Northwest Investment Profiles -- Tracking Care -- Phamis Finds Niche Computerizing Medical Records

TODAY THE SEATTLE TIMES examines Phamis Inc. in a periodic report on publicly traded Northwest companies from an investor's point of view. Phamis is based in Seattle. Its main product is Lastword, a computerized information system that coordinates care by tracking patient records, billing information and medical histories. Stock ticker symbol: PHAM. Friday's closing price: $27.75. 52-week range: $12 to $31.

The miracle of modern medicine can transplant a healthy organ into a dying body, but when it comes to something as simple as maintaining patient files, hospitals fall back on 19th-century technology: paper.

It's the paradox of 20th-century health care.

Hospitals that run sophisticated tests involving millions of dollars of high-tech equipment still rely on runners or old-fashioned pneumatic tubes to deliver the results - in paper form - up and down hospital floors.

In fact, most departments aren't even linked to one another with a basic computer network.

"It's amazing," said Rod Baker, director of information services at Tacoma-based MultiCare, which runs Tacoma General and Mary Bridge Children's Hospital. "When I got here in 1990, the pharmacy wasn't even automated. It was all done by hand."

But things are changing, in part because of new technology developed by companies such as Phamis Inc., whose Lastword information system was adopted at MultiCare two years ago.

Lastword is a mix-and-match computer system that offers up to 40 different applications from which hospitals can choose, including billing, record-keeping, appointment-making and medical-history programs.

Baker said it is far more efficient, powerful and easy to use than the first computerized record-keeping system MultiCare tried, which was developed by one of Phamis' competitors, Shared Medical Systems.

Phamis, based in Seattle, is a small but emerging player in what is now an $8 billion health-care information market.

Hundreds of other companies, including Microsoft, also have recognized the need for hospitals to upgrade and replace their antiquated record-keeping systems and are racing to stake out various portions of the market.

At last count, there were at least 413 different companies developing health-care information systems, according to Dorenfest & Associates, a consulting firm based in Chicago.

In the next two years, the information-systems industry - which is still in its infancy - is expected to grow to $13 billion, industry analysts said, making Phamis' market that much more lucrative and its competition that much more fierce.

"Potentially, Phamis is in a very interesting position to take advantage of current trends," said Mitch Work, senior vice president of Dorenfest. "They've been doing quite well."

Phamis went public last December after a record year for sales and profits. In 1994, the company generated $34.4 million in revenue, up 79 percent over the previous year, and signed more contracts than in any year since it was founded in 1981. The company reported earnings of $2.4 million.

In just the first three quarters of 1995, Phamis has already exceeded last year's profit with $3.4 million in earnings and is close to topping last year's sales.

John Putnam, an analyst with Adams Harkness in Boston who rates the stock "attractive," estimates that 1996 earnings will grow to 83 cents a share, up from 60 cents in 1994. Ann Gallo of Alex. Brown & Sons predicts 78 cents.

The stock, which opened last year at $12 a share, nearly tripled by midyear before settling in at its current price.

Several analysts including Gallo predict Phamis - with a price-earnings ratio of about 36, still respectable in this high-growth industry - will hit $35 a share in the next nine to 12 months.

"Phamis has tremendous growth opportunities," Gallo said in her most recent report. She recommends the stock a "strong buy."

Because the company has a large backlog of contracts, analysts believe Phamis will be able to grow at a consistent rate of about 25 percent to 30 percent a year for the next few years.

To be sure, Phamis is neither the largest nor the most influential company in the industry. NatWest Securities analyst Raymond Falci noted that Phamis ranks just 26th in the industry in terms of revenue.

But Phamis' overall ranking doesn't matter as much as its dominance within its niche: Providing fully integrated, patient-centered information systems. Those are systems that, in part, allow physicians and specialists to call up patient records simultaneously from different departments within a health-care network.

"It's the fastest-growing segment by far in health-care information," said Falci, adding that there are less than 15 companies working in this niche. "As a result, Phamis is one of the fastest-growing companies around."

Phamis' Lastword system is designed to capture clinical information such as charts, medication histories and lab results - data that has traditionally been kept in paper form and housed in archives or hospital basements - and to integrate that with financial data that's already available.

Up until now, most health-care information systems captured only billing information. That's because hospitals have been paid on a fee-for-service basis in which payments were based on the amount of services rendered. That meant that their financial interests weren't tied to the patient's overall health but to his or her individual treatment.

But as medicine moves toward managed care and health-care providers assume the financial risk for caring for patients over the course of a lifetime, they need more clinical data to make sure their patients remain healthy and their costs remain low.

That, in fact, was the original reason Phamis was founded - though for a decidedly different group of patients. Phamis, which stands for Public Health Automated Medical Information Systems, was originally a software system developed in the '70s by the United States Public Health Service for its national system of hospitals and clinics.

At the time, it was used to keep track of merchant seamen, whose medical records were difficult to chart because they utilized a number of different clinics and hospitals.

Much like those seamen, health-care consumers today rely on networks of outpatient facilities and clinics spread throughout a large geographical area. Today's health-care providers require information systems that can integrate data and make it available to all of their facilities, including clinics, outpatient offices, hospitals and even home-health-care settings.

In September, Providence Medical Center joined a growing list of hospitals that switched from an antiquated in-house billing system to Phamis' Lastword system.

"We realized that we're in the business of providing health care to people, not in the business of simply providing bills," said Mike Scheuerman, Providence' chief information officer.

At Group Health, the Lastword system manages an intricate appointment-making system for the dozens of clinics, hospitals and sub-acute facilities that the co-op runs throughout the state.

In addition, Group Health is using the system to help with its population-based care. Because Lastword captures so much patient data over long periods of time, Group Health believes the system can help it determine which treatments are the most efficacious and cost-effective for common disorders such as diabetes.

That's something that Providence and MultiCare say they also hope to do.

Still, Linda Kloss, executive director of the American Health Information Management Association, noted that although hospitals are desperately in need of more sophisticated record-keeping systems, they are also losing money at record rates. Many are thinking of merging or aligning with other health-care networks because of dwindling hospital usage.

In theory, this would deter a great number of the 4,000-plus hospitals that don't already have state-of-the-art information systems from making a $5 million to $20 million investment on such a system. So, too, might some of the concern swirling around patient confidentiality.

Thus far, cost hasn't stopped a number of health-care organizations from investing millions in these systems. Group Health, for instance, which is in the midst of a major cost-cutting effort, said it is committed to investing up to $100 million for its health-care information systems over the next five years.

According to Dorenfest, health-care companies that have historically spent only 2 percent of their operating budget on upgrading information systems are now investing 10 percent to 12 percent of their budgets.

Some analysts even speculate that the consolidation taking place within the health-care industry might spur investment in information systems because health-care networks need to be able to tie in data from newly merged hospitals and clinics.

Frank Sample, Phamis' chief executive officer, said Phamis is targeting the nation's 1,000 large- and medium-size health-care providers.

Those are hospitals and medical groups that can afford large capital investments at this time. And in the event of mergers and consolidation, those are the groups that play the dominant role in whatever new health-care networks are established, he said.

"It's an evolving industry," Sample said. "And we want to be able to evolve with it."