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Over the past several years, the U.S. has been quietly updating its healthcare information technology infrastructure. Signed into law in early 2009, The Health Information Technology for Economic and Clinical Health (HITECH) Act was passed alongside the more widely publicized American Recovery and Reinvestment Act. This healthcare provision has started to bear fruit. Moreover, these trends still have some life, and as more healthcare providers modernize their medical information systems, investors may want to consider opportunities here.

The HITECH Act has effectively hastened the conversion of paper-based medical records to electronic health records (EHRs). The act encourages healthcare providers to digitize their records by utilizing economic incentives and penalties. Providers who do not switch will face 1% reductions to their Medicare reimbursements starting in 2015. This penalty will increase by an additional 1% each year thereafter, up to a maximum of 5%. On the other hand, incentive payments are available for early adopters who can demonstrate Meaningful Use of an EHR system.

Although these Medicare incentive payments are structured to provide the greatest benefit to those who first qualified for Stage 1 Meaningful Use in 2011. Providers who joined the program in subsequent years will still qualify, albeit at lesser rates. All Medicare incentive payments will cease in 2015, so 2014 is the last year healthcare providers can sign up. In contrast to this program, Medicaid incentive payments will not cease until 2021, with 2016 as the cut-off date for initial participation.

These two incentive systems have different qualification requirements, but should work in tandem to eventually bring about a full conversion to digital EHRs. Although non-hospital providers can only qualify for one of these two programs, monetary reimbursement of adoption costs has proven to be an effective motivator thus far.

Companies that offer EHR solutions should enjoy some nice growth potential over both the near and long term. Healthcare providers will likely rush to qualify for expiring Medicare incentives this year and the next, or Medicaid incentives over the longer term. According to several recent surveys, between two-thirds to three-quarters of all physicians in the United States have begun using an EHR system. Within this group, roughly half may potentially be looking for alternative vendors, as ever more stringent Meaningful Use standards translate into greater failures in attestation.

Investors looking to capitalize upon this demand for EHR services should not pick up just any Health Information Services stock haphazardly. Companies that specialize in this area do not necessarily offer comparable products, although there does tend to be a convergence over time. At the top of the heap in terms of the number of successful attestations, are publically traded companies like Cerner Corporation (CERN), Allscripts (MDRX), and Nextgen of Quality Systems (QSII). These established players have been in business for a long time, and will likely attract customers opting to go with a proven brand.

In contrast, relative newcomers like athenahealth (ATHN) have shaken up the industry with cloud-based EHR solutions. Having pulled in successful-attestation rates that are more than double the industry average, athenahealth has seen its stock price skyrocket on lofty expectations. Other players in the segment have undoubtedly taken notice of these successes and have followed suit with their own cloud-based forays into the software-as-a-service (SAAS) arena. Investors will definitely want to take a closer look at these more modestly-valued competitors.

As the Health Information Services sector continues to make progress, both in terms of adoption rates and technological improvements, customers will have even more reasons to outsource their EHR requirements. Although the government’s subsidy-driven program is affected by budgetary sequestration activities, it has already provided an important first step in updating the U.S. health technology infrastructure. Left relatively unchanged, the Medicare and Medicaid incentive plans will continue to provide a positive top-line boost for HIS companies. Over time, these efforts will yield greater accessibility to healthcare information, which will prove to be invaluable for both patients and the broader society. Companies that provide effective Health IT solutions should enjoy respectable growth for many years to come, and eventually benefit from a lucrative business model over the long haul.

At the time of this article’s writing, the author did not have positions in any of the stocks mentioned.