The proposed multibillion-dollar merger of Healtheon Corp. and WebMD underscores how desperate Internet healthcare companies are to tap the physician market -- and how valuable they think doctors will be.
Healtheon of Santa Clara, Calif., and Atlanta-based WebMD announced their deal May 19. The all-stock merger was worth as much as $12 billion when it was announced, although Healtheon's sinking stock price sent the value of the deal down to $6.6 billion May 25. An extra $360 million is coming from investments by technology heavyweights such as Microsoft Corp., which chipped in $250 million.
Two days before the Healtheon-WebMD announcement, another billion-dollar deal was launched. Elmwood Park, N.J.-based Synetic is planning a $1.4 billion stock merger with Tampa, Fla.-based Medical Manager. Both deals are expected to close later this year.
Healtheon-WebMD and Synetic believe the deals will give them access to the offices of hundreds of thousands of physicians. Those doctors would use the Internet to process insurance transactions, organize billing, fill prescription orders, pick up continuing medical education credits and view other healthcare information.
The companies also will collect demographic information about physicians to use in selling advertising. However, they say individual profiles won't be turned over to advertisers, nor will information be included without a doctor's consent.
According to HHS, physicians directly or indirectly control 80% of the $1 trillion healthcare market, making doctors the flash point for the Internet's infiltration of healthcare.
"There's an extreme upside that's not been tapped," says Lloyd Greif, president of Greif & Co., a Los Angeles-based investment bank. "It's a wide-open market."
Consultant Manuel Lowenhaupt, M.D., who leads Deloitte & Touche's Care Management, Information Technology division, says Internet healthcare companies will succeed if they can make doctors' daily work more productive, efficient and effective. Surveys, including one commissioned by Healtheon, show as many as 85% of doctors use the Internet but rarely in the course of their practice.
"There has to be a perspective (from Internet companies) on when (doctors) need help," Lowenhaupt says. "It's not, 'I have some free time, let's go onto the Internet.' "
The Healtheon-WebMD and Synetic deals are extremely speculative, even for Internet investors used to eye-popping prices for money-losing companies.
Internet companies aren't proclaiming that they can put physicians online right now, but they are trying to amass the resources, partners and expertise to make it happen soon.
Initially, Wall Street was excited by that prospect, boosting Healtheon's stock price as high as $126 from $84 May 19 and also raising values for most other healthcare technology companies.
But with a weekend to think about it, traders started unloading Healtheon shares, which fell as low as $89 on Monday, May 24, dragging down other companies with it. The next day, Healtheon's stock closed at $67 on Nasdaq. At $126 per share, the Healtheon-WebMD merger would be worth $12.3 billion; at $67, it would be worth $6.6 billion.
For the first quarter of 1999, WebMD reported $17.6 million in revenues and $18.6 million, or 30 cents per share, in losses. The company was founded in 1996 and started its Web site Oct. 1, 1998. In an initial public offering filed in January with the Securities and Exchange Commission, WebMD said it expected 1998 revenues of $616,000 and losses of $31.7 million. The company withdrew its IPO filing May 12.
Meanwhile, Synetic, which also manufactures plastics, is using the Medical Manager deal as part of a plan to build up CareInsite, its Internet division.
CareInsite on March 26 filed with the SEC an IPO of $16 per share, or a total $104 million. For the nine months ended March 31, CareInsite, which isn't yet an active site, reported a $15.5 million loss on $213,000 in revenues.
Synetic's stock fell $12.13 May 25 to $88.50 per share, reducing its merger value to $1.2 billion.
It's not just the losses that make these deals speculative. In Healtheon-WebMD's case, the success of the merger may be predicated on technology that hasn't even been developed.
Healtheon Chief Executive Officer Mike Long says the company is doing some "experimental work" with hand-held computers that will enable physicians to use the Internet, rather than relying on their office staff. Healtheon-WebMD stresses that it wants physicians to use its products.
"One of the key things is getting a device other than a (personal computer) that is as easy to use as scratching out a prescription on a piece of paper," says Long, who will be chairman and chief operating officer of Healtheon-WebMD.
During a teleconference announcing the deal, Healtheon co-founder James Clark admitted bringing the Internet to healthcare has been "a tough challenge . . . tougher than I thought."
"There's too much dependence on (existing computer) systems, lack of integration, fragmentation, inefficiency," says Clark, who will step down as Healtheon's chairman but remain on the new company's board. "That can't be good for the quality of care."
Healtheon-WebMD executives estimate that $250 billion of the current $1 trillion in annual healthcare spending is waste. They see the Internet as a way to eliminate that waste, improve quality of care and make money.
At the least, companies are trying to position themselves for when a younger, more online-savvy group of physicians becomes prominent.
Mark Leavitt, M.D., CEO of Portland, Ore.-based MedicaLogic, had an epiphany last year when speaking to a group of graduating medical students. His revelation played a role in MedicaLogic's current $100 million conversion from selling electronic medical record software facility by facility to making it available over the Internet.
"The speaker before said, 'Here are the latest diabetic guidelines, and if you need this, you can e-mail me,' " Leavitt says. "And I said, 'Wait a minute.' I asked (the students), 'How many of you use e-mail?' Every hand went up. 'How many of you have access to the Internet?' Every hand went up. 'How many of you can type?' Every hand went up.
"Every year there are 12,000 new doctors graduating, and if you give them a paper chart, they say, 'You're kidding.' Plus, you have physicians using e-mail now to talk to their kids in college."
Only about 5,000 physicians use the WebMD Internet site, which Healtheon-WebMD says is the front door to its services. But executives are hoping their big money buys more. Backers such as Microsoft and DuPont are underwriting $330 million in physician subscriptions to Healtheon-WebMD at $29.95 each per month.
Healtheon-WebMD says this will allow up to 200,000 doctors to get free subscriptions for five years.
Healtheon in particular has tried to forge numerous partnerships and acquisitions to gain access to physicians.
Leading up to the WebMD merger, Healtheon on April 21 offered $460 million in stock for MedE America, an East Meadow, N.Y.-based electronic transactions company. And on May 20 Healtheon struck a partnership with Raleigh, N.C.-based Medic Computer Systems, a division of British software maker Misys. The deal calls for Medic's practice management systems, which have access to 65,000 physicians, to be integrated with Healtheon's Internet site.
Meanwhile, Synetic is buying Medical Manager to get access to 120,000 physicians using that company's office systems, says Synetic Senior Vice President David Schlanger.
Synetic also struck alliances with The Health Information Network Connection, an information transmission group owned mostly by New York-area HMOs, and East Hanover, N.J.-based National Prescription Administrators, a pharmacy-benefit management company. The alliances would give Synetic access to at least 40,000 physicians.