Oracle's $28 Billion Cerner Health Tech Bet Sputters With Lost Customers and Slipping Sales

(Bloomberg) -- When Oracle Corp. spent $28 billion two years ago to acquire electronic-records company Cerner Corp., it promised a revolution in health care technology.

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Co-founder and Chairman Larry Ellison declared the deal would help fix many of the labyrinthine industry’s ills by modernizing notoriously dated systems, and would create a major growth engine for his company’s earnings as well. Oracle “is now going to be at the center of the next generation of health care,” Ellison said in December 2022.

Instead, interviews with more than 30 current and former employees and customers show the software maker has lost at least a dozen of Cerner’s large clients. Bold product ideas, these people say, have also taken a backseat to the unglamorous work of upgrading legacy systems, with Oracle engineers surprised by the amount of effort required to implement changes and move customers to the cloud.

Previously unreported financial documents seen by Bloomberg show that sales from the division including Cerner, now branded as Oracle Health, are expected to decline in the current fiscal year and stay flat the following year as a multibillion-dollar federal contract is on hold. Thousands of workers have been cut in an effort to boost profit, and Oracle is saddled with billions of dollars in debt from the deal.

Ellison’s prediction that Cerner would help Oracle woo massive health-industry customers has so far failed to become reality in the US, while gaining some momentum overseas. Existing clients say they have seen little improvement in the software, which has long been plagued by technical glitches such as difficult integration between products.

“We’ve heard very, very loudly that our customers need us to address the present — they have issues today,” Oracle’s Marc Levy said during a November webinar for clients, held to respond to complaints and demonstrate progress.

Health care has long been Big Technology’s great white whale. Apple Inc., Amazon.com Inc. and Google parent Alphabet Inc. — all innovators that have been unquestionably dominant in their respective main businesses — have each spent billions trying to disrupt the industry, only to scale back their ambitions when faced with the complexity and power of the established US medical system.

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“It’s unlike other sectors because of regulations and HIPAA compliance,” said Jackson Ader, an analyst at KeyBanc, referring to the federal health-privacy law. Amazon built an app for virtual doctors visits and a bracelet for measuring body fat. Google launched initiatives like glucose-monitoring contact lenses and a platform for early heart-failure detection. Apple explored opening consumer clinics with the same sleek design of its retail stores. All ended with underwhelming results. Even Ellison’s cancer-focused software startup, Project Ronin, was recently shut down after struggling to find customers.

While Oracle’s long-term vision for modernizing health information technology is compelling, and has the potential to positively affect patient care, the company has faced significant setbacks — much like its technology peers. Oracle didn’t respond to requests for comment on the Cerner unit’s performance.

Cerner’s Slow Descent

Cerner, Oracle’s biggest acquisition ever, fit neatly into Ellison’s longtime vision for improving medical treatment. The billionaire, the world’s 10th-richest person, has funded longevity research, health-focused resorts and cancer detection and treatment centers. His company considered buying Cerner as far back as 2003. Ellison is so focused on health care that he recently said Oracle would move its global headquarters to Nashville, a center for the industry.

When the purchase was announced, Ellison said it would be “Oracle’s corporate mission” to give medical professionals the data to make better treatment decisions. The deal, he said, was “about saving lives.”

Founded in 1979, Cerner is one of the dominant makers of software for clinical tasks like note-taking during patient visits or writing prescriptions. These applications make up what is known as an EHR, or electronic health records system. For hospitals, they’re a backbone of technology and a massive expense. For example, Cerner’s contract with Chicago’s network of public hospitals is worth almost $400 million over a decade, according to documents obtained through a public records request.

Sales at the Kansas City, Missouri-based company soared in the 2010s, especially after a federal law required hospitals across the country to digitize patient records. This expansion started to wane around the time founder and longtime Chief Executive Officer Neal Patterson died of cancer in 2017.

Revenue growth and product updates slowed in this period while more customers turned to Epic Systems, the Wisconsin-based company that has long been Cerner’s chief antagonist. Epic is led by founder Judy Faulkner, who is one of the world’s richest self-made women, and is known for its quirky corporate campus.

