One of the important objectives of health care reform is to increase the efficiency of the current system from top to bottom. Cutting costs and waste could save billions and reduce everyone’s health care costs considerably. My screening process has led me to a unique company that could play a big role in cutting health care costs.

HMS Holdings (HMSY) provides cost-reducing services to healthcare providers, Pharmacy Benefit Managers (PBMs) and government sponsored health care programs, such as Medicaid and the Veterans Health Administration.

HMS Holdings reduces costs for Medicaid by making sure claims are accurately paid, billing problems are minimized, and fraud has not occurred. According to reports, the Medicaid error rate of 10.5% costs $38 billion annually. Each year, HMS Holdings recovers more than $1 billion from fraudulent claims on behalf of government programs.

For the first half of 2009, HMS’s revenues increased 25% and earnings per share soared 42% as a result of strong demand and new contracts. I forecast rapid 24% EPS growth during the next 12-month period and beyond.

I foresee great potential from a possible new national health plan that will stress a more efficient system with less waste. The company is small, with just $200 million in sales, but the balance sheet is strong.  HMSY shares are high-priced at 32.3 times next 12-month EPS, but the potential is substantial.

I also like companies that produce generic drugs.

Health care reform will hopefully contain measures to reduce health care costs for all Americans.  Drug costs are high, and one way to reduce the cost of prescription drugs is to promote the use of less expensive generic drugs. The largest generic drug company is Teva Pharmaceutical (TEVA), which is developing new generic drugs at an amazing rate.

Teva Pharmaceutical, based in Israel, develops, manufactures, and markets generic and proprietary branded (store-brand) drugs. The company is the largest generic drug producing company in the world and, in addition, sells active ingredients to other pharmaceutical companies.

Teva’s largest selling generic drug, Copaxone, is used to treat multiple sclerosis. The company’s aggressive acquisition and product development programs are driving strong sales growth. TEVA recently purchased U.S.-based Barr Pharmaceuticals for $7.5 billion. Barr is increasing Teva’s generic drug sales significantly in the U.S. and in parts of Europe. The acquisition is already producing higher profits than expected.

Teva’s product pipeline is very strong with 198 new drug applications waiting for FDA approval, several of which could become blockbusters. We forecast earnings growth of 28% during the next 12 months. Teva’s generic drug business is growing more rapidly because consumers around the globe are opting for lower priced generic drugs.

TEVA shares are very reasonably priced at 12.5 times forward EPS with a dividend yield of 1.1%. The company’s sales will increase 18% and EPS growth will likely be close to 28% during the next 12 months and 17% in future years. TEVA is an unbelievable bargain.  Buy now.