Investment Insights

Jeff Benjamin

Legislation causes boom in health care tech market

Companies leading the switch to digital medical records are poised to prosper

Nov 1, 2009 @ 12:01 am

By Jeff Benjamin

In whatever way Congress and the Obama administration eventually change the national health care system, there is one segment of the health care market where reform has already begun and is gaining momentum.

The category, known as health care information technology, consists of companies dealing with the conversion of paper medical records to a digital format.

While digitization of medical records has been going on for years, the movement got a boost in February with the passage of the Health Information Technology for Economic and Clinical Health Act. The HITECH Act provides funding in the form of grants and incentive payments to promote health care IT adoption in a highly fragmented universe of medical practitioners.

“The sector as a whole needs an influx of information technology, not just the digitalizing but in a fashion that can be shared,” said Patrick Dunn, an equity analyst with Morningstar Inc.

For investors, there is interest in identifying the early leaders, as well as finding the bigger companies that could enter the business as the market matures.

Mr. Dunn, who has completed extensive research on the category, has identified a handful of small companies that are poised to benefit from trends in health care IT. None of the companies on his list, however, is rated higher than three stars by Morningstar, in part because they are being swept up in the broader national debate over health care.

“What some people don't really understand, though, is that the IT act is done, and that money is already out there,” Mr. Dunn said.

Another reason for the sector's mediocre rating is that digitalization of medical records, while certainly the technology of the future, will not come about easily. Some of the challenges the movement faces include establishing standards, being cost-effective at the practitioner level, compatibility with other technology and a lack of motivation among medical professionals.

“This is something that was also being emphasized during the Bush presidency,” said Mr. Dunn. “But getting it done is not as easy as it might seem.”

As a carrot, the Obama administration has proposed spending $50 billion to encourage health care IT adoption. But it also is proposing a stick in the form of limits on Medicare reimbursement for doctors who are not writing electronic prescriptions by 2012, according to Mike Havrilla, the co-founder of BioMedReports.com, a news portal for the health care sector.

Mr. Havrilla, who is trying to find support for his effort to launch a health care IT exchange-traded fund, manages an index of companies in the category that is posted at both covestor.com and kaching.com.

He believes a broad portfolio is the best way to gain exposure to the category because it is made up of smaller and less established companies.

“These companies would be hard to pick individually, because they are small and risky,” said Mr. Havrilla, whose index includes 70 stocks.

One company he identifies as a leader is Allscrpts-Misys Healthcare Solutions Inc. (MDRX). Shares of the $2.9 billion company, which offers software, services and connectivity solutions for health care providers, have gained more than 100% this year and are trading in the $20 range.

Cerner Corp. (CERN), which has a $6.2 billion market cap and provides IT solutions in the area of electronic medical records and platform communications, is also on Mr. Havrilla's radar.

Cerner shares, which are trading at around $78, are also up more than 100% from the start of the year.

Anyone watching this industry would be advised to also pay attention to acquisition targets, according to Mr. Dunn.

“As some of the uncertainty clears up surrounding the expansion of the technology and the platforms, we might see some bigger companies come in and take over the space, and take over some other companies,” he said.

Mr. Dunn cited the pending acquisition of Perot Systems Corp. (PER) by Dell Inc. (DELL) as an example of how larger companies will consolidate players in the health care IT business.

“Dell is interested in being the middleman to set up either the hardware or the network to exchange the data,” he said. “They're betting that no matter what standard is adopted, there will be a need for a network and hardware.”

A new Investment Insights column appears every Monday on InvestmentNews.com. E-mail Jeff Benjamin at -jbenjamin@investmentnews.com.

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