lot of software and it all has to work together really well.

• 3:44:19David Rosenthal?

  Yep. And 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 vertical market software companies on the show before.

• 3:44:33Ben Gilbert?

  No, I don't think we have either.

• 3:44:35David Rosenthal?

  We sort of have, and I was thinking about, why is that? And I'm like, oh, well, that makes sense. Generally, vertical market software companies are not going to get that big. You're limited by your vertical market. This is a rare case where because the market they operate in is so big, the American healthcare market.

• 3:44:53Ben Gilbert?

  And it's something we all use.

• 3:44:54David Rosenthal?

  And it's something we all use, and it's something that is so important, you actually can get a really valuable company built, serving just one end 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

• 3:45:17Ben Gilbert?

  Oh, maybe.

• 3:45:18David Rosenthal?

  plausibly maybe be as valuable. We gotta do a Bloomberg episode someday, but that'll be our second vertical market software company that we cover. But then I was Googling and I was thinking about it and I was like, well, people talk about Viva Systems.

• 3:45:30Ben Gilbert?

  Yeah, Viva, which is also healthcare.

• 3:45:33David Rosenthal?

  They're probably the largest public company, but I was like, yep, they're definitely not worth as much as Epic and they're also operating in healthcare.

• 3:45:39Ben Gilbert?

  They're not worth as much as Epic?

• 3:45:41David Rosenthal?

  No, it's about a $20 billion market cap company.

• 3:45:43Ben Gilbert?

  Oh, wow. Yeah, I don't think so.

• 3:45:45David Rosenthal?

  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, fan favorite, friend of ours.

• 3:45:56Ben Gilbert?

  But they bundle together a bunch of different verticals.

• 3:45:59David Rosenthal?

  Exactly. They're a roll up. And I think some of their biggest companies are vertical market healthcare and healthcare IT companies within Constellation.

• 3:46:10Ben Gilbert?

  Yep.

• 3:46:11David Rosenthal?

  Mark Leonard, I'm sure, is a big Epic fan, or maybe not fan, because he probably operates some competitors.

• 3:46:16Ben Gilbert?

  Yeah.

• 3:46:17David Rosenthal?

  I'm sure he has respect for Judy.

• 3:46:19Ben Gilbert?

  I am sure. I mean, 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?

• 3:46:29David Rosenthal?

  Let's do carve outs.

• 3:46:30Ben Gilbert?

  Let's do something fun.

• 3:46:31David Rosenthal?

  All right. I've got two. I've got a regular carve out, a today carve out, and then I have a preemptive carve out.

• 3:46:37Ben Gilbert?

  Great.

• 3:46:38David Rosenthal?

  My today carve out is a friend of mine turned me on to a very, very popular OG YouTube video that I had never seen. Ken Block, the rally car driver, did a YouTube video back in 2012 of San Francisco. They shut down the streets in San Francisco.

• 3:46:59Ben Gilbert?

  Whoa.

• 3:47:00David Rosenthal?

  And he did this incredible rally car 10 minute long video through San Francisco. It's like watching the old movie Bullet with Steve McQueen and the iconic.

• 3:47:09Ben Gilbert?

  Yeah, yeah.

• 3:47:09David Rosenthal?

  But it's like that with a 600 horsepower rally car driven by one of the best in the world. I can't believe I'd never seen this before. And it's like, I sit, I'm like, oh, I know those blocks. I live there, you know?

• 3:47:20Ben Gilbert?

  Wow.

• 3:47:21David Rosenthal?

  So cool. Amazing video. And he sadly died recently in an accident, which is why it was kind of 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 DC Shoes, you know, like the skateboarding shoes. He was one of the two co-founders. 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. Super awesome. I can't believe I'd never seen it before. So we'll link to it in the show notes.

• 3:47:53Ben Gilbert?

  Huh. I don't know anything you just said, so I gotta go look it up. Cause none of that made any sense to me.

• 3:47:58David Rosenthal?

  Right. It's a short enough, very impressive video. Very cool to watch.

• 3:48:02Ben Gilbert?

  Sweet.

• 3:48:03David Rosenthal?

  That's my main carve out. And then my preemptive carve out is I am so excited for the Switch 2.

• 3:48:09Ben Gilbert?

  Ah, if it ships, if they start taking pre-orders again.

