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— Analysis —
When the University of Pittsburgh Medical Center hired IBM Corp. three years ago to streamline and modernize its bloated array of servers and information technology systems, it might have been hard to imagine the influence the $400 million project would have on the healthcare industry. But after paring over $80 million annually from UPMC's IT insfrastructure costs, the project was held up as an example of how technology could reduce healthcare costs, and the new administration studied it carefully as it assembled its $19 billion stimulus package to modernize medical record keeping. "This is the kind of thing the government looked at and decided that the stimulus could help," says Dan Pelino, IBM's general manager of global healthcare and life sciences industry.
-- See other stories in this Healthcare Special Report -- Naturally, large technology companies such as IBM are enthusiastic about the unprecedented governmental push, which contains $19 billion worth of subsidies, grants and loans aimed at prompting hospitals and doctors' offices to put their data and records online. The goal is to develop seamless systems where general practitioners and specialists can easily access a patient's medical history, X-ray images and test results with a few keystrokes. It seems a potential boon for companies that develop information technology for the healthcare industry. But some observers view the stimulus money as anything but a gravy train. At best, it is unclear exactly, or even whether, the money will boost technology companies that serve the healthcare industry, says David Brailer, chairman of investment firm Health Evolution Partners. He argues that the largest portion of the money goes to hospitals, 75% of which have either instituted electronic record-keeping systems already or are doing so. Brailer described the 25% that haven't as "troubled hospitals" that should get all of this parcel of the stimulus. Physicians' offices will get $4 billion over two years, which means a 30% increase in doctor spending on electronic record keeping. "This doesn't change the game, and it's such a fragmented market that it's really hard to know the effect," he says. "Our current thesis is that its really hard to figure out who the winners will be." Brailer spent two years as the previous administration's national coordinator for health information technology, then founded Health Evolution Partners to invest in promising startups in the field. His firm is something of a stimulus package in and of itself, though on a much smaller scale than the upcoming federal effort. The California Public Employees' Retirement System last year funded Health Evolution Partners with $700 million and charged it with a similar goal: Cut costs in the healthcare industry -- and generate strong returns as well. The firm has already allocated about 15% of its money and aims to invest a further $100 million to $150 million in 2009, Brailer says. Empirical analysis supports Brailer's view on the impact of the $19 billion. In a study of the legislation's affect on the technology industry's credit ratings issued last month, Moody's Investors Service noted that most of the incentives will not be awarded until 2010 and then will be spread over several years. "While the healthcare information technology (HIT) aspect of the U.S. government's economic stimulus package may sound like a hit on paper for technology companies, we do not expect it to strengthen currently strong companies or to resuscitate weaker ones," the report said. Moody's sketched out a hypothetical situation in which IBM and Hewlett-Packard Co. split the $19 billion over the four years after 2010. Assuming input costs were known and projects the companies undertook achieved average service margins of 11%, the money would mean $247 million in annual operating revenue for each company. Given IBM's annual operating revenue of $15.9 billion and HP's of $10.5 billion, this would represent a drop in the bucket. Naturally, the $19 billion would be spread over a far wider collection of technology companies, but, as Moody's put it, this would dilute the impact and generally fail to move the needle for any single company. Despite the predicted lack of major impact, some positive developments will emerge from the package. For one, says Brailer, it will draw interest from venture and private equity firms that have not necessarily paid close attention to opportunities in healthcare technology investing. "Overall, lots of technology investors that haven't spent time in healthcare are going to start investing money in healthcare IT," Brailer says. "There is a tremendous amount of interest in this within private equity," Pelino adds. "There's been an increase in the number of organizations that have been talking to IBM and looking for advice on how to mitigate the risk of a business model." Most of the basic plumbing of what Brailer refers to as "the medical Internet" is being developed and managed by big companies such as IBM, HP, Oracle Corp. and other large technology concerns. But startups that develop data privacy, security and identity management applications will benefit from new demand for cutting-edge technology, he says. IBM's Pelino argues that the new push from the government to smooth communication and data sharing will make standards all-important. This could provide challenges and opportunities for technology startups, he says. "Entrepreneurs have had vertically based solution sets that didn't fit into integrated delivery systems or cost too much," Pelino says. "If they can fit their solutions within standards, now big providers are going to be more willing to look at them." As with all technology sectors, success will emanate from solutions that generate revenue or significantly cut costs and are scalable to answer the needs not only of small doctors' offices, but bigger hospital systems. Despite the lack of visibility into exactly how the $19 billion expenditure will play out for the technology landscape, Brailer says it's a good thing it took as long as it did for Washington to set aside this kind of money, since the government and industry were unprepared to use it to great advantage. "Probably the most merciful thing was that we had $50 million to work with, because there was no way anyone was ready to do this in 2004 and 2005," Brailer says. |
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