Before the credit crisis worsened, healthcare reform was one of the primary issues on the presidential campaign trail. Now, it gets barely a mention as other more pressing matters weigh on the country and President-Elect Obama’s transition team.
Healthcare Reform in 2009?
Still, by all indications, profound investments in the healthcare system are on the docket for next year. Last week, former Senate Majority Leader Tom Daschle was nominated to be the new Secretary of Health and Human Services, a pulpit from which he can press his career-long interest in improving the U.S. healthcare system.
Meanwhile, Senator Max Baucus, chairman of the Senate Finance Committee, recently told the Washington Post that he considered healthcare information technology, or HCIT, to be a key part of a fiscal stimulus package. In his words, it “represents the beginning of healthcare reform.”
Like so much with the stimulus package, there hasn’t been a lot of specificity. We still don’t know, for instance, how much will be spent as estimates have ballooned from around $500 billion to more than $1 trillion over two years. However, during his campaign Obama called for a $10 billion a year investment over the next five years to help facilitate the adoption of more advanced HCIT systems, including electronic health records.
It was believed that these investments would yield savings of roughly $77 billion a year through shorter hospital stays, fewer tests, more appropriate drug regimes, and other various efficiencies.
With the current need to reinvigorate the economy, such a “cashflow neutral” investment that helps spread the government’s spending away from its focus on infrastructure and energy will attract strong bi-partisan support — especially since President Bush has been a big proponent of electronic medical records as a way to reduce the cost of healthcare.
Bringing Down the Cost of Healthcare
Additional funding to this space will be a boon to healthcare software provider Cerner (CERN), which specializes in bringing down the cost of care through efficiencies like electronic medical records.
Since it was founded in 1979, the company has become a leader with a client base of more than 6,000 hospitals, clinics, labs, and pharmacies around the world generating revenues of $1.5 billion last year. Cerner’s main software product, called Millennium, is a unified solution that is easily scalable to include clinical, financial, and operational information systems. Besides software sales, the company offers computer hardware from providers like Hewlett Packard (HPQ), technical support, educational training and managed services.
Cerner shares are up 144% in the past six years, vs. 7.4% for the tech stocks in the S&P 500. The company has won investors’ admiration by growing earnings at a 23% annual rate thanks to a continued focus on research and development efforts and the healthcare industry’s interest in moving from piecemeal applications towards holistic solutions with a common software platform. Not only is this a cheaper solution from a technical support standpoint, but allows better integration of applications.
This creates great cross selling opportunities for Cerner in its existing client base where on average there are only six out of 57 application solutions installed. From document imaging and physician ordering, to revenue management and automated drug delivery, there is a whole range of services healthcare providers can take advantage of.
Opportunities in the Global Market
New business development is focused mainly on international markets in dire need of basic IT infrastructure. Credit Suisse analysts estimate that the global market opportunity for HCIT is roughly $30 billion. With domestic revenue growth funded by government investments, Cerner will be free to expand its international footprint into the emerging market economies.
Cerner is currently operating 19 locations outside the United States and has installed Millennium software in 17 countries. With longtime operations in the United Kingdom, Australia, and France well entrenched, the company has recently expanded into Spain, Ireland, Egypt, Malaysia, and the United Arab Emirates. Cerner also recently announced its first South American client, a health system operating in Santiago, Chile. As a result of these efforts, Cerner’s international revenue contribution has grown from 6% in 2003 to nearly 20% last year.
Finally, Cerner has been transitioning its focus from one-time upfront software and hardware sales to a managed services model whereby clients access software remotely from data centers. This is a win for both Cerner, which gains a more stable and visible revenue stream, and for healthcare providers, as they are able to cut ownership costs.
About 10% of revenue is generated in this way now, but the company has been aggressively marketing the advantages of its hosted services.
It’s a solid bet now for anyone betting on stimulus money rejuvenating the healthcare IT business.
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