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Tickers in this Article: QSII, IYH, GOOG, ESRX, CERN, EM, MCK
As our population continues to grow and age, providing affordable healthcare will remain a top priority for law makers. Accounting for more than 16% of the nation's gross domestic product, Americans spent nearly $2.2 trillion on healthcare throughout the second half of this decade. This astronomical amount will only grow as Americans seek better quality of life in their old age. Long term, investments in overall broad healthcare funds such as the iShares Dow Jones US Healthcare (NYSE:IYH) make sense. However, just as technology has revolutionized how we shop, listen to music and power our homes, it's doing the same for healthcare.

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Technology Will Set You Free
Problems with drugs, such as hand-out errors, cost American hospitals between $8,000 and $15,000 per bed each year, or about $1.6 million and $3 million for an average hospital. Roughly 0.4% of hospital services go unbilled, at a cost per bed of just over $4,000. These are just a few of the various expenses caused by insufficient investments in healthcare IT. However, clinics, hospitals and doctors' offices are receiving a major facelift with regards to technology.

According to McKinsey Quarterly reports, new systems that allow for electronic health record's (EHR) can provide staff members with online access to patient data and lab reports. Computerized order entry (CPOE) requires physicians to follow a menu of defined procedures when requesting services, tests or drugs for patients. These new computerized approaches can optimize the use of labor, reduce the quantity of adverse drug events and duplicate tests. These advances in hospital IT are predicted to save nearly institutions nearly $30 billion to $40 billion each year in erroneous costs.

The U.S. government sees the value in healthcare IT. With the passage of the American Reinvestment and Recovery Act as well as the new healthcare bill, new provisions were enacted to spur hospitals towards EHR and CPOE systems. Financial incentives will reimburse approximately 15 to 20% of total expenditures on such systems. This shift towards a computerized healthcare IT infrastructure is gaining statewide attention as well. For example, New York recently awarded 11 healthcare organizations $109 million in state grants to upgrade their healthcare IT.

Big Improvements Mean Big Spending
Analysts estimate that U.S. hospitals will need to spend
approximately $120 billion in order to upgrade their information technology systems. This windfall spending on IT has many firms jumping into the sector. Google (Nasdaq:GOOG) has recently relaunched its Google Health EHR system and Express Scripts (Nasdaq:ESRX) has developed a system that data mines in order to figure out who's likely to skip meds or develop complications or new problems down the road. There are plenty of ways for investors to add the sector to a portfolio. Here are a few picks.

Small-fry Quality Systems (Nasdaq:QSII) is quickly gaining market share versus rival Cerner (Nasdaq:CERN). Quality Systems was recently selected by the Ohio State Information Partnership as the preferred EHR vendor. Nearly 6,000 physicians in the state will receive $28 million in stimulus funds to help integrate QSII's products into their hospitals and clinics.

Originally focused on strictly automating healthcare billing, Emdeon (NYSE:EM) has moved quite aggressively into data management, consulting and ePrescribing. The company's suite of products and solutions make it attractive as an overall play as a "one stop shop" for hospitals.

Drug distributor McKesson Corporation (NYSE:MCK) has also begun providing healthcare IT solutions. As one of the largest drug channel stocks, the company benefits from efficiencies of scale and is able to allow its IT users to tap into its vast network of health products. The company also produces a whole group of robotic medicine dispensing cabinets and equipment designed to prevent drug error or abuse.

Bottom Line
As healthcare costs continue to rise faster than inflation in the U.S., many new solutions will be needed in order to provide care at lower costs. By adopting healthcare information technology, hospitals and clinics will be able to achieve cost savings as well as new levels of safety. Companies such as MedAssets (Nasdaq:MDAS) that provide such products as EHR will continue to see their earnings and demand rise as more hospitals move to technology-based solutions. (To learn more about the healthcare investing, read Investing In The Healthcare Sector.)

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