While health-care reform continues to be mired in debate, one of the few initiatives that has garnered bipartisan support has been the development of electronic health records (EHRs) and interoperable health-care information technology (HIT). Numerous studies have shown that the implementation of this technology can improve both operating costs and the quality of care, and the Health Information Technology for Economic and Clinical Health (HITECH) Act, which passed in February 2009, provides federal funding by way of grants and incentive payments in order to promote HIT adoption.

Although a meaningful implementation of this technology may take the better part of a decade, a few key factors may help determine which companies will come out on top.  In our April issue of Healthcare Observer, our health-care analysts offered a review of the current state of the industry and the challenges to achieving rapid uptake among hospitals and physicians.

Revenue and Clinical Integration
Generally speaking, the HIT market is an amalgamation of boutique shops and specialized software. Oftentimes one company may provide billing software, while another provides an EHR platform. Companies that develop modular software that successfully incorporates the various components of HIT will have an advantage over firms that continue to specialize in one particular niche.

Over the past several years,  Eclipsys ECLP has striven to diversify its offerings. By providing clinical, financial, and infrastructure platforms, the company is a solid candidate for health-care networks searching for an all-in-one solution. Eclipsys' top line has taken a considerable hit in recent quarters as hospitals delayed IT projects, but the company's relatively affordable subscription fees and increased outsourcing should enable it to survive the lull long enough to reap the benefits of increased private and federal pressures.

Hospital and Physician Compatibility
HIT companies have historically catered to either hospitals or smaller physicians' offices. Companies that can develop software that meets the needs of both group

s will be highly attractive for potential clients searching for advanced cross compatibility. Many hospitals choose to help fund HIT installations in local physicians' offices. Hospitals in large urban areas often rely on referrals from nearby practices. By paying for HIT that can better communicate with their own systems, these large hospitals are strengthening their ties to the physicians.

North Shore and Long Island Jewish Hospitals have recently agreed to a $400 million deal with  Allscripts Misys MDRX and expect that approximately 7,000 doctors will begin using EHR software as a result. Hospitals will be more likely to fund software for physicians that can easily exchange data with their own platforms, while physicians will be more apt to participate if the software is designed with physicians' needs in mind.

Allscripts' 2008 merger with Misys Healthcare was designed to integrate Misys' physician services with Allscripts' EHR and e-prescribing technologies. We have been impressed by the efficient combination of the salesforce, which has been able to complete several cross-selling deals.

Platform-Fee Types
Although the HITECH Act provides for federal funding, the current economic environment will probably continue to deter adoption over the next few years as hospitals and physicians are unwilling to spend large sums of money regardless of federal assistance. Given such reluctance, companies with subscription-fee pay schedules and low up-front costs may benefit more than their competitors.

Often, the nature of the pay schedule is determined by the type of platform offered. Companies that install their software locally tend to charge high initial fees for the requisite hardware and installation services; however, companies that offer Web-based platforms often distribute the fees over the life of the contract.

 Athenahealth ATHN provides Web-based billing and practice management software for physicians. Because the software is Web-based, there are no up-front licensing or hardware leasing costs. Athenahealth's platform is particularly attractive to physicians, because unlike EHR software, the financial benefit of the former is markedly easier to measure.

M&A Activity
Considering the HIT sector's high growth potential, we expect it will continue attracting large health-care and IT firms such as  McKesson MCK,  Siemens SI, and  Google GOOG. For more on how we think the industry will evolve and develop, which companies will acquire or be acquired, please see the link below.