Health Care's Shot in the Arm
Disease management is bringing a measure of sanity to medicine.Smart insurers and employers are giving it a good look. So should smart investors.
By Jonathan Weber

(Business 2.0) – Common sense is in short supply when it comes to improving America's health-care system. But there's one emerging area, called disease management, that promises a dose of just that. Its precepts are so compelling that it's likely to become a permanent--and profitable--feature of most health insurance programs no matter how the system is eventually reformed.

The idea behind disease management is that people with chronic conditions do much better over the long run and require far less in the way of costly acute care if they take proper care of themselves. For many, though, particularly the elderly, the poor, and the uneducated, caring for themselves--taking their medications properly, monitoring their conditions--is more difficult than it sounds.

Disease management programs combine education, ongoing patient contact, and remote diagnostic and monitoring technologies to control conditions like diabetes, asthma, and congestive heart failure. The market is already worth $750 million annually, and one estimate says it could hit $20 billion by 2010.

Investors ought to consider two public pure-plays in disease management: American Healthways (ticker symbol: AMHC) and Matria Healthcare (MATR). Both have seen huge earnings growth in the past few years--and rising stock prices to match. Most Wall Street analysts think they are fully valued, but I'm not convinced: American Healthways has received two contracts under a Medicare disease management pilot program and is poised to profit handsomely if those projects lead to a broader Medicare initiative. (A number of states also have Medicaid trials under way.) Matria, for its part, specializes in programs for Fortune 1,000 employers, which are desperate for health-care solutions that are cost-effective and not seen as benefit cuts.

Beyond the pure-plays, there are other ways to ride the trend. Large insurers and managed-care companies are increasingly developing their own disease management programs; UnitedHealth Group (UNH) is even expected to begin offering disease management as a separate commercial product. Aetna (AET), Cigna (CI), and PacifiCare Health Systems (PHS) also have active disease management initiatives.

Given that timely administration of medications is a big part of disease management, it's no surprise that pharmacy benefit managers are already active in this area. In February, Medco agreed to acquire Accredo Health, a specialist in delivering chronic-care drugs. Investors might now want to consider Priority Healthcare (PHCC), the other public firm specializing in distributing drugs for the chronically ill.

And then there are the arms merchants. Disease management is mostly a matter of delivering services--coordinating care among doctors and communicating with patients. But for some illnesses, equipment can also be involved. QMed (QMED), which makes cardiac monitoring equipment and is pushing hard into disease management, could make out nicely.

Perhaps no company is better positioned to ride the trend than McKesson (MCK). Among its raft of disease-management-ready offerings are information systems, specialty drug distribution, and a service called Telehealth Advisor, which tracks patients' blood pressure, glucose levels, and other indicators and transmits the data to clinicians. McKesson is already a prime contractor on one of the Medicare pilot programs and should only gain as disease management catches on. That's a healthy development for health care--and investors.

Care That Keeps Giving

Managing chronic diseases could be a rewarding opportunity for a number of health-care businesses, from insurers to pharmacy benefit managers to the makers of medical devices.

Source: Bloomberg