It used to be that a doctor's idea of a health care information services system was a dictation machine, a transcriber, and a metal filing cabinet. Today, health care information services still involves dictation, but the information that doctors are providing stretches far beyond the confines of a row of metal cabinets along a back office wall.
Healthcare information services are tying patient data into scheduling, billing, and systems at other providers in a bid to create electronic mobile dossiers that can improve patient treatment and lower health care costs. The seismic shift toward IT systems specifically designed for the health care industry is creating investing opportunities, so let's take a closer look at what investors should know about this quick-moving industry.
What are health care information services?
Healthcare information services are constantly evolving but generally speaking, these services include software solutions, clinical content, hardware, and devices that offer health care providers secure access to clinical, administrative, and financial data that can be used to boost quality, improve safety, and increase efficiency across the sector.
For example, physicians are implementing health care information services to create electronic passbooks that can be updated and shared with other caregivers. Services can also help streamline physician practices by improving patient scheduling and communication, along with billing.
In hospital systems, health care information services are improving record-keeping and the sharing of essential patient information. Services are also increasingly tracking and analyzing patient outcomes to help doctors figure out which treatments work best.
How does the health care information services industry work?
Healthcare information services systems are complex, and provider requirements often vary from user to user.
As a result, health care information services companies not only market hardware and out-of-the-box software solutions, but they also market future customization and training through higher-margin service subscriptions and maintenance contracts. These lucrative multiyear contracts provide predictable and recurring revenue that may insulate health care information services companies from revenue volatility.
Still, the health care information services market remains dynamic due to changing demographics and regulations, and responding to these changes requires considerable research and development and marketing costs.
Although the health care information services industry is maturing, it remains fragmented among a variety of specialty health care IT companies. Many of these companies lack the resources to adapt to continually changing customer demands, standards, and regulations. As a result, health care providers remain concerned over interoperability between old and new systems and that suggests that industry consolidation will continue as customers turn toward large companies with the size necessary to support innovation.
What's driving demand for health care information services?
Demand for health care information services systems is increasing thanks to a slate of developments, including:
- Growing demand for patient care
A shift toward personalized medicine and an ageing population means that there is a significant need for scalable models that can track and report on patient care individually and across large populations. Baby boomers are turning 65 at a rate of around 10,000 per day through 2029 and these active and longer-living boomers are increasing the cost and complexity of care. As a result, health care information systems that can help doctors determine appropriate treatment regimens, eliminate potential provider errors including harmful drug interactions, and improve patient outcomes are likely to remain in demand.
- Industry standards
The implementation of the World Health Organization's international medical code standards is one example of changes to industry standards that drive demand for next-generation IT solutions.
The International Statistical Classification of Diseases and Related Health Problems (or ICD) provide a standardized tracking system for global health. The ICD standards are also used for determining medical payments; as a result, as the classification of disease becomes increasingly complex, so do health care information services systems. That suggests that health care information services companies best able to adapt to changing standards will remain market share leaders.
- Government regulation
Shifting government regulation also impacts demand for health care IT solutions. For example, the Affordable Care Act, or ACA, was signed into law in 2010 and as a result millions of newly insured patients began receiving health care services.
To reduce the impact of rising demand, the U.S. Department of Health and Human Services established a carrot-and-stick approach to instituting efficiency boosting health care information systems through "meaningful use" incentives established under the HITECH provision of the American Recovery and Reinvestment Act of 2009.
Regulators also increased demand for health care information services by creating accountable care organizations, or ACOs, that aim to provide better and cheaper patient care. ACOs can include hospitals, specialists, and primary-care doctors who work collectively to improve patient outcomes while reducing overlapping or unnecessary costs. As a result, ACOs rely heavily on technology to help guide care decisions and measure medical outcomes.
- Consumer demand
Online banking has become the norm, and patients are increasingly looking to the health care industry to provide similar solutions that offer greater transparency and access to personal medical records. That desire translates into market-share opportunities for health care information services companies to create, maintain, and facilitate these electronic medical records.
Why invest in health care information services companies?
The fast-paced health care information services industry looks poised to keep growing as global economies develop and the populations of developed nations live longer.
The industry offers high gross margin opportunity thanks to software and services subscriptions and opportunities for operating margin expansion as the industry matures and companies leverage scale against fixed costs. That makes health care information services companies an intriguing investment opportunity for those seeking exposure to growth-oriented investments in health care.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B.Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Athenahealth. 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.