In February of 2009, President Obama signed one of his signature pieces of legislation into law... the American Recovery and Reinvestment Act (ARRA), generally referred to as the "stimulus package."
I don't want to get into the politics, but this measure hadreaching implications... especially for investors.
Let me explain...
The provisions created a federal mandate for all Medicare providers to implement electronic health records (EHR).
The reasoning behind electronic medical records is simple: efficiency. There are those who think that the percentage of health care costs as a share of gross domestic product (16%) is too high and, additionally, that costs are growing too fast. Digital medical records are an attempt to reduce costs.
Digital records will help organize all that data and help end medical errors, stop unnecessary (or redundant) medical tests and eliminate the danger of improper drug interaction -- all while streamlining health provider workloads and decreasing paperwork.
A better system means better results and improved patient experiences at a lower cost. Computerized records can revolutionize the industry, just as they did for banking and retail.
So, how does a 2009 mandate still affect investors today? Here's the story...
When the stimulus was signed in February 2009, it incorporated the HITECH Act and federal "meaningful use" incentive program for digital medical records.
HITECH provides some $35 billion in subsidies to physicians and hospitals that prove they have adopted and are using EHR technology. But most of these health care providers have yet to begin the process.
You see, when the government announced its plans for electronic health care systems, there was a lot of talk about the rules that said hospitals must begin "meaningful use" of digital medical records systems by a certain date (depending on a number of factors) with every hospital and clinic achieving full implementation by 2015.
Unfortunately, no one really knew what meaningful use looked like.
It took some extra time to get the confusion worked out, and today many hospitals are just starting to convert their records.
In a letter to the chief administrator of the Medicare program in April, the American Hospital Association (AHA) essentially asked for more time for its members to comply, noting that 80% of hospitals, to date, had failed to meet guidelines.
So how much will our nation's health care system be spending to convert to a completely digitized system?
At an average cost to hospitals of $100,000 per licensed bed for EHR software, the total price tag for the conversion to these systems has been estimated at nearly $100 billion.
Estimates for doctors' offices vary, but a sampling of the forecasts I found started at $25,000 per physician. There are nearly 700,000 doctors in the United States, which conceivably adds another $17.5 billion.
That brings the total price tag up to about $117.5 billion. And with 80% of the market still in need to EHR, as much as $95 billion could be spent in the next three years. This means big opportunities for the companies that write that software.
This won't be a one-time deal, either. The digitization of our medical records will require future software updates and upgrades. As our health care system finally enters the age of the Internet, there will continue to be opportunities for EHR companies to innovate the space.
Right now, two of my favorite software companies are athenahealth (Nasdaq: ATHN) and Allscripts (Nasdaq: MDRX) -- both of which should see increased revenue as more hospitals make the switch to their EHR software.
athenahealth is already showing signs of increased revenue from the spending. In 2011, it brought in $324.5 million, up from $245.5 million in 2010 -- a 32% gain. The company serves nearly 33,000 medical providers, including more than 23,200 physicians.
My other favorite, Allscripts, at last count, sells its products to more than 180,000 physicians, 1,500 hospitals and 10,000 post-acute organizations, which help patients transition from long-term hospital care back to the community.
Its marketing is methodical: One practice at a time, one system at a time, one region at a time. Once it gains a customer, it seeks to sell to everyone that provider works with, then, every provider that all of those caregivers work with, until the entire region is using the same seamless Allscripts system.
So far the company's method seems to be working... Allscripts was able to double its revenue to $1.4 billion in 2011, compared with a year earlier.
Risks to Consider: Of course, with investing, nothing is 100% certain. These are both smaller companies, so you can expect above average volatility if the market suffers a set-back.
Action to Take --> But one thing is for certain... the new medical EHR software is going to be big. And with 80% of U.S. hospitals still yet to implement the program, both Allscripts and athenahealth could be clear beneficiaries.