(originally published 11/7/2006 on zachmortensen.net)

No doubt you’ve read the news: A 25-year-old Kaiser employee named Justen Deal has blown the whistle on the HMO’s multi-billion-dollar implementation of HealthConnect, Kaiser’s in-house name for the product suite provided by Epic Systems Corporation of Verona, WI. There’s no need to rehash the story here, but I would be remiss if I did not take this opportunity to point out how these allegations relate to the economics of healthcare IT and software in general.

To sum up: The problem at Kaiser seems to be one of taking a system that had been quite successful on a smaller scale with fewer requirements and pushing it well beyond its limits. Kaiser CEO George Halvorson praised outgoing CIO J. Cliff Dodd — the first but probably not the last executive casualty of these revelations — for making HealthConnect “the largest civilian automated medical record system in the country.” What he didn’t say is that HealthConnect is at least one order of magnitude larger than the next-largest Epic implementation. How could it be otherwise considering that few organizations can rival Kaiser’s size? There are only so many organizations that have 180,000+ employees to begin with, and only one of them is in the business of healthcare as far as I know.

Halvorson went on to say:

“We need our systems capability and infrastructure to perform at levels that will let us compete successfully with health care providers, health care systems and mega health plans that are investing heavily in their own systems capabilities.”

This comment is a tacit admission that Kaiser will lose any competitive advantage it may currently enjoy if it cannot scale its systems to fit the size of its organization. Kaiser’s competitors are moving ahead with their own systems capabilities, but Kaiser is hamstrung by the difficulty of scaling its systems to fit its enormous size. It’s quite a bleak picture, but it gets worse when you consider the underlying economics of software integration on a such a large scale.

As I’ve discussed previously, the cost of developing software is an exponential function of the software’s size. The intrinsic value of integrating software is a function that grows much more slowly than does the cost. The cost of developing a tightly-integrated software system is bound to eclipse its value at some point, and if any healthcare organization is approaching or has already reached that crossover, it’s Kaiser. The fact that Deal reports Kaiser to be spending $1.5 billion per year on HealthConnect and other IT projects gives us an idea of just how badly the cost of their largest-integrated-system-in-the-country has scaled.

Smaller, more-specialized companies that compete with Kaiser therefore enjoy a competitive advantage because their software systems are more functional and more cost-effective. Since these other companies don’t have to achieve the same level of integration across functions as Kaiser, they can enjoy greater functionality with fewer tradeoffs, thereby making them more competitive. What’s more, the reduced size of these specialized software systems means Kaiser’s competitors pay relatively fewer dollars per unit of functionality.

Assuming, as Halvorson says, that well-performing systems are essential to Kaiser’s ability to compete, the fact that Kaiser’s competitors are becoming absolutely more competitive by investing relatively less money means that eventually it will become impossible for Kaiser to compete no matter how much money it sinks into its systems.

Perhaps we’ve entered an age in which the size of any competitive business is limited by its ability to scale its software systems. Businesses whose size precludes them from acquiring or building well-performing software systems may find that the only way they can compete is to shrink or split into reasonably-specialized businesses that are small enough to slide back under the software cost-value crossover point.

Could a presently-unfolding failure of HealthConnect ultimately force Kaiser to split itself up into more-specialized entities in order to stay alive? Given what George Halvorson has said about the importance of the project and what we know about how software behaves as it becomes increasingly complex, it’s reasonable to conclude that if an IT project failure can bring down a healthcare organization, then Kaiser, the largest and most complex of all such organizations, is certainly most at risk.