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Practice Fusion is scrapping free software model after agreeing to sell to Allscripts

  • Practice Fusion is planning to start charging doctors to use its software, sources say.
  • The change comes weeks after Practice Fusion agreed to a disappointing $100 million sale to Allscripts.
  • Practice Fusion has struggled to build a growing business model based on ads.
Matthew Douglass and Ryan Howard of Practice Fusion
Source: Platform
Matthew Douglass and Ryan Howard of Practice Fusion

Six weeks after Practice Fusion agreed to sell itself to Allscripts for a fraction of its prior valuation, the medical software company is scrapping the business model that propelled it to unicorn status.

Practice Fusion gained traction by offering free electronic health records software to doctors — as an alternative to the expensive systems from big vendors — and the company made money by serving relevant pharmaceutical ads to its users.

But Practice Fusion recently started notifying customers that, beginning this summer, the service will convert to subscription payments and cost $100 per physician per month, according to two sources familiar with the matter who asked not to be named because the change hasn't been made public.

It's a massive shift for a company whose founder and ex-CEO preached about the virtues of a free product and promised that it would never cost money for users. Ryan Howard, who was ousted in 2015 because of disagreements with the board over strategy and after the company missed financial targets, according to sources familiar with the matter, told Medgaget two years earlier that "Practice Fusion will always be free."

The product proved to be a particular favorite among small physician groups, like primary care doctors and dermatologists, and the company said that its user base has grown to 100,000 health-care professionals. One industry publication called it the "poster child" of free platforms.

In a statement to CNBC, a Practice Fusion spokesperson said that as part of its mission the company has "been offering some features and services to our customers at no cost while other solutions and services offered do involve reasonable prices," and that a change is on the way next month.

"We have a product announcement upcoming in early March, and we look forward to sharing it further with you and all of our stakeholders very soon," the company said.

Practice Fusion has had a rough start to 2018. In January, the company said it was being acquired by Allscripts for $100 million. That's about one-fifteenth its expected valuation in 2016, when it reportedly hired J.P. Morgan to explore an IPO.

Soon after the acquisition was announced, CNBC reported that top executives pulled in millions of dollars as part of a pre-arranged deal, while common shareholders were wiped out.

"Evaluate their options"

During its growth years, Practice Fusion benefited from legislation passed in 2009 that incentivized the medical community to move from paper to digital records.

The market exploded with dozens of medical records vendors, but most charged subscription fees for the service and additional expenses to upgrade. Epic and Cerner have captured the top end of the market, which includes academic teaching hospitals, while Practice Fusion and a handful of others compete for the smaller physician groups.

Industry experts including Ken Comee, CEO of rival CareCloud, said the change could be a boon for other vendors that target independent practices.

"Maintaining the customer base could be a challenge because they're charging for something that was once free," Comee told CNBC. "It might encourage doctors to evaluate their options."

(Clarification: This version of the story updates the circumstances surrounding Howard's departure from the company.)