Companies That Are Keeping Patients Out Of Hospitals

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Medical care is expensive, and the best way to lower costs is to keep patients out of hospitals. There are a few companies positioning themselves through acquisitions to do just that, including Nestle (NASDAQOTH: NSRGY) and Cardinal Health (NYSE: CAH).

The Most Expensive Care Around

Being in a hospital is probably the most expensive way to receive medical care. This is partly because a trip to the hospital usually involves a grave illness or major procedure. However, the actual cause of the visit isn't what's so expensive. The doctors, nurses, and other staff all cost a lot to pay, and the medical devices, from high-tech beds to monitoring devices, are all expensive to buy and maintain.

Frequent hospital visits are largely why the last year or so of a person's life is the most expensive, medically speaking. While many people benefit from being kept alive, hospital care add up--particularly so if there are multiple episodes.

Chronic Illnesses and Kicking People Out

Many chronic illnesses eventually send people to the hospital. Untreated diabetes, for example, can lead to amputations. That's not something that can be taken care of in a doctor's office. So, keeping people out of hospitals is a bigger effort that has to encompass keeping people healthy with ongoing treatment. This, invariably, means treating people in their own homes for as long as possible.

Treating people in their homes, however, can also take place after a medical episode. Indeed, keeping people out of hospitals is good. But so, too, is getting people out of a hospital as soon as possible. That means less invasive surgery and providing the tools that patients need to mend in their own homes.

Two Mergers

Nestle and Cardinal Health have both made recent acquisitions to position themselves to benefit from the trend toward treating people in their own homes.

Nestle

Nestle, best known for its massive food empire, has been bulking up its recently-created Health Science division. The most recent purchase was of privately held U.S. Pamlab. That company makes prescription pills, probably best thought of as vitamins, that help patients with diabetic peripheral neuropathy, depression, schizophrenia, pregnancy, and mild cognitive impairment.

And this isn't the only deal Nestle has made--others include Prometheus Laboratories, Vitaflo, and Accera. This is clearly a business for which the company sees a big future. Nestle is a great company based solely on its industry-leading brands. The Health Science unit is icing on the cake, but a treat that could pay dividends for years to come.

Cardinal Health

While Nestle is making things to help people stay out of hospitals, Cardinal Health's agreement to buy AssuraMed will put it in a position to deliver the products that people need to stay in their homes longer. AssuraMed is a large supplier of products for home use to treat diabetes, wounds, and incontinence, among other things.

While the company is largely a middle man, since it doesn't make most of the products it delivers, its distribution systems are vital to delivering care in a cost effective manner. And keeping people at home is far better, for everyone, than sending them to a hospital because of such things as bed sores, which can be prevented with the right care.

Others that Should Benefit

Two of Cardinal Health's biggest customers are CVS Caremark (NYSE: CVS) and Walgreen's (NYSE: WAG). These drug stores have been growing by taking market share from small, individually owned pharmacies for years. Now that they are nationwide chains, they have been looking for other avenues to grow. CVS, for example, bought pharmacy benefit management service Caremark to enter a related business and expand its reach. Walgreen's, meanwhile, has partnered with Alliance Boots to expand overseas.

CVS's 2007 purchase of Caremark quickly boosted the company's top line, as the two companies merged. The combined company, despite a slight dip in 2010, has continued along the path to higher sales and earnings. The real benefit, however, will likely be felt in the future as more emphasis is placed on the use of pharmaceuticals, notably generic drugs, to lower medical costs. As the largest dispenser of drugs, CVSCaremark has an immense amount of leverage over suppliers.

Walgreen's bold move to expand abroad is still in uncharted waters. It is hard to tell exactly how an international drug store will fare. However, the baby boom generation isn't just a U.S. phenomena, so developed markets around the world will see the same trends. Moreover, as developing nations advance, more people will be able to afford the types of healthcare products, drugs and otherwise, that the company sells. Boots has a notable footprint in emerging markets, including stores in China.

Interestingly, however, as the baby boomers reach their peak medical spending years, these two companies could see growth in the United States pick up. With a generation that is struggling with chronic illnesses like none before it and increasing use of prescription medicines to treat these ongoing problems, demand is very likely to tick up.

Sure, the baby boomers have been dealing with illnesses like diabetes and high blood pressure for some time, but they were younger and their bodies were better able to handle the stress. As the bulk of the generation crests toward 65, their bodies will increasingly feel the strain under their illnesses. CVS and Walgreen's are both set to benefit as more drugs are used more often to keep people at home.

Good and Bad

It certainly isn't a good thing that more and more people are aging and getting ill. However, it is a fact of life. That there is technology that can keep people happily in their homes, and make investors money along the way, is good.


Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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