Medical device maker Medtronic (NYSE:MDT) believes there's big money to be made from helping health care providers comply with regulatory mandated reductions in hospital readmission rates.

As a result, Medtronic paid $200 million for privately held Cardiocom this past summer. That bet gives Medtronic turnkey share in the telehealth industry -- a growing market bridging acute and primary care for patients with chronic conditions like heart disease.

Regulatory focus on improving outcomes
The interest in Cardiocom likely stems from a provision in the Affordable Care Act that penalizes hospitals unable, or unwilling, to embrace policies and procedures geared at reducing readmissions.

According to the Centers for Medicaid and Medicare, or CMS, some 20% of Medicare patients are readmitted within 30 days of discharge, and those readmissions cost Medicare more than $15 billion every year.

To reduce those readmission costs, the ACA instituted fines for hospitals with high readmission rates. In August, CMS announced 2,225 hospitals are being fined a combined $227 million for 2013, equal to 1% of their reimbursements. That's likely to get the industry's attention.  Particularly given penalties will climb to as high as 3% in 2015 and expand beyond heart attack, heart failure, and pneumonia patients to also include chronic lung disease, elective hip and knee replacements starting next October.

In steps Medtronic
Medtronic thinks one of the ways providers will look to cut readmissions is by deploying telehealth products and services like those offered by Cardiocom.  If so, Medtronic's large presence in cardiac care gives it a big network of customers to cross-sell.

Those customers are increasingly collaborating with home health care industry participants like Amedisys (NASDAQ:AMED) to cut costs and reduce readmission rates. However, Amedisys and its peers are facing its own cost pressures tied to Medicare and Medicaid reimbursement rates. That's pressuring the industry to lower its own costs, which supports their use of telehealth solutions.

According to a 2006 study by the University of Minnesota, virtual visits between a skilled home health care nurse and chronically ill patients at home can improve patient outcome at lower cost than traditional skilled face-to-face home health care visits.

Since players like Amedisys can deliver at-home care at a cost of one tenth that of a hospital stay, they offer a compelling solution for commercial and government insurers.  According to a study of Veterans Health Administration patients, the VHA found telehealth technology reduced bed days of care by 25% and readmissions by 20%.


Source: Almost Family investor presentation.

If Medtronic's is right that health care will increasingly shift to the home, it will expand the company's reach considerably. Only 13% of the 7.5 million heart failure patients in the United States are right for cardiac implants.  By providing telehealth solutions, Medtronic may end up serving millions of additional patients.

Other companies vying for business
Cardiocom controls 12.5% of the market for patient home monitoring, making it the second largest player an industry expected to grow to $395 million by 2017 from $182 million in 2012, according to Frost & Sullivan.

But, Cardiocom isn't alone in the marketplace.  It's in a footrace with other competitors, including Honeywell's (NYSE:HON) HomMed unit, which is tucked into Honeywell's Automation and Control Solutions division. According to Honeywell, patients using HomMed's telehealth solutions total more than all other competitors, including Cardiocom, combined. That makes Honeywell a big player in this fast growing market and suggests Medtronic will have to work hard to differentiate its own offering.

Medtronic will also compete with Bosch Healthcare and Philips NV in the home telehealth market.

The Foolish final take
Medtronic's strategy to expand its product line into telehealth appears to dovetail nicely with the company's current cardiac focus. It also offers Medtronic other opportunities given that Cardiocom's product line includes glucose monitors for diabetes patients, which is another of Medtronic's existing markets.

Of course, there's always the risk that the regulatory or competitive landscape will derail the potential opportunity. Medtronic will also need to continue to innovate and lean on its provider network if it wants to wrestle share away from industry heavyweight Honeywell, which could weigh on margins. However, despite those challenges the move into new adjacent addressable markets provides an opportunity for growth and that's never a bad thing.

Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC, an institutional research firm.  E.B. Capital's clients may or may not have positions in the companies mentioned. Todd also owns Gundalow Advisors, LLC, a high net worth advisory. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool owns shares of Medtronic. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.