With the stroke of 22 different pens last week, President Obama not only changed the way healthcare is delivered in the United States, he also indirectly changed the way investors should approach healthcare stocks. By and large, hospitals and insurers were deemed to be the bill's beneficiaries, while pharmaceutical companies got the short end of the stock - though even they have something of a silver lining.

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Funny thing though.... while the market has been trying to figure out how - or if - the insurers, hospitals and pharmaceutical companies would prosper under the new plan, the group that was sitting in the catbird seat has still gone unnoticed (and is still undervalued).

Care to guess who?

2,000 Pages Of Headache

The bill's final count totaled a whopping 2,409 pages of government mandate, oversight and red tape, straight from the folks who don't seem to know the meaning of simplicity or efficiency. So, it's not as if the enrollment of the last 32 million uninsured Americans - about a 12% increase in the total number insured - will mean a mere 12% increase in processing and paperwork. It will be much more complicated than that (and likely much less streamlined than the current system).

So, here's the multi-billion dollar question: If the healthcare industry - hospitals and insurance companies in particular - will be up to the eyeballs in another 2,409 pages of legalese on top of another 32 million patients and customers to service, odds are good that efficiency and the margins its brings will sink, not grow.

IT's The Solution

The solution is an obscure group of stocks trapped somewhere between a technology and a healthcare classification: healthcare information technology. These organizations help the industry keep its billing, payment cycle, claims management, bookkeeping requirements, HIPAA and other aspects of the business humming along. Most also consult in conjunction with the services they provide.

Business was already good, but think about it - with a 2,400-page overhaul of the healthcare system, hospitals and insurers have just had more than they can technically chew crammed down their throats.

It's time to call in the cavalry.

Naming Names

There aren't a whole lot of investment-grade names in the healthcare IT arena, though some good ones are among the few to select from. Mediware Information Systems (Nasdaq: MEDW) is one of those good ones.

Mediware just posted its sixth consecutive quarterly increase in revenue and earnings, hammering home the definition of "recession-proof business model". While a tad on the expensive side with a trailing 12-month earnings multiple of 28.35, the fact that the company posted two earnings beats in its last two showings is encouraging.

Allscripts-Misys Healthcare Solutions (Nasdaq: MDRX) is another expensive one, though perhaps worth the price. Allscripts-Misys has added three new clients within the last two weeks, following in Mediware's growth footsteps.

Perhaps the favorite name in the group right now among the pros, however, is Cerner (Nasdaq: CERN). While its competitors have designed impressive stand-alone software for hospital use, Cerner has developed an entire suite of integrated software products that can be implemented seamlessly. Think "customized cloud computing" for the healthcare industry.

Yes, Cerner is expensive, too, with its trailing P/E of 36.6 - the price one pays for quality. Cerner never even came close to taking a loss during the recession.

Drumroll, Please...

And finally, one of the industry's most attractive names - and one of the few that isn't terribly overvalued right now - is Emdeon (NYSE: EM).

How is Emdeon sporting a projected (2010) price-to-earnings multiple of 15.8 when its peers are facing comparable figures in the high 20s and low 30s? It truly may be an oversight of the collective market. The company went public in the middle of last year, and as such, the only data the market has is for the last two quarters of 2009.

Either way, the future looks bright, particularly in light of the company's recent decision to buy a consulting firm - Healthcare Technology Management Services - for $11 million. A company that had previously been content to focus on payment management is now getting into the consulting business? Yes. As was stated above, the new healthcare system will be complex; and Emdeon is getting positioned for future demand.

Last Word

Those four aren't the only four stocks in the healthcare IT bunch to think about. Indeed, President Obama just did them all a huge favor. Don't let the pharma, hospital and insurance hubbub put the IT names at the bottom of the pile. (For more stock analysis, take a look at America's Top Dividend-Paying Stocks.)

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Tickers in this Article: MEDW, MDRX, CERN, EM

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