Obama's Healthcare Plan Shot In The Arm for IT Sector

The federal stimulus package passed in February may help some IT companies climb the stock charts.

The law provides $19 billion to replace the ubiquitous paper chart on a clipboard with electronic medical records.

While some traditional technology names will benefit from this portion of the American Recovery and Reinvestment Act of 2009, it’s the healthcare IT companies that will see the biggest boost and represent the biggest opportunities for investors.

Forrester Research expects about $14 billion of the $19 billion will be available to technology vendors through purchases of technology gear and related services.

Much of the money will come in the form of grants the federal government makes to healthcare providers.

That’s why companies such as Cisco Systems and Oracle are offering advice to organizations regarding how to land stimulus grants.

“Part of the need is for vendors to understand who could be potential recipients of these grants, and then work with those recipients to help them make their request for the grants, so that they can get the funding to then spend on things like medical technology,” says Andrew Bartels, principal analyst at Forrester Research.

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EMRs require specialized applications for both hospitals and smaller physician clinics, but there’s also a need for more general-purpose technology to run the systems, such as PCs, servers, data storage, and networking equipment.

Dell and eClinicalWorks recently announced a partnership to sell eClinicalWorks’ EMR solution through Wal-Mart’s Sam’s Club stores. The package, which will be offered to practices with up to three providers, includes Dell desktops, tablet PCs, and laser printers, as well as setup and training services.

“Those physicians in small practices, which is the majority of them, will at least double their purchases of electronic health record products over the next few years,” says Wes Rishel, vice president at Gartner.

Rishel adds that the bigger piece of the pie will come from providing implementation services, which favors companies like IBM and Accenture . But analysts believe for most tech vendors, the healthcare stimulus plan represents only an incremental revenue stream.

“One of the big issues here is that some of the markets for technology many vendors have counted on, such as state and local governments, are likely to be cutting back on their purchases,” Bartels explains. “So what they may gain from the stimulus package may simply replace what they may be losing from state and local governments who would otherwise be cutting back on their purchases.”

A Potential HIT for Investors

For the pure-play healthcare IT companies, or HITs, however, the stimulus package promises to be a windfall. Companies such as Quality Systems, Allscripts, and Athenahealth specialize in EMR products for small and mid-size physician practices, while Cerner and Eclipsys develop solutions that primarily target hospitals.

“There’s $30 billion of incremental spending pumped into an industry that does $20 billion a year in revenue,” says Sean Wieland, senior research analyst at Piper Jaffray. “It’s going to move the needle.”

The problem, according to Wieland, is that most of these stocks have already rallied in the wake of the stimulus bill’s passage. Both Cerner and Quality recently hit 52-week highs after impressive four-month run-ups.

Furthermore, these companies won’t start to record stimulus-related software bookings until 2010. Nonetheless, Wieland says these stocks are still a good bet for the long term.

“Quality Systems’ earnings, using some very conservative assumptions, could go up by 48 percent in 2011—48 percent upside to our current EPS estimates if this all comes through,” says Wieland.

“This is still very much an investable theme, but there’s a near-term, long-term thing here. What you’ve got in the near term is a really tough economic cycle," Wieland says. "If these stocks can weather the storm in the near term, I think there’s upside in the long term.”

So much upside that Wieland expects more players to enter the market in order to achieve the government’s goal of 75-percent provider adoption by 2013.

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“It’s taken 20 years to get 50,000 physicians on board,” he says. “What we’re talking about now is putting another 400,000 physicians on e-systems within the next five years.

The healthcare IT industry is a very small industry says Wieland with a very specific set of capabilities that each company provides.

"These companies are going to have to expand their implementation capabilities significantly, "Weiland says. "There’s going to be a lot of new technology that comes on board and a lot of interesting developments over the coming years. There’s plenty of room in this market for a diverse group of players.”

Ediitor's Note on Disclosures:

Sean Wieland of Piper Jaffray does not own shares in QSII, MDRX, ATHN, CERN, or ECLP.

ECLP has been an investment banking client of Piper Jaffray during the past 12 months, and the firm makes a market in the securities of QSII, MDRX, ATHN, CERN, and ECLP.

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