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To many Cerner employees, Oracle’s takeover looked like a solution to the malaise of the post-Patterson years. The Silicon Valley stalwart promised to combine its database and cloud software with Cerner’s clinical-focused applications to create a full suite of tools to win customers and provide “the future of health care.”

But for now, customer departures have accelerated — at least a dozen major clients inked deals to replace Oracle Health software in 2023, according to people familiar with the deals and documents seen by Bloomberg. The previous year, the business lost clients with a combined capacity of 4,658 patients, according to KLAS Research, an industry analyst. Common complaints are aimed at Cerner’s application for tracking clinical revenue, the way its tools are integrated together, technical glitches and uncertainty or worsened service associated with the Oracle takeover, said Coray Tate, a research director at KLAS. Epic gained market share in this period, according to the analyst.

Boston Children’s Hospital is one such customer — it switched last year to Epic in large part because the move would make it easier to exchange information with neighboring hospitals that typically use Epic, said Chief Information Officer Heather Nelson. The decision was already in motion before the Oracle takeover, but the uncertainty around the acquisition “didn’t help,” she said.

Northwell Health, a network of New York hospitals, also recently made the switch — IT chief Sophy Lu says her organization’s decision was primarily because Epic had a better-integrated set of tools.

It may be difficult to win back any former customers. Replacing an EHR system is a massive undertaking that involves retraining nurses, doctors and billing staff. Nelson of Boston Children’s says hospitals will typically use a system for as long as 15 years before even thinking about switching to something different.

Epic, in particular, likes to brag about retention. One of the most popular presentation slides at the company is blank and titled “Customers Which Have Switched From Epic to Cerner,” said Eric Helsher, Epic’s vice president of client success. When a health tech vendor is acquired by another company, he said, user satisfaction often declines and the culture changes.

“We’re aware of the narratives some of our competitors are promoting,” Oracle Executive Vice President Mike Sicilia said during the November webinar with discontented customers. “We believe that our actions, our solutions and our continuous engagement with you will speak louder than any narrative.” For its part, Oracle has ribbed Epic for being too expensive and running on a database it calls archaic and insecure.

Yet for the time being, the competition seems to be weighing on Oracle. Cerner’s revenue is expected to decline 5% to about $5.6 billion in the fiscal year ending in May and remain flat the following year, according to documents seen by Bloomberg. That figure excludes pre-Cerner Oracle Health businesses like its life sciences unit.

Contrast that performance with the expectation in late 2021 when Chief Executive Officer Safra Catz said the acquisition would “be a huge additional revenue growth engine for years to come.” Still, executives have said the division will return to growth and have attributed the lackluster performance to transitioning customer contracts to a software-as-a-service model.

For now, the focus is on trimming expenses, especially labor costs, to bring the unit closer to “Oracle standards,” as Catz put it. “The situation at Cerner — that is just not how we run a place,” she said during a late 2022 investor meeting. Thanks to aggressive cost cuts, Cerner’s annual operating margin is about 33%, the documents show. That’s an increase from a 22% adjusted margin in its final year as an independent company, though accounting methods may have changed as part of its integration with Oracle.

Adjusted operating margin is a favorite metric to measure profitability of software companies — it calculates the percentage of sales remaining after deducting some costs of operation. Cerner's profitability remains shy of Oracle's industry-high 46% adjusted operating margin in the last year before the merger.

Many of the steepest job cuts at Cerner have been among employees called consultants as Oracle has tried to automate processes and lean on third-party contractors. The division that includes consulting and sales shed more than 3,000 workers from March 2023 through February 2024, according to documents seen by Bloomberg.

With slipping revenue, the risk of losing large contracts and the traditional difficulty of selling to the health care industry, investors are largely gloomy on the Cerner acquisition, said KeyBanc’s Ader. “The bear case is that Oracle bought a permanent and distant No. 2 competitor in a flat US market with possibly major downside risks from high-profile contracts.”

Moving to the Cloud

Oracle’s biggest near-term focus is moving Cerner clients to its cloud infrastructure, allowing easier software updates and data sharing with lower labor costs. Ellison provided a rosy update to the initiative during a March earnings call, saying that the majority of Cerner’s customers have been moved to the cloud.

