Hospital Information Technology Adoption Rates Going from 10% Today to 55% by 2014

[Joanne98]

67 WALL STREET, New York - August 10, 2009 - The Wall Street Transcript has just published its Healthcare IT Report offering a timely review of the sector to serious investors and industry executives. This 39 page feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling [phone] or via The Wall Street Transcript Online.

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{"s" : "bios,cah,esrx,hum","k" : "c10,l10,p20,t10","o" : "","j" : ""} Topics covered: Healthcare Information Technology Providers - Extreme Growth Potential - Effect of US Government Stimulus Package - Stock Winners and Losers - Current Valuation Analysis - Healthcare IT Earnings Projections - Customer Analysis - Market Opportunity - Medicaid Reimbursement - Balance Sheet Stress - Free Cash Flow Growth

Companies include: Computer Programs & Systems (CPSI); Quality Systems (QSII); Allscripts (MDRX); Eclipsys (ECLP); Cerner (CERN); Quality Systems (QSII); Cerner (CERN); athenahealth (ATHN); General Electric (GE).

In the following brief excerpt from just one of the 8 interviews in the 39 page report, industry expert and stock picker Jamie Stockton of Morgan Keegan discusses the outlook for the sector and for investors.

Jamie Stockton joined Morgan Keegan & Co., Inc., in 2006. He received a BS degree in Finance and a BS degree in Accounting at the University of Arkansas. Prior to joining Morgan Keegan, He was a research analyst at Greenwood & Associates. He is a Chartered Financial Analyst and a member of the CFA Institute.

TWST: Healthcare IT covers a lot of ground. Where are you focusing your attention?

Mr. Stockton: As far as the companies that we cover, it is primarily software companies like Cerner (CERN) and Eclipsys (ECLP) that focus on the hospital space and then other companies like Quality Systems (QSII) and Allscripts (MDRX) that focus more on the physician practice space.

TWST: What makes them appealing?

Mr. Stockton: Originally when we picked up coverage of healthcare IT, the reason it was appealing to me was that healthcare is roughly 18% of GDP in the US, but if you look at healthcare providers as a percent of overall IT spending in the US, it is more like 5%. So relative to its size within the economy, health care is a space that has traditionally significantly under-invested in technology. That under-investment has manifested itself as a largely paper-based health record system. There is a lot of visibility that healthcare spending is going to grow faster than the economy overall, so that 18% of GDP is going up. I think the Congressional Budget Office projects it will be 22% by 2020 and 30% by 2030. So the IT spend of healthcare providers should grow dramatically. That was originally why we as a firm chose to cover the space - we felt it was going to be a good growth area. And then you saw President Obama really start to talk about changing the dynamic in health care. During his campaign he said he wanted the government to spend $10 billion a year for five years to help the transition from paper-based medical records to electronic. Then he got the nomination and then he won the election. I think a lot of people felt like that would be a good tailwind for the space just because the Administration supports it. But then in January when the stimulus package was introduced in the House and there was a significant healthcare IT component, I think that really surprised a lot of people.

TWST: It just keeps getting better.

Mr. Stockton: That is right.

TWST: Why has the space under-invested so dramatically over the years?

Mr. Stockton: I think a lot of people try to make the comparison between financial services and the healthcare sector and they ask, "If financial services has been so good about investing in IT, why has the healthcare sector not been as good?" There is a big difference between quantitative information, which is numbers in banking, and qualitative information, which is a lot of what you are dealing with in health care. So trying to capture the qualitative information stemming from a patient's medical history, their diagnosis or the treatment plan is much more difficult. On top of the difficultly of capturing that information electronically, we have a lot of physicians and nurses that have built their behavior around a paper-based medical records system. Change is hard. That is one thing I really stress to clients when I talk to them about the space. It is not easy because this is relatively complex information and it is not a simple thing to just capture it in a digital format. But we need to make the system more efficient from an administrative cost standpoint, and we must make sure that the level of care is as good as it can be without wasting money on inappropriate drugs, tests or procedures.

TWST: Does this stimulus spending hopefully address those issues or is it going to be just a case of misspending as it has been in the past?

