March 30, 2000 4:56 PM
Healtheon Takes It in the Ribs
By Alec Appelbaum
Bad day for Healtheon/WebMD (HLTH). The health industry's many-headed Internet Hydra dropped 16% to $25.81 a share and is now 80% off the 52-week high it hit many months, and several acquisitions, ago.
Thursday's problem: Six large health insurers are reportedly contemplating an alliance that would let patients choose doctors online while allowing hospitals and doctors to process claims over a secure network. In other words, it would strike at the core of Healtheon's business.
Maybe.
Healtheon is the biggest health-care information company online. So on the one hand, it seems obvious that it would lose out on the chance to manage the Internet communications for the six companies contemplating the alliance: Aetna (AET), Cigna (CI), WellPoint Health Networks (WLP), Oxford Health Plans (OXHP), Foundation Health Systems (FHS) and PacifiCare Health Systems (PHSY).
But on the other hand, these companies probably aren't targeting Healtheon. What they're worried about, argues health-technology consultant J.D. Kleinke, is the gathering mass of unhappy consumers. "This is a blocking move," says Kleinke, who runs a Denver business called Health Strategies Network. "These plans are doing this to defensively react against the fear that consumer disaffection with managed care is going to accelerate on the Web."
Ah, yes. Consumer dissatisfaction and managed care. They go together like state class-action lawsuits and tobacco, don't they? Ted Marmor, who teaches public policy at the Yale School of Management, also sees a bigger bogeyman spurring the insurers. Legislation that would require insurers to provide more coverage and benefits ? the so-called "Patients' Bill of Rights" ? could wreak havoc with insurers' profits, says Marmor. The House has already passed such legislation and President Clinton has endorsed it.
In this climate, insurers need to lower costs and control data. Owning an Internet payment system instead of being chained to Healtheon's would likely help insurers control costs. But it's also true that building a network would carry its own load of costs, notes Jupiter Communications senior analyst Claudine Singer. So in many ways, partnering with Healtheon might make more sense than squeezing the established company out of the picture.
Healtheon declined our request for an interview: a spokesman apologetically told us today was the day the company had to file its 10-K. But president Jeffrey Arnold has argued elsewhere that his company's software and services can help health insurers.
That may be a bit optimistic, says Jupiter Communications' Singer, but it's not cockeyed. Unlike insurers, Singer notes, Healtheon manages information for over 280,000 doctors who might hesitate to work with insurers. We've already written about how most doctors yawn at Healtheon's services so far (see story). But many physicians who would find Healtheon merely boring already find insurers to be repugnant. For that reason ? and since insurers need doctors to cooperate for their networks to become cost-cutters ? Healtheon's consulting, design and software expertise could make sense as part of an industry network.
Insurers could also have trouble working together: Getting these companies to share data is a lot more complicated than banding Ford (F), General Motors (GM) and DaimlerChrysler (DCX) to buy parts online. As Singer explains, Ford knows that GM buys bulk steel and competes with GM on design, price and brand. But if Aetna thought that Cigna could find out something about the health risks of the people it insures ? information that determines its rates and expenses ? that would make Aetna less likely to cooperate.
No wonder prospective members sound skittish about the alliance. "We have confirmed that we're in discussions with this alliance, but it's only one of many options," says Aetna spokeswoman Joyce Oberdorf. Aetna "might do multiple ventures" with many partners, she says, and some solo projects to bolster efficiency among doctors, hospitals and drug providers. "The industry is struggling to come up with ways" to make the Internet useful to consumers, said someone familiar with the situation
Indeed, many obstacles lie between a news report and an operating alliance. Aetna's desire not to get pinned down means there may still be plenty of openings for Healtheon. It's true that Healtheon is struggling at the moment to consolidate its many acquisitions (which is why its stock price is so low) and it is still trying to define its business. But the big Web service has established revenue channels elsewhere. It sells services to 280,000 doctors and multiyear software and services packages to big drug makers like Eli Lilly (LLY). With OnHealth, it will operate the two most popular consumer sites on the Net. And it just hired ABC network President Patricia Fili-Krushel to run them.
Healtheon still has a lot to prove, there's no doubt about it. But so does the health insurance alliance. After all, these are the same guys who dreamed up the HMO business. Is a vague competitive threat from them really reason to knock 16% off of Healtheon's market cap?
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