Athenahealth launches medical-record guarantee

CHICAGO (Reuters) - Athenahealth Inc ATHN.O, which provides business services to doctors' offices, will offer a guarantee to lure small U.S. physician practices as they convert to electronic medical records.

If users of the Athenahealth system cannot collect their Medicare bonus incentive for going paperless, then the company will not charge for its services for six months.

The government’s economic stimulus package included $19 billion in incentive payments for hospitals and physicians to convert to electronic medical records.

Athenahealth, which went public in 2007 and has a market value of $1.3 billion, focuses on small physician practices. About three-quarters of all U.S. doctors practice in offices with 10 or fewer physicians, and a large number of these offices are not buying the technology to implement electronic medical records.

Athenahealth is telling its clients that if they are unable to collect government incentives -- up to $44,000 per eligible physician -- then the company will stop billing for its services for six months, or until incentives are received.

Athenahealth Chief Executive Jonathan Bush said he hopes the guarantee can push Athenahealth’s current 2 percent share of the physician market to 3 percent.

The company will account for a guarantee as “warranty expense” in its financial statements. When a physician signs on, the company will recognize an expense representing up to six months of service fees. This will also be recognized as a liability on the balance sheet, said Athenahealth Chief Financial Officer Carl Byers.

“The number of (doctors) who sign up for guarantees will drive the ultimate magnitude of this expense and liability. Our hope is, of course, that this will be a very large number,” he said.

Once the guarantee is fulfilled and the company no long has the liability, it will be reversed when the doctor receives the government incentive. The company will then recognize a related gain.

It is impossible to know the total cost of the program or the potential risk since it cannot be known how many doctors will sign up.

“It’s less than we spend on marketing every year,” Bush said. “I’d rather lose money standing behind a guarantee than buying a million banner ads with the same money. I’m sick of banner ads and I bet doctors are really sick of them.”

“Our biggest obstacle as a company ... is that 88 percent of doctors have no idea we exist,” he added, citing a recent survey by the company.

Other participants in the field of electronic medical records include Cerner Corp CERN.O, McKesson Corp MCK.N, Eclipsys Corp ECLP.O, Allscripts Misys Healthcare Solutions Inc MDRX.O and Quality Systems Inc QSII.O.

While Athenahealth’s bill-collecting and electronic medical records services are Web-based, its rivals sell software to manage electronic records and other services,.

“I have announced every year at company meetings that this is the year of the tipping point. This is when we stop growing at a plain old linear 30, 40, 50 percent a year and we start to double and triple every year. And every year it doesn’t happen,” Bush said in an interview.

“Malcolm Gladwell’s ‘Tipping Point’ says you need 3 percent to begin to tip ... and so my thought is if we get to 3 percent we can start to grow exponentially. Maybe this guarantee gets us that half percent we need,” he said. “We think this (program) makes good golf course conversation.”

Analyst Wes Rishel of Gartner Research said the risk of offering the guarantee is the six months in service revenue per physician and cash flow disruptions associated with it.

“The downside risk is that it could be enough to create kinks in earnings that might cause a lower valuation for the stock for a while, but it’s not going to take the company down because they’re pretty well capitalized already,” Rishel said.

The real risk, he said, is if a large number of physicians is not successful in collecting incentive payments.

“There’s more of a reputation risk than cash risk” he said. “The upside is that this could work really well for them.”

Reporting by Debra Sherman; editing by John Wallace