August 4, 1998
related medical information technology article
Will Healtheon Be Jim Clark's Next Netscape?
IF YOU WERE EXPECTING a big Internet IPO from the sugar
daddy that helped bankroll Netscape Communications
(NSCP), think again. Jim Clark's expected $75 million initial
public offering of Healtheon, registered on July 31 and
underwritten by Morgan Stanley, Hambrecht & Quist,
Goldman Sachs and Volpe Brown, is not a Web venture or
an Internet software firm, but rather a daring entry into the
highly contested field of information technology services.
(Morgan Stanley has not yet priced the offering or assigned
it a date.)
The company has much in common with many Internet
IPOs, however: Healtheon's centerpiece application, a
system that would radically streamline the bureaucracy of
health care, has yet to attract revenue, let alone profits. As of
the first half of this year, the company is in the hole for $21
million, on sales of roughly $20 million, most of that
generated by consulting work not directly related to
Healtheon's target business. The company has racked up
about $73 million in debt, and since opening its doors almost
three years ago, its business plan has had more twists and
turns than a strand of DNA.
All in a day's work for Clark and venture capitalists Kleiner
Perkins Caufield & Byers, the team responsible for
Netscape's stunning $1 billion IPO back in August 1995.
Clark, the charming Texan and yachtsman whose been
known to defend America's honor abroad in sailing cup
races, founded Healtheon in December 1995. Observers
watched to see if the person who launched Silicon
Graphics (SGI) and who made Marc Andreessen a very
rich man could do it a third time. Like Netscape in its first
tottering steps, Healtheon is really public venture capital -- a
chance for investors to bet on a bold but unproven vision for
an as-yet-unmaterialized market. So in that sense at least,
it's d‚j… vu all over again for Jim Clark.
Unlike other Internet IPOs, Healtheon is not making money
off of selling software for the Web, nor is it trying to reap
advertising revenue from freebies. The company's premise is
that the health care industry -- which Healtheon estimates to
be about a trillion dollars in the U.S. -- needs a universal
network, and that providing such will put the company at the
center of commerce in that industry. "Jim's intention from the
beginning always was, and always has been, for Healtheon
to be a hub" of transactions, says a source who's worked
closely with the company since inception. Clark was
unavailable for comment.
Theoretically at least, Healtheon's stock in trade is creating
private data networks on the Internet for the various parties
in the health care biz, including doctors, HMOs and drug
makers. Healtheon's network would allow the parties to
exchange all the tedious paperwork necessary for various
operations, such as claims processing and patient referrals, in
a more efficient digital manner. Using the Internet's rough
and ready infrastructure to do so would be a lot cheaper
than trying to build such a system from scratch.
To date the company has set up two data centers, one in
Santa Clara, Calif., and one in Atlanta, Ga., with impressive
firewall software and Unix servers capable of processing a
very high volume of transactions securely, a digital antidote
to the medical profession's paper-based red tape. But up
until now, Healtheon has subsisted off the more mundane
business of maintaining data networks for a handful of
customers. In its registration form, the company states that
90% of its business comes from four customers: United
HealthCare Corporation (UNH), an $11 billion company
that is among the country's largest HMOs; drug maker
SmithKline Beecham (SBH); Brown & Toland Medical
Organization, a physician management outfit that represents
West Coast doctors; and Beech Street Corp., another
doctor group.
Ultimately, Clark and CEO Mike Long think they can get all
parties, including doctors, consumers, companies, insurers
and HMOs, to pay for forms processing through the
Healtheon network, either on a per-transaction basis or as a
subscription. That approach, says Healtheon in its filing
papers, would allow small businesses to benefit from the
network resources big companies classically enjoy when
they contract for expensive, custom-built data networks,
known as value-added-networks (or VANs).
But it took more than a bit of trying to get to that strategy.
Back in '95, as Clark sprinted from the Netscape IPO, he
took a look at the market size of health care and, like any
intelligent individual, figured there had to be a brilliant
business opportunity in bringing the Internet to the
technological backwater that is modern medicine. Clark
dipped into his personal fortune, then estimated at $1 billion
(pre-Netscape plummet), and joined with Kleiner and
venture capitalists New Enterprise Associates and Sierra
Ventures to put up two initial funding rounds that had
reached $11 million as of last summer.
Because of Clark's prominence, the missteps along the way
have provided rich fodder for the business press. Before it
sounded like a drug company, Healtheon was named
Healthscape, a Netscape spinoff meant to provide medical
information to the public over the Web. Clark and company
soon realized that public medical information was going to be
a small business for hundreds of Web sites, from mom and
pop outfits to professionals such as MediConsult.com, but
not necessarily a multibillion dollar business. The technology
newsletter ComputerLetter, in an excellent write-up last
summer, detailed how Clark and company shifted to a
strategy of providing online medical benefit registration for
corporate employees, selling to the insurers and HMOs and
using Web browsers and corporate networks to simplify
paperwork.
Since then, it's been a case of: Can Jim Clark's money buy a
business plan? A Forbes article this past June details how
after a blowup with insurer Blue Cross and Blue Shield of
Massachusetts last year, Healtheon received $25 million in
new funding, including $11 million from Clark, to change
course once again, this time bringing in CEO Long, a veteran
of the information technology outsourcing world, to replace
acting CEO David Schnell. Long promptly laid out $150
million to buy ActaMed of Atlanta, whose data network
allows physicians to order lab tests from SmithKline and
track patient information, such as treatment eligibility.
Healtheon is looking to combine the ActaMed software into
a forthcoming offering dubbed Racer, which will handle the
entire paperwork process that ensues every time your
primary care physician refers you to a specialist. Clark's
venture will be competing, yes, with giants such as $12.6
billion (market cap) HBO & Co. (HBOC), recently profiled
in SmartMoney Interactive (see "Daily Screen: The Other
HBO Drama,") but it will also be going up against the
hundreds of tiny smaller software and services firms in a
highly fractionalized medical information technology market
that observers expect will begin to consolidate in the near
future.
"There's about a hundred companies trying to do this," says
International Data Corp. analyst Dennis Byron of the efforts
to use the Internet to create universal networks for the health
care community. Byron says not only HBO, but also
traditional software firms such as German software giant
SAP AG (SAP), are moving more and more away from
traditional software sales to focus on value-added services in
lucrative markets such as health care.
How does a new player survive? "The old rules still pply,"
says Byron. "Be first to market with something no one else
has thought of, and get there for a year, and that gets you in
the game. Then you've gotta be great marketers."
Healtheon is far from the only company eyeing the Internet,
but unlike SAP, it does have the dubious honor of being
among the first to build a business from scratch on the
promise of bringing all the health care parties to the table.
Until Racer is ready to roll, ActaMed's proprietary,
non-Internet business is the main driver of revenue, which
Healtheon is hoping will reach some $85 million this year.
In a sense, the company is very reminiscent of another
Kleiner Perkins deal, At Home (ATHM), which is helping
the cable companies build Internet services for the masses.
Similar to how ATHM tapped Los Alamos researcher and
Internet guru Milo Medine to help educate the cable guys on
how to build Internet Protocol data networks, Healtheon's
vice president of engineering, Pavan Nigam, worked on the
ill-fated Orlando network built by Oracle Corp. in the early
part of this decade to provide on-demand television.
In both At Home's case, and that of Healtheon, the hope is
that a really reliable add-on to the Internet will lure the
intended audience out of the woodwork. For Healtheon,
though, there is the unique challenge of taking the
traditionally technophobic medical community and putting it
online.
Competing against Microsoft in the browser market was just
a warm-up compared to this |
