Financial Perspectives – Summer 2008

Focus on Healthcare

Alexander Y. Draper,
CFA, Healthcare Research Team

Healthcare information technology (HIT) encompasses secure, standards-based, electronic health records to improve patient care and increase administrative efficiency. This sector is divided into clinical systems dealing with laboratory results, medications, allergies, procedures and the like; and financial systems focused on streamlining billing and other administrative functions.

To assess the direction of the HIT market, we surveyed participants including consultants, vendors and providers, and augmented our findings with an analysis of surveys conducted by other organizations.

Among our key conclusions:

• We believe that, in 2008, the sector’s growth will continue at roughly the same pace as in 2007 – most likely at 5% to 8% – coming in below the double-digit growth of the prior two years.
• A primary determinant of HIT vendor success continues to be the willingness of hospitals and ambulatory clinics to allocate portions of their budgets to new systems.
• We expect the sector to continue to focus on clinical, rather than financial, systems.
• Financial constraints – primarily Medicare/Medicaid reimbursement rates and the stability of the capital markets – continue to impede customer spending.
• Customers expressed more concern over vendors’ financial stability than their prices, suggesting that they are seeking to establish relationships rather than simply purchase products.
• No single HIT vendor appears to have a major competitive advantage in this arena: Customers revealed no material difference in their perceptions of the major publicly traded HIT vendors.

Although we expect to see continued growth in HIT budgets in 2008, budget constraints experienced by hospitals and clinics are likely to pose a significant risk to growth. That is, we believe decision-makers would like to spend more on technology acquisitions but may not have the financial resources needed to carry out their objectives.

In the late 1990s and early 2000s, HIT vendors struggled to persuade prospective customers that their products would result in a tangible positive return on investment (ROI). Industry research indicates that this is no longer a hurdle. In a recent survey, only 5% of respondents cited quantifiable benefits, or ROI, of an HIT system as the most significant barrier to implementation. This compares to 6% in 2007 and 11% in 2006.

Instead, “lack of financial support” now tops the list, cited by 26% of survey respondents as the most significant barrier. This compares to 20% in 2007 and 18% in 2006.

In summary, the ability of HIT vendors to sell their products reflects in part their effectiveness in establishing relationships with existing and prospective buyers – giving incumbent vendors an advantage. Perhaps more importantly in the current environment, sales are also a function of the willingness of hospitals and clinics to allocate funds to new systems.

Raymond James & Associates and Raymond James Financial Services are wholly owned subsidiaries of Raymond James Financial, Inc. (NYSE-RJF).

The information contained in this newsletter has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. We may, from time to time, have a position in the securities mentioned and may buy or sell such securities in the course of regular business.

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