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A bitter pill: Business: Old-line companies revolt

The grand ambitions of online health companies have been stymied by offline competition, the New Economy bust, opposition by physicians and daunting technological obstacles.

 

Business: Old-line companies revolt

The online medical industry's dramatic reversal of fortune can be traced to a single day in the spring of last year.

The shares of such companies as WebMD and TriZetto Group began a precipitous slide on March 30, 2000, when The New York Times reported that six of the largest insurance companies were planning to form a consortium, later to be called MedUnite, that would provide similar services to those promised by the Internet start-ups.

"There is no question that part of the timing of MedUnite making its presence felt had to do with trying to disrupt the momentum," TriZetto's Jeff Margolis said. "The timing also won time for the different health plans and MedUnite to come up with a better answer for their physicians and members."

Although dot-com health companies probably would have been caught a few weeks later in the crash that befell most Nasdaq-traded stocks, many executives in the Internet health-data business are certain that news of the consortium speeded the unusually rapid decline in their stocks.

Adding further insult, the Internet companies themselves may have unwittingly played a hand in this fate by riling the health care companies into action with a series of highly public boastings.

"To some extent, the consortium emerged in response to some of the outspokenness of Jim Clark and the Healtheon folks, who I think probably were also carried away by their enthusiasm," WebMD's Roger Holstein said. "In their desire to create a new wave, they spoke so loudly...that they scared the health plans into believing...these new Internet businesses could displace them in meaningful ways."

MedUnite and its founding members dismiss the issue of competition, saying simply that the time was right because the appropriate technology to overhaul their processes had finally arrived. "The attention WebMD and others were getting was not a prime motivator for us," Cigna's Marjorie O'Malley said.

Nevertheless, basic survival instincts did seem to come into play when insurance companies decided to team with one another rather than go it alone. Their combined forces effectively gave notice to the fledgling Internet companies that they were still the power in the sector.

"I think the health plans said, 'Hell, the value of some of these Internet companies is greater than the values of our companies,'" said one executive in the thick of the battle. "I don't want to question their motives going forward, but I think they thought that if the values of companies like WebMD and others declined, it could possibly be leverage to force mergers or acquisitions."

At least one advantage in the battle may go to whichever side offers the quickest switch from EDI to the Web--not so much for technical reasons as for business demands.

At Pentucket Medical Associates, a practice based in the Northeast with three office locations and about 65 physicians, the move to the Internet is hung up on a licensing issue. The EDI service that the practice now uses, WebMD's Healthwire, reaches 95 percent of the insurers they deal with, while WebMD's Web-based product would reach only about 60 percent of the providers at this time, according to Frank MacNeil, Pentucket's director of information technology.

"The whole benefit to being online is to get one interface regardless of what HMO we are dealing with," he said. "If WebMD called me and said they had all the HMOs on their Web-based product, I would start the switch-over process immediately."

The enemy within
Ironically, the membership of MedUnite could be the consortium's own worst enemy.

Like any large industry, health insurance has a long history of internal mistrust and bitter rivalry that could hinder the cooperation necessary for MedUnite to succeed. In addition, the consortium's collective power in the sector could draw the attention of federal regulators concerned about the possibility of collusion and control of access and prices.

Those obstacles have been encountered by the auto industry's Covisint, the only other consortium attempting an online conversion of similar scale; it has been mired in technological problems, administrative bickering and a souring market for business-to-business exchanges. Although Covisint came under scrutiny by the Federal Trade Commission, the Justice Department and the European Commission, it was eventually cleared by antitrust authorities.

MedUnite, however, presents a unique conflict of interest for regulators. The federal government, which is charged with protecting consumers from predatory pricing and collusion by large corporations, is in fact the nation's largest insurer with its Medicare program--and, therefore, has much to gain in cost savings if a standard is established for processing claims electronically. State governments could also reap tremendous savings for Medicaid programs that offer insurance coverage to their indigent populations.

Federal agencies declined to discuss any potential conflict of interest in regulating MedUnite, saying only that the consortium is not under any antitrust scrutiny. MedUnite sees no reason for such concerns, saying that consumers stand to benefit from the long-overdue lancing of an inflamed bureaucracy.

"There are no antitrust issues with what we are doing," said MedUnite Chief Executive Dave Cox. "What we are saying is that nobody else has the ability to make the changes that are necessary other than the insurance companies."

MedUnite said it is helping health plans electronically streamline their administrative processes. Once the systems have been modernized, the coalition said, it will allow competitors to use its processing networks for claims and benefits.

Precedents follow the money
Many analysts play down any antitrust concerns, pointing to precedents in the financial industry. Since the early 1980s, automated teller machines operated by competing financial institutions have been linked over vast electronic networks, allowing customers access to their bank accounts regardless of location.

"There are a lot of interconnections for (financial institutions) but also a lot of competition," said David Main, executive director of the Healthcare Technology Network of Greater Washington, an association that studies the merits of technology in different parts of the health care industry. "I don't think consolidation has to result in the type of anti-competitive behavior that the federal government would have to be concerned about."

In the absence of antitrust considerations, Internet medical companies are hoping to exploit the expense and inefficiency that characterize many large consortiums.

"A company whose only purpose is to play in the middle is a company that is challenged to survive over the long term. You have to throw MedUnite into that category," one medical industry executive said. "If one health plan comes up with a less-expensive way to directly interact with its constituents, is MedUnite at any less risk than WebMD? I don't think so."

But MedUnite's online rivals face other risks as well. Like all Internet companies, the health start-ups are hoping to stay afloat until the overall economy recovers and business gains traction. For now, most financial analysts concede that the e-health industry seems more a concept than a reality.

"We believe that a couple more quarters could bring signs of material adoption rates at a handful of companies," James Kumpel, an analyst at Raymond James, wrote in a report last month.

The several dozen companies outside that chosen few, meanwhile, are confronting the dark prospect of looming extinction.

"This is a highly fragmented industry with at least 20 to 25 public and privately funded companies duking it out," said Jupiter's Stacey Rich. "There is no way the marketplace can support all these companies."


 


WebMD
Elmwood Park, N.J.
Formed by the megamerger of Jim Clark's Healtheon with WebMD in 1999, the company has suffered an exodus of executives in its recent history. Clark, of Netscape fame, unceremoniously quit WebMD's board of directors last year along with its co-CEO, Jeff Arnold. Co-founder and CTO Pavan Nigham also slipped out around that time. Just last week, WebMD said its president, Marvin Rich, is resigning. Despite the crowded field, once high-flying WebMD with its backing from VC legend John Doerr is the most closely watched of the online health care companies as an indicator of how the sector will fare.

TriZetto Group
Newport Beach, Calif.
Reflecting the ongoing consolidation in the industry, TriZetto Group emerged in October 1997 after System One, an early online electronic funds-transfer company, merged with Margolis Health Enterprises, a company that offered technology consulting to health care organizations. TriZetto has fueled its growth over the years with acquisitions, including bringing Creative Business Solutions, FinServ Health Care Systems and HealthWeb Systems under its wings. The company went public Oct. 8, 1999.

MedUnite
San Diego, Calif.
Seven major health insurance companies played a pivotal part in sending WebMD to the sickbed when they came together to form a consortium that promised to provide the same services as WebMD. Aetna, Anthem, Cigna, Health Net, Oxford, PacifiCare and WellPoint Health Networks officially became strange bedfellows on Nov. 15, 2000, when they announced the formation of MedUnite. With early promises of creating Web-based products, MedUnite is emerging as yet another closed-network player.