A pure play in health care IT

One company is set to benefit from the transition to electronic records.

By TheStockAdvisors Feb 13, 2012 2:29PM
Image: Dentist working on a computer © Andersen Ross/Brand X Pictures/Getty ImagesBy Jeffrey Loo, S&P Capital IQ Equity Analyst, S&P The Outlook

Our latest "focus stock" is Cerner (CERN), which carries S&P Capital IQ's highest investment recommendation of "strong buy."

Cerner is the largest pure-play provider of health care information technology (HIT) and related services. Its products and services help health care organizations from single-doctor practices to multi-hospital health care systems manage their clinical, financial and management information systems.

Consultants Frost & Sullivan estimate HIT will grow at a compound annual rate of 13% over the next five years, expanding from a $20 billion industry currently to $37 billion.

S&P Capital IQ estimates Cerner has about a 9% overall market share and a substantial 40% to 45% market share of the hospital end market.

Fueling the industry's robust growth are new regulations requiring the adoption of HIT and the growing recognition that HIT can improve safety, quality of care, and efficiency while lowering overall health care costs.

The American Recovery & Reinvestment Act -- otherwise known as the "stimulus bill" -- included $30 billion in financial incentives to physicians, hospitals and other health care providers that adopt and use electronic health record (EHR) technology.

Further, if health care providers do not meet the law's "meaningful use" requirements by 2014, Medicare will lower their reimbursement rate by up to 5% beginning in 2015.

The criteria for meeting the requirements for meaningful use is a three-step process. According to a recent report from the Centers for Medicare and Medicaid Services, the adoption rate for HIT systems is anticipated to be most robust in 2012 as health care providers rush to meet requirements.

However, S&P Capital IQ believes the three-stage implementation process provides Cerner with a multiyear growth opportunity.

The company's strategy includes selling additional products and services to its existing clients as they implement additional requirements under meaningful use.

The company believes more than 30% of hospitals attesting to stage 1 of meaningful use are Cerner clients.

In S&P Capital IQ's view, these clients would likely utilize Cerner services and solutions for stage 2 and stage 3, as changing vendors and/or systems is complex and would likely cause disruptions.

Further, we believe Cerner, with its extensive suite of products, could gain market share from competitors that do not have the appropriate products and solutions to meet stage 2 or stage 3 requirements.

In addition to the meaningful-use implementation, we believe several additional regulatory requirements will drive further investments for HIT.

Included within the Patient Protection and Affordable Care Act (the health care reform law) is the Value-Based Purchasing Program, which will restructure how Medicare pays certain health care providers.

Starting in October, hospitals will be paid incentives for inpatient acute care services based on the quality of care, not just the quantity of services. The goal is to improve quality of care while lowering overall health care costs. HIT will play a crucial role in aiding hospitals in determining and enacting best practices in a timely manner.

Many countries are at varying stages of implementing required HIT systems and solutions. Cerner has clients in more than 25 countries, and international business accounts for about 15% of its total sales.

We believe Cerner's extensive product offering and global exposure could drive global sales significantly higher. However, we note recent global economic challenges have delayed some countries' HIT expansion.

The company is in the midst of a significant multiyear growth opportunity because of various regulatory requirements leading to the widespread adoption of HIT. We think Cerner, with its market leadership position and extensive product and services offering, is well positioned to expand its market share both domestically and internationally.

In our view, Cerner's robust and growing backlog provides investors with solid sales visibility. Last, we consider Cerner's valuation compelling, given our view of its long-term growth outlook.

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