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In a concerted effort to tap the potential in the electronic health record ("EHR") market, imaging and interoperability solutions provider Merge Healthcare (MRGE - Analyst Report) recently struck a deal with SimonMed Imaging, the nation’s largest specialized outpatient physician imaging practice.

As per the deal, SimonMed will deploy Merge’s entire suite of cloud-hosted radiology solutions along with iConnect Access and iConnect VNA.

SimonMed, whose majority is owned by Dignity Health (formerly Catholic Healthcare West), currently has over 50 imaging centers employing 80 physicians.

Apart from Merge’s iConnect Access (a zero-download DICOM image and XDS viewer) and iConnect VNA (a vendor neutral archive to create an enterprise imaging strategy backbone), the radiology solutions that SimonMed will be using includes Merge RIS, which is a web-based radiology information system for streamlining of workflow and meeting the Meaningful Use criteria.

The other “meaningful use” solutions from Merge are Merge PACS (a real-time picture archiving communication system), Merge Documents (a paperless office solution), Merge Referral Portal and Merge Dashboards.

Notably, “Meaningful Use” is part of EHR incentive program, which is designed to stimulate the use of technology in healthcare. Funded by the HITECH Act, the program enables providers to adopt EHR and meet Meaningful Use needs in order to earn reimbursements and avoid Medicare penalties.

We are encouraged with this newly formed alliance between Merge and SimonMed since it adds to the number of healthcare establishments currently served by Merge.

The company has seen other successes in recent times. In June 2012, the Community Health Network selected iConnect VNA and iConnect Access to provide real-time access to images and information among its network of providers and referring physicians.

Earlier in May, Merge entered into another radiology contract with Lakeland Healthcare, a national radiology group. During the second quarter of fiscal 2012, Merge Meaningful Use solutions were deployed by 12 new clients, representing more than 125 physicians. The company expects accelerated adoption in the second half of fiscal 2012.

Currently, imaging in laboratories accounts for over 90% of data storage in healthcare. Merge 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 orthopedics and radiology in meaningful use.

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

According to Frost and Sullivan and Merge research reports in 2012, the global market for imaging software and services, healthcare IT interoperability solutions and EHR solutions for orthopedics, radiology, cardiology and ophthalmology is currently worth $7.5 billion a year. With greater adoption of EHRs in doctor’s offices, hospitals and imaging centers, there is a corresponding increase in the need for data exchange.

In December last year, CMS declared that more than 175,000 professionals and hospitals had registered for the meaningful use incentive programs. A total amount of $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.

Thus, favorable demographic trends, reinforced by a supportive regulatory environment, are expected to sustain the strong growth in demand for EHR-related software in the foreseeable future. We believe that Merge is well placed to gain a meaningful share of the multi-billion dollar American Recovery and Reinvestment Act (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.

Currently, Merge retains a short-term Zacks #3 Rank (Hold). Over the long term, we have a Neutral recommendation on the stock.

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