Health Care's IT Revolution

The drive to implement electronic health records is attracting a brace of big-name outfits

by Wendy Diller From Standard & Poor's Equity Research

In 2004, President Bush called for all Americans to have electronic health records (EHRs) by 2014. Since then, he has emphasized health-care information technology in some high-profile speeches, including the 2007 State of the Union address, as critical to making the U.S. health-care system more efficient, affordable, and safe. Other politicians and health care policy experts are also urging faster adoption of health-care IT, including EHRs.

EHRs are electronic accounts of individuals' health history and treatments, which can be transmitted digitally among doctors, patients, and facilities. While not a new concept, EHRs are at the core of a growing push to adopt a national strategy for implementing health-care IT. The urgency is escalating as an aging population threatens to overburden the enormous U.S. health care budget. Making information available easily and quickly via EHRs could help reduce medical errors, enable physicians to get a more accurate profile of a patient's medical history before treatment, and reduce administrative costs.

In the past, physicians have bought administrative IT for their offices, but have resisted EHR because of time constraints, cost, confusion, and lack of standards to enable different systems to communicate with each other. Hospitals have acted slightly faster, but they are still far behind other industries in installing state-of-the-art IT networking programs, such as digital medical records.

To drive adoption, the Bush Administration is pushing government-funded health-care programs (Medicare, Medicaid, the Veterans Administration, the Federal Employees Health Benefits Program) to initiate EHR demonstration projects, and has organized public-private collaborations to set industry-wide standards for interconnectivity and quality. The federal government is also funding state-run experimental programs that use innovative EHR applications.

Keen Competition

These government efforts—and resulting revenue sources—haven't been lost on the corporate world. EHRs require hardware, software, databases, networks, and, at their most advanced, picture archives of radiology and pathology images. Specialized health-care IT vendors such as Cerner (CERN; not ranked by S&P), McKesson (MCK; S&P investment rank 3 STARS, hold), Eclipsys (ECLP; 2 STARS, sell), and Allscripts (MDRX; not ranked) previously sought to establish widespread EHR networks, with limited success. The new federal government initiatives are reinvigorating the field.

Even as these companies renew their efforts to tap the market, they face increasing competition from deep-pocketed first-time entrants. These include the world's top three diagnostic imaging companies, Siemens (SI; 3 STARS), General Electric (GE; 5 STARS, strong buy), and Philips Medical Systems, a unit of Philips Electronics (PHG; not ranked).

Technology companies are also getting into the act, including Oracle (ORCL; 5 STARS), IBM (IBM; 5 STARS) , and Intel (INTC; 4 STARS, buy). Even Microsoft (MSFT; 3 STARS) has signaled its interest. These companies participate in some unrelated areas of health-care IT, but haven't been active in digital medical records.

Important Initiatives

Because the private sector has been so tough to develop, companies are optimistic that new government efforts, and increasing peer pressure in the medical community to improve quality, reduce medical errors, and become more efficient, will change the paradigm.