Leidos' health footprint set to swell after $10B VA-Cerner pact signed

The Veterans Affairs Department’s long-awaited sole-source contract with Cerner to replace the agency’s homegrown electronic health record system was signed Thursday to kick off one of the government’s largest IT modernization programs in years.

As reported Thursday by our sister site FCW.com, that potential $10 billion contract over 10 years will see the VA go with the same commercial health IT outfit the Defense Department is partnering with for a similar effort now called “Military Health System Genesis.”

With the prime contract in tow, it would appear that Cerner’s next step is to enlist teammates for the system integration and infrastructure update aspects among other areas as part of that transition. FCW has reported that could add another $6 billion to the total cost.

Cerner is the primary partner for prime contractor Leidos on the MHS Genesis program at DOD, which the VA wants its future EHR system to be interoperable with.

DOD awarded the $4.3 billion MHS Genesis prime contract to Leidos in 2015 and Cerner is the electronic health record at the center of that work. MHS Genesis is being implemented at three DOD sites in the Pacific Northwest but that effort is on pause due to technical problems at the initial operating capability sites.

Those are not changing DOD’s plan to deploy the system between 2019 and 2022, however.

“The VA’s (Cerner) announcement is, in part, a continuation of the positive work we’ve done with MHS GENESIS at the DoD’s initial operating capability sites,” Jerry Hogge, senior vice president of Leidos’ health group, told us in an emailed statement.

“Cerner has been in close coordination with us about their plans to collaborate with organizations in the ‘Leidos Partnership for Defense Health’ -- and others -- to create seamless care across the continuum as service members transition from active duty to VA facilities and community providers.”

Accenture Federal Services and health care product distributor Henry Schein are primary partners for Leidos’ DOD EHR team that includes dozens of other large and small business partners.

The $10 billion VA-Cerner contract is roughly twice the ceiling value of the award to Leidos for the DOD effort, which reflects the enormous scale of what the VA doing as it is the largest integrated health care system in the U.S.

Leidos Chief Financial Officer Jim Reagan said as such in a Nov. 29 investor conference hosted by Credit Suisse.

“It’s a big, big undertaking… it will be much larger than (MHS Genesis),” Reagan said. “The VA is clearly looking for interoperability between DOD’s system and the system they’re going to adopt, as well as interoperability with a myriad of other systems that need to be able to plug and play if they’re not Cerner-based systems.”

Once fully deployed, MHS Genesis will support the availability of electronic health records for 9.4 million beneficiaries and roughly 205,000 MHS personnel worldwide.

The VA has more than 9 million beneficiaries across more than 1,200 sites that include 170 large medical centers.

Leidos executives over the past year have touted their strong interest in teaming with Cerner for the VA initiative. Assuming that teaming arrangement does happen, Leidos’ participation is likely to see a slow ramp up but would easily lock it in as the leading health IT player in the government services landscape.

During Leidos’ first quarter earnings call April 29, CEO Roger Krone said that although “it's really not our program,” the company “will do everything we can directly with Cerner or the VA or things that we're contractually allowed to do under the defense health program to make that program successful and to allow both agencies to reap the benefits of picking essentially the same electronic health care records system.”

Health revenue of $1.8 billion made up for roughly 17 percent of Leidos’ total sales last year. The company greatly increased its federal health market footprint in the merger three years ago with the former Lockheed Martin IT business.

Analysts at Cowen & Co. see Leidos’ work on Genesis being a major driver of health business in 2019 and 2020, while the company would start to see any potential VA revenue starting in late 2019 or 2020.

Krishna Sinha, equity analyst at Vertical Research Partners who tracks government services companies, wrote in a March 2 research note that Leidos could see 4-percent health revenue growth this year and 7 percent in 2019, followed by 12 percent in 2020 and 2021 and then a 20-percent decline in 2022 once MHS Genesis is fully deployed.

Those figures exclude any work for the VA and the Coast Guard, which signed onto MHS Genesis in early April and awarded Leidos a contract modification of a still undisclosed amount for the effort.

For Cerner, this would be a first in being the prime contractor on a large government IT job, unlike the DOD Genesis program where they are a subcontractor to Leidos.

But Cerner executives have touted their experience in other large implementations as working in its favor for the coming VA work.

“This is not something that's out of the ordinary for us to think about managing and having expertise around managing very large implementations with a number of third parties," Cerner President Zane Burke said in an Oct. 26 earnings call.

The company will get an initial $500 million down payment for the VA system, FCW reported. That and any other subsequent payments would go into Cerner’s backlog and they would then draw down from it to recognize revenue.