The Meaningful Use Money Trail

By Keith Speights - April 25, 2012 | Tickers: ATHN, CERN, CYH, HCA, HMA | 0 Comments

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Some very meaningful amounts of money have been trading hands in the health care world over the past year in the pursuit of Meaningful Use dollars. The Centers for Medicare and Medicaid Services (CMS) recently reported that nearly $4.5 billion in incentives for providers to implement electronic health record (EHR) systems has been paid out so far with more to come. Let’s examine the money trail for these payments to see who has benefited and who has not.

CMS to Health Care Providers

CMS directly reimburses eligible health care providers who successfully attest to their implementation of certified EHR technology. Over two thirds of the incentive payments ($3.1 billion) have been distributed to nearly 2,700 hospitals. The remaining $1.4 billion went to as many as 74,000 eligible medical professionals, primarily physicians.  

Roughly 17% of the $3.1 billion in payments to hospitals went to three large publicly traded health systems:  Community Health Systems (NYSE: CYH), HCA Holdings (NYSE: HCA) and Health Management Associates (NYSE: HMA). So, how have these organizations fared since the Meaningful Use attestation period opened in April 2011? Not too good. The table below shows performance of these stocks since last April.

The federal payments didn’t help the hospitals’ bottom lines for a simple reason. The money only temporarily passed through their coffers because they spent the incentives on implementing EHR systems. Actually, there is some reason to believe that the incentives hurt the financial performance of the providers. An Accenture study found that hospital IT operating expenses as a percentage of total operating expenses increased by 80% during an EHR implementation. Some U.S. hospitals even announced layoffs that were attributable in part to the additional cost of implementing EHR systems that exceeded their federal incentive payments.

Health Care Providers to EHR Vendors

The ultimate destination on the Meaningful Use money trail is the EHR vendors. We can see the incentive impact by looking at three major players:

Athenahealth sells software-as-a-service (SaaS) EHR technology to physicians. The company has been a fast up-and-comer in its market. Cerner and McKesson are both established health care technology veterans operating in multiple health-related markets. The run-up in stock values for these companies was even more impressive prior to April 2011 as health care providers implemented EHR systems in anticipation of the federal incentives.

Not everyone in the EHR vendor community fared as well over the past year. Companies like Allscripts and CPSI are lower now than they were at the outset of the attestation period. Most EHR systems vendor stocks, though, experienced strong up trends as Meaningful Use mania swept across the health care industry.

Where the Trail Leads Next

While federal incentives will continue to be paid out over the next several years, the easiest of the easy money for EHR vendors has already been made. That’s not to say that the cash in-flow will dry up for these vendors. They will still be able to count on an on-going revenue stream from existing customers, new revenues as providers implement enhancements to meet forthcoming Meaningful Use stages and incremental revenues from providers who have not yet certified with CMS.

Of the three EHR vendors mentioned earlier, McKesson is the best alternative for investors. It has a forward P/E of 12.64 compared to 53.64 for athenahealth and 26.28 for Cerner. McKesson’s 5-year expected PEG of 0.95 is more attractive than athenahealth’s  2.88 PEG and Cerner’s 1.70. As I mentioned in an earlier post, McKesson also is positioned to benefit from the trend toward use of payment bundling.

Earnings for the publicly traded health care providers could benefit from getting past their large EHR implementations (and associated costs) in the near future. All three providers mentioned have low P/E ratios. HMA is probably the best stock of the group with consensus expected earnings growth for next year at 15%, well above its peers.

However, investors might be better off waiting to buy any health care provider stocks until the dust settles with the Supreme Court’s decision on "ObamaCare" and the 2012 elections. With so much uncertainty, the rest of the money trail could be a bumpy one.

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