The following post is sponsored by GE Capital Healthcare Financial Services.
The rapidly growing healthcare IT industry presents fresh opportunities for healthcare investors. In this article, K. Newton Juhng, senior vice president, Investment Research Group at GE Capital Healthcare Financial Services, discusses how the trends will impact investors in healthcare.
Q. What is the state of the healthcare IT industry?
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A. The healthcare IT industry has been a fast-growing industry for over a decade as healthcare systems and physicians adopt technology to enable more efficient, cost-effective care. Used properly, IT systems can improve the quality of care, whether through better data capture or identifying potentially harmful drug-drug interactions.
The healthcare IT industry, as a whole, is still in a relatively early phase of development. Many healthcare systems still use conventional methods to exchange information, such as paper and faxes. While some hospital systems have adopted paperless, electronic systems, the vast majority still utilize some amount of paper.
On the physician office side of the industry, many are still using paper charts rather than electronic health records. But at the same time, the industry is rapidly evolving to adopt newer technologies such as tablets, smartphones and remote telemonitoring. The main focus is currently on clinical systems such as electronic health records, which will be able to capture data at the point of care and put that data into a repository where clinicians would be able to get a more complete picture of a patient’s medical history.
Other areas of significant interest include health information exchanges and interoperability. After all, what good is data if it can’t be transported to the appropriate care setting in a timely manner? While this would seem to be an easy task, one must remember that there are thousands of healthcare IT systems developed independently of one another and those systems were not built initially to communicate with one another. Getting them to do so is no small feat.
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Another spotlight should be placed on data analytics and reporting of results. Without the ability to analyze data, the overarching goal to improve the quality and cost of care cannot be achieved.
Q. Has the federal government played a significant role in the development of the industry?
A. The federal government was the impetus behind the HITECH Act, which was part of the economic stimulus package (The American Recovery and Reinvestment Act) back in 2009. It created a groundbreaking program dubbed “meaningful use” which was meant to spur the adoption and usage of electronic health records in doctors’ offices and hospitals. Whereas prior initiatives paid a lot of lip service to the need for electronic systems, the HITECH Act saw the federal government carve out $37 billion of actual funding for potential incentive payments to be paid to healthcare providers (both hospitals and doctors) if they bought certified electronic health records and showed meaningful use. Not only did the federal government stimulate adoption, but it also helped enact standards in the industry through the creation of a number of certification entities such as CCHIT and The Drummond Group.
Despite a vocal minority of Republican legislators who are looking to repeal the HITECH Act, the focus on expanding the healthcare IT industry has been a bipartisan effort. Both political parties have acknowledged that the application of more healthcare IT is a crucial part of the efficient healthcare solution.
The meaningful use program is in three different stages and, in order to gauge how far we as a country have come with adoption, the availability of funds for stage II of meaningful use is set to begin in January 2014.
Q. How is healthcare reform affecting the way people are investing in the healthcare IT industry?
A. Investing in the healthcare IT industry can be tricky with the advent of healthcare reform. The changes stemming from the Affordable Care Act have definitely changed where dollars are flowing and where Healthcare IT companies are choosing to focus their energy.
Companies that are positioned to help bend the cost curve or improve quality of care are receiving significant interest and investors are searching for companies that can aid in the new paradigm. That paradigm includes: accountable care organizations, patient-centered medical homes and increased emphasis on outcomes-based medicine.
With providers moving away from the traditional fee-for-service model to more capitated, risk-based models, those healthcare IT vendors that can help facilitate the transition should expect to see increased demand for their services.
Q. Are there any particular trends that you would highlight for investors?
A. As I mentioned in the previous question, the “accountable care” trend is opening up opportunities for companies that can aid in that effort. Specifically, companies that have strong data analytics platforms or can help with population health are viewed quite favorably. However, with that attractiveness have come inflated purchase prices.
The marketplace is poised for a consolidation trend that we think is inevitable. There are thousands of certified electronic health record systems in the market from hundreds of vendors. We expect the number of electronic health record vendors to start to reduce over time. Some will not be able to hurdle the higher functionality bar that has been set by stage II of meaningful use. Others, we expect, will be bought. Over time, we believe the larger enterprise vendors are likely to buy up smaller entities that have strong best-of-breed functionality in particular niche areas. Smaller entities may come together to compete more effectively with the larger players.
Q. What is the outlook for the industry and are there any particular areas that show significant investment in the future?
A. The outlook for the healthcare IT industry remains bright. We are still at the early stages of broad scale adoption of IT by the healthcare industry. When compared with other industries like financial services or airlines, you get a better picture of how the application of information technology can really bring greater efficiency to the operations of those businesses. Healthcare will eventually get there, it’s just slower to adopt and moves a bit more deliberately. The ability of these systems to be used to help improve quality while reducing the cost of care squarely positions the industry to be a part of any type of healthcare solution.
In terms of where to look for future investment, there has been less emphasis placed on security and privacy, which could get rectified in the future. There is some question about whether any upgrades in this area would be from more general vendors or healthcare-specific ones. Another area where we expect to see added investment is in revenue cycle management. Such an investment would generate additional cash flow to help pay for the maintenance and improvement of existing and new IT systems.
