Epic Systems: The Untold Story of Healthcare's Most Powerful Company

“Kaiser came to both companies and said, hey, we'd really warrant 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. Apparently, Cerner did offer them 10% of the company for this deal. 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.”— Ben Gilbert

Kaiser Deal

Strategy & Decision Making · Business & Entrepreneurship

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Refused equity for largest deal ever

“She goes to the bank and she gets a bank loan for $70,000 to finance and buy the data General Eclipse minicomputer. She rounds up a bunch of friends, family, and other people to invest money in the new company. Together, they all put in about $70,000. They value the company at $70,000, so pre-money valuation of $70,000, post money of $140,000. And those were the only primary investors ever in Epic Systems.”— David Rosenthal

Company Formation

Business & Entrepreneurship · Strategy & Decision Making

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$70K debt, $70K equity, never raised again

“Every single customer has their own technical specialist teams for every single product that they use. If you're a hospital system, you have your own technical specialist team for your EpicCare EMR, for MyChart, for Resolute, for anything you use, you have your own dedicated team. Then on top of that, every customer has their own dedicated BFF who is a single person within Epic, and their sole job is to make sure that you as a customer are successful.”— David Rosenthal

Customer Success Model

Leadership & Management · Business & Entrepreneurship

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BFF model: grade customers, not just serve

“Epic has a list of 10 commandments. They have them posted in every bathroom and in every break room across the entire campus. The 10 commandments are: (1) Do not go public, (2) Do not acquire or be acquired, (3) Software must work, (4) Reality equals expectations, (5) Keep commitments even the unspoken ones, (6) Focus on competency do not tolerate mediocrity, (7) Have standards be fair to all, (8) Have courage what you put up with is what you stand for, (9) Teach philosophy and culture, (10) Be...”— David Rosenthal

Culture

Leadership & Management · Business & Entrepreneurship

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10 commandments in every bathroom

“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. In Paul Graham's legendary 2012 essay Startups = Growth, he's talking about how the whole thing you need to do as a startup is focus on next week's growth. He says: 'In theory this sort of hill-climbing could get a startup into trouble. They could end up on a local maximum. But in practice that never happens.”— Ben Gilbert

Analysis

Strategy & Decision Making · Business & Entrepreneurship

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Judy and Paul Graham: same insight, different contexts

“The Epic team is doing their planning and getting ready for the Kaiser pitch. The team had decided that the way they were going to handle the transaction flow question was to do a theoretical presentation. Carl Dvorak flew into 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 throughout the day in this system and how our system will process it.”— David Rosenthal

Kaiser Deal

Strategy & Decision Making · Operations & Execution

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All-nighter Excel model won Kaiser deal

“Market penetration of electronic healthcare records went from 9% of hospitals in 2009 to 95% by 2014. It's insane. What other markets have you ever heard of that saw usage go from almost nobody to almost everybody in five years? Epic, by being the high price, high value vendor, and the one that you could count on working with the lowest risk, were going to win in this situation. It basically rewards the most reliable software, not necessarily the most innovative software.”— Ben Gilbert

HITECH Act

Strategy & Decision Making · Economics & Markets

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9% to 95% in 5 years, Epic wins on reliability

“Judy goes out, spends three days with Neil and gets a total crash course in setting up and running a company. Neil ran Meditech 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. Meditech recruited from the universities there in Boston.”— David Rosenthal

Company Formation

Leadership & Management · Operations & Execution

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Company-building as software engineering

“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. Her quote on this is: The sun was shining, I was dis-attentive, I was just sitting there, and suddenly it all came to me. Here's how you build it. The integrated system. I remember running to the kitchen, grabbing a pad of paper, and just writing code, code, code, code. That code became Chronicles.”— Judith Faulkner

The Breakthrough

Creativity & Innovation · Technology & Engineering

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Chronicles epiphany: single database insight

