Confronting ICD-10, the Health Care Industry's Y2K

Back in 1999, the media wildly speculated that Y2K -- a computer bug caused by data only being dated with the last two digits of the year -- would cause communication grids to collapse, airplanes to crash, and governments to crumble. Fortunately for us, reality was far more mundane. Solving Y2K simply required a lot of IT spending on upgrades for legacy software.

Today, the health care industry faces a similar predicament with ICD-10 -- a standardized coding system for all diseases that all medical practices will be required to follow by October 2014.

America is currently the only country in the world still using its predecessor, the 30-year old ICD-9, which uses outdated terminology and lacks specificity. ICD-10 uses 141,000 codes, compared to the 17,000 used by ICD-9. The proper implementation of these more diverse, detailed codes can drastically enhance overall clinical, administrative, and financial performance.

Medical practices aren't prepared for ICD-10
Despite those benefits, almost 75% of health care providers aren't ready for the jump to ICD-10, according to a recent survey by QualiTest Group. Only half of the providers have even completed an ICD-10 impact assessment. 25% had completed an impact assessment, but had not started planning the critical ICD-10 testing phase. The testing phase generally takes nine to 12 months to complete, which means many practices are at risk if they don't start within the next month.

With that major deadline looming and a large number of health care providers seriously lagging behind, medical practices are turning to some major manufacturers of CDI (clinical documentation improvement) software to help their practices meet ICD-10 standards.

For investors looking to capitalize on this scramble to upgrade their systems, three companies will be major beneficiaries: 3M (NYSE: MMM  ) , Nuance Communications (NASDAQ: NUAN  ) , and Cerner  (NASDAQ: CERN  ) .

3M's growing health care business
3M, which has a diversified portfolio of products spanning across a large number of industries, is emerging as a major player in health care products. Last quarter, revenue at 3M's health care segment rose 4.6% year on year to $1.3 billion, accounting for 17% of the company's top line. This growth was fueled by robust demand for its health information systems, food safety products, as well as critical, chronic, and oral care products.

3M's answer to ICD-10 is its 3M DRG Assurance Program, which the company claims has helped practices realize a 4-to-1 return on investment within the first year. 3M's program is an all-in-one package that sends its consultants on site to help train medical staff in new documentation procedures, review charts and coding, and to install 3M's CDI System as a software solution that automates the review process.

Nuance pages Dr. Siri
Nuance, the creator of Apple's Siri, has a different approach to CDI software. The company's product, Clintegrity 360, is an integrated computer-assisted system for CDI and coding at ICD-10 standards.

However, what sets Clintegrity 360 apart from other CDI products is its voice recognition software, which is equipped with clinical language understanding, or CLU, tools. Nuance's CLU technology is a bit like Siri with a medical degree -- it automatically extracts clinical data from a physician's narrative and catalogs it through the sequential steps of care delivery, coding, and quality reporting. Clintegrity 360's CDI and CLU can also be smoothly integrated into mobile electronic health record, or EHR, software.

Emphasizing point-of-care performance over back-end upgrades
Last October, health care IT giant Cerner announced that it would integrate Nuance's CDI technology into its EHR software -- a major collaboration since Cerner has the eighth largest market share in the EHR market. From the partnership, two new products were created: Cerner Care Management and the Cerner DRQ (document quality review) Module -- which are respectively used to improve workflow and to automate the CDI process within Cerner's EHR, PowerChart. Cerner also produces a native iPad EHR app, PowerChart Touch.

Cerner's revenue rose 11% last quarter to $707.6 million, but fell short of the consensus estimate of $724 million. However, sales could accelerate over the next year as more medical practices scramble to upgrade their systems.

For Nuance, its health care portfolio -- which consists of Clintegrity 360, Dragon Medical 360, and PowerScribe 360 -- is its strongest area of growth. Last quarter, non-GAAP revenue at its health care unit surged 29.1% year on year to $238.1 million, accounting for 48.5% of its top line. Mobile and consumer products, for which it is more widely known, slumped 16.2% to $111 million.

Foolish bottom line
Investors should watch these three companies as the health care industry enters the home stretch for meeting ICD-10 standards, as well as the "meaningful use" deadline for EHRs next February. Both deadlines will usher in a new era of efficiency in health care, with EHRs and CDIs at the forefront of this revolution.

Other companies to watch in this space include General Electric, Greenway, and McKesson, which all offer their own services and solutions for ICD-10 compliance.

Rising health care costs continue to be a hotly debated topic, and even legendary investor Warren Buffett called this trend "the tapeworm that's eating at American competitiveness." To learn more about what's happening to the health care system -- and how to potentially profit from this trend -- click here for free, immediate access.


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