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Buy or sell: Lofty health IT stocks at risk if e-records delayed
September 30, 2011 / 3:21 PM / 6 years ago

Buy or sell: Lofty health IT stocks at risk if e-records delayed

(Reuters) - Shares of companies providing information technology to the U.S. healthcare industry are delicately poised -- highly priced for potential revenue growth, yet vulnerable to any wobble in a government drive to computerize patients’ health records.

<p>Geisinger Health System pediatrician Dr. James Zolla enters and reviews patient medical information in the Geisinger Health System electronic health records system at the Geisinger Clinic in Selinsgrove, Pennsylvania, October 28, 2009. REUTERS/Brad Bower</p>

The pace of that drive -- to have doctors and hospitals adopt electronic health records (EHRs) -- is at risk as the United States tackles its massive budget deficit.

Proposals to cut the debt mean incentives to encourage the switch to EHRs may be trimmed, and a set of requirements for adopting e-health records may be delayed.

Clinical IT providers -- offering services ranging from recording patient data to diagnostics images -- include Cerner, Allscripts, Athenahealth, Quality Systems and Computer Programs & Systems.

They were expected to benefit hugely from the Obama Administration’s push for e-health records.

The HITECH Act of 2009 requires physicians and hospitals to digitize past medical records and adopt EHRs as the government seeks to create a single online platform to connect all doctors, hospitals and caregivers.

To push the process along, the government set up the ‘meaningful use’ incentive program. Requirements on how to meet the first stage of this are in, but a second stage is delayed.

Some analysts play down the impact of the delays on the companies’ revenue. Others say the expensive stock valuations leave no room for any further uncertainty.


Even as deficit-cutting proposals threaten some areas of healthcare provision, President Obama’s commitment to EHRs is such that the incentives are not expected to be changed.

In a recent Citigroup survey of hospital executives, close to 8 out of 10 respondents believed current market volatility would not hit near-term healthcare IT spending trends.

And, if talks on how to cut the deficit further delay the timeline for the second stage of the EHR guidelines, doctors and hospitals would actually have more time to comply with Stage 1 regulations. Very few have cleared Stage 1 to date.

According to a recent Healthcare Information & Management Systems Society (HIMSS) report, only half of U.S. hospitals are in a position to qualify for Stage 1 incentive payments, and fewer than 50 percent of physician practices meet the criteria.

“I don’t think it actually has a clear negative impact on vendors and, if anything, might actually help them ... by giving them a little breathing room to do it effectively, efficiently and in a high quality manner,” said Robert W. Baird analyst Eric Coldwell.

“EHR is the No. 1 investment focus (for hospitals), unquestionably,” he said.

E-health records can improve a hospital’s finances by reducing waste and increasing efficiency, recent independent research showed. A study published in the Journal of Healthcare Information Management suggested EHRs can quickly save money and boost revenue.


But, given current high healthcare IT share valuations, there are fears that even the slightest delay in the revenue cycle could derail the stocks.

“These stocks are priced to perfection,” said Maxim Group analyst Anthony Vendetti.

“These companies trade at multiples above their growth rate. (The stocks) have very little room for disappointment and have to consistently exceed expectations on every metric.”

Cerner, the only large-cap stock in the sector, trades at nearly 40 times its forward earnings expectations, well above the sector average of 26, according to Thomson Reuters data.

There is also some skepticism about whether EHRs really can reduce costs, and apprehension about potential competition from open-source health IT systems.

“There are a bunch of white papers written by doctors and researchers that so far haven’t been able to find evidence of lower costs,” said Morningstar analyst Rafael Garcia. “Yes, they improve the quality of healthcare delivery, but so far there is no evidence of lowering prices.”

Also, it may not be long before there is a competing open-source e-healthcare system that hospitals and physicians can easily access for free. The Open Source Electronic Health Record Agent (OSEHRA) forum has welcomed contributions from developers to set up an EHR system.

“In due time, it will become attractive and people are going to look at it as an alternative to go to the next stage or next round of health IT installations, instead of paying a few million dollars to vendors,” Garcia added.

Reporting by Esha Dey in Bangalore, Editing by Ian Geoghegan and Anthony Kurian

Our Standards:The Thomson Reuters Trust Principles.
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