While that was true, it didn’t tell the full story, according to people familiar with the matter. The customers who have been shifted to Oracle’s cloud are by far the smallest and least technically complicated, such as family clinics with only a few doctors running on standardized software. The vast majority of the cloud transition has yet to happen, and will involve moving major customers that have their own domains — unique and often highly customized versions of Cerner’s software.

The company is also focused on revamping Cerner’s applications. So far, they’ve “fixed some deeper architectural issues with the system,” including more than 8,000 bugs, Levy told customers during the November webinar. Levy oversees engineering for the new health division, where many of Oracle’s cloud-infrastructure engineers were moved to iron out Cerner’s technical problems and bring the legacy software company into the 21st century.

Longtime Cerner employees describe friction with the Oracle workers, saying they underestimated the complexity of health care software and the work required to modernize Cerner applications. Camaraderie has been further thwarted because Oracle’s employees are typically paid much more than those from Cerner, for whom salaries have been largely frozen since the merger, multiple employees say.

Particular emphasis has been placed on improving Cerner’s revenue-tracking tool for customers, which Tate of KLAS said has been an “Achilles heel.” An updated edition of the application is being used by more than 100 hospitals, customers were told in November. Cerner’s solution for tracking the health of large groups of people on behalf of governments or medical institutions — a category of software also known as “population health” — is already keeping tabs on data from more than a half a billion people, an executive said in a March speech.

Oracle also is planning to integrate artificial intelligence within products to automatically take notes via a feature dubbed ambient listening, which is intended to save doctors and nurses from hours of typing and clicking. Epic uses similar features from Nuance, a Microsoft Corp. unit that relies on OpenAI’s large language models.

Banking on the VA contract

While it has struggled in the US market, Oracle Health has notched success in adding clients overseas, according to KLAS. Stagnant US demand for electronic health records means the big expansion focus is international, where the company sees the potential for about $500 million in additional annual recurring revenue in the coming years, according to a person familiar with Oracle's thinking. The company has agreements to run health systems for public entities in Sweden, the UK and Saudi Arabia, Oracle has said.

To be sure, Oracle is historically good at selling to governments — its first customer in the 1970s was the US Central Intelligence Agency. Still, the source of many of Oracle’s headaches has come from one major government customer. Before the acquisition, Cerner scored a flagship $16 billion deal with the US Department of Veterans Affairs to standardize software at its 171 medical centers over a decade.

“We’re just going to delight our customers — and delight this one customer in particular that’s very important,” Ellison said of the Veterans Affairs deal shortly after the acquisition was announced.

But the contract has been marked by controversy — after highly publicized outages and patient deaths at just a handful of facilities where Cerner’s software was launched, the rollout was paused by the government. Some lawmakers have called for abandoning it entirely, which threatens to financially derail the Oracle Health division. Federal projects accounted for about a quarter of Cerner’s revenue in the fiscal year ending May 2023, according to documents seen by Bloomberg.

Oracle, known as one of the most active tech companies in Washington, lobbied on legislation related to the VA contract more than any other issue in 2023, according to disclosure filings. It also began spending hundreds of thousands of dollars a year to fund several health care-focused interest groups. The company is pushing for the VA contract to restart this year — meaning the software would be expanded to more facilities and contribute significant revenue.

A recent launch at a joint VA and Defense Department hospital in Illinois was seen as a critical test of Oracle’s ability to continue with the project. So far, it’s been “the most successful deployment we’ve had, a federal official told reporters in late March, according to the Federal News Network.

The massive federal project may be aided by Seema Verma, the new head of Oracle Health. Verma, who oversaw Medicare and Medicaid during the Trump administration, was appointed to lead the division late last year. She is known as a major proponent of rules that would require that patient data could move easily among different records’ providers, called interoperability, and has criticized Epic as a barrier to these efforts, according to a person close to her. Epic’s Helsher pointed out that Epic exchanges data with many other systems through its Care Everywhere program and has worked on software to connect information among different vendors’ products.

Verma joined Oracle because she shares Ellison’s view for modernizing health care by better integrating technology and improving the transferability of patient data, she said in a March speech, according to a recording provided by Becker’s Hospital Review. In the speech, Verma touted the clinical product updates Oracle has released this year.

“Since Oracle’s acquisition of Cerner, it’s been heads down to create this vision,” she said on a stage in Orlando. “But this year, you will see that the end state is closer than many might think.”

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