The Healthcare Services sector can be subdivided into these sub-groups:
- Software: IDX Systems Corp., Cerner Corp., Eclipsys Corp., McKesson Corp.
- Distribution: AmerisourceBergen Inc., Cardinal Health Inc., Fisher Scientific, Henry Schien Inc., McKesson Corp., Owens and Minor Inc., Priority Healthcare Inc.
- Pharmacy Benefits Managers [PBM-s]: Caremark RX Inc., Medco Health Systems Inc., and Express Scripts [large drug chains like Walgreen’s, CVS are excluded in this discussion].
- Outsourcing: Charles River Labs Inc., Covance Inc., ICON Plc, MDS Inc. [
- Connectivity: Dendrite Intl. Inc., IMS Health Inc., NDC Health Inc., WebMD Corp.
The Medicare Modernization Act [MMA] was passed in 2004, and is scheduled for implementation in 2006. MMA is now being looked upon as a growth driver – a dramatic change from the way in which anything associated with Medicare was perceived in the past.
Healthcare Technology – Software
The focus of these companies is on quality of care, patient safety and lower operating costs through the implementation of Clinical Information Systems [CIS], Computerized Physician Order Entry [CPOE], and Picture Archiving and Communication Systems [PACS]. Much of the effect of spending driven by HIPAA-mandated bar-coded medical management systems and CPOE is currently in progress and will slow down considerably in the next year. PACS is enjoying a good run currently and will continue for the next three years – driven by enthusiasm from physicians who like the accuracy and speed that is offered by a PACS.
Capital is hard to come by at the point of service [POS], and Information Systems command only one to two percent of the entire budget at most hospitals and providers. In fact, IDX Systems and Cerner will see more benefits from capital spending by the National Health Service in the
Healthcare Services - Distribution
The past year has been a difficult one for the distribution market – due to transition from a traditional “buy and hold” – to a fee for service [FFS] model. The distributors have encountered much more resistance than they expected – from drug-manufacturers in this transition, and, there is not much visibility of the structure of the FFS models either.
Margins have been under pressure due to fewer and smaller drug price-hikes than in the past, and we are less sanguine about price-hikes starting in calendar 2006 – when Medicare drug coverage takes effect.
In summary, the increase in drug volumes due to the larger number of patients with prescription drug coverage is negated by shrinking margins, less flexibility in the price-increase front, and decreased visibility of FFS contracts.
Healthcare Services – Pharmacy Benefit Managers
Caremark, Medco and Express Scripts are currently benefiting from efforts on the part of health benefits plan administrators to contain costs by requiring employees to purchase drugs that are needed to treat chronic conditions by mail-order. The PBM-s should benefit from a small amount of drug-price inflation [currently about 3% per annum], new drugs, new business wins, and an increased focus on servicing specialty drug programs.
We are very sanguine about this group’s potential to prosper due to the new Medicare prescription benefit. Tempering our recommendation of the PBM-s is the possibility of increased competition, increased government oversight, frequent negative press about the PBM industry, adverse regulatory changes and loss of key customer[s].
Healthcare Services Outsourcing, and Connectivity
These two sub-sectors are beyond the scope of our discussion.
Bapcha Murty,
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