Digital duo: Electronic medical records

by Andy Obermueller, editor Game-Changing Stocks

The reasoning behind electronic medical records is simple: efficiency. Digital records will help  end medical errors, stop unnecessary tests and eliminate the danger of improper drug interaction -- all while streamlining workloads, decreasing paperwork and lowering costs.

Computerized records can revolutionize the industry, just as they did for banking and retail. And athenahealth (ATHN) and Allscripts (MDRX) are my favorite software plays on this market.

When the American Recovery and Reinvestment Act -- known as the Stimulus Act -- was signed in 2009, it incorporated the HITECH Act and federal "meaningful use" incentive program for digital medical records.

HITECH provides some $35 billion in subsidies to physicians and hospitals that prove they have adopted and are using EHR technology. But most of these health care providers have yet to begin the process.

So how much will our nation's health care system be spending to convert to a completely digitized system?

At an average cost to hospitals of $100,000 per licensed bed for electronic health records (EHR) software, the total price tag for the conversion to these systems has been estimated at nearly $100 billion.

Estimates for doctors' offices vary, but a sampling of the forecasts I found started at $25,000 per physician. There are nearly 700,000 doctors in the United States, which conceivably adds another $17.5 billion.

This won't be a one-time deal, either. The digitization of our medical records will require future software updates and upgrades. As our health care system finally enters the age of the Internet, there will continue to be opportunities for EHR companies to innovate the space.

Right now, two of my favorite software companies are athenahealth and Allscripts -- both of which should see increased revenue as more hospitals make the switch to their EHR software.

Athenahealth is already showing signs of increased revenue from the spending. In 2011, it brought in $324.5 million, up from $245.5 million in 2010 -- a 32% gain. The company serves nearly 33,000 medical providers, including more than 23,200 physicians.

My other favorite, Allscripts, at last count, sells its products to over 180,000 physicians, 1,500 hospitals and 10,000 post-acute organizations, which help patients transition from long-term hospital care back to the community.

Its marketing is methodical: One practice at a time, one system at a time, one region at a time. Once it gains a customer, it seeks to sell to everyone that provider works with, then, every provider that all of those caregivers work with, until the entire region is using the same seamless Allscripts system.

So far the company's method seems to be working... Allscripts was able to double its revenue to $1.4 billion in 2011, compared to a year earlier.

Of course, with investing, nothing is 100% certain. These are both smaller companies, so you can expect above average volatility if the market suffers a set-back.

But one thing is for certain... the new medical EHR software is going to be big. And with 80% of U.S. hospitals still yet to implement the program, both Allscripts and athenahealth could be clear beneficiaries.

Learn more about this financial newsletter at Andy Obermuellers's Game-Changing Stocks.

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