Health Care Trends Part 3: Hospital Admissions, IT Standardization

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Includes: BAX, BDX, CERN, GE, PGH, QD, SYK, ZBH
by: Bullish Bankers

If you have not read the first and second parts of this article, please follow the links. By now, you should be getting a quick glimpse of the trends that are influencing health care companies operations and decisions. In my first article I discussed how the government’s and FDA’s agendas are affecting the health care industry, and in my second article, I examined recent M&A activity, generic competition, and trends within the CRO industry. In this article, I will touch over the things that are plaguing Managed Care Organizations (MCO) and Medical Supplies companies and forces that are inspiring growth in Health Care IT.

Decline in Hospital Admissions

The decreasing number of people admitted into hospitals is hindering the managed care industry. Although the healthcare industry has been typically perceived as recession-proof, due to the increase in unemployment and the decline in the amount of disposable income each family has, people have not been rushing out to the hospital as quickly as they were before the recession. Since hospitals have fewer patients coming in, they generate less cash, and in response, hospitals decreased inventory levels of every day items. Companies like Baxter (NYSE:BAX) and Becton Dickenson & Co (NYSE:BDX) have really felt the pinch on sales as hospitals cut costs by not refilling inventory back to previous levels. BDX’s medical device segment, BD Medical, experienced a 3% decline in sales during fiscal Q2 2009 in response to the decreased inventory levels. However, once hospital admissions start increasing, hospitals will need to increase their inventory level to reflect the number of patients admitted.

This trend spells bad news for the rest of the medical device sub-sector as well. To cut costs even further, and to add fuel to the fire, hospitals have significantly reduced their capital equipment budget. This has taken its toll on machine and equipment manufacturers like GE (NYSE:GE) and Phillip’s Electronic (NYSE:PGH), because the first part of the budget that hospitals cut is for capital machinery. In 1Q09, GE’s Health Care segment, orders for their medical equipment were down 16% and revenues were down 10%. Personally, I do not think hospitals will dish out money for capital equipment in the near term, so I am staying away from pure play capital equipment manufacturers. Hospitals won’t buy new MRI machines and CT Scanners until they are comfortable with market conditions or until their machines need updated.

Fortunately, Americans will return to hospitals at a faster rate since they will need the care that they had previously put off, which would help boost medical supplies companies stock prices. Discretionary health care companies that provide supplies for elective surgeries, tests, and procedures will benefit in the recovery. If you think about it, when you need a hip or a knee replaced, you will only put it off until the pain in your body is greater than the pain to your wallet. This should occur when people start feeling more secure about the future of our economy and when people start returning to hospitals for care. If you’re looking to capitalize on this trend, Stryker Corp. (NYSE:SYK) and Zimmer Holdings Inc. (ZMH) are the big players in elective surgeries.

Health Care IT

I already discussed the influences of the government on health care in my first article, but this hot topic deserves its own section. The government puts health care IT close to the top of its list as a means to lower costs. Obama wants to invest $10 billion a year over the next five years to convert your health records from paper to digital. According to Obama, “administrative simplification” and “standardization” can reduce costs by $2 trillion, resulting in a $2500 average in savings per family. This new focus on health care IT provides companies with an opportunity to secure a safe stream of revenue throughout the next few years. If you look at Cerner’s (NASDAQ:CERN) and Quadramed’s (QD) performance in the past 6 months (up over 60%), you’ll recognize how prudent it could be to invest in health care IT companies.

By now, you should be cognizant of the trends that are influencing the health care industry. With so many factors influencing it, there are always opportunities to gain from investing in health care. Before you invest, I encourage you to do more in-depth research of the forces that are changing the industry, because effective research can pay dividends.

- Brendan Stevens

Disclosure: The fund the author is associated with currently holds BDX and CERN