Friday, July 24, 2009

Trading in Transparency

One of the elements of competitive and therefore viable market is transparency. Buyers need to have full information. Otherwise sellers have too much power. In my view we have not had such transparency in the health care industry. Physicians and hospitals own all the information and they do not share!

Electronic records will tilt power toward the consumer. Patients, who are the buyers, will have complete and immediate access to their health care records. They can switch physicians and hospitals without fear of losing important knowledge about their medical history. What is more effective than the threat of losing a patient to incentivize quality performance?

Technology is a wonderful thing, allowing computers to run up the flag of alarm when duplicative tests are ordered. Prescription abuse could be brought to an end.

What is more, regulators and others could have access to aggregated data that will enable the establishment of benchmarks for adequate care. This will eventually make it possible to price insurance coverage as well as compensation based on outcomes rather than on frequency of treatment.

Congress mandated electronic records for physician offices and hospitals and set a 2014 deadline. That is four years out and may seem like adequate time, but the medical community is dragging its feet on EMR (electronic medical records). This means market penetration is still minimal, leaving lots of room for new products and new orders.

The problem now for investors is that the stocks of medical information solution providers may be overvalued even after the equity market debacle in the last year. Take Eclipsys Corp. (ECLP: Nasdaq) for example. The stock trades at 36.0 times forward earnings after a drop in the consensus estimate. The forward PE of Cerner (CERN: Nasdaq) is 23.7 times forward earnings, which is not much more compelling that the trailing PE of 27.6 times. Mediware Information Systems (MEDW: Nasdaq) is another name in the space, but is even less a value.

In the end Congress may have already taken the most important action toward reforming health care by mandating electronic medical records. However, investors must trade cautiously to capitalize on the move.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein. ECLP was mentioned in the Small Cap SEARCH newsletter with generally favorable commentary.

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