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Cerner layoffs underscore company's move to reduce costs

Cerner laid off 255 employees as it seeks to reduce operating costs. One analyst said it's further evidence that the Meaningful Use boom years are gone.

Cerner Corp. laid off 255 employees Wednesday, as the EHR vendor works to cut costs and refine its operating model.

In an email statement, Cerner said it is "looking to identify organizational efficiencies" and part of that strategy includes realigning resources "focused on key growth areas across the company." Cerner provided no further details on the layoffs, such as the departments in which the layoffs occurred. 

Jeff Becker, healthcare analyst at Forrester Research, said the Cerner layoffs do not come as a surprise, as the company had transitioned to a new operating structure in early 2019 and has been focused on reducing operating expenses. Cerner announced the operational changes in April, just weeks before it published its first quarter earnings.

Less than 1% of the EHR vendor's nearly 30,000 employees are affected, but Becker said the Cerner layoffs point to a larger trend: "The Meaningful Use boom years are firmly behind us, and U.S. health systems are not shopping for EHRs the way they once were."

Cerner layoffs signal broader cost-cutting efforts   

Although the company's revenue in 2018 was $5.366 billion, up 4% from 2017's $5.142 billion revenue, the company's net income shows a significant decrease year over year.

According to a Cerner news release, the company's net income in 2018 was $630.1 million, a more than 27% decline from 2017's net income of $867 million. Net income is a company's total profit after all other expenses have been accounted for.

Forrester healthcare analyst Jeff BeckerJeff Becker

In January, Cerner offered voluntary separation packages for employees in an attempt to shed costs and noted then that additional staff reductions might be necessary, according to Becker.

In April, Cerner announced a "cooperation agreement" with activist investment fund Starboard Value LP, which included placing two hedge fund designee directors on Cerner's board. The EHR vendor reiterated that it was focused on company reorganization and cutting costs.

The Meaningful Use boom years are firmly behind us, and U.S. health systems are not shopping for EHRs the way they once were.
Jeff Becker Healthcare analyst, Forrester

"[Cerner] is certainly under internal pressure from those board members to address its cost structures," Becker said.  

Starboard Value held about 1.2% of Cerner's shares when it negotiated the directors' seats. It decreased its stake to 0.92% in June and continues to have influence over the EHR vendor, according to Lonnie Hirsch, founder and CEO of Forefront Healthcare Consulting. Hirsch said in an email that Cerner's cooperation agreement with Starboard Value may have been an attempt to placate the investor fund to some extent and to keep them from a larger board takeover or other aggressive moves.

Hirsch believes Cerner has to show "good-faith efficiency improvements," or cost-cutting measures, that activist investors like Starboard Value often want to see. The layoffs could be a "token gesture" and part of a larger efficiency push being demanded of the company, he said.

"Cost reductions will always be part of the mix when investors are concerned about the trend of an industry and of returns they are or are not seeing from any particular company," Hirsch said.   

Impact of Cerner layoffs

Although the EHR vendor is implementing cost-cutting measures, Becker doesn't believe the Cerner layoffs will impact its deals with the U.S. Department of Veterans Affairs or the U.S. Department of Defense.

Cerner contracted with the VA last year to put it on the same EHR system as the Department of Defense, and is being paid $10 billion over 10 years to do it. Yet there has been mounting concern about the rollout's slow progress.

Forefront Healthcare Consulting CEO Lonnie HirschLonnie Hirsch

"If you are the worried investor type, you might be concerned that Cerner could have some vulnerability on that deal if the rollout doesn't go well, which is just another reason to tighten costs," Hirsch said.

According to Cerner's statement on the layoffs, the company has onboarded nearly 3,000 associates in 2019 and plans to hire "hundreds more" throughout the year, many in Kansas City, Mo., where Cerner is headquartered. Employees impacted by the layoffs are eligible for those opportunities, according to the statement.

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