Investing in Healthcare Information Technology

For more information on healthcare information technology, please go to www.morningstar.com/goto/NYSSA for a subscription to the Healthcare Observer, where our lead healthcare information technology analyst, Patrick Dunn, provides a detailed overview of the industry.

Over the past couple of decades, medical groups have increasingly looked to healthcare information technology as a way to improve efficiency and profitability. The growing interest in new healthcare software combined with the Obama administration’s budget of $19 billion for healthcare information technology should spark industry growth. However, the healthcare technology industry remains highly fragmented and in a relatively early phase of its development, which increases the challenge of investing in the favorable secular trends.

Growth Potential of Electronic Health Records

Electronic health records represent a way to digitize the old hand written patient medical charts. As of 2006, just over 10% of medical groups had installed electronic health record systems. The lack of consensus on the structure of an electronic record system has created a major stumbling block for market penetration. However, in 2004, the Certification Commission for Healthcare Information Technology (CCHIT) was formed to resolve the uniformity problem by setting up a minimum set of standards needed for each system. With over $80 billion that could be saved annually if these systems were broadly utilized and only minor market penetration, we expect a strong ramp in demand for new systems over the next decade.

Near-Term Growth of Electronic Health Records 

Near-term challenges will likely limit the growth potential of electronic health records through 2009. The credit crisis has weighed on hospitals’ willingness to spend on information technology. Further, while Obama’s stimulus package for IT will surely help in time, over the next year, many medical groups are going to wait and see how best to use the public funds.

How to Invest in Electronic Health Records

A diverse group of many types of companies compete in the electronic health record industry. We believe companies that offer a wide range of information technologies will likely become one of the dominate players in the industry. Eclipsys ECLP has broadened its product offerings over the past few years to include clinical, financial, and infrastructure platforms. The company is poised to reap the long-term rewards of increased utilization of electronic health records.

The Merger and Acquisition Angle

The high growth potential and largely fragmented nature of the healthcare IT industry suggests many mergers and acquisitions for the group. The 2008 merger between Allscripts MDRX and Misys has created a uniquely positioned company that can offer technology to both hospitals and smaller physician groups, a differentiated offering than many of its smaller peers. Several bigger firms, including McKesson MCK, Siemens SI, Google GOOG and Oracle ORCL have stuck their toes in the healthcare waters and could make a play for a smaller healthcare focused technology company. Cerner CERN represents a highly likely acquisition target as the company has a well-established electronic record and device platform.

What about Revenue Cycle Management Technologies?

Medical groups have used revenue management systems for several years. While almost 85% of all healthcare providers use some sort of revenue cycle management system, many of these systems are outdated, costing providers an estimated $20 billion in lost revenue. Many of the current systems have not kept up with the changing reimbursement landscape. Also, in early 2009, the Department of Health and Human Services created a new rule that requires more specific coding of procedures, increasing the codes from 18,000 to 65,000 by 2013. The massive amount of new coding will encourage further upgrades to revenue cycle management systems. We believe Athenahealth ATHN is well positioned to answer the needs of the health providers. The company continuously updates its platform with new payer rules and corrects denied claims automatically, not allowing the mistake to happen again.

--Damien Conover, CFA and Patrick Dunn