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NextGen Healthcare Information Systems, a full subsidiary of health care IT vendor Quality Systems Inc. (QSII - Analyst Report), recently revealed an agreement with Physical Rehabilitation Network (PRN) to install NextGen Patient Portal, NextGen Ambulatory EHR, NextGen Practice Management and other offerings in its business. Furthermore, PRN has entered into a 5-year understanding with NextGen RCM Services to enhance revenue cycle management.  

PRN runs a chain of physical therapy clinics in the western part of the country. It runs, owns or manages more that 100 centers. 

PRN will utilize NextGen offerings to simplify administrative duties, which will lead to enhanced patient care. For example, by utilizing NextGen RCM Services, PRN will utilize a single-platform model across its entire business, thereby linking revenue, administrative and clinical functions. NextGen will also provide offerings geared to take care of PRN’s unique requirements. 

Quality Systems runs a pure-play business model in an attractive industry with a large number of catalysts, which provoke frequent speculation about mergers and acquisitions. On the positive side, we observe the high proportion of recurring revenues. Of late, however, the condition of the pipeline metric has not been encouraging.

The company has made multiple acquisitions to bolster organic growth. Its acquisitions are expected to facilitate its entry in the small hospital segment. We are concerned about execution risk emanating from Quality Systems’ entry into the rural inpatient market.

Moreover, competition is intense from well regarded players such as Athenahealth (ATHN - Analyst Report), Cerner Corporation (CERN - Analyst Report) and others. Price discounting is frequent, particularly at the lower end, and Software as a Service (SaaS) based model appears to have exacerbated pricing pressure. While fresh projects have shrunk in number, the replacement market is growing.

Quality Systems has traditionally focused on providing solutions for physician practices. However, core ambulatory EHR providers such as Quality Systems will see opportunities for product sales shrink, as physician groups are increasingly absorbed into hospitals.

Currently, the stock retains a Zacks Rank #3 (Hold). However, we are more positive about other stocks such as Merge Healthcare Incorporated (MRGE - Analyst Report) which carries a Zacks Rank #2 (Buy) and is expected to do well. 

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