• 3:48:12David Rosenthal?

  Ah, yeah.

• 3:48:13Ben Gilbert?

  Maybe by the time this comes out.

• 3:48:14David Rosenthal?

  I'm not worried about it hitting the ship date. I think they gotta sort out the US price 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. Full backwards compatibility, maintaining the online accounts.

• 3:48:34Ben Gilbert?

  Hmm.

• 3:48:35David Rosenthal?

  System looks incredible. Shipping with the 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 am just so excited.

• 3:48:55Ben Gilbert?

  Sweet. Oh, that'll be so fun. All right. Mine.

• 3:49:00David Rosenthal?

  Go for it.

• 3:49:01Ben Gilbert?

  I just rewatched the movie Knives Out.

• 3:49:03David Rosenthal?

  Oh, yeah. Good one. Daniel Craig.

• 3:49:05Ben Gilbert?

  Extremely fun. So good. It's just pure popcorn. It's visually stunning. Everyone loves a whodunit. Daniel Craig's awesome. The whole cast is great. So if you haven't seen that, you'll really enjoy movie night. My second one is I must be the last person to discover this album. I have been listening to the album Brat by Charli XCX. It is awesome.

• 3:49:28David Rosenthal?

  Well, you're definitely not the last person because don't worry, Ben. I will always be behind you in discovering music.

• 3:49:33Ben Gilbert?

  I just got to say like, I'm the oldest malest. And also the fact that this came out 2024. Everything about this is like a ridiculous carve out. But I was watching Charli XCX 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 are currently sitting in in front of your computer.

• 3:49:57David Rosenthal?

  I love it.

• 3:49:57Ben Gilbert?

  And then my last one is Odeza just released an album called Music to Refine To. And it is remixes from Severance. It's just good. Leave it on lofi in the background while you're doing work. I love Odeza. I love Severance. It's my world colliding.

• 3:50:14David Rosenthal?

  I'm grateful that all of us have you to keep us up to date on music here. My music is frozen in amber at like 2006.

• 3:50:22Ben Gilbert?

  If you want to feel like you're at like a much cooler party than you've been invited to in 20 years, listen to Brat.

• 3:50:26David Rosenthal?

  Great.

• 3:50:30Ben Gilbert?

  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, Arvind Navarathnam at Worldly Partners for his great write up. Linked in the show notes, Brendan Keeler, who writes the Substack Health API Guy. He's awesome. Brian Lawrence is the founder of Oak Cliff Capital and was a great thought partner in this episode. Lacan Wang, a healthcare technology investor and managing partner of JSL Health Capital. Scott Gaines, a longtime IT executive from Highland and Cover My Meds. Patrick Wingo, the head of research at Eleon, someone who has studied the health IT space very diligently and formerly at Palantir.

• 3:51:15Ben Gilbert?

  John Bertrand, the CEO of Digital Diagnostics, an advisor at 8VC 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 and was inspired to become an Epic shareholder himself. David, I know you've got a few folks as well.

• 3:51:40David Rosenthal?

  Yeah, a whole number of health system CIOs who I spoke with. Huge thank you to all of you. 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 doctors at big Epic sites. So Molly Kantor, who's a doctor here at UCSF in San Francisco, and Karine Davila, who is a doctor at MGH, at Harvard MGH in Boston.

• 3:52:09Ben Gilbert?

  Nice.

• 3:52:10David Rosenthal?

  Got to speak with both of them about the physician experience of using Epic. And then finally, we have a number of people to thank at Epic itself, since there really isn't any 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.

• 3:52:30Ben Gilbert?

  And Yes.

• 3:52:31David Rosenthal?

  she responded, and we did.

• 3:52:33Ben Gilbert?

  Thank you, Judy, for spending time with us and helping us understand all the missing details we had on Epic's company history. And of course, also to Carl Dvorak, Sumit Rana, and Lee Levon, also from Epic, who spent time with us and walked us through the history.

• 3:52:49David Rosenthal?

  Yeah, we really, really appreciate it.

• 3:52:51Ben Gilbert?

  Yep. 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. 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 acquired.fm/slash/Slack. And with that, listeners, we'll see you next time.

• 3:53:19David Rosenthal?

  We'll see you next time.

• 3:53:23Speaker 02

  Is it you, is it you, is it you? Who got the truth now? Huh?