Smart Investing in the $2.7 Trillion Healthcare Sector

Includes: ZLKKF
by: StreetAuthority

By Andy Obermueller

Love him or hate him, President Barack Obama has done one thing that will change healthcare in the United States forever. And it's actually a good thing.

The $787 billion stimulus bill passed in 2009 contained a massive provision for the adoption of electronic medical records (EMRs) -- that is, mandatory computer-based record-keeping. An EMR contains test results, prescription drug dosages -- everything.

Though the diagnostic and treatment technology used in healthcare is among the most advanced in the world, most medicine is still practiced with paper reports loaded into charts jammed into file cabinets.

Not surprisingly, when information is needed (the results of a medical test, for instance) it's unavailable as often as it's found. The test, or whatever information was needed, then must be performed again, which generates additional cost, takes more time and usually adds another appointment to both the patient's and the doctor's schedule.

But duplicate test results aren't the only problem with the status quo. The current record-keeping system also lends itself to a high degree of inaccuracy. Take prescriptions: Medication errors are frighteningly common, harming at least 1.5 million people a year, according to the Institute of Medicine of the National Academies.

This adds billions to the cost of delivering health care, to say nothing of suffering and, in some cases, even death.

In fact, if preventable medical errors were included in the Centers for Disease Control and Prevention list of the top 10 causes of death -- which they are not -- those errors would be the sixth-highest tally.

Medical errors amount to some 98,000 deaths a year, ahead of diabetes and kidney disease.

You might reasonably think electronic record-keeping -- especially in this age of interconnectivity -- would have been implemented decades ago. But it took a lot of cash from the Treasury and the power of a series of federal government "carrots and sticks" within the Medicare program to get the ball rolling.

To begin to combat the notion that medical errors are as likely to kill a person as some sort of illness or disease, the Obama administration devoted more than $20 billion to move hospitals and clinics to the 21st century.

The process has already begun and the deadline is looming. The entire U.S. health care system must comply with the new EMR system by 2015, when all hospitals and clinics will be required to employ the new medical record keeping method. The cost is staggering: Some have estimated it at $100,000 per licensed hospital bed, which works out to more than $94.2 billion in spending.

But there's more to fixing this problem than simply moving to electronic records.

Mark my words: Human error in the clinical and hospital settings will be minimized by greatly limiting human input in the flow of information.

Nearly every monitor, device, sensor and electronic control in the doctor's office, imaging center, lab, pharmacy or hospital will be connected and integrated with the EMR system. The pill a patient needs will be electronically prescribed, distributed, billed, paid for and reordered without the need for human workflow, cross-checked for accuracy at every turn.

One reason investors should be interested in this area is its opportunity for growth; another is its size.

Healthcare spending is a huge part of the U.S. economy and it remains a growing sector. Even with the advent of ObamaCare, which was sold as a cost-cutting plan, the size of health care spending is still projected to grow in dollar terms and as a percentage of gross domestic product (GDP), as the chart below shows - (click to enlarge).

Remember, the scale at the left side is in billions, so the second line up from the bottom of the chart is $1 trillion. In other words, as a country, we are today at about the $2.7 trillion mark in health care spending.

By the close of the decade, this will nearly double. And you have to ask yourself: Would you rather own a lot of low-margin hospital stocks that might be able to turn a net profit of 5% in a very good year, or would you rather own the companies that are delivering the game-changing technology that hospitals will be begging for to reduce errors, costs, and liability?

That's why I've been tracking a few of the most promising plays in my stocks advisory.

These are companies like Zarlink (ZLKK.PK), with its Medical Implant Communications Service, a wireless radio technology that's part of the world's first implanted device to treat hypertension and heart failure. Zarlink chips are extremely low power, and the medical device maker is the industry's only provider of standards-compliant radio chips for the health care market. And Zarlink is the go-to supplier -- a $300 million company that has already shipped more than a billion chips.

I know what field I'm interested in investing in. It's the same thing I'm always interested in buying: My slice of the profitable future.

Disclosure: Neither Andy Obermueller nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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