Value Line has initiated coverage of Quality Systems Inc. (QSII) in The Value Line Investment Survey. The company provides computer-based practice management, electronic health records solutions, revenue cycle management applications, and connectivity services for medical and dental group practices and hospitals in the United States. Effectively, the company acts as the “back office” for doctors and hospitals, handling various record keeping, billing, and government filing requirements.

The company was founded in 1974 to provide information systems to dental group practices. In the 1980s, it went public and began serving the broader medical market. Two acquisitions in the 1990s expanded its presence in the medical arena, and now make up Quality Systems’ Next Gen division. As of 2011, the company operates four divisions, QSI Dental, NextGen, Inpatient Solutions, and Practice Solutions. The divisions operate autonomously, with their own product lines, development, implementation and support teams, and sales staffing and branding. However, the individual units share accounting and other administrative functions resources.

The QSI Dental (approximately 6% of fiscal 2011 revenues) and NextGen (approximately 75% of revenues) Divisions develop and market similar products geared to different audiences. Each division provides practice management software that is designed to assist in running a medical office, including such things as scheduling, billing, and patient record keeping. That said, the market for scheduling and billing products is fairly competitive and most larger, and many smaller, practices have already installed such systems. As such, the company competes heavily in the “replacement market” for these systems. Record keeping systems, on the other hand, are often paper based, changing the dynamic of the sales effort. In this case, Quality Systems seeks to introduce electronic record keeping methods.

Historically, the products offered by Quality Systems were computer based. However, it has been making a push into the so-called software as a service (SaaS) space, whereby customers access systems and information hosted on Quality Systems computers. This set up is beneficial for both parties, as the medical and dental practices do not have to purchase expensive computer systems and Quality Systems receives what is, in effect, rental income for the use of its systems. Another benefit of SaaS systems is that they are highly scaleable, allowing a practice to grow or shrink without the need for new systems or upgrades. Providing such services, however, adds a certain risk to Quality Systems’ business model, as it is now responsible for protecting patient records.

The Practice Solutions Division (about 14% of revenues) effectively provides billing and collection services for medical practices. It uses the Web-delivered SaaS model and the NextGen Practice Management software platform to execute its service. While the QSI Dental and NextGen Divisions provide the products needed to run a medical office, the Practice Solutions Division essentially becomes the back office for medical providers, allowing the medical practitioner to focus on seeing patients while someone else handles such things as billing. The Inpatient Solutions Division (approximately 5% of revenues), meanwhile, focuses on providing the company’s many services to rural and community hospitals.

Quality Systems’ efforts at expansion include both adding new clients and increasing business with existing clients. In order to do this, the company will have to focus on maintaining its current product offerings and adding enhancements that make its products more valuable. The shift to SaaS delivery is an example of such product enhancements. Note, however, that efforts of this nature can be complicated and should something not work as expected, revenues and profits could be hurt.

To date, acquisitions have been an important part of Quality Systems’ growth efforts. It has entered new product markets, operational regions, and expanded existing offerings via the purchase of other companies. It is highly likely that acquisitions will play an integral role in the future, though it is important to note that the success of any purchase is far from certain.

Also of note is the company’s exposure to government regulations. Although such regulations are likely to be a growth driver, as medical professionals seek to outsource compliance to a third party, such as Quality Systems, it also increases the provider’s risks. Thus, staying up to date and in compliance with the changing rules and regulations in the U.S. medical market is vital for the company’s success in more ways than one. For example, a rule change affecting medical billing would likely require changes to be made throughout the company’s business; such efforts could have a material impact on the bottom line. Failure to make the necessary changes would likely result in client losses and reduced new sales; which would constrain the top line.

Quality Systems’ business has grown along with the use of technology. It services an interesting and largely stable market. New regulations and a push to increase medical efficiency through the use of technology present both opportunities and risks for the company. Subscribers should monitor Value Line’s regular quarterly reports in The Value Line Investment Survey, while keeping an eye out for Supplementary reports when late breaking news takes place on this healthcare information systems provider.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.