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Stock Strategist

Three Health-Care IT Stocks for the Future

Health-care IT aims to bring the industry into the 21st century.

We see several potential investment opportunities among companies focused on health-care information technology. These are technology firms whose products help the health-care system run more efficiently. Their offerings run the gamut, from computers that keep tabs on patients to digital prescriptions sent directly from the physician's handheld device to pharmacies. Such digital administration reduces health-care delivery and administration costs.

We've recently reviewed and updated our takes on the seven health-care IT companies in Morningstar's coverage universe. Strong industry trends gird these firms' fundamentals and our estimates of their fair value. Market noise can buffet their stock prices, though, making them volatile. The stocks of a few of our favorite health-care IT firms are currently approaching our "Consider Buying" prices.



 Health-Care IT Stocks in Our Coverage Universe
Company Morningstar      Rating      Moat Rating Risk Rating "Consider Buying" Price
IMS Health  Wide Average $27.00
Allscripts Healthcare (MDRX) Narrow Average $17.70
Dendrite International  Narrow Above Average $10.20
Trizetto Group  Narrow Average $16.20
Cerner  None Average $36.20
Emdeon  None Above Average $7.60
Visicu  None Above Average $7.00
Data as of 03-14-07

First, a little industry background. The movement to curb health-care costs in America benefits all health-care IT firms. As has been well publicized, the costs of administering health care are out of control. Different studies indicate that administrative costs alone account for 15%-30% of total U.S. health-care expenditures. The primary reason is that the traditional paper-based processes in most hospitals and practices are inefficient and can contribute to substandard care. Paper-based records require time and labor to file and, for some information, repeatedly type into a computer. They often get lost, leading to the redundant cost, labor, and effort of patient retesting. Handwritten charts and prescriptions can lead to adverse drug interactions, which are responsible for 7,000 deaths and 1.5 million injuries every year, according to a July 2006 study by the Institute of Medicine. In the digital era, health-care administration is increasingly anachronistic.

Ushering in modernization isn't an easy task. Outdated procedures, even if costly, are deeply entrenched at health-care facilities across the country. Why risk disruption, especially when patients' lives could hang in the balance? Physician practices are often run on shoestring budgets: Many practitioners are reluctant to spend tens of thousands of dollars on health-care IT software with which they are unfamiliar. Some hospitals and insurance companies, wary of investing in new technologies that would pay for themselves over time in the form of increased efficiency, rely on decades-old systems to patch together a network for administrative duties.

Nevertheless, the winds of change are blowing. Ask your doctor the next time you're in for a visit if he or she is familiar with any of the companies on our list above: odds are that your doctor has either recently purchased or is considering purchasing a health-care IT system. Electronic health records, electronic prescribing, remote patient monitoring, Internet-based physician education (e-detailing), and administrative record software are taking hold.

Several parties are driving the adoption of health-care IT. President Bush has set a federal government goal that every U.S. citizen will have an electronic health record by 2014. State governments are capping the percentage of participant premiums that insurance companies can spend on administrative overhead. The so-called Stark Laws, meant to prohibit physicians from referring Medicare patients to a hospital that is paying the physician for the referral (meant to stop kickbacks), are being relaxed so hospitals can compensate referral physicians for the costs of implementing health-care IT systems. Insurance companies are increasingly rating physicians for their quality of care and including use of health-care IT as a large determinant of the rating.

Slowly but surely, the stodgy old methods of health-care delivery are being forced into the digital era. And that spells gold for health-care IT firms, their stocks, and their investors.

 IMS Health 
Economic Moat: Wide
Business Risk: Average
IMS Health is the only health-care IT firm that we believe has a wide economic moat. The stock has been knocked down over fears of regulatory pressure regarding the collection of physician prescription data, which could affect the quality of IMS' core product. We believe that IMS will persevere by expanding its array of services to offset regulatory and other headwinds. From the  Analyst Report: "IMS Health's long-term prospects look bright. The company owns a global information repository of prescription and over-the-counter drug sales covering more than 1 million products from more than 3,000 drug manufacturers. Major pharmaceutical companies rely on IMS' information services to maximize and measure the performance of their investments in new drugs. We believe IMS has a wide economic moat, because it would be very difficult for a competitor to replicate its wealth of data on a global scale."

 Allscripts (MDRX)
Economic Moat: Narrow
Business Risk: Average
Of all the health-care IT companies, your doctor is most likely to have heard of Allscripts, which creates clinical software solutions for physician practices. The firm was already performing well, with significant growth opportunity, when it acquired A4 Health Systems in early 2006. The acquisition broadened its target market into the small physician practice market and brought the firm an administrative software solution to complement its clinical offering. Allscripts benefits from high-profile client practices that act as reference accounts for prospective customers. From the  Analyst Report: "Allscripts provides e-prescribing and electronic health-care records products to small and midsized physician practices. More than 30,000 physicians currently use Allscripts' products in about 3,500 organizations. This large customer base should help the company increase sales to new customers, as potential customers place emphasis on reference sites. In addition, pharmaceutical companies are looking for efficient and cost-effective channels to market their products to physicians. Allscripts is poised to benefit from this trend. The company delivers very profitable electronic marketing and educational programs to doctors through the Web."

Economic Moat: None
Business Risk: Above Average
Visicu is a risky firm, with no economic moat and above-average business risk, in our opinion. Still, our intrinsic value captures this risk, and we are very intrigued by the firm's prospects. The company's core product is a remote patient monitoring system that allows better staff utilization in hospital systems. The risk primarily stems from the fact that this system is underpinned by a single patent, which is being challenged in court and circumvented in practice. From the  Analyst Report: "As the U.S. faces a shortage of intensivists to staff intensive care units, Visicu's eICU program provides an information technology platform that allows hospitals to leverage the scarce pool of intensivists. Severity-adjusted mortality data gathered from 68 hospitals using Visicu's eICU program show a 27% reduction in intensive-care mortality rates. These positive results could encourage potential customers to implement the eICU program."

Rafael Garcia, Morningstar's health-care information technology analyst, contributed to this article.

Mike Taggart does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.