Nuance Sees Opportunity in Health IT Reform, New Frontiers With iPhone Software

3/29/10

Count Nuance Communications among the Massachusetts-based providers of software for doctors that could benefit hugely from healthcare reforms and technology initiatives emerging from Washington.

Healthcare customers are the biggest market for the Burlington, MA-based company’s (NASDAQ:NUAN) speech-recognition and phone-based products, accounting for about 40 percent of the firm’s $950.4 million in revenue for fiscal 2009. To grow and protect its top market, the company is advocating for the government to adopt standards that would make its technology a key tool that doctors will need to use when they deal with electronic patient records and order diagnostic imaging tests like CT scans.

Nuance’s foothold in the healthcare arena might be fueling rumors that it’s a potential acquisition target, according to a recent Bloomberg News report. For example, the company says there are more than 100,000 physicians who use the company’s speech-recognition software that enables them to dictate patient information directly into electronic health records, including records systems from most major providers such as Allscripts, eClinicalWorks, and General Electric, according to Nuance. Brent Thill, an analyst for UBS, told Bloomberg this month that Nuance is a good takeover target and the healthcare market will become more important as the government streamlines the healthcare system.

Indeed, the federal stimulus package passed in February 2009 allocated $19 billion in incentives to drive adoption of electronic health records systems, which are expected to reduce medical errors and eliminate some wasteful spending. While the government works out standards and regulations for doctors’ use of the subsidized EHRs, Nuance, not surprisingly, has been advocating for guidelines that would make its speech-recognition software an important component of the systems.

Specifically, Nuance has said it wants standards that make comprehensive physician narratives—like those its speech-recognition software is designed to capture for electronic health records—a requirement for doctors’ to qualify for the government incentives. There were no standards for speech-recognition in proposed rules that require healthcare providers to demonstrate “meaningful use” of the records systems before they can get incentive payments. The “meaningful use” criteria haven’t yet been finalized. But the company is hoping that the final definition, expected in June, addresses the need for detailed physician narratives in electronic health records.

“If you look at the meaningful use requirements, one set of them is that healthcare providers have to report active problems with medications, allergies, et cetera on every patient,” says Peter Durlach, a senior vice president in the healthcare division of Nuance. While the use standards don’t call for speech-recognition specifically, he says that software like Nuance’s that helps providers put this required patient information into EHRs enables doctors to be compliant with the federal guidelines.

The company could get an even bigger boost in demand for its healthcare software if the government adopts certain reforms to regulate how physicians order imaging exams to reduce wasteful procedures, Durlach said. One of the company’s software products helps radiologists determine whether certain imaging tests such as CT scans are appropriate for specific patients before they are ordered. Radiologists are already major adopters of the company’s speech recognition software, he said.

Nuance—which also provides its speech software for law firms, call centers, and customers in other industries—has fueled its rapid growth in the healthcare market with a series of major acquisitions in recent years. Its $357 million takeover of Stratford, CT-based Dictaphone in February 2006, for example, provided Nuance with a customer base of about 4,000 hospitals and medical groups using its speech software. Nuance’s later $363 million purchase of Needham, MA-based eScription gave the company another big moneymaker in eScription’s software for automating medical transcription.

By integrating those technologies, Nuance has grown into the dominant player in the fast-growing healthcare speech-recognition software business, which was worth an estimated $170 million in 2008 and expected to double in size by 2013, according to Datamonitor, a market research firm. In 2008, the company also scooped up Royal Philips Electronics’s speech recognition unit for $96.1 million, primarily to strengthen its presence in the healthcare segment of the speech recognition market in Western Europe. That deal actually raised some question about whether Nuance is getting too big, as it touched off a U.S. Department of Justice antitrust inquiry last year. (The investigation ended in December after justice officials found that Nuance had enough competition, according to the company.) Perhaps the company’s biggest competitor in medical transcription and speech-recognition technology is Mount Laurel, NJ-based MediQuist (NASDAQ:MEDQ), although that company actually licenses some of the speech technology it uses from Nuance.

Later this year Nuance plans to begin providing doctors with the ability to use their iPhones to dictate patient information into electronic health records, among other capabilities. The company is also advancing the use of “natural language processing” technology, which automatically organizes information culled from people’s natural speaking, to make it easier for doctors to update electronic health records without having to manually add data to various parts of the records, Durlach said.

We’ll keep an eye on Nuance to see whether it continues to buy other medical software companies or becomes an acquisition target itself.

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