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Health IT Stocks: A Good Long-Term Bet?

By  +Follow June 26, 2013 10:55AM
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Efforts to encourage the use of electronic medical records, or EMR, have existed since at least 1996 when the Health Insurance Portability and Accountability Act was passed with the intention of more effectively combatting insurance fraud. Along with the Affordable Care Act (ACA) this previous legislation has been bolstered by the Physician Quality Reporting Initiative that seeks to incentivize physicians and hospitals around the country to adopt a modernized medical records system.

Bloomberg recently reported that the U.S. ranks only 7th among industrialized nations in terms of its adoption of EMR, with 69 percent of physicians claiming to have used the electronic system in 2012. But one can only imagine that the number will increase, and that it will do so in the short-term; according to Accenture research, the $24 billion dollars in revenue generated globally by the industry in 2012 is set to increase some 10 percent a year through 2015.

Even a precursory look at some of the publicly traded companies that have become involved in the IT side of the health industry would seem to corroborate this. McKesson Corporation (MCK), is one such example. The $25.7 billion market-cap company is trading at $114.82, up 22 percent over the last 12 months.

The same can be said for Cerner Corp. (CERN), a $16.33 billion market cap company with shares at $96.35, up nearly 20 percent on the year, as well as Allscripts Healthcare solutions (MDRX), a $2.2 billion market cap company trading at $12.75 per share and up over 25 percent in the past year.

EMR seems to be the inevitable way of the future for how medical records are kept, and a host of other developed countries are way ahead of the U.S. in effectively utilizing them. But there have been a number of controversies that have arisen along with the increasing adoption of digitized records in the U.S. since the ACA was first approved in 2010.

Reports have surfaced that harmful and at times lethal doses of drugs have been administered to patients due to human error in the process of data entry and network delays in updating medical information. A December study from the Pennsylvania Patient Safety Authority found that over an 8-year period, 3,099 incidents of medical errors due to difficulties with electronic records were reported. 1,142 of those incidents were reported in 2011 alone, more than twice the number that were reported in the previous year.

Furthermore, companies that design EMR software are not beholden to any form of government oversight in the way that, say, medical equipment makers are forced to report injuries and deaths resulting from the use of their products. There have also been privacy concerns with regard to how a patient’s medical information may be sold for marketing purposes.

That said, some 200,000 deaths per year are the result of medical malpractice, with a great number of these resulting from preventable errors, including those involving a patient’s health records. EMR errors appear to be most common when a hospital first changes over to an electronic system, but there is plenty of evidence to suggest that a properly functioning EMR system actually helps to reduce these errors, and along with them, the resulting financial burden on the health care system in general. And this could mean that health IT stocks have a bright future ahead of them indeed.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


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