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In a concerted effort to tap the growing market for electronic health record ("EHR"), imaging and interoperability solutions provider Merge Healthcare (MRGE - Analyst Report) recently struck another deal with a national radiology group Lakeland Healthcare. As per the deal, Lakeland Healthcare group will deploy Merge’s entire suite of cloud-hosted radiology solutions to meet the “Meaningful Use” need as well as to improve workflow.

The Lakeland Healthcare group is a multi-site practice with two regional hospitals and a number of affiliated and free standing clinics in Illinois. Each year this group performs 300,000 studies for hospitals in the US.

Thus, Merge strongly expects this newly formed alliance between them to increase the number of hospitals served along with an increase in the company’s number of studies to over one million in a couple of years.

Merge’s radiology solutions comprise Merge RIS, a web-based radiology information system used for streamlining of workflow as well as helps to meet the Meaningful Use criteria. The other meaningful use solutions of Merge are Merge PACS (a real-time picture archiving communication system), Merge Financials (a web-based billing system), Merge Documents (a paperless office solution), Merge Referral Portal and Merge Dashboards.

Earlier this month, Merge also added 12 new practices to its ever-growing list of users who selected its complete EHR solution to achieve Meaningful Use need. Presently, Merge Meaningful Use solutions are deployed by over 89 clients, representing more than 850 physicians.

The company encouragingly noted that the Centers for Medicare & Medicaid Services (CMS) proposed a second set (Stage 2) of the Medicare/Medicaid Meaningful Use EHR program (released in March 2012) that included specialties like radiology and orthopaedics in meaningful use.

The company remains optimistic that with this Stage 2 requirement, the specialty physicians will come up to meet the Meaningful Use criteria, thereby driving the demand for its offerings.

According to the CMS, through December 2011, more than 175,000 professionals and hospitals registered for meaningful use incentive programs and $2.5 billion was paid out in 2011 to eligible hospitals and professionals. The incentives will be offered for a period of 4-5 years after which physicians will be penalized for not adopting proper measures.

Favorable demographic trends, reinforced by a supportive regulatory environment are expected to sustain strong growth in demand for EHR-related software in the foreseeable future. We believe Merge is well placed to bag a meaningful share of the multi-billion dollar ARRA-related healthcare information technology investment opportunity.

However, we remain concerned about the declining Medicare reimbursement for advanced medical imaging that could negatively affect hospital and imaging clinic revenues, thereby reducing the demand for imaging-related software and services offered by Merge. Furthermore, the presence of many big players like General Electric (GE - Analyst Report) and McKesson Corporation (MCK - Analyst Report) has made the healthcare solutions and services market highly competitive.

Presently, Merge retains a short-term Zacks #4 Rank (Sell). Over the long term, we have a Neutral recommendation on the stock.

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