Healtheon/WebMD to CareInsite: "Be Mine!"

Feb 14 2000

Is Healtheon /WebMD becoming the Microsoft of online medicine?

The Internet health care company announced Monday the acquisition of its most significant competitor, Medical Manager Corp., and its CareInsite Internet subsidiary. The stock deal, valued at $4.9 billion, gives Healtheon/WebMD direct access to the 185,000 doctors who use Medical Manager's medical software, which is being incorporated into CareInsite's Web services for physicians.

Perhaps as importantly, Healtheon/WebMD acquires Medical Manager's seasoned health care management team led by industry veteran Martin Wygod, who becomes co-chairman of the combined companies. Medical Manager and CareInsite also will infuse Healtheon/WebMD with nearly $500 million in cash reserves. Healtheon/WebMD and CareInsite have been competing to connect physicians, health plans, pharmacies and laboratories over the Internet.

The acquisition caps a frenetic month of deal making that now gives Healtheon/WebMD an entree to about two-thirds of the nation's physicians. In recent weeks, Healtheon/WebMD purchased the world's largest electronic claims processor, Envoy, and struck an alliance with CareInsite competitor IDX , a medical software maker that sells Web services to doctors through its ChannelHealth subsidiary.

"As far as I'm concerned, it's 'game over' in the connectivity space," says Caren Taylor, a health care analyst at E-Offering who follows CareInsite closely. "It will be very difficult for other companies to compete viably."

In conference calls with reporters and analysts, Healtheon/WebMD and CareInsite executives downplayed the notion that Healtheon/WebMD is a Microsoft in the making, seizing control of doctors' desktops.

"We see this as an extremely big market," said Healtheon/WebMD CEO Jeff Arnold. "You've got 30 billion transactions; 27 billion are not electronic today. You have 20,000 competing sites out there. The whole e-health care category is very new, and there's still a tremendous amount of work to do."

That work begins at home. With its shopping spree near an end, Healtheon/WebMD must integrate its numerous acquisitions and partnerships and get a substantial number of physicians and their staffs to change the way they practice medicine and run their offices.

"Now the real challenge is what happens when there isn't anything else to acquire and you can't continue to acquire to maintain revenue growth," Taylor says. "At some point you have to deliver. The biggest risk always has been integration and execution. Now it's even bigger."

As one questioner put it during Monday's conference call, "It seems you have to stop recruiting the army and put it into battle. Where's the beef?"

The number of doctors actually using the companies' Internet services remains small. About 3,500 doctors are online with CareInsite, which is set to launch its physician portal this month. Healtheon/WebMD executives say they have signed up 78,000 doctors, but only about 6,000 were actually transacting business online at the WebMD portal by the end of 1999, according to the company's most recent statements.

Arnold said that Healtheon/WebMD and CareInsite would combine their services for doctors by summer's end. "This is not a strategy that is a year from now, or two years from now. We're six months away from having an integrated product that can go to market," he said.

But Wygod interjected a cautionary note. "This is a very difficult undertaking and we're not saying it's easy," he said of the task of bringing the health care industry online. "It's going to take us years to roll this out and do properly."

The two executives' responses are indicative of the companies' cultural differences. Healtheon/WebMD has pursued a non-stop series of headline-grabbing partnerships designed to make the company the brand name in online health care.

In contrast, CareInsite has maintained a deliberately low profile while it built its Internet services for physicians and locked up its initial market in the New York region. The company has avoided the media and, until recently, didn't even have a Web site. "The key is not to reach for the headlines, but to really build a solid business with a strong economic proposition and execute and deliver on it," said CareInsite executive VP Roger Holstein said in a recent interview.

A member of fallen junk-bond financier Michael Milken's circle in the 1980s, Wygod is the founder of mail-order drug house Medco Containment Services. Medco transformed the drug distribution business by acting as an intermediary between health plans and pharmacies. Wygod sold Medco to pharmaceutical giant Merck in 1993 for $6.6 billion. He later left Merck to become chairman of Synetic, an online medical company that subsequently merged with Medical Manager. The company took its CareInsite subsidiary public last June.

CareInsite is automating and putting online the complex set of rules that govern managed care and dictate treatments and drugs that doctors can provide to their patients. For instance, when a doctor goes online to write a prescription, CareInsite flags whether a health plan requires a different drug's use, or if additional approval is needed to prescribe the medication.

The company's acquisition stunned some analysts, who noted that CareInsite's health care industry experience, its cash reserves and relatively high stock price gave it a fighting chance against Healtheon/WebMD.

But on Monday Wygod said he had been negotiating with Healtheon/WebMD for the past seven months. He indicated that Healtheon/WebMD's purchase of medical claims processor Envoy for $2.5 billion last month persuaded CareInsite executives to collaborate rather than compete against the company. The deal meant that CareInsite would have to clear its transactions through Healtheon/WebMD or spend a lot of money setting up its own network.

"It increased my level of interest," said Wygod with a chuckle, when asked about Envoy.