It's safe to say that many investors were surprised when Healtheon Inc. (Nasdaq: HLTH) recently announced plans to merge with WebMD, in a multibillion stock swap that gives half of the new company to a small, privately held health care portal operator with negligible revenues. But the deal's proponents believe WebMD will be a catalyst that brings hundreds of thousands of doctors onto Healtheon's system, which uses the Internet to handle bureaucratic functions performed in the medical field, such as verifying a patient's insurance, retrieving test results and storing prescriptions.
Soon after the deal was announced, ZDII spoke with Steve Curd, Healtheon's executive vice president and chief operating officer.
ZDII: How will this new combined company function? Given that WebMD and Healtheon have had different approaches, how do they complement and leverage and help each other?
Curd: Healtheon at its roots is an engineering company. When Jim Clark and Pavan Nigam founded the company three years ago, they saw health care as a very complex, highly fragmented industry. As an engineer, they simply looked at it as a problem, and they looked at it as a problem that needed to be solved. And as a company we developed deep web-based development and engineering expertise. And out of, for example, 750 employees, probably over 300 of them or more, 350 of them, have engineering backgrounds and competence.
Over the past three years Healtheon has worked awfully hard to build what we call the Healtheon Integration Platform, or the HIP. And the HIP is basically constructed out of building block modules that provide high integrity, high security, high performance business transactions that can be delivered over the public Internet. And it turned out that was a much tougher challenge that the team anticipated it to be. So the punchline is, we've spend a lot of resources and time in engineering this high integrity, public Internet-based transaction delivery platform.
In parallel with that, we've worked hard on either acquiring or building connectivity with the large institutions of health care. For example: big payor organizations; big insurers; clinical reference laboratories for diagnostic results communication out to the physicians; and pharmacy companies, or pharmacy benefit managers, or PBMs as they're called, regarding the prescription and dispensation of drugs.
And so part of our engineering focus has been on connecting to those systems that are 15 or 20 years old on the back end, in which the health care information is locked up.
Now to contrast that with WebMD, WebMD has largely built a consumer brand. They have struck strategic relatioships with media and distribution channels. And they've focused significantly on creating a consumer brand and a set of distribution channels for their product, including, for example, pre-paid subscriptions through life sciences companies like DuPont.
ZDII: The subscriptions for physicians.
Curd: That's correct.
And so, if you look at the combination it's just a remarkably powerful story. The combined company will have not only the engineering platform, which is in release 3.0, and ready for business and is, in fact, being used for production traffic. Prior to the Mede (America) transaction, we were planning to carry about 150 million transactions through the platform this year; after we integrate Mede America, which is a large health care transaction company and will be consummated in the next couple of months, this year we expect to carry more like 450 million health care transactions via this platform.
ZDII: What kind of growth rate should we be looking for from this new company?
Curd: Well, obviously we can't disclose that to you individually. We have bankers' expectations that have been published and that are in the public domain, and so does Medi America.
But I can tell you that there's no question that the combination of Mede America, Healtheon and WebMD has the potential to sustain a steeper growth rate, primarily for two reasons.
One is, with Mede America, we are significantly deepening our back end connectivity with those old engines of health care. So, for example, we will be directly connected to over 500 payors, instead just a few dozen, which is Healtheon's current model.
And with the WebMD branding and distribution, we believe we can connect significantly more Internet-based browsers on the front end with those high-value transaction engines on the back end, by marrying the Medi America and WebMD components of the business model into the Healtheon distribution platform.
ZDII: Would it be fair to expect exponential growth now that you have WebMD as this front end?
Curd: I won't even use that term, because exponential is too precise of a term. I would just say that we expect significant growth.
ZDII: You have $470 million in guaranteed revenue over the next five years through subscriptions being underwritten by Microsoft and DuPont. What percentage will subscriptions and advertising have of your new company's overall revenue?
Curd: I don't know the answer to that.
My expectation is that we will, in addition to these guarantees, we will have significant revenue sources from carrying transactions, and so the subscriptions on the front end side are only part of the story. The other part of the story is that every time a physician, for example, submits a transaction, in many cases that transaction arrives at an institutional sponsor which is also paying us for that transaction.
ZDII: So you get a cut of transaction revenue?
Curd: Indeed we do.
ZDII: When you say "transaction", you mean...?
Curd: There are eligibility transactions, which is the way a physician uses to decide whether or not he'll get paid for seeing the patient.
A claim transaction, or a claims status transaction, those are administrative.
on the diagnostic side, they are laboratory diagnostic transactions, so the submitting for example of a specimen and the receipt of the order is a transaction fee base. And the arriving of a prescription, or a script, is also considered transaction, and for each of those transactions we collect a fee.
ZDII: The Wall Street Journal did a story on Microsoft as a broker of this deal. How critical was Microsoft in getting this deal done?
Curd: They were very a important part of the definition of the partnership.
It is important to us as a first mover to rapidly disseminate sets of standards, to eliminate fragmentation that can often incur in a new industry. As we move into this space, Microsoft's role was pulling together the two premier players in the space, and putting behind us their commitment of support for our integration platform, for the HIP that I mentioned earlier, and to support us with their technology, to proliferate that standard.
Our expectation is that we will become the electronic commerce standard for the industry. And therefore, other partners can use those standards to avoid significant resources necessary to recreate them, and we can focus the resources in health care on value added transactions, rather than rebuilding utilities and utility standards that have already been defined.
So I think from all those perspectives, Microsoft's role as a technology partner, their role in identifying the premier players, the premier industry movers in the space, and collaborating in such a way that they brokered our conversation, and helped achieve a common platform of understand, is just very important.
ZDII: The medical field tends to be reluctant to change its systems. It's a little unclear as to how having WebMD as a front end would make it easier to convince physicians and hospitals to switch from their legacy technology.
Curd: WebMD brings a lot of things to the party. One of the things that I mentioned earlier is some of their media and distribution rights, which enable us, we think, to create a brand that we can more rapidly deploy to physicians.
I think the work, the investments they have made in developing these media relationships and these channels of distribution, and the sponsorship models -- for example, their insight in having DuPont and Microsoft offset the monthly subscription fees for the physicians -- are all important parts of the story. One of the things that's important to realize in this space is that physicians are very cost-sensitive -- which is an understatement, you might remark -- so for WebMD to have secured pre-paid subscriptions, even if they're just $20 or $30 a month, that $20 or $30 a month can be a significant barrier to adoption.
ZDII: This deal gives Healtheon and WebMD shareholders 50-50 ownership of the new company. But Healtheon has a lot more revenue than WebMD does. Why is WebMD valued so much relative to Healtheon then?
Curd: I've already spoken to the value that WebMD brought to the table. These valuations are very difficult to turn into equations, as you know, and so the strength and depth of the partnership that they brought into the relationship, we think was a very important part of the valuation.
ZDII: Your stock is a pretty powerful currency. What other areas might you address through acquistion?
Curd: Obviously, as a policy, we don't discuss future acquisitions. I would tell you, however, it would not be inconsistent to see us continue to focus on building back end connectivity strength -- connectivity to other connectivity companies that provide access to the back end transaction engines.
ZDII: So it's all back end, as far as you're concerned, the front end is all taken care of with WebMD?
Curd: Well, I wouldn't say that either.
There are two primary thrusts. One is continuing to improve the quality of back end connectivity, and the breadth of that connectivity among the health care institutions. And the second is very rapid Internet based deployment out to the caregivers in healthcare, which we call the providers, and the consumers.
So it would not be inconsistent to see us continue to grow both organically and through acquisitions, for us to continue to strengthen our position in those three spaces. QAFOLKS