HOW TO PLAY IT: DIGITAL HEALTH CARE

America's economic stimulus is likely to include substantial funds--maybe $20 billion--to digitize medical records.

The money will flow to a broad group of companies over time. But before you dive into their stocks, it's important to understand hidden forces that will shape this market.

The funding is designed to speed computerization of patient medical data and prescriptions. Electronic health records and e-prescriptions are highly valued by health-care experts because they replace error-prone paper files and can quickly be shared online by doctors, hospitals, and patients. Proponents say digital records will reduce medical errors and cut administrative costs. "The technology is proven," says Christopher Caine, vice-president for governmental programs at IBM ), which is handling digitization for the Mayo Clinic and others. "Funding is what's needed."

The bulk of President Barack Obama's stimulus spending may break into two distinct streams: One would flow to hospitals, the other to private physicians. Depending on how the torrents size up, two somewhat different groups of companies will sop up the rewards. Investors will need to scrutinize the final legislation to assess those currents, says Jeff Goldsmith, a health-care consultant and author of Digital Medicine: Implications for Healthcare Leaders. (The Senate approved the plan on Feb. 10 but must reconcile its version of the bill with one passed by the House on Jan. 28. Obama has said he wants to sign a bill by Feb. 16.)

In one scenario, hospitals could each receive $2 million or more to go digital. If they grab the lion's share of the funding, Goldsmith says companies that sell large-scale medical record systems, including such majors as McKesson ), General Electric ), and Siemens ), will get a boost.

This group also includes one pure-play stock: In 2008, Cerner ), based in Kansas City, Mo., generated about $1.7 billion from sales and upkeep of hospital-installed electronic records gear and software. Bret Jones at Leerink Swann was among the analysts who downgraded Cerner's stock to hold from buy in January. He cited "premature investor enthusiasm" over the notion that health-care information technology would be included in the stimulus.

Obstacles to digitization include privacy concerns and a lack of technical standards. Jones says it will take up to two years before money from any stimulus package trickles down to companies such as Cerner, and he doesn't expect the stock, at 35.40, to move above 40 this year. Those with a longer-term horizon might want to invest once the stimulus plan is set.

The other big funding stream will be steered to the physician community. Only 38% of U.S. doctors use electronic records, according to a 2008 survey from the National Center for Health Statistics. The stimulus bill could spur recruits by awarding them bonus payments of up to $65,000. That would help Athenahealth ) in Watertown, Mass., whose billing network is used by more than 17,000 medical providers. Jones downgraded Athenahealth to hold from buy on Jan. 5 after a runup in its stock but he still admires its "dominant" market position.

Drug prescriptions are also going to change. Fewer than 5% of those written in the U.S. are transmitted electronically to pharmacies. Obama's advisers hope to use a system of bonuses and penalties to doctors to speed the adoption of e-prescriptions. One beneficiary: Allscripts-Misys Healthcare Solutions ) of Chicago, whose software is the most widely used by doctors and hospitals. Its stock has fallen to 8.20 from 15 last August, which puts it near Jones' target of 15 times his 2009 projected earnings. Below 7.80, he says, the stock is a buy.

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