“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.”— Ben Gilbert

Introduction

Strategy & Decision Making · Business & Entrepreneurship

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No sales, no M&A, customer selectivity

“By the end of the company's first decade of existence, at the end of 1988, they only have 24 customers. It's only doing $1.5 million in revenue, and they've got a handful of employees. That's the crazy thing. Unlike Microsoft, this was a small business from the get-go. A great software business for a local entrepreneur in Madison, Wisconsin, I think is how you would describe that.”— David Rosenthal

Slow Early Growth

Strategy & Decision Making · Business & Entrepreneurship

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10 years: $1.5M revenue, patient capital

“In 1992, they launch EpicCare, which I believe is the first graphical user interface, like Windows-based EMR application in the entire industry. This is not something that your average doctor or nurse or medical assistant is going to use on a Unix terminal. Now here in the 90s with EpicCare, 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 in their EMR.”— Ben Gilbert

Product Evolution

Technology & Engineering · Creativity & Innovation

DUR_CONTEXTUAL

First GUI EMR, PC-era timing perfect

“On the developer side, there's a super prescriptive software methodology that they use to minimize bugs. You go through this intensive training for six months when you join, and then when you start programming, the whole system is designed to run minimizing the number of hours between when a line of code is written and then when it is tested, 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.”— Ben Gilbert

Culture

Technology & Engineering · Operations & Execution

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Minimize time from code to test to fix

“In 2009 when the bill is passed, there is $27 billion available in direct incentive payments to hospitals that implemented electronic medical records. If you include broader incentives, 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 paying you money but then paying them even more for actually using your software.”— Ben Gilbert

HITECH Act

Economics & Markets · History & Geopolitics

DUR_CONTEXTUAL

$36B government subsidy pulled forward future

“They have the majority of the US' major hospital systems using their software, and of their over 600 customers, they have never lost a single one. That is the craziest thing to me about this company is at 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.”— David Rosenthal

Introduction

Operations & Execution · Strategy & Decision Making

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47 years, zero churn, one 6-month exception

“Right around the same time, Epic also launches MyChart. If you had asked me before doing research for this episode, when would I guess that MyChart launched, this is an internet-based consumer-facing medical records access interaction platform on the web in a highly regulated HIPAA-regulated industry. I would've guessed, I don't know, 2010 maybe? Mid-2000s at the earliest. No, Epic launched this in the year 2000.”— David Rosenthal

Product Evolution

Creativity & Innovation · Technology & Engineering

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MyChart 2000: decade ahead of market

“Forbes has a list of the most wealthy self-made women. I think their estimate is silly low. In 2021, Forbes estimates her net worth to be $7.6 billion implying the company is worth $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 a 30% EBITDA margin at Epic, that would give you a number of $51 billion.”— Ben Gilbert

Valuation Analysis

Economics & Markets · Business & Entrepreneurship

DUR_CONTEXTUAL

$100B valuation, most successful female founder

“Judy hears this problem and she's just like, my future is in math. In 1961, Judy graduates high school. She goes to Dickinson College to major in math. While she's there, she gets a summer job at the University of Rochester in their particle physics lab. They give her a book, a manual on Fortran, Judy teaches herself Fortan in a week, and becomes one of the best programmers in the lab.”— David Rosenthal

Early Life

Creativity & Innovation · Technology & Engineering

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Taught self Fortran in one week

“The story goes that her programming was so good and she was so efficient at writing these applications 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.”— David Rosenthal

University of Wisconsin

Economics & Markets · Technology & Engineering

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Too efficient for hourly pay model

“Judy's mom won and shared the Nobel Peace Prize in 1985. Del Greenfield became the executive director of Oregon Physicians for Social Responsibility, which in partnership with a broader international group called Physicians for the Prevention of Nuclear War, wins the Nobel Peace Prize.”— David Rosenthal

Early Life

Culture & Society · History & Geopolitics

DUR_CONTEXTUAL

Mother won Nobel Peace Prize 1985