Time to Get on the Health IT Train
Greg is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There’s a revolution going on in healthcare these days, and I don’t mean Obamacare. While information technology has become ubiquitous in our everyday lives, the healthcare industry has traditionally been slow to adopt IT. Thankfully, that is beginning to change.
Although Obamacare contains some important health IT provisions, arguably President Obama’s most significant contribution to health IT during his first term was signing into law the 2009 Health IT for Economic and Clinical Health (HITECH) Act. Created to promote the adoption of health IT products, services, and infrastructure, the HITECH Act provided financial incentives in the form of mandatory payments through the Medicare and Medicaid programs to encourage physicians and hospitals to adopt and use certified electronic health records (EHR).
So far, $7.7 billion worth of incentive payments have been made, with the Centers for Medicare and Medicaid Services estimated to pay out a total of $20 billion as part of the effort. According to the Office of the National Coordinator for Health IT, more than half of eligible U.S. healthcare professionals and more than 75 percent of eligible hospitals have registered to participate in the Medicare or Medicaid incentive programs.
This is good news for our country’s fiscal and physical health. Given our nation’s runaway debt and healthcare costs, the effective use of IT in the medical field has the potential to fundamentally change healthcare in America. The widespread adoption of health IT could not only lower healthcare costs by reducing duplicative and unnecessary tests and procedures, but also help reduce medical errors.
What does this all mean for the investment community? There are EHR companies out there poised to capitalize on the healthcare industry’s technology revolution that might be worth looking at, including a recent survey by research firm KLAS of the major EHR vendors such as Allscripts (NASDAQ: MDRX), Cerner (NASDAQ: CERN), Epic, GE, McKesson (NYSE: MCK), Meditech, and Siemens.
According to KLAS, privately-held Epic and publicly-traded Cerner have moved into first and second place, respectively, for EHR marketshare in the over 200 bed market. KLAS also reported that Allscripts, McKesson, Meditech, and Siemens signed new customers but in the end lost marketshare in larger hospitals as organizations steer toward higher levels of integration and clinical functionality. It's important to note that Cerner’s KLAS ranking has skyrocketed, moving from seventh to second in a four-year period.
Compared to Cerner, EHR vendor Allscripts appears to be struggling. Recently, Piper Jaffray noted that Allscripts' "bookings are accelerating downward, margins are going nowhere, and the company attempts to integrate a portfolio of outdated products while embarking on an ambitious release cycle of new products." Cerner, however, is a different story. In late October, the company reported that third-quarter earnings rose 25 percent with record sales.
While Cerner is a sound company, their current P/E of 36 is very high compared to a competitor like McKesson with a P/E of 14. McKesson is a strong company with a strong line of products and services poised to take advantage of the HITECH Act. The company has positioned itself as one of the better placed EHR vendors to benefit from increased health IT spending over the next few years. Granted, the health IT market is competitive and price sensitive. But, McKesson is in a strong position vis-à-vis the competition.
On December 5, Fitch Ratings affirmed the long-term ratings of McKesson at "A-." Fitch believes McKesson's strong market positions in specialty drug distribution, medical-surgical distribution, and health IT will support intermediate-term growth and profitability. And, given the lack of opportunities in pure U.S. drug distribution, Fitch expects McKesson to further explore growth opportunities in these areas.
Currently, only 20 percent of McKesson's revenues come from the company's strong market positions in the distribution of specialty pharmaceuticals, med-surg supplies, and in health IT. "McKesson is one of only a handful of companies with a significant share of these relatively fragmented markets," Fitch stated. "As a result, Fitch believes McKesson is uniquely positioned to benefit from growth opportunities related to its ancillary businesses as those markets grow and consolidate over time."
Overall, McKesson's strengths include strong stock price performance, solid record of earnings per share growth, attractive net income growth, impressive return on equity, and debt levels that are reasonable. Not surprisingly, S&P gives McKesson a very positive five stars (out of 5) strong buy rating.
Optimism about the growth prospects of health IT in the second term of the Obama administration is warranted. Now would be a good time to get on the health IT train, as Cerner and McKesson are leaving the station.
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