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Imaging and interoperability solutions provider, Merge Healthcare (MRGE - Analyst Report) recently collaborated with Surescripts network to connect Merge’s extensive imaging platform to the Surescripts Clinical Interoperability Network. The connectivity will allow healthcare providers that use Merge’s electronic health record ("EHR") solutions to deliver imaging reports on the Surescripts Network. Additionally, physicians will be able to access the images directly through Merge’s Honeycomb cloud-based solution.

Currently, an increasing number of institutions are adopting EHR solutions under the norms of Meaningful Use Stage 2. However, connecting to these electronic solutions has become difficult as well as costly. Nonetheless, Merge believes that its link with Surescripts’ connectivity solutions will definitely solve this problem, as it would give healthcare providers an alternate and cheaper choice over the expensive custom interfaces.

The overall U.S. health IT ("HIT") market witnessed a dramatic change in February 2009 with the passing of the Health Information Technology for Economic and Clinical Health ("HITECH") Act, which was included as part of the American Recovery and Reinvestment Act ("ARRA"), an economic stimulus bill.

In August 2012, the final regulations for the stage 2 of the Meaningful Use incentive program for EHRs were released, along with the final rule on the 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, selected companies in this space, including Merge, are witnessing improved and positive investors’ 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.

This will benefit Merge in the long run. It is believed that the company is well placed to capture 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. As a result, the demand for the imaging-related software and services offered by Merge would decrease as well. Furthermore, the presence of many big players like 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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