Healtheon/WebMD: Let's Make a Net Health Care Deal

SAN FRANCISCO (01/28/2000) - Healtheon/WebMD CEO Jeff Arnold's to-do list this week looked like this: Attend birth of son; announce $2.5 billion acquisition of the nation's largest electronic medical claims processing company, and strike a strategic alliance with a major competitor.

And that was just by Monday.

"We are creating the world's dominant brand in Internet health care," Arnold told reporters. That has become Arnold's signature line, but the purchase of medical claims processor Envoy and its collaboration with rival IDX goes beyond branding. In one stroke, Healtheon/WebMD has assimilated a significant chunk of the health care industry's electronic infrastructure. The company also effectively neutralized IDX, whose ChannelHealth Internet subsidiary has Web-enabled IDX medical software used by a quarter of the country's physicians.

The agreements followed rumors that a takeover of Healtheon/WebMD by a major portal was in the works. But in an interview with The Standard on Wednesday, Healtheon/WebMD chairman Mike Long said, "We're not contemplating such a transaction."

"Remaining independent is our preference," Long added. "We're not going to send a signal that we're for sale. But the world changes a lot faster now. We're realists also."

The Envoy and IDX agreements offer a preview of an online health market divided among several major players who collaborate and compete as needed to connect doctors, patients, health plans, pharmacies and laboratories over the Internet.

The acquisition of Envoy from Quintiles Transnational gives Healtheon/WebMd entree to sell additional services to the 250,000 physicians, 4,500 hospitals, 900 insurers and health plans and 35,000 pharmacies that use Envoy. The purchase guarantees Healtheon/WebMD annual revenue of $350 million when Envoy's 1.4 billion transactions are combined with Healtheon/WebMD's existing claims processing business. Healtheon/WebMD paid Quintiles $400 million in cash plus stock. Quintiles, which manages clinical drug trials and provides other services to the pharmaceutical industry, will become one of Healtheon/WebMD's largest shareholders, with a 16 percent stake in the company.

The purchase removes Envoy as a competitive threat. Healtheon/WebMD had faced the possibility that Envoy would Internet-enable its claims processing services and compete against the company. "We have coveted Envoy for some time," Long says. "We were reluctant to rely on an organization that might perceive us a competitor, that might potentially deny us access to connectivity."

Moving Envoy's transactions to the Internet will take several years and depend on a commitment by health care institutions to move their operations online, Long says.

IDX executives also had discussions with Quintiles about Envoy. "We all have been dancing with each other for awhile," IDX chief executive Richard Tarrant says. "We realized the benefit of three-way dance."

Healtheon/WebMD will process medical claims for IDX and its ChannelHealth unit, which will incorporate Healtheon/WebMD's medical content in its physician service. Healtheon/WebMD in turn will feature access to IDX's clinical information on its WebMD site. IDX also will issue 3 percent of its stock to Healtheon/WebMD for a stake in the company. The two companies also will jointly develop a service to allow doctors to write drug prescriptions online.

"It's great for ChannelHealth, because [Healtheon/WebMD] will not be competing against us [for doctors]," Tarrant says of the alliance.

The most lucrative aspect of the three-way relationship ultimately may be the agreement to develop Internet services for the pharmaceutical industry. The companies will tap their online physicians to recruit patients for clinical drug trials as well as provide direct marketing of pharmaceutical products to doctors and consumers.

The ramifications for one of Healtheon/WebMD's biggest potential competitors, CareInsite, remain unclear. The New Jersey-based company is focusing its efforts on the physicians who use medical software made by its parent company, Medical Manager.

"There's no question about it, it is a competitive threat," says CareInsite chairman Martin Wygod. "It's something we are going to have to react to one way or another."

That threat got bigger Thursday when Janus Capital Corp. agreed to pay Healtheon/WebMD $930 million for 15 million shares of the company.

But one of Healtheon/WebMD's regional competitors, Bellevue, Wash.-based Pointshare, welcomed the deals. "It keeps attracting capital to the area," says Pointshare CEO Tim Kilgallon.

"To the extent it becomes important for us to hook up with Envoy, we'll hook up with Healtheon."

In a speech Wednesday at a Jupiter Communications conference in Orlando Fla., Long said Healtheon/WebMD has lined up $5 billion in investment capital and secured partnerships with 80 companies. "So if you're going to compete with us, with our broad business model, be prepared to make the investment," he said.

"On the other hand, if you want to partner with us, let's talk."

That prompted one audience member to remark, "That sounds like the Microsoft model: 'We want to work with you, or we'll eat you for lunch.'"

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