Athenahealth And The 'Meaningful Use' Clause

| About: athenahealth, Inc. (ATHN)

Athenahealth (NASDAQ:ATHN) is a bit of a loose cannon in the HCIT (healthcare information technology) sector because it is the only company that offers cloud-based services. In fact, that's all they do. Competitors like Allscripts Heathcare Solutions (NASDAQ:MDRX) and Cerner (NASDAQ:CERN) may be living in the past with their legacy software systems. In investing circles, Athenahealth has gone from B-List actor to celebrity status in the last two years. Their technical wizardry in the software-as-a-service category has traders eating it up as the stock has advanced from $21/share to its current price of $60.

There's an old adage that "timing is everything," and, one of the reasons for the stock's skyrocket up is the HITECH (Health Information for Economic and Clinical Health) Act which is part of the government's stimulus plan. Long story short, Uncle Sam is giving money to healthcare providers to modernize their medical records. Thirty billion dollars has been slotted to reimburse each physician up to $64,000 if they increase the use of EMRs (electronic medical records).

In a recent Forbes essay, Athenahealth CEO Jonathan Bush gives some off the cuff remarks about the program: "The government made doctors an offer they couldn’t refuse: go become a “meaningful user” of electronic medical records and get a bonus. Don’t, and see your Medicare rates cut. Of course, the only EMRs that doctors know about are the legacy software-based systems that they looked at and rejected fifteen years ago. Already making less than ever before, they are faced with the prospect of being told go buy one of these dogs (legacy EMR products), lay out a bunch of cash (Gov: “we’ll get you back”), slow down your practice in learning the new technology and make even less money."

This "meaningful user," or "meaningful use" concept CEO Bush talks about is a pay-for-performance clause in the HITECH Act. You must be able to prove to the government that you are meeting their criteria before you get reimbursed. I've got no beef with the government, but they've been known to drag their feet. It's a big bureaucracy, and, delaying payments could put a damper on the uptake of this program. That would put pressure on the earnings of companies like Athenahealth.

According to a September 2nd, 2011, Investor's Business Daily article by Reinhardt Krause, "Athenahealth, Cerner In Hot Pursuit OF HITECH Funds": "No matter what happens with ObamaCare or Medicare cuts, HITECH spending is forecast to continue ... Medical software firms have responded by releasing new products compliant with HITECH regulations. The programs also help hospitals and doctors document 'meaningful use' of new EMR/EHR systems. The systems automate the recording of patient data in daily activities, and they deliver required information to government health agencies."

In a recent press release, CEO Bush talks about Athenahealth's new Dashboard service, and how it will not only help physicians, but the business prospects for the company. Dashboard was obtained via a recent acquisition of Proxsys, and, Bush believes they have the answer to simplifying the "meaningful use" clause. Proxsys is a provider of services focused on the front end of the revenue cycle. In other words, they automate the check-in procedure at hospitals in connecting to insurance companies through cyberspace, and, keeps the physicians updated in regards to HITECH Act requirements:

"In working hand-in-hand with our providers every day it’s become abundantly clear that achieving Meaningful Use is very complex, far more complex and labor intensive than most people could ever have imagined, and by pulling back the covers with this new dashboard we are hoping to get the industry talking about how to best help our nation’s physicians become Meaningful Use compliant."

That sounds great for the company because it makes things easier for medical professionals, but the big question remains, will it increase the top and bottom lines? Athenahealth has a knockdown, drag-out fight ahead of them. They are the underdog in this space. They only have a 3% market share in the addressable 620,000 physician base in the United States, and, 50% of these doctors are affiliated with hospitals who have already allocated their initial HITECH software spending in their legacy systems.

In going back to the previous Investor's Business Daily piece, the article also interviews Citigroup analyst George Hill who says: "It's no longer a "green-field opportunity" for medical software firms because first-stage hospital contracts have been doled out ... It's key for the medical software business to get a greater share of hospital spending as they move to stages two and three of meaningful-use requirements, which take effect is 2013 and 2015."

Although investors are getting worked up about the stocks in the healthcare information technology sector, and have jacked up the price for Athenahealth, it may be due for a pause. It's had a nice run up, and the next stage of the HITECH Act doesn't come to fruition for two more years as previously stated. Since it's a cloud pure play, I don't paint it with same brushstroke as I do with its rivals in the legacy software sector. I think it should be valued along with contemporaries like (NYSE:CRM). What I mean by that is they deserve a premium valuation since they are riding the wave of the future with software-as-a-service.

My last article on Athenahealth was published on March 6th, and, in that posting I thought the stock was out of my comfort zone in regards to the P/E ratio, so I took a pass on it, although I stated it was a good company. Since that writing, the stock has been the life of the party rising 33%. You would have left money on the table if you'd followed my advice. It should be noted that I haven't recommended any stocks for eons because I believe the market is like a ticking time bomb. That said, I still think Athenahealth is overpriced, so let's look at the numbers.

Yahoo Finance consensus earnings estimates are for $.84/share for 2011 and $1.14/share for 2012. At a price of $60, that gives us P/E ratios of 71 and 53 respectively. Growth rate for both next year, and, as a five year CAGR (compound annual growth rate), we're looking at roughly 35%. That calculates out to a PEG Ratio of 1.5 for 2012. As a momentum investor, you'd be hard pressed not to like this trade. As a value investor, there will probably be a better price going forward despite my belief that it deserves a premium valuation. After all, you are betting on the government coming through with the reimbursements in a timely fashion.

Although the company has been minting money, analysts aren't overly impressed at this juncture. In fact, there has been very little change in analysts' opinions from my original article over six months ago: six have a buy or strong buy, eleven say to hold, and, four give it a sell. That's not a ringing endorsement. Because of the uncertainty in the implementation of the "meaningful use" proviso, which was just launched on April 18th, I would wait until after the next conference call on October 21st, before putting any money to work.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I am short the market with inverse ETFs