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Secular Shifts In Health Care Delivery Drive Demand For IT Systems

|Includes:AET, Cerner Corporation (CERN), HMSY, MDRX, MDSO, UNH

TWST: You cover a wide range of health care stocks. How does health care IT fit into the overall picture for you right now?

Mr. Windley: It's an attractive space for a couple of reasons. The government incentives to hospitals and doctors to purchase and implement health care IT systems has been and continues to be a catalyst for health care IT vendors. On top of that, though, the secular shifts in health care delivery are driving demand for healthcare IT systems as well. To be more specific, as hospitals and doctors consolidate, as delivery systems integrate, they need to have better business management information systems, on the revenue cycle side and on the patient care side. That's driving them to implement more sophisticated systems. While perhaps government artificiality is a driver, the free market change and evolution in the way we are delivering health care is driving demand as well.

TWST: Within that IT space, where are you focusing your attention right now?

Mr. Windley: We cover half a dozen or so companies, and we're applying our energies fairly evenly. Within that group of companies, there are firms that focus more on selling software and services into the hospitals, as well as some that focus more on the physician office. We also have a couple of nontraditional companies in that space. One, HMSY (NASDAQ:HMSY), is focused on fraud, waste and abuse. As government spending for health care is poised to escalate pretty dramatically, the need for an auditor, if I may use the term loosely, to identify areas of inappropriate spending and recoup those monies is of increasing importance as well. The other one-off is a health care IT cloud player for the pharmaceutical development process, Medidata Solutions (NASDAQ:MDSO), and they're having quite a successful run.

TWST: What's the latest that you're hearing on utilization and how that could or does impact health care IT stocks?

Mr. Windley: We continue to hear that that the number of patients coming to facilities is depressed. Third-quarter numbers are likely to show continued negative volumes year over year and may be more flattish sequentially. The impact is that hospitals' financials continue to be under pressure, and their pricing increases are relatively smaller than they have been in the past. That is in part because Medicare is taking some pricing out, state-based Medicaid updates are relatively small, and the commercial managed care rate increases are a little more challenging.

Most will say that commercial increases are in a typical 5% to 6% range, but it's, if anything, erring on the low side of that. You've got low volumes and somewhat lower pricing, which is not a good combination. The providers in general, and hospitals specifically, are under a lot of pressure to take cost out of the system. Plus they're faced with the health care IT spend, which is a big expenditure. Hospitals are torn between the pressure to limit spending in the short to intermediate term, and the pressure to install systems that help them to be more efficient over the long term, and it's a tug of war for administrators. I'd say the fact that the government incentives are out there helps them to get over that hump. The ROI calculation is being subsidized in that purchase decision.

Another factor is that the providers are looking forward to 2014, when the number of paying patients walking through the door improves. Perhaps, then, the hospitals can endure a few more quarters of financial pain to get through an improving 2014. But that places a lot of chips on 2014, and it requires that improvement to happen fairly rapidly in 2014.

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