Sector Watch: Health-care information stocks

Caps on Medicare and Medicaid reimbursement are requiring health-care providers to manage costs more effectively, spurring demand for software systems marketed by MedAssets (Nasdaq:MDAS) and Quality Systems, Inc. (Nasdaq:QSII).

Demand for cost-management software is increasing due to steadily rising health-care costs. Health-care spending is forecast to grow nearly 7% annually and reach $4.1 trillion by 2016. Spending for hospital care exceeded $650 billion last year. Government agencies and insurance groups seek to control their expenses by limiting medical reimbursement rates through fixed fee plans. Many hospitals are struggling. For example, community hospitals had a Medicaid/Medicare shortfall of nearly $30 billion in 2006. To survive, hospitals are embracing IT solutions as a means for improving efficiencies and reducing costs. MedAssets estimates the addressable market for its software exceeds $6.5 billion.

MedAssets provides software and related services that help hospitals boost operating margins and cash flow. By using MedAssets’ tools, some hospitals have been able to increase operating margins by as much as 500 basis points through increased revenue capture and reduced supply costs. The company’s customers include more than 125 health systems, 3,300 hospitals and 30,000 non-acute care health-care providers.

MedAssets’ revenues have grown nearly 36% annually over the past five years. The company operates through two segments: the revenue cycle management segment has over 1,000 hospital customers and is a leading industry provider of revenue management software. MedAssets’ spend management segment manages $15 billion in health-care supply spending and has the country’s third-largest group purchasing organization (GPO) as its customer.

Revenue cycle management tools help hospitals bolster cash collections, reduce accounts receivable and increase regulatory compliance by managing the revenue cycle all the way from patient admission through claims processing and accounts receivable. A typical customer realizes 1% to 3% revenue improvement . . .

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