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Imaging and interoperability solutions provider, Merge Healthcare (MRGE - Analyst Report) continues to expand rapidly through new product developments. The company recently announced an update to its Eye Care PACS solution that will provide support for DICOM OPT ("OCT") standard.

This OCT standard plays a crucial role at eye care facilities in obtaining valuable images and data. Merge being among the first vendors to support the OCT standard, expects this achievement to help grow its enterprise imaging solutions for eye care.

Merge Eye Care PACS is a web-based image management solutionthat automatically imports images and diagnostic reports from multiple diagnostic devices into a single, web-based system which can be reviewed from anywhere, anytime.

This advanced solution of Merge, which is a part of the company’s Electronic Health Record (EHR), incorporates all diagnostic devices and clinical applications utilized in an ophthalmic practice into one end to end system. This enables physicians to review their patient's images and diagnostic reports via a web browser or web-enabled device.

The overall U.S. health IT (HIT) market witnessed a dramatic change in February 2009 after the Health Information Technology for Economic and Clinical Health (HITECH) Act, was passed as part of the American Recovery and Reinvestment Act (ARRA), an economic stimulus bill. The ARRA along with the HITECH provisions included more than $35 billion in incentives, which reward providers who use certified EHRs in a meaningful way.

According to the Centers for Medicare and Medicaid Services (CMS), through December 2011, more than 175,000 professionals and hospitals registered for the ‘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 specified measures.

In August 2012, the final regulations for the stage 2 of the Meaningful Use incentive program EHR had been released along with the final rule on certification of EHR technology. As per this final mandate, the 2009 ARRA, which authorized the $27 billion program, requires providers to use certified EHRs in order to earn bonus payments from Medicare, Medicaid or both for Meaningful Use. Implementation of the final stage 2 ruling will begin in 2014.

The stimulus aims to increase the use of EHR by medical practitioners, in both ambulatory and hospital-based settings. As a result, only a few selected companies in this space are witnessing heightened investor interest.

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. According to the recent information from Frost & Sullivan and Merge’s own research, the global market for imaging software and services, healthcare IT interoperability solutions, and EHR solutions for radiology, cardiology, ophthalmology and orthopedics is worth $7.5 billion annually.

Thus, with greater adoption of EHRs in doctor’s offices, hospitals and imaging centers, the need for data exchange is on the rise. In this backdrop, a reliable imaging interoperability platform becomes significant as a vendor-neutral archive ("VNA").

We expect that the persistent product development and continued client wins will benefit Merge in the long run. It is believed that 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 the 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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