Stock Strategies

Return to Article

Stocks to Watch Once Managed Care Gets Straightened Out

John Rubino

Managed care seemed like such a good idea at the time.

You really have to wonder how we missed the obvious: Giving insurance companies a financial incentive to deny care while not allowing patients to sue when they're blatantly screwed pretty much guarantees a cycle of substandard care, public outrage, government regulation and lousy stock performance.

The fix, though, is actually pretty straightforward: Just put doctors back in charge of the medical side of things and get radically more efficient, like the rest of the private sector. Then, as we baby boomers age into Viagra-popping, bypass-demanding medical hyperconsumers, health care will turn back into the hot growth story it always should have been.

So let's check out some companies with a shot at leading the way.

Healtheon/WebMD(HLTH Quote - Cramer on HLTH - Stock Picks) you probably already know. The brainchild of Jim Clark, founder of Silicon Graphics(SGI Quote - Cramer on SGI - Stock Picks) and Netscape, is trying to turn the medical-paperwork nightmare into a simple online process whereby doctors submit standardized forms to insurance companies over a common platform. If successful, this will revolutionize the back-office side of the business.

"Healtheon is the first and only end-to-end solution," gushes Robertson Stephens analyst Sheryl Skolnick in a December report. "The company has created an unparalleled powerhouse in the space, with brand awareness, marketing strategy, technological prowess, connectivity to payers and original and unique content." (Robertson Stephens has done underwriting for the company.)

Since its massive post-initial public offering run-up, this stock is off by nearly three-quarters. But it still has a market cap of around $5 billion.

drkoop.com(KOOP Quote - Cramer on KOOP - Stock Picks) and Medscape(MSCP Quote - Cramer on MSCP - Stock Picks), meanwhile, operate online "consumer health care networks," or portals. Click on the issue or disease that interests you, and you get updated news on treatments and breakthroughs. Or go to one of the hosted chat support groups to find people with the same concerns.

Both sites are great ways for health care consumers to educate themselves, which in turn makes the market more efficient. But whether this ad-driven model generates enough revenue to justify a growth-stock multiple remains to be seen.

Next come the makers of information systems that let hospitals do their thing more efficiently. Cerner(CERN Quote - Cramer on CERN - Stock Picks) and IDX Systems(IDXC Quote - Cramer on IDXC - Stock Picks) offer software that automates the information flow by letting nurses and doctors type patient data into a terminal instead of writing it over and over again on paper charts. The data are then available in legible form to anyone in the system, and aggregated into databases that tell doctors which treatments work best for which cases.

Both companies combine their decision-support software with hospital management systems that handle billing and ordering, competing on the payment side with Healtheon. But -- maybe because of hospitals' recent obsession with Y2K -- neither company has shown much growth in the past year, and both stocks have been losers lately.

Way smaller, but putting up more comforting numbers, is Apache Medical Systems(AMSI Quote - Cramer on AMSI - Stock Picks), which makes decision-support software for intensive care units. Its database of 700,000 or so patient histories allows hospitals to identify who should and shouldn't be in ultra-high-cost intensive care units. By moving the "shouldn'ts" to normal wards, hospitals save what Apache claims is serious money.

Its revenue is rising at a 25% annual rate, and it's in the process of putting its system online, eliminating the need for hospitals to maintain the software in-house (and maybe giving the stock a little dot-com cachet). I bought a few thousand shares of Apache on Wednesday, but don't take that as a buy recommendation. With a market cap of only $13 million, this stock is too risky for most investors and too illiquid for most traders.

Also trying to make managed care more efficient are the pharmacy benefits managers, or PBMs, including Express Scripts(ESRX Quote - Cramer on ESRX - Stock Picks), Advance Paradigm(ADVP Quote - Cramer on ADVP - Stock Picks) and Caremark Rx(CMX Quote - Cramer on CMX - Stock Picks).

Unlike online drugstores (think PlanetRx.com(PLRX Quote - Cramer on PLRX - Stock Picks) and Drugstore.com(DSCM Quote - Cramer on DSCM - Stock Picks)), which sell to anyone, the PBMs partner with major health plans to manage the plans' pharmacy benefits. This is the high-volume, low-margin part of the business (a doctor's visit generates one payment to the doctor and maybe several ongoing prescriptions), so there are lots of ways to use info tech to cut costs and improve service. All are growing at double-digit rates and trading at relatively modest multiples of sales and earnings growth rates.

And check out AmSurg(AMSGA Quote - Cramer on AMSGA - Stock Picks), which installs and operates on-site surgery centers for medical practices. By customizing the centers for practices' specialties and sizing them to operate at full capacity, AmSurg allows the practices to offer more convenient and theoretically higher-quality out-patient operations.

It's growing at better than 25% a year and making good money. And according to CEO Ken McDonald, it has just scratched the surface. "We've identified over 1,200 practices in the right specialty and right size that don't have an [in-house] surgery center. There are also about a thousand existing centers that are acquisition candidates."

Because it's a small-cap health care stock in a market that hates both of those things -- and because the government has been dithering about reimbursement rates for some Medicare-covered procedures -- AmSurg is trading at around half its earnings growth rate. But it now looks like reimbursement rates will be set at reasonable levels, easing at least that concern.

Now, obviously I've missed one or two hot little health care companies here. So send in your favorites, and in a few months I'll do a follow-up column to round out the story.