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 from implementing MedAssets' software. Savings are realized through spending management tools that reduce supply costs by managing procurement through a portfolio of GPO contracts.
MedAssets’ revenues rose 41% year over year in the first six months of 2008 to $120 million from $85.3 million. Recently acquired Accuro Healthcare Solutions contributed $5.1 million to six-month revenue growth. MedAssets’ net income for the first six months of 2008 increased to $1.1 million or $0.02 per share from a net loss of $1.4 million, or $0.13 per share, in the same period last year. MedAssets predicts 29%+ growth in 2008 revenues to at least $270 million and 14% growth in per-share earnings excluding acquisition-related costs to a $0.50 to $0.56 range. Analysts think MedAssets can produce 23% annual growth over the next five years. My $22 target for MedAssets is above the Tuesday's closing price of $16.48.
Quality Systems, Inc. develops and markets software and systems for managing dental and medical practices. Its software, marketed under the NextGen and QSINet brand names, is used by over 30,000 physicians across some 1,500 physician practices. The company markets its products and services through a direct sales force focused on medical and dental practices, physician networks, professional schools and community health centers.
Demand for Quality Systems’ practice management tools reflects the increasing complexity of payer organizations and reimbursement models. As pricing, billing, reimbursement and records management becomes increasingly complicated, medical practices must invest in tools that streamline the process by integrating back office functions with patient clinical information.
Clinical software for managing patient records is a significant growth area for Quality Systems. At present only about 20% of U.S. physicians have switched to electronic patient records but the U.S. Congress is pushing hard for electronic records and other health- care IT improvements. In addition, new Medicare legislation includes incentives for doctors who prescribe drugs electronically -- another boost for clinical software. The physician market is an especially attractive niche since it is much less penetrated than the hospital market. Quality Systems and Allscripts are the two biggest players in the clinical software segment that addresses small and mid-size physician practices.
Quality Systems recently acquired Healthcare Strategic Initiatives, a full-service health-care revenue management company, and expects to improve its cross-selling opportunities through this acquisition.
Quality Systems’ revenues grew 19% in fiscal year 2008 to $186.5 million and net income jumped 21% to $40.1 million. Results were even more impressive in the first quarter of fiscal year 2009 with revenues up 31% year over year to $55.2 million from $42 million and net income improving 40% year over year to $11.1 million from $7.9 million. Per-share earnings climbed 38% year over year to $0.40 from $0.29. In addition, management signaled its confidence in full-year results by raising quarterly cash dividends 20% to $0.30. Consensus analysis estimates target 21% growth this year and 20% annual growth over the next five years for this company. Investors should note however that Quality Systems’ share price has climbed nearly 40% this year and that shares are presently trading near a 52-week high. My $48 target price for Quality Systems is above Tuesday's closing price of $42.84.
About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience.
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