Perhaps no other industry on Wall Street has attracted such bipolar attention as healthcare -- an affair that runs intensely hot and cold with almost no in-between.
The reasons for enthusiasm are obvious. The market is indeed huge, the opportunities for improvement vast. But while the healthcare industry copes with a whirlwind of change, Wall Street works the same as always:
* Investors exhibit special talents for identifying large, high-growth markets that offer significant potential for high returns on invested capital.
* Investment professionals generally have a keen eye for management teams with considerable intellectual capacity, dynamic strategic skills, and energy and passion for their businesses.
* Management teams, with the help of analysts, investment bankers and sometimes even portfolio managers, develop expectations that are almost always too high and too unrealistic. We listen to what management tells us, discount their plans and ultimately derive quantitative and qualitative measures to assess whether a company is executing its strategy. If all goes well, value is created and higher returns follow. Ultimately, though, management is responsible for its performance relative to "street" expectations.
Those hopes were dashed regularly in recent years. Though one company after another claimed to have the information technology solution for all or part of the healthcare market, the promise (and promises) lagged reality, with only modest investment successes and a higher number of outright investment disasters.
The double whammy of Y2K and shrinking hospital budgets due to federal spending cuts further shook investor confidence last year.
Enter the Internet. And welcome back to high expectations.
Waves of investors during the past year have bankrolled new breeds of healthcare information companies. Investor enthusiasm remains high for companies that are leveraging the Internet throughout the healthcare industry as a communications and efficiency-bearing technology. We view the market as consisting of companies providing either content, connectivity or commerce solutions to one or more constituencies including consumers, providers, payers, employers, medical products manufacturers, distributors and government agencies.
Healthcare executives should make it their business to understand the issues Wall Street focuses on regarding this new industry, its breed of enterprise and the expectations investors bring to the table. They should understand the ground rules the investment community is setting for the Internet companies.
By so doing, physician groups, hospitals, managed-care organizations and others might better align their organizational goals with those of these emerging players. And healthcare customers might be better able to distinguish between companies that can facilitate success for all involved and others whose projects or service offerings are doomed to failure.
The healthcare/Internet convergence has introduced new business paradigms and performance measures on Wall Street to analyze and track companies as they seek to establish momentum in the healthcare industry. Of the issues and expectations surrounding these companies, the following four are high on our list:
Brand this. An expensive battle is being waged to establish mind and market share among consumers. We view this as a national vs. local tussle between media companies and healthcare enterprises.
There is ample skepticism on Wall Street about Internet media companies trying to enter the healthcare market to compete with local providers. Companies such as drkoop.com, Medscape, Healtheon/
WebMD, OnHealth.com and others are attempting to provide high-quality, consumer-oriented information over the Internet and establish a relationship with the consumer as a trusted source of timely and accurate health information. Huge media organizations such as CBS, Time-Warner and News Corp. have invested billions to own a piece of this online consumer real estate. The recent announcement of a merger between America Online and Time-Warner adds further complexity to the landscape.
In contrast, healthcare information systems vendors such as IDX Systems Corp. and Eclipsys Corp. are working with providers to build highly functional Web-based destinations that extend local healthcare services, including information requests and delivery, scheduling, medical records and prescription refills.
This issue is front and center for all healthcare delivery organizations and requires an aggressive response now.
ASPs will rule. As we write this, Y2K was a nonevent. The millennium-induced halt to software purchasing is gone, and the need to automate many financial and administrative processes in the healthcare industry remains paramount. Clinical systems in both acute and ambulatory settings are few and far between.
However, healthcare organizations do not necessarily want to own and support huge information technology infrastructures. Purchasing multimillion-dollar software licenses has never been a favorite activity of hospital executives. Enter the "application service provider," or ASP.
In this model, which is growing rapidly in business-to-business markets, computer applications and data are maintained at an off-site computer server and accessed through Web browsers. Software is managed by a third party (either an independent ASP or the software manufacturer) and is sold as a service and distributed via the Internet.
Software moves from a capital item to an expense. Total costs perhaps go down in the long run. However, are healthcare executives, a fairly conservative bunch, willing to let an outside firm host mission-critical business information and functions?
Is there a commitment to moving business processes online? What about clinical data and Internet security?
Many information technology vendors are moving to an ASP offering, which should ultimately be quite successful given the compelling economics. Also look for the rise of the independent ASP, such as TriZetto Group of Newport Beach, Calif., which offers a host of different vendor applications.
Wall Street believes the ASP will be a successful new model. The question is, as with previous technology: What will be the rate of adoption?
I want my connectivity! Probably no area of opportunity has garnered as much enthusiasm as the Internet's potential to link business partners and automate manual transactions. Healtheon/WebMD, CareInsite, AllScripts, privately held AccentHealth and others are working to automate some and potentially all of the estimated 6 billion annual healthcare transactions, most of which are still conducted manually.
Automating routine functions via a Web-based interactive connection is generally considered by investors to be the true "slam dunk" opportunity to utilize the Internet in healthcare. But a host of issues threatens to throw cold water on this enthusiasm.
Ability to drive adoption of these applications by physicians and their proxies has long been an issue in healthcare. Other challenges include payer connectivity, the cost of financing rollout of the services, security issues, the local nature of healthcare delivery and potential federal regulation.
Reinventing the medical supply chain. The Internet has and will continue to transform many industries by altering the way buyers and sellers manage their transactions. At their heart, the new business-to-business exchanges are turning markets upside down, squeezing out inefficiencies, driving prices lower, increasing quality of service delivery and decreasing purchasing cycles.
Exciting new companies have created dynamic online healthcare exchanges, including Neoforma.com and Medibuy.com; SciQuest and Chemdex in the life sciences industry supply business; and privately held Cimtek Commerce in the physician office supply market.
The Internet erases geographic barriers among trading partners (a major issue in healthcare), is ubiquitous and easy to use, and inexpensive, compared with current electronic data interchange networks.
Tremendous cost savings can be achieved by decreasing procurement time, creating markets for unwanted goods, reducing errors and adding information to support purchasing decisions.
Creating market hubs between buyers and sellers offers tremendous opportunities in the healthcare market and should serve as a wake-up call to traditional middlemen that they must add value or go away. Look for significant activity in the healthcare electronic commerce markets this year.
To sum it up, investors assume a fairly rosy outlook for specific sectors within the online health arena. The challenge, as in the past, will be for these new companies to use their intellectual and financial capital to convince you, the customer, that the time has come to reinvent the way you conduct healthcare business.
If there's proof that adoption has indeed taken hold, the future should be very bright indeed for the entire industry, including vendors, customers, investors and even patients.
Seth Frank is vice president for securities research at A.G. Edwards & Sons, St. Louis.