CPSI 2017 Annual Report

1 PART I ITEM 1. BUSINESS Overview Computer Programs and Systems, Inc ("we," "CPSI" or the "Company"), founded in 1979, is a leading provider of healthcare solutions and services for community hospitals and post-acute care facilities. CPSI offers its products and services through four wholly-owned companies - Evident, LLC ("Evident"), TruBridge, LLC ("TruBridge"), Healthland Inc. ("Healthland"), and American HealthTech, Inc. ("AHT"). Our family of companies is focused on improving the health of the communities we serve, connecting communities for a better patient care experience, and improving the financial operations of our clients. The individual contributions of each of these companies towards this combined focus are as follows: • Evident, formed in April 2015, provides a comprehensive acute care electronic health record ("EHR") solution, Thrive, and related services for community hospitals and their physician clinics. • Healthland provides a comprehensive acute care EHR solution, Centriq, and related services for community hospitals and their physician clinics. • TruBridge focuses on providing business management, consulting, and managed IT services, along with its complete revenue cycle management ("RCM") solution for all care settings, regardless of their primary healthcare information solutions provider. • AHT provides a comprehensive post-acute care EHR solution and related services for skilled nursing and assisted living facilities. Our companies currently support approximately 1,100 acute care facilities and approximately 3,500 post-acute care facilities with a geographically diverse customer mix within the domestic community healthcare market. The Company has a limited presence in the international healthcare IT marketplace, with one client in the Caribbean nation of St. Maarten. Our target market for our acute care solutions includes community hospitals with 200 or fewer acute care beds. Our primary focus within this defined target market is on hospitals with 100 or fewer beds, which comprise approximately 94% of our acute care hospital EHR customer base. Our target market for our TruBridge services includes community hospitals with 300 or fewer acute care beds. The target market for our post-acute care solutions consists of over 15,000 long-term and skilled nursing facilities. During 2017, we generated revenues of $276.9 million from the sale of our products and services. Industry Dynamics The healthcare industry is the largest industry in the United States economy, comprising approximately 17.9% of the U.S. gross domestic product in 2016 according to the Centers for Medicare and Medicaid Services ("CMS"). CMS estimates that by fiscal 2026, total U.S. healthcare spending will reach $5.7 trillion, or 19.7% of the estimated U.S. gross domestic product. Hospital services represents one of the largest categories of total healthcare expenditures, comprising approximately 32.4% of total healthcare expenditures in 2016 according to the CMS. According to the American Hospital Association’s AHA Hospital Statistics, 2018 Edition , there are approximately 3,500 community hospitals in the United States that are in our target market of hospitals with 200 or fewer beds, with approximately 2,600 of those in our primary area of focus of 100 or fewer acute care beds. In addition, there is a market of small specialty hospitals that focus on discrete medical areas such as surgery, rehabilitation and long-term acute care. Notwithstanding the size and importance of the healthcare industry within the United States economy, the industry is constantly challenged by changing economic dynamics, increased regulation and pressure to improve the quality of healthcare. These challenges are particularly significant for the hospitals in our target market due to their more limited financial and human resources and their dependency on Medicare and Medicaid populations for a substantial portion of their revenue. However, we believe healthcare providers can successfully address these issues with the help of advanced medical information systems and our suite of complementary services. Specific examples of the challenges and opportunities facing healthcare providers include the following: Changing Economic Dynamics. The economy of the healthcare industry, although not immune to general macroeconomic conditions, is heavily impacted by legislative and regulatory initiatives of the federal and state governments. These legislative and regulatory initiatives have a particularly significant impact on our customer base, as community hospitals typically generate a significant portion of their revenues from beneficiaries of the Medicare and Medicaid programs. Consequently, even small