Healthcare Technology &
Distribution
SECTOR REVIEW
Hospital IT Survey Results Encouraging;
Conference Call Monday 7/27 11:00am EST
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Bottom Line: Increased speculation that HCIT vendors will benefit from ‘09
economic stimulus package under ARRA has led to higher expectations on the
group & some question whether valuation has gotten ahead of fundamentals. As
a result, we conducted a survey of hospital execs & given the positive responses
from the survey we are becoming increasingly more positive on inpatient HCIT
vendors, CERN, ECLP & MCK. In addition to our survey, we also outline what
we know so far of the stimulus under the ARRA. We along w/ CS Tech Team will
host a conference call on Monday to discuss survey results & get an update on
the ARRA w/ consultant Michael Mytych (details below).
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Background of Stimulus Package: To qualify for stimulus incentives, hospitals
have until 2015 to demonstrate "meaningful use" of a certified EHR system while
physicians have until 2014. Although there has been progress, standards,
certification & “meaningful use” definition have yet to be finalized. Failure to
adopt/use a certified EHR will result in reimbursement payment reductions after
2015. In this report we detail how stimulus works & penalties for non-adoption.
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Hospital Survey Suggests Hospital Demand is Real: As part of CS’ Qtrly
Hospital survey, we developed several questions aimed at eliciting responses
from hospital executives that assess their preparedness & expectations around
stimulus incentives. Although still early, our survey responses are slightly more
bullish than we had anticipated. More importantly, most executives have begun
to seriously assess the preliminary “meaningful use” criteria with progress ahead
of schedule as most expect to start making required purchases in the 2H09/2010
timeframe. While software sales will benefit, there is potentially more opportunity
in professional svcs. We highlight the key takeaways in this report.
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Inpatient Vendors Poised to Benefit…Looking for Entry Point: Our survey
suggests hospitals will be making purchases over the next 6-18 months. While
we are more positive on inpatient vendors CERN, ECLP and MCK, we recognize
that valuations have already moved up & caution against chasing the group. The
twists & turns of regulatory news flow combined with economic environment
have & will continue to create volatility. We would suggest trying to find a more
attractive entry point for the group, but have a more positive long-term bias.
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Opportunity Knocks For Broader Tech Sectors: Healthcare spending
represents only 3% of total global IT spending & as such would have a ltd impact
to the overall tech universe. However, the ARRA does represent an incremental
opportunity for above average growth in this vertical for tech companies. The CS
Technology Team provided its insight into the hardware, software, and services
segments most likely benefit from the stimulus – details in the note.
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Conference Call: We are hosting a conference call on Monday 7/27 at 11:00am
EST with an IT industry consultant, Michael Mytych to discuss the results of our
survey and the opportunities more broadly resulting from the stimulus. Please
find attached our calendar invite & Mr. Mytch’s bio. Dial-in: US/Canada: (866)
394-9561; Int'l: (706) 758-9648; ID# 22048005. Email invitation to follow.

Summary
The recent economic stimulus (under the American Recovery and Reinvestment Act of
2009) signed in February 2009 presents a huge potential opportunity for HCIT vendors.
Part of the stimulus, appropriates net HCIT spending of $19 billion, which is expected to
potentially expand the market by roughly double its current market size over the next
several years. With adoption rates low among physician and hospital providers, HCIT is
under penetrated and presents a large potential opportunity.
As such, expectations for both inpatient and ambulatory EHR vendors have heightened as
there is increased speculation that HCIT vendors will greatly benefit from the 2009
economic stimulus package. Stocks have already reacted with the group’s performance up
more than 55% relative to the S&P 500. Some bears question whether valuation has
gotten ahead of fundamentals, particularly as it’s still early in the process. Up for debate is
the adoption rate – whether providers will make the high up-front investments necessary to
meet the “meaningful use” standards – and if they do, the timing of when these purchasing
decisions will be made, particularly as qualification definition is still in flux.

Despite the run, we believe the opportunity is real and could come earlier than the Street
expects. This is supported by our recent survey results (detailed in the note), which points
to significant progress made by hospitals towards making EHR purchasing decisions.
While there are some potential road blocks such as interoperability standards, most
executives have performed a gap analysis vis-à-vis the meaningful use definition and
where possible, are shifting dollars in their existing budget towards qualifying for the
stimulus incentives.
We believe relative to the physician market, hospitals are more likely to adopt EHR
systems that are comprehensive enough to meet the government’s definition. In our
January 2009 survey, hospital executives ranked spending on HCIT initiatives as a major
budgetary priority in 2009, with an overwhelming 77% of respondents that planned to
focus on clinical IT applications over financial systems. So even before the ARRA,
hospitals were beginning to look into clinical system purchases. We believe the incentives
under the stimulus make it now more attractive and likely that a hospital make the
necessary investments in an EHR system to meet the “meaningful use” standards.

Additionally, despite it being a relatively high cost to swallow for hospitals, the penalties
associated with non-adoption are steep. Hospitals appear more motivated than physicians
in implementing an EHR as they are better suited to tackle the technical resources/aspect
of EHR systems. Furthermore, most hospitals have an IT system in place so incremental
investments to qualify for incentive payments would make sense. While software sales
are expected to benefit, there is potentially more opportunity in professional services as
hospitals look to deploy and integrate new/existing clinical systems within the required
timeframe to qualify for stimulus incentives.
While we do expect some benefit in the physician IT market, there are several barriers to
adoption, which we discuss further in the note such as cost, resistance to change on the
part of physicians, time consuming to learn, etc.