Medsphere Systems, a healthcare software developer that sued its co-founders after an open-source software disagreement, has finally settled that case. The press release doesn’t exactly burst with detail — in fact, it devotes exactly one sentence to the lawsuit — but it represents at least a modicum of good news for the worthy effort to promote more widespread use of an open and standardized medical-record system.

Medsphere essentially aims to turn VistA, an electronic medical-record system originally developed by the Veterans Administration and later made publicly available, into the Linux of healthcare. VistA generally wins high marks from its users, although so far it’s mostly used by government agencies. See my earlier piece on VistA and Medsphere’s spotty history — including its legal dispute with co-founders Scott and Steve Shreeve — here. (The lawsuit apparently originated with an open-source release by the Shreeves to which Medsphere’s board and CEO took exception. Scott Shreeve blogged about the matter here.)

I’d been scheduled to speak with Medsphere’s new CEO, Mike Doyle, on Friday, but never heard back. Scott Shreeve, who said the settlement agreement limits his ability to speak about the case, told me that “basically, we hope Medsphere comes in and does a good job. We wish them the best.” For more background on Shreeve, Medsphere and VistA, see this 2005 interview from a site called HIStalk, which does predate the lawsuit.

Meanwhile, Medsphere is apparently moving ahead with plans to raise more than $15 million in a third funding round, VentureWire reports (subscription required). Doyle told VentureWire he hoped to have the funding round completed in three to six months.

Over the past year, Medsphere has signed up at least three new customers — Century City Doctors Hospital in LA, a Wyoming hospital and Brooklyn’s Lutheran Medical Center — for OpenVistA, its open-source version of the VA software. The company has raised $16 million in financing to date, including a $7.5 million second round in 2005.

UPDATE: Added a link to Scott Shreeve’s account on the origin of his dispute with Medsphere and made a few minor wording changes to better describe that controversy and Medsphere’s customer-acquisition gains.

Warning: Some of what follows is a bit convoluted — business disputes are rarely cut-and-dried, particularly once lawyers get involved. But it’s an interesting and important story, not least because the electronic medical-records system at the heart of the controversy, known as VistA, could offer one way out of the economic and technological morass into which the U.S. healthcare system continues to sink.

Medsphere is best-known as one of the early open-source developers of VistA, an electronic health-record system originally produced by the Veterans Administration. VistA has virtually nothing in common with the “personal health records” touted by the likes of Microsoft and Google these days (see my reviews here and here), which allow individuals to add — and presumably delete or change — medical info in a digitized health record. VistA, by contrast, is an electronic records system intended for use in hospitals and clinics that integrates and systematizes medical care, reducing physician errors and forcing specialists to coordinate their care. VistA is often cited as a major reason quality of medical care and patient satisfaction have soared at the VA in recent years (see, for instance, here.) The public-domain VistA is also in use at several other state and federal agencies and overseas.

Early on, Medsphere was committed to open-source development of VistA. Eventually, however, the company released a version of VistA under a proprietary license and last year sued the brothers who co-founded the company, Scott and Steve Shreeve, for “misappropriation of trade secrets” and other alleged violations after they posted VistA code to sourceforge.net, an open-source repository. The action outraged the open-source community; see, for instance, this impassioned retelling of Medsphere’s open-source history. Near as I can tell, the company has never officially explained itself; the closest I’ve seen it come was this “open letter” to employees, which of course is filled with classic corporate doublespeak.

The new CEO, Michael Doyle, could presumably seize the opportunity to restore Medsphere’s relationship with the open-source community and move ahead with plans to make VistA more commercially attractive by, for instance, adding a medical-billing module (something the VA never needed). Doyle, in fact, most recently served as CEO of Advantedge Healthcare Solutions, a producer of medical-billing software. (Kenneth Kizer, the former Medsphere CEO who filed the lawsuit against the Shreeves, will remain chairman of the company.)

So far, Doyle seems to be making encouraging noises in this respect. In an interview with LinuxMedNews on Monday, Doyle sang the praises of open-source development, although he continued to suggest that the company might still adopt a “hybrid” open-source model of some sort. Doyle also said he doesn’t plan to be involved in the lawsuit against the Shreeves and hopes “that it gets settled soon.”

Other commenters around the blogosphere (for instance, ZDNet’s Dana Blankenhorn and C/Net’s Matt Asay) have taken these developments as a sign that Medsphere is looking to put its troubles behind it. That seems a little premature to me, but there’s no reason not to hope for the best. Given that the cost and inflexibility of electronic-record systems still present major obstacles to their widespread adoption, a robust, open-source VistA that meets the needs of commercial healthcare institutions and physician practices could be a big step forward in improving the quality and cost-effectiveness of the healthcare system as a whole.

Here’s the intro to the main story, but unfortunately the Merc does not make its accompanying 11-point diagram of key features available electronically (you’ll have to actually buy the newspaper for that).

There are other adjoining stories in the package, including a look at the momentum of Apple’s competing OS, how to get the most out of Vista (conclusion, you may not want to bother at first; its worth upgrading to Microsoft Office 2007, though, which will work with your old XP), and devices being shipped with Vista.