Health information technology stocks were market darlings in 2009. They soared because analysts foresaw strong prospects for revenue growth in the sector once President Obama signed the stimulus bill into law (exactly one year ago, today).
That’s because the bill includes the Health Information Technology for Economic and Clinical Health (HITECH) Act which sets aside nearly $20 billion in federal funds to promote the utilization of electronic health records by providers.
But this year, things have turned a bit sour for HIT stocks. Athenahealth dropped 12% in January, Quality Systems dropped nearly 20%, and Cerner, which soared from the $30s to the $90s in 2009, dropped to $75 at one point recently.
There are systemic reasons and company-specific reasons for the fallback. With respect to the former, HIT stocks rose because their fortunes were tied to a law that had already been enacted (HITECH) a distinct contrast from other health care sub-sector stocks which were subjected to the vexing twists and turns associated with healthcare reform, a link that rendered those sectors unattractive.
But now that hopes for reform have faded, analysts see these previously beaten-down stocks to be more attractive. This has prompted many to recommend booking profits from HIT stocks and moving into the stocks of big insurers and providers.
On the company-specific side, Athenahealth announced just 2 weeks ago that it was changing the way it reports its non-GAAP net income. The announcement drove its share price down as analysts reduced estimates for the company’s future earnings. One analyst, Brean Murray, estimates Athena’s earnings overstatement at 17% for 2009 and 10% of its forecasts for 2010, according to a story in thestreet.com.
Most analysts do not believe that the extent of the accounting restatement warrants an SEC investigation, which is the good news for Athena.
As for Cerner, the Kansas City-based EHR vendor saw its stock nearly triple last year, in part because analysts thought it was positioned to cop a share of the large hospital market that many felt would make the earliest stimulus-motivated push into EHRs. Cerner delivered on this expectation by landing contracts with Tenet Healthcare Corp. and Universal Health Services.
So What’s the Net?
The net on this is that no one knows how hospitals--which are the target markets for these HIT companies--will respond to HITECH incentives. Many of them have no plans to go forward with an EHR right now.
This uncertainty creates the context around which the market will value HIT companies. The companies and the analysts who recommended their stocks a year ago set an expectation that the flood gates would be visibly opened (if not in "full flood mode”) by the end of 2009. To the extent these expectations have been met, the stocks have done fine.
But the pressure to hit revenue targets will grow for these HIT companies with each earnings season. A miss by 2 or more companies next quarter may well prompt some analysts to change their view from “stimulus cash to drive continued, robust sales” to “provider reticence and regulatory delays to hamper EHR roll-out.”
We know what would happen after that.
Glenn Laffel, MD, PhD
Sr. VP Clinical Affairs, Practice Fusion
This blog originally appeared at Practice Fusion's EHR Bloggers.