Mr. Stockton: I believe that the stimulus is going to accelerate the adoption of electronic health records pretty significantly. If you look at the government's numbers, they essentially say that today about 20% of physicians and about 10% of hospitals have adopted enough of this technology to be considered an electronic health record user. The government estimates that those adoption rates are going to go from 20% for physicians today to 85% by 2014, and hospitals will go from 10% to 55% by 2014. I may not completely agree with those numbers. The physician adoption number is probably a little too aggressive an assumption, but I do think that it will help significantly because one of the biggest obstacles in the past has been making the return on investment case. Essentially the government has stepped in to offer incentive payments of up to $44,000 for most physicians and $5 million for the average hospital to get an electronic health record in place. The physicians and hospitals do not get the payments unless they have already adopted the technology, so the payments essentially act as a rebate. That is the carrot. The program also has a stick in the form of Medicare reimbursement penalties that begin in 2015 and phase up to 3% for hospitals or 5% for physician practices. The return that healthcare providers get on these systems is going to be much more visible than it has been in the past, because of the incentive payments on the front-end and then the penalties on the back-end of this program.I think healthcare providers want to provide the best care they can and they see that this has the potential to improve the quality of the care they are providing. It is just that they do not have unlimited resources to make the investment and today, with this program in place, the investment will appear to be much more worthwhile.

The Wall Street Transcript is a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs and research analysts. This 39 page special issue is available by calling [phone] or via The Wall Street Transcript Online .

The Wall Street Transcript does not endorse the views of any interviewees nor does it make stock recommendations.

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http://finance.yahoo.com/news/Hospital-Information-twst-3547557772.html?x=0&.v=2

[AdHocSolver]

1. Having worked in IT, including at a hospital and a bank, I envision medical IT as...

...turning out more like what we got with electronic voting machines.

The enthusiasm of the groups mentioned in the OP has to do more with what will happen to the stock prices of corporations which write medical software than the actual improvements that they allege will occur in medical practice.

Since fifty percent of the software that is written is abandoned because it doesn't work, and a lot of what is out there is riddled with bugs, or hobbled by viruses, worms, and trojans, coupled with the fact that a lot of software development is now offshored to India and other countries, I predict that by 2014, computerized medical records will be another disaster.

I notice that the guy they interviewed has degrees in finance and accounting. He talks about the business generated and the profits to be made by investing in these companies. For most of the IT jobs I had, data processing departments were managed by people with business or accounting degrees, and NO computer technology expertise. After several years, it became obvious why the software in these places (including a hospital and a bank) was so bad.

[notesdev]

2. Yeah same

They're fooling themselves if they think they can get that number done in four years.

I'll be surprised if they can even choose a platform in that time.

[AdHocSolver]

3. If they seriously want to develop medical software that is affordable and works, go open source.

Develop the system to run on a Linux distribution using any combination of C, Perl, Python, Java, and/or PHP, among others, which are open source, mature software, and essentially free. The open source software available includes databases, communications, internet, office suites, graphics, multimedia, and systems administration. Linux and most of the aforementioned software will run on numerous platforms from PC's to mainframes. There are distributions that will run on older, slower hardware just fine. Hospitals and medical clinics will be able to reuse older hardware, saving a lot of money. Moreover, since a lot of computer hardware is made in Asia, reusing older hardware will not increase our trade deficits.

Hire a small team of experienced open source software developers and give them access to medical professionals who are also computer savvy to help with system design and testing. Giving a pile of money to a bunch of for-profit software companies is a sure road to costly failure.

The use of open source software will save hundreds of millions, if not billions, of dollars in initial costs and in updates, since open source software updates are free as well.

The cost of using expensive proprietary software which is made obsolete every few years to increase sales and profits will make the use of electronic medical records MORE costly than the current system. I don't doubt that the extreme cost factor of implementing computer systems using proprietary software is a significant reason why it hasn't been done already.

Paying hospitals to use expensive proprietary software to develop medical systems, when essentially free open source software of high (higher!) quality is readily available is throwing money down a rathole.


P.S. $44,000 for a medical records system for a single physician sounds rather expensive. $5,000,000 for a hospital to install a medical records system, assuming that it would use proprietary software, is ABSURDLY LOW. Somebody pulled numbers out of their hat (or more likely, out of the part of their anatomy covered by the seat of their pants).

P.P.S. As I mentioned in a previous post, as someone who worked for many years in software development, these guys are selling snake oil.