Business: Health care at Internet speed

Health care at Internet speed

That's the goal of WebMD. But so far, the growing company hasn't had much luck getting its complex online system for handling doctors' back-office functions to work smoothly.

By KRIS HUNDLEY

You go to your doctor's office for a physical. The secretary calls up your appointment on her computer, then hits a button and hooks into the Internet where she instantly checks your insurance coverage and co-pay.

While you're in the examining room, the doctor taps another computer screen to pull up your medical history, lab and X-ray results and a record of your last hospital visit. When he orders a referral on the computer, a software program first checks to make sure the specialist is on your insurer's list. When he writes an electronic prescription, the computer checks to make sure the drug is on the HMO's approved drug list. If not, it immediately requests the HMO's approval.

The prescription zips via the Web to a drug store on your insurer's network. The referral to a specialist pops up on a computer screen in that physician's office.

When you walk out of the exam room, the clerk pulls up the doctor's notes on her computer and immediately files a claim for your visit via the Internet. When you get home, you can e-mail the doctor's office with follow-up questions or consult a consumer Web site for more details about your diagnosis, as well as your personal health history.

Call it traditional health care at Internet speed.

And, because this is WebMD Corp.'s dream, guess what company would provide the online medical services and take a profit every step of the way?

To make this ambitious dream a reality, WebMD has been moving at a pace that makes even the Internet look slow.

Jim Clark, billionaire founder of Netscape Communications Corp. and Silicon Graphics Inc., started a company called Healtheon four years ago when he sketched out plans for bringing health care's back-office functions into the electronic age. In November, his company finalized its merger with WebMD, an Atlanta consumer health information site founded by 30-year-old Jeffrey Arnold. Since then, the combined company has acquired or partnered with more than 80 companies that do business with the medical community, including buying the largest processor of electronic health care transactions.

With the completion last week of its latest deal, the merger with Medical Manager Corp., formerly of Tampa, the company now known as WebMD says the dream is one step closer to reality.

"We've done a wonderful job of assembling the assets to deliver the vision," said Arnold, who is co-chief executive of the new merged company with Martin Wygod of Medical Manager. "Now the challenge comes down to execution."

That's no small challenge. A year ago, WebMD had 200 employees; today, it has 5,000. The company, which had an undisclosed number of layoffs in August, said it expects more cutbacks at the end of this month as it consolidates operations. Last week, Arnold declined to comment on the future of Medical Manager's office in Tampa, which has about 150 employees.

With Medical Manager, which sells software to manage doctors' offices, WebMD gets access to the desktops of nearly 200,000 physicians. Now the company has to build a connection from the doctor's scheduling software to the Internet. That on ramp will allow WebMD to act as a toll taker each time those doctors or their back-office employees file a claim, order an X-ray or buy a stethoscope via the Web.

The key will be for WebMD to get doctors, who might now use the Internet after hours to check stock prices, schedule flights or take continuing medical education courses, to integrate the Web into their office practices.

The payoff, WebMD claims, will be instant connectivity to everybody that matters: insurers, hospitals, pharmacists. And with each connection comes a payoff, averaging 25 cents per transaction, to WebMD. Those quarters would add up quickly, with billions of transactions expected annually. WebMD estimates it will reach profitability by the end of next year.

In some ways, WebMD has been the prototypical dot-com company, relentlessly promoting itself in slick, prime-time TV ads, while burning cash and posting losses. Even WebMD's youthful-looking Arnold, who made his first $25-million by age 28 with an earlier endeavor, fits the get-rich-quick formula.

Like many Internet start-ups, WebMD has yet to turn a profit, losing $518.3-million in the last quarter alone. Its stock has been hammered since investors lost their once boundless faith in dot-com companies in April. From a high of just more than $71 in January, its stock fell as low as $11.25 in August. It closed Friday at $15.19, down 81 cents.

But the company, which is headquartered in Atlanta, has avoided the fate of Internet washouts like drkoop.com. In a brutally tough market, WebMD has emerged as a powerful survivor because it accumulated high-profile, deep-pocketed backers who were willing to believe in the company's dream while it was little more than vapor.

Among its big backers: Microsoft, with $250-million; Janus Capital, with $930-million; and News Corp., with $1-billion.

James Kumpel, e-health analyst with Raymond James & Associates Inc., said he was initially skeptical about WebMD when he began covering the company in November.

"But the breadth of its backers creates the impression of inevitability," he said. "They've been winging it till they can make it. And they've got an awfully over-reaching set of goals. If they can even deliver on half of them, WebMD will be considered a success."

There are a few stumbling blocks, however, not the least being skepticism from health professionals who have been hearing promises of a paperless doctor's office for ages.

Analysts, who have been surprisingly upbeat about WebMD's prospects even as investors have driven down its share price, also are likely to have a change of heart if WebMD doesn't succeed in moving doctors' transactions to the Internet -- and fast.

"We already have the consumer eyeballs," Arnold said, referring to WebMD's popular medical information site. "The No. 1 challenge is adoption by physicians, and to do that we have to create a compelling value proposition."

* * *

WebMD also has to do something else: Its complex system has to work. So far, Lenore Reeves, accounts receivables manager for the largest doctor group in south Pinellas County, says it's doing a miserable job.

