Tricky Software Transplant at McKesson

At an Alabama health care network, putting data and images from various labs and departments together into a single electronic record for a patient crashed the computer system. At a similar New England network, hospitals found they could not issue timely, complete bills in part because they could not pull in current information on treatments from the appropriate databases.

When the $30 billion McKesson Corp.—then the world’s third-largest drug distributor—took a $14 billion gamble in January 1999 by buying what was at the time a leading medical-information systems and health care software company, it set in motion events that would have a disastrous impact on shareholders, hospitals, physicians and patients.

A series of fraud allegations, accounting revelations, charges and counterclaims created high drama for months on Wall Street. Yet the executive-level missteps hit no one more directly than CIOs and health care administrators on Main Street. They are the San Francisco company’s customers who, after losing time, money and, in one case, a job, are only now recovering.

The 1999 merger with HBO & Co. raised eyebrows early on when evidence of financial fraud by the Atlanta software company emerged. Shareholders filed lawsuits alleging executives falsified revenue and earnings to inflate the company’s stock price. Soon, McKesson announced it would restate its sales and earnings to reflect that HBO & Co. had prematurely recorded more than $40 million in sales before the merger.

The company’s market value plunged by $9 billion. The Merrill Lynch brokerage sued, alleging that McKesson and HBO’s auditor, Arthur Andersen LLP, had both known HBO had “materially overstated” its financials prior to the merger. The Securities and Exchange Commission levied its own charges. Three years later, actions are still pending, and McKesson has lost an estimated 10% to 15% of its customers.

“When McKesson bought HBO, they didn’t do enough homework—not only of the company’s financials but also of its product line and customer service,” said Ronald Johnson, president of RL Johnson & Associates, a health care consulting firm. HBO “built itself largely through acquiring software pieces that didn’t fit together. No rhyme or reason. The end result was customers battling interface and integration issues that McKesson wasn’t willing or able to resolve.”

For example, if a particular hospital employed billing software that identified patients using seven-digit numbers, and the software used to order X-rays or other procedures in, say, radiology or the laboratory used a six-digit code, the two databases couldn’t communicate. The result: Doctors, nurses and administrators couldn’t effectively interact across departments, leading to redundant paperwork, missed appointments or lab requests or, in some cases, a temporary loss of a patient’s digital records.

Patients might have register once at the emergency room, fill out their insurance and medical histories and then repeat the procedure with, say, the oncology department after a particular treatment or diagnosis was rendered. In the end, one patient might have up to three or four different identification numbers within a single hospital, and McKesson’s software couldn’t aggregate the information so that one ID number would match another.

HBO has been the primary software vendor for 22 years at Capital Region Health Care (CRHC), a health care delivery network based in Concord, N.H. CIO Dean Morrison says he’s seen it all as the company grew and later merged with McKesson.

“McKesson, through HBO, leveraged itself by buying a lot of small software companies to fuel their stock growth,” says Morrison.

“After the merger, they started cutting corners by shipping software that wasn’t ready or selling software that didn’t exist or overpromising on the functionality,” he says.