As Easy as Herding Cats
By Alec Appelbaum
THE PICTURE OF HEALTHEON
HEALTHEON/WEBMD (HLTH) wants to make life easier for doctors, patients and the insurers who pay the bills by moving medical transactions to the Web. Investors bid up Healtheon stock on Monday when the company announced plans to buy CareInsite (CARI) ? its only large competitor providing e-commerce software to health-care professionals. The online health-care market is now Healtheon's to steer. But Healtheon's big challenge ? enticing doctors to use its software ? will make its life more difficult than some investors may realize.
Healtheon deserves credit for ambition. Jim Clark, the visionary who founded Silicon Graphics (SGI) and Netscape, created Healtheon in 1997 when he drew a diamond linking doctors, patients, insurers and hospitals and put his own Internet-based software system in the center. Of course, the $1.25 trillion health-care market was chugging along without an Internet clearinghouse. Clark's notion put Healtheon in the middle of a market that didn't yet exist. Since then, Healtheon has tried to fill in that space by buying or allying with all the companies that are actually conducting health-related business online. Today, by announcing plans to buy CareInsite, Healtheon stakes a claim to most of the doctors around the country actually using the Web. But it still faces the daunting task of making the Web important to doctors. And that task will determine if its stock keeps rising or trades sideways.
Healtheon has its work cut out for it. Today, the company essentially acts as a broker, providing software to simplify and automate transactions between all players in the health-care industry. Theoretically, it can get paid by a variety of sources, including doctors and hospitals who use its software, advertisers who buy space on its portal sites and medical labs that post test results on its system. But its market is still small: Healtheon serves 65,000 doctors and 450 insurers and employers. It has collected a total of $57 million in revenues and lost a total of $55 million in its three quarters as a public company.
So far, Healtheon's major achievement has been capturing most of the current e-commerce health-care universe. WebMD, which Healtheon bought last November, operates portal sites for consumers and doctors and has an alliance with CVS (CVS), the nation's second-largest drug retailer, to link to that company's online pharmacy." Envoy, which Healtheon announced plans to buy for $2.5 billion last month, processes roughly two-thirds of online health-care claims. And CareInsite creates software that automates tasks such as prescription orders for 185,000 doctors in metropolitan New York, an area of the country that Healtheon hadn't yet penetrated. So Healtheon's spending has bought it size.
And size drives its strategy. As Jupiter Communications analyst Claudine Singer explains, the company wants to charge 20 cents to 50 cents for every transaction its software nudges along. When a patient gets a prescription from a doctor, Singer says, that prescription tends to trigger 10 separate transactions. The doctor checks the patient's eligibility and medical history and sends an order to a pharmacy, which communicates with the patient's health insurer, and so on. CEO Jeff Arnold told CNBC today that Healtheon's cut would be drastically lower than the $10 average processing cost that accompanies each paper transaction. If Healtheon/WebMD can really get into the heart of this business, it can generate enormous cost efficiencies and cash flows.
It's a bold idea. "I do believe that what WebMD is doing could probably point in a direction that's really going to change what's going on," says Steve Parente, a health management professor at the University of Minnesota's Carlson School of Management. Instead of foisting big proprietary data systems on doctors' offices, Parente explains, the company could attract thousands of doctors with a simple promise: you subscribe to an Internet service, and we'll update your records while you handle your cases. So what's to stop this stock from climbing?
Outside forces, that's what. For one thing, it may have run into a brick wall in terms of acquisitions. "Healtheon has scooped up every major potential competitor and made them an ally," says Singer. "Now the only thing left to do is turn this amalgam into a business that works." And though Healtheon's imposing size gives it clout within its existing market, it's not clear how fast it can reach the thousands of doctors whose participation will make it grow.
To lure doctors, the company must prove that its data are secure. Doctors with their own offices and hospitals both figure to be especially tetchy about online security, Parente says. Recent well-publicized site attacks "are not building a lot of trust," says the professor, and doctors seem unlikely to decide to put all their records somewhere they can't put under physical lock and key.
Healtheon must also persuade stubborn doctors that the Web can save them money. Unlike retailers such as Barnes and Noble (BKS), doctors don't have to sweat to keep customers from taking their business elsewhere. "It's easier [for the doctor] to scrawl out the prescription on a piece of paper than it would be to schlep over to the computer," Singer says. To catch on broadly among doctors ? and among hospitals, which have already spent heavily on older software systems ? Healtheon has to deliver clear bottom-line benefits.
That will probably take some prodding. Parente says managed care companies might encourage doctors to move online by promising them discounts for supplies and other sales incentives. The companies' motivation is that Web-based orders and databases could lower their processing costs. An HMO might even put scores for its plans on the Web, Parente says, giving it a level of user-friendliness that would attract employers.
But it will take an even bigger deal to make this outcome look certain any time soon. "If Healtheon would partner with somebody like Cigna (CI), I would stand at attention a lot faster than I am now," says Parente. Until then, Healtheon's growth will depend on its own marketing and performance. Other factors, such as the spread of portable devices that could make it easier for doctors to tap the Internet, lie beyond the company's control.
Still, when the online health-care market grows, Healtheon should be a marquee stock for riding that growth. But the health-care industry isn't like any other business on the Internet. In other industries, consumers push providers into providing online ease and convenience. In health care, doctors need to prescribe an online solution before Healtheon's fortunes can really grow.
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