Reeves supervises a 13-person department at the St. Petersburg-Suncoast Medical Clinic that checks patients' insurance eligibility and secures referrals. Overhead for the department, which processes about $50-million in claims each year, costs the clinic $234,000 annually.

About 16 months ago, the clinic began using the Internet site designed by Healtheon, WebMD's predecessor, to access eligibility information on United HealthCare members. The system was slow, but usable. Then Healtheon combined with WebMD and Reeves' workers began getting error messages when they tried to sign on.

"We've only been able to get on their site once since they merged with WebMD, and then it froze up on us," said Reeves, who has had numerous visits from company sales representatives but no resolution of the problem. "I think they're promoting something they want to get to, but they're sure not there yet."

Though Reeves' staff can't use WebMD's site, they still manage to check eligibility for many patients electronically. Blue Cross and Blue Shield of Florida, the largest health insurer in the state, has an Internet site that gives the clinic instant member information.

And there's always the traditional system of electronic data interchange, or EDI, via a dedicated phone line. The clinic staff uses Envoy, an EDI service recently purchased by WebMD, to check eligibility for Aetna, Prudential, Cigna and Medicaid patients. They enter the patient's ID number into a machine that looks like a credit card processor. Within seconds, eligibility is confirmed or denied.

Reeves' clinic pays nothing for access to Blue Cross and Blue Shield's Web site. Checking eligibility through Envoy's EDI system costs 8 to 11 cents per transaction.

Envoy's EDI system also is used by the clinic to file about 99 percent of its claims electronically. These claims are downloaded each night from the clinic's computers over the EDI line to clearinghouses that check for errors. The clinic pays about $2,000 a month for filing claims through the EDI line.

Though the system has worked smoothly for years, since WebMD acquired Envoy in May glitches have become commonplace, operations manager Connie Wade said.

"They're rejecting many claims for obviously false reasons, saying we've forgotten to include the last name or provider number," Wade said. "It's tedious and time-consuming to fix. It's almost like they're trying to force you to file claims over the Internet."

Arnold said the company has been working hard to integrate systems and that when the pieces are all in place, the shift to the Internet will be invisible to the user.

"It's going to be so seamless and offer such additional functionality that the worker won't know or care whether they're online," he said.

WebMD would like big users such as the St. Petersburg-Suncoast clinic to move all their transactions to the Internet. But the company has yet to convince the workers there that the Internet is any better, faster or cheaper than existing systems. Said Wade, "If I thought there was one Web site that would be able to do it all, I'd be buying that company's stock up like crazy."

Wade says she doesn't own any WebMD shares.

* * *

While front-line workers may be disillusioned with WebMD's performance so far, analysts are generally more hopeful that the company will prevail. Nancy Weaver, an analyst with Stephens Inc. of Little Rock, Ark., thinks WebMD shares will reach $24 within a year.

She says doctors will be motivated to move from existing EDI systems to WebMD because the Internet will give them flexibility in filing and tracking claims.

"It's a land-grab strategy," Weaver said. "If WebMD can establish its market share through Medical Manager and Envoy, then fold claims and eligibility onto its Internet system, it will have a huge engine that can produce nice revenues over time."

Kumpel of Raymond James also has a strong buy rating on WebMD despite continued negative cash flow and negative earnings.

"The stock is cheap, not based on classic fundamental measures, but based on the sum of the parts," Kumpel said, referring to the many acquisitions made by WebMD, particularly of companies such as Medical Manager and Envoy. "Until they get the interfaces with the Medical Manager software done, I don't expect a whole lot of upward movement. But in 12 months, I expect it to be substantially higher."

Though a handful of rivals are vying for parts of WebMD's market, the company has partnered with or acquired its potentially biggest competition. And though several insurers made noise last spring about challenging middlemen like WebMD by forming their own clearinghouse, nothing more has been heard from the group.

"I think such a consortium of insurers would be too unwieldy and is unlikely to be a viable stand-alone business," Kumpel said. "It probably makes more sense for insurers to work with an objective third party."

WebMD's Arnold thinks there's plenty of room for competition.

"We think the insurance companies and other folks will have multiple Internet strategies," he said. "And because of the work we've done to get to the doctors' desktops and consumers' eyeballs, we'll be part of those strategies."

As WebMD prepares to prove it can do what it has long promised, some analysts wonder if its size and control over so many pieces of the health care transaction might inspire resistance rather than loyalty.

Eric Brown, research director for health care e-commerce at Forrester Research in Cambridge, Mass., said doctors should be relieved to find a secure Internet site where they can store confidential patient data and access it from anywhere.

"But doctors may fear that because WebMD wields such control, they will be unable to sway any power over the company," Brown said. "At this point, WebMD is seen as being very, very calculating and not necessarily loved. Kind of like Richard on the Survivor series."

WebMD Corp.

Ticker: HLTH

Headquarters: Atlanta

When it started: Company formed by merger of Healtheon and WebMD in November 1999.

What it does: WebMD wants to link doctors to hospitals, insurers, labs, pharmacies and the consumer via the Internet.

How it proposes to do it: The company has acquired or formed alliances with more than 80 companies in the medical industry, most recently buying Medical Manager Corp., a practice management software company formerly based in Tampa.

Co-chief executives: Jeffrey T. Arnold and Martin Wygod

2Q revenues: $101.1-million

2Q net loss: $518.3-million

2Q per-share loss: $2.64

Stock price: $15.19 as of Friday)