Health Reform Could Send This Stock Through the Roof

Before the first word was uttered in the national health care debate, a significant change was put into motion to remake the U.S. health care system. It was nothing short of revolutionary, and the first major elements of that change are about to go into effect.

Few investors realize its far-reaching ramifications...

The initial changes the White House made were found in the stimulus package. That bill, the $787 billion American Recovery and Reinvestment Act, contained nearly $20 billion in direct federal funding for a new type of medical technology.

The game-changing technology I'm talking about is President Obama's ambitious plan to transition the nation to digital medical records. My Game-Changing Stocksreaders have heard me banging this drum for almost a year now... and here's why.

The first requirements of the U.S. government's digital records program begin in 2011. Leading providers of digital medical record software should book billions in business and establish or extend relationships that will deliver a wide revenue stream.

The systems will be phased in gradually, but all medical providers must be in full compliance by 2015.

Make money by saving money
One of the core reasons behind the shift to digital medical records is simple -- they provide significant cost savings. It automates and streamlines the clinician's workflow, including notes from the actual visit to support other care-related activities, quality management, and reporting of outcomes.

And there's plenty of reason to cut spending. Not only is the health care sector very large, but it's growing at a much faster clip than the U.S. economy  as a whole. The Kaiser Family Foundation, which tracks health policy, said the sector was worth $2.3 trillion in 2008, 222% more than in 1990 and 809% more than in 1980.

That's why the U.S. government does not mind subsidizing some of the costs associated with transitioning the nation to digital medical records. Doctors' offices and hospitals will be eligible for federal money to help defray the costs of the new systems, which can run into millions of dollars for hospitals.

Hospitals will be paid millions. That's the carrot. The stick is that providers who don't have the systems in place by 2015 will face cuts in Medicare  payments -- the last thing a hospital would want.

The U.S. government has even set aside $598 million to establish 70 Health Information Technology Regional Extension Centers, which will offer health care providers technical assistance as they select, buy, install and implement their new digital medical records systems.

The companies digitizing these records and implementing these systems are where we're going to find the biggest winners.

Here's a hypothetical situation...

Allscripts (Nasdaq: MDRX), one of the nation's leading electronic medical records software providers, has 800 hospital clients. Hospitals are eligible for up to $4 million in Medicare funding as incentives to implement the systems. These incentives are just that, incentives. They're subsidies meant to defray only a portion of the cost of these systems.

But let's assume that Allscripts gets just $4 million in business from each of its clients. That's $3.2 billion in NEW business. That's going to make one heck of a difference for investors, as Allscripts had posted just $705 million in fiscal 2010 revenue. And remember, that's a conservative estimate -- some of the largest hospitals might spend $20 million on a new system and another several million each year to maintain it.

Action to Take --> That's why the P/E ratios for many of these companies are relatively high -- as P/E ratios rise, so does the expectation for growth. And that growth, as my friends in the Great State of Texas would say, is going to be a gullywasher.