BUSINESSWEEK ONLINE : DECEMBER 11, 2000 ISSUE
BUSINESS WEEK E.BIZ -- SPECIAL REPORT Curing an Industry's Ills The first wave of "e-health" tripped up. Can the second wave do better? The great info-tech revolution has bypassed most of the medical profession. In a world where a 13-year-old can trade Graffiti tips with her grandmother on a Palm, most doctors still write out prescriptions by hand. Which calls to mind the old joke about the doctor's hastily scrawled prescription. The patient used it for two years as a railroad pass. Twice it got him into Radio City Music Hall and once into Yankee Stadium. O.K., the joke isn't so funny. But neither is the fiasco that has resulted from efforts to graft health care onto the Internet--a pursuit known as e-health. Most of the well-known medical ventures that have been hatched in cyberspace are now in critical condition. On Nov. 2, the Nasdaq de-listed Caredata.com Inc. (CDCM), a glitzy Internet company that helps doctors track patients' blood sugar and other vital signs online. Six days later, vitamin and health supplement retailer MotherNature.com Inc. (MTHR) announced that it was closing up shop. Other e-health stocks are trading in e-hell, including former highfliers DrKoop.com Inc. (KOOP) and WebMD Corp. (HLTH) They are down 4000% and 600%, respectively, from their all-time highs and are struggling to regain investor confidence. These debacles don't undercut the fundamental logic of e-health: The whole health-care sector is in dire need of a high-tech overhaul. But the first wave of e-health outfits took the wrong tack. They were intent on applying the cool Web technology that spawned Yahoo! (YHOO) and Amazon.com (AMZN) to health care. But they weren't diligent in figuring out who would pay for it. ''Management teams and investors got caught up in a broader Net euphoria. They started drinking their own Kool-Aid and ignored reality,'' says analyst Robert Rouse of Lehman Brothers Inc. Internet technology, with its ability to streamline and standardize communications among doctors, patients, insurance companies, and pharmacies, can surgically remove bureaucratic tangles and reduce the number of medical errors. But for e-health companies to succeed as businesses, they must first succeed as health-care companies, solving problems that either doctors, hospitals, insurance companies, or consumers will pay money to see fixed. ''The first round of e-health companies made a fatal error,'' says analyst Benjamin M. Rooks of CIBC World Markets. ''They didn't follow the money.'' The second wave of e-health startups won't make the same mistake. These companies are focusing on services aimed straight at physician offices, pharmaceutical companies, or pharmacies. Some will connect doctors to medical databases via wireless links. Others will make money on technology to monitor patients 24 hours a day. Still others will cash in by streamlining the complicated steps in the drug-testing process. ''Over the next few years health care will change dramatically,'' says Daniel S. Messina, chief financial officer of Aetna U.S. Healthcare Inc. ''The companies that help make that happen will be the new health-care leaders.'' Adds Eve Kurtin, a venture capitalist with Pacific Venture Group in Encino, Calif.: ''This second wave is poised to succeed where the first one failed.'' Here is a bird's-eye view of the $1 trillion U.S. health-care system, which smart e-health companies will keep in sharp focus. Health care is the modern-day equivalent of a medieval patchwork of fiefdoms, with doctors, hospitals, and insurance companies allied to form local--not national--power structures. It is the only sector of the economy where the consumer does not pay for the services she chooses--and is outraged at the very thought of financial responsibility. It is an industry populated by entrepreneur-physicians and clinicians who are trying to break even in what has become a high-volume, low-margin business. In short, medicine is riddled with inefficiencies, outrageous costs, and outmoded technology. And this whole composite of fragmented cottage industries is under crippling financial pressure as medical spending continues to skyrocket. Already, health care accounts for 14% of the nation's gross domestic product, and that's expected to climb to nearly 20% by 2005. Simple question. To succeed, newbie e-health companies will have to find lessons in the struggles of the floundering first wave--beginning with the most famous: DrKoop.com. The company was founded on the premise that patients want easy-to-understand information about diseases, procedures, and medicines. And that premise isn't wrong. A recent survey by Cyber Dialogue, a market-research firm that tracks Internet health-care trends, found that health-care information is one of the three most popular topics on the Net, after money and sex. In 1999, 24.8 million adults, or 43% of all adult Internet users, searched the Web for health info--a 45% increase from 1998. By 2002, growth of this group will outpace that of general Internet users by 60%. A golden market opportunity, right? Not so far. The founders of DrKoop.com and hundreds of other consumer health sites forgot to ask one simple question: Who's going to pay for this content? Strike one against them: Consumers don't like to pay. They are used to insurance policies that are heavily subsidized by the government or by their employers. And Net surfers don't generally pay for the information they tap. Strike two: Pharmaceutical companies can't easily step in with subsidies. Should they sponsor medical Web sites, they could taint the discussion that occurs there. Strike three: In general, doctors are so strapped for cash that they don't have the wherewithal to advertise their services on e-health sites. WebMD rivals DrKoop as a poster child of the e-health bust. Nearly two years ago the company's stock soared from $40 to $125 on bullish forecasts that it would slash inefficiencies in health care by linking doctors and hospitals to insurers. But the company had trouble convincing insurers to join up, and, without the insurers, doctors weren't buying into what they perceived as a cumbersome service. ''It didn't really help me solve my problems,'' declares Dr. Peter Basch, a Washington (D.C.) internist. The stock is now trading in the $12 range. In addition, WebMD failed