Quality Systems Inc. has gone from darling to diversification, and the shift in gears looks to be giving the Irvine-based medical software maker and its shares a shot in the arm.
Its core business has long been the software behind electronic medical records that dentists and doctors use to manage their practices.
Lately it has developed a much broader product base to pick up some slack as the adoption of electronic medical records brings maturity to the market’s segment.
“We started to see [that] the adoption curve for medical records, like all curves, has a beginning, a middle and an end,” said Quality Chief Executive Steven Plochocki. “As our sector was starting to go down the back side of the bell curve, where adoption was starting to hit the 60% to 70% mark, we knew that we needed to restructure operationally and even in our research and development.”
Plochocki, who joined Quality’s board in 2004 and became chief executive in 2008, said the company has now “transitioned into 32 different product offerings.”
The new products have helped stop an unusual slide for Quality shares, which have risen 10% since the start of the year, with a recent market value of just over $1 billion.
Heyday, Decline
Quality was a steady darling of Wall Street in the days before federal healthcare reform, consistently among the hottest public companies based in OC in terms of growth and market value. Its shares rose 738% between 2000 and 2009.
The run came to a halt toward the end of the decade and the decline continued into last year, when shares dipped 24%.
Much of the decline came as expected benefits from healthcare reform—which mandated an eventual shift to electronic medical records—proved slow to materialize.
Quality then decided to restructure with an emphasis on development and sales of new products to complement and supplement its electronic medical records business.
The company, which had $444.7 million in revenue in the 12 months ended March 31, has spent recent months making sure its lengthy list of clients gets familiar with its new product lineup.
Plochocki pointed out one key new product: revenue cycle management software for coding and documenting health insurance claims to help doctors manage their payments and cash flow.
“It has the best tailwinds of all our product lines,” he said.
The revenue cycle management product accounted for $20.4 million, or 16% of Quality’s $123.4 million revenue in the three months ended Dec. 31, Plochocki said.
Reimbursement Codes
He credits upcoming regulations that will create more billing codes for Medicare, the federal insurance program for elderly people, as a spur to sales.
Medicare will have about 74,000 reimbursement codes by fall compared to about 20,000 today, Plochocki said.
“That will rise to 140,000 reimbursement codes by 2017,” he said.
The company’s diversification thrust also takes in population health software, which assists hospitals and other care providers in taking care of groups of people with common conditions, such as diabetics, in an approach that’s seen as central to healthcare reform.
Quality also has developed software products for patient management; electronic data interface, which allows the exchange of data via electronic communications; and interoperability, where different types of technology receive and exchange information.
“All of these pieces are vital for physicians to be able to manage patients in low-cost settings so that they can become successful under the new payment model,” Plochocki said. “We are now starting to sell them very quickly and rapidly into our large installed base.”
‘Capitation’
Plochocki referred to the growth of alternative payment models under federal healthcare reform nationwide, such as “capitation,” which occurs when insurance providers give doctors set amounts of money in a period of time to take care of their patients.
California adopted capitation in the 1970s and 1980s through HMOs.
Plochocki said federal agencies are hastening moves toward capitation.
“Medicare issued a statement the other day that they want to have at least 90% of Medicare by 2018 totally under a value-based [payment] model,” he said.
Quality got in position for such shifts in part with a boost to its R&D spending, which rose 34% to $41.5 million in the 12 months ended March 31. The R&D budget equated to about 9% of its revenue, compared with 7% the year prior.
Its goal in making the change was “helping physicians move from the fee-for-service world that we [operated] in into the brand-new, value-based modeling world where they’re going to be paid basically a capitated rate, and they’re going to have to manage patients very diligently,” Plochocki said.
‘Resumption of Growth’
“They necessarily had to diversify,” said Gene Mannheimer, a longtime Quality observer and senior research analyst at New York-based Topeka Capital Markets.
And it has worked, bringing “a resumption of growth” in recent quarters that “is really driven by newer areas of business,” Mannheimer said.
One example is Quality’s 2013 acquisition of Costa Mesa-based Mirth Corp., which makes technology that helps healthcare providers and institutions such as hospitals achieve interoperability.
“We believe that an expanding [revenue cycle management] pipeline, new product launches and strategic partnerships … will drive growth going forward,” Chicago-based Zacks Investors Service said in a research note issued after Quality released its financial results for the three months ended Dec. 31.
So far, so good—Quality swung to a $6.7 million profit in the quarter from a $12.6 million loss in the three months ended in December 2013. Its revenue grew 13% over the same period a year earlier.
