A parade of companies are spending billions of dollars hoping to move the healthcare industry away from fee-for-service medicine and high volumes of unnecessary tests to an efficient system that improves the quality of care and gets treatment right the first time.
A snapshot of this trend can be seen in the radiology services sector, where companies are buying technology firms and signing partnerships to put the healthcare industry into the cloud and shift from traditional brick-and-mortar facilities to perform X-rays, CT scans, and MRIs.
There are many potential benefactors to this trend, including computer giants such as IBM (NYSE:IBM) and its Watson artificial-intelligence system, as well as General Electric (NYSE:GE), which has for years sold imaging machines around the world. And financiers such as investment bank Goldman Sachs have made investments such as Goldman's stake in Imaging Advantage, a privately-held firm that this month partnered with outpatient radiology center operator RadNet to introduce cloud-based radiology services to hundreds of centers across the country.
The stocks of these companies could grab some momentum as they sign more clients such as large hospital systems. Hospital operators, too, could benefit, as they are under pressure to accept risk, improve outcomes, and cut down on unnecessary test-ordering under value-based care contracts.
Unnecessary imaging costs $100 billion a year
MRIs alone can cost up to $2,000 each. Reducing the unnecessary number of these tests and avoiding duplication can mean higher profit margins for hospitals and insurance companies.
Naseer Hashim, CEO of Imaging Advantage, says his company conducts fewer tests and provides more accurate results, often "under 30 minutes instead of several hours or even days."
"Almost every American entering the healthcare system receives a diagnostic test to find out what's wrong or if nothing's wrong," Hashim said. "A third are unnecessary, and a significant percentage are simply read incorrectly."
The U.S. spends $2 trillion a year on healthcare, which is 16% of the nation's gross domestic product. Diagnostic imaging costs are one of the fastest-growing segments of the healthcare economy, accounting for nearly $100 billion a year.
When hospitals and doctor groups agree to take on financial risk in a "bundled payment" contract with an insurance company or government health programs such as Medicare, they agree that they can provide the necessary quality medical care for one bundled fee, grouping all of the services involved in an episode. Thus, they need to make sure they get the diagnostic test done right the first time, or they won't make money on the bundled fee.
Big Blue spends $1 billion
To help hospitals and doctors lower their costs, cloud-based technology is being used to link radiologists and facilities to make sure X-rays, MRIs, and CT scans are read promptly and accurately.
IBM just two months ago closed on its $1 billion acquisition of Merge Healthcare, which provides medical image handing and processing technology.
"Merge will become part of IBM's new Watson Health business unit, bolstering IBM clients' ability to analyze and cross-reference medical images against 315 billion data points already in the Watson Health Cloud, including lab results, electronic health records, genomic tests, clinical studies, and other health-related data sources," IBM said in announcing the deal. "Insights generated by Watson could then help healthcare providers and researchers to pursue more personalized approaches to diagnosis, treatment, and monitoring of patients."
General Electric, too, is a recent entrant into the space. At this month's Radiological Society of North America meeting in Chicago, the company's GE Healthcare division unveiled the "GE Health Cloud" to connect more than 500 imaging machines using an array of technology including apps.
"By connecting clinicians with the insights needed, when and where they need them, clinicians can take action to improve healthcare outcomes and delivery around the globe," GE Chairman and Chief Executive Jeffrey Immelt said. "We are betting big on the GE Health Cloud."
As the marriage of digital technology and medical providers takes shape, the healthcare industry will be pressed to improve and rein in costs. If they do, that will be good for patients, but it will also improve the bottom lines of companies involved, as well as their investors' share prices.
Bruce Japsen has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. 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.