to consider that nearly half of the nation's 600,000 physicians work in small practices outfitted with one or two doctors. These businesses took a big hit in 1997, when the Balanced Budget Amendment pared back already slim reimbursements from HMOs and Medicare. Many of these small businesses can't afford the cash outlay--typically thousands of dollars--required to link up to the Internet. ''Only if the technology can improve the economics of a practice will doctors adopt it,'' says Dr. Bruce Hochstadt, an analyst with Thomas Weisel Partners. But who has time to figure that out? In a one-doctor practice there is no chief information officer to evaluate the potential cost savings. Doctors generally have scant expertise in running a small business and little time to bone up on technology. Most hospitals aren't much better off. Few have resources to spend on what Dr. Russell J. Ricci, general manager of IBM Global Healthcare, derisively terms ''Intergalactic, Big Bang health-care solutions'' of the sort that WebMD was pitching. More than 80% of today's hospitals are either government-owned, not-for-profit, or for-profit but losing money. In a financial crunch, most hospital administrators will shell out for new MRI and CAT-scan machines before considering a complicated new scheme from the likes of WebMD. Hand-holding. So what are the legitimate goals that the second wave of e-health companies should set? And how will they be rewarded in the marketplace? Many startups have focused on handheld devices that allow doctors to send wireless prescriptions, order lab tests, check for adverse drug reactions, and dictate notes. Because these devices can improve the way a doctor practices medicine and don't require hundreds of thousands of dollars to set up, physicians appear interested. According to an October article in Modern Physician, more than a quarter of doctors own handhelds. Of those, 22.2% have replaced their prescription pads with these gadgets. Already, dozens of companies are competing to put these devices into the hands of the country's doctors. The vanguard includes startups such as ePocrates, iScribe, Parkstone Medical Information Systems, and Allscripts. Some appear to be positioned for takeoff. Allscripts Inc., a startup in Libertyville, Ill., has signed up more than 2,000 doctors to use its Palm and PocketPC software. By acquiring a rival called ChannelHealth Inc., it will soon reach an additional 118,000 physicians. For most of these ventures, the ideal client is a tech-savvy professional like Dr. Charles F. Shaefer Jr., an internal and critical-care specialist at University Hospital in Augusta, Ga., who whips out his Palm about 20 times a day. An incident last March explains why he's addicted. A teenager visited his office, complaining of a miserable cold and heavy congestion. Shaefer was about to prescribe an antibiotic but then remembered the young man's dermatologist had prescribed acne medicine. Shaefer checked his Palm, which was loaded with a prescription-drug reference program made by ePocrates Inc. of San Carlos, Calif. ''Lo and behold, the drug I was going to give him could have caused increased pressure on the brain,'' which can be life-threatening, Shaefer says. ''I have made better decisions because I have consulted the ePocrates program.'' Bottom line. Many wireless e-health ventures will soon roll out a service doctors have been clamoring for: so-called charge capture. This is software that accurately documents and classifies the hundreds of clinical activities performed by doctors and other health-care professionals. According to Synergy Medical Informatics, a privately owned company that develops medical software, the average physician with an annual billing of $650,000 is currently losing between $35,000 and $100,000 a year to claim denials. These lost claims occur because the doctors do not have adequate documentation for their patient encounters or have billed incorrectly for their services. Charge-capture software addresses the problem by helping doctors choose the appropriate fee schedules and diagnosis codes--showing, for instance, that a patient was seen for possible strep throat, not a pelvic exam. That's something that appeals directly to a doctor's bottom line, says Thomas Weisel's Hochstadt. He is betting that doctors would be willing to spend $100 a month for handheld services that could recoup thousands in lost revenues. Not all the new companies have hitched their fates to handhelds. Pacific Venture's Kurtin likes companies that actually deliver care, as opposed to information. Pacific was an early investor in LifeMasters, one of the leading online services that helps people deal with such chronic diseases as diabetes and asthma. Because the LifeMasters program can dramatically lower medical costs, insurers in Florida, Oregon, Washington, and California have signed their members up for the service. These patients will log into a secure web site daily and enter critical information about their condition, be it blood pressure, blood sugar, or breathing rate. To date, LifeMasters has attracted at least $40 million in venture-capital funding, and its revenue each year has tripled over the previous year's level. There is also growing evidence that patients want information directly from their doctors. Companies that tap this desire will probably be rewarded--even in these early days of e-health. Although it's tough to predict the ultimate winners, the first wave of e-health companies will be succeeded by a second, and then a third. Slowly and inevitably, these companies will improve the quality of medical care. That could be the best prescription yet for patients and physicians. By ELLEN LICKING Please click here for a correction to this story. _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					e.biz Contents for Dec. 11, 2000 issue RELATED ITEMS Curing an Industry's Ills TABLE: Patients Want Health Information Directly from Their Doctors.... TABLE: ...But Most Doctors Don't Deliver the Goods Online... TABLE: ...So What Are Physicians Doing on the Internet? CHART: Hospitals and Pharmacies Are Processing More Health Claims Electronically...And Doctors' Offices Are Finally Starting to Catch Up ONLINE ORIGINAL: One Doctor's E-Health Checkup INTERACT E-Mail to Business Week Online

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