Athenahealth Paying Dearly to Take on Larger Rivals

Athenahealth (Nasdaq: ATHN  ) is a high-flier in the Boston business community, led by the outspoken and forceful Jonathan Bush. Bush, however, openly admits that his Watertown, MA-based company is relatively unknown outside of local business and technology circles -- including among most U.S. physicians. Athena has been ramping up efforts to raise its profile among doctors, the target audience for its Internet-enabled billing and electronic health records services. Yet the company has been criticized for the relatively high price of the push.

Athena's stock price dropped more than 18 percent after it disclosed on April 29 that its first-quarter profits slid 80 percent, from $1.5 million in the first three months of 2009 to $300,000 in the same quarter of this year. Despite a 33 percent jump in revenue during the first quarter, the company said, profits were down partially because of its increased spending on efforts to gain more customers. Some analysts on Wall Street have slammed the firm's spending, but company officials are forging ahead with the strategy despite the criticism.

About 16,400 physicians currently use Athena's Internet software and services to manage their billing, and a goal of the company's marketing is to grow its customer base to 100,000 doctors. To reach that target number, Athena is spending money on measures to get doctors to warm up to the firm's relatively new concept of charging customers at a rate that fluctuates depending on how well its billing system performs for them. The company gets a cut of its customers' revenue, based in part on how much the firm collects from health insurance companies, rather than making most of its money from software sales and licensing fees, as some its competitors do. Athena is also making the case that its software, which is delivered over the Internet, reduces doctors' need to invest in servers to handle the workloads and operation of its technology.

Nevertheless, Athena appears to be fighting against at least a few currents in healthcare. Doctors are notoriously hesitant to adopt new technologies like Athena's. Also, the company will have trouble matching the marketing might of its larger competitors such as GE Healthcare, Allscripts-Misys Healthcare, and Siemens Medical Solutions. Allscripts, for example, has about 10 times as many physician customers as Athena and more salespeople beating the pavement to grow that user base further still, says George Hill, an analyst for Leerink Swann, a Boston-based investment bank and equities research firm.

"The problem here is that Athena now has to increase its marketing spending to fight well outside of its weight class with respect to company size," Hill says. Another challenge for Athena, he adds, is to convince larger medical provider organizations to agree to the same pricing structures that the company has been able to use with small- and mid-sized doctors practices. Athena typically charges its customers between 4 and 8 percent of their billing revenue, he says, depending on the number of services a customer is getting from the company.

In a recent interview, Bush, the chairman and CEO of Athena, gave a characteristically blunt and candid explanation of why his company's expensive marketing drive is effective and necessary. "I've been waiting for Malcolm Gladwell's tipping point for a decade and it still hasn't come," says Bush, who co-founded Athena in 1997. "So I finally said, 'How about we advertise,'" he adds with a laugh. "And it turns out that works: We've had the largest lead volume we've ever had and the largest increase in lead volume we've ever had in our company's history in [the first quarter], because we started really advertising. So screw the tipping point; I just want the business."

Athena is also in a race with competitors to grow its tiny share of the electronic health records market. As part of federal stimulus passed last year, the U. S. government plans to spend $17 billion to provide Medicare and Medicaid incentives to doctors who adopt electronic health records under certain guidelines known as "Meaningful Use," beginning in 2011. Athena launched its electronic health record (EHR) offering in late 2007 and as of March 31 had fewer than 2,000 physicians using the software to store their patients' medical information. So the company has a lot of ground to cover to catch up with its EHR competitors such as Westborough, MA-based eClinicalWorks, which says it has a customer base of more than 40,000 health providers.

Still, Athena is able to get new users started on its Internet-based system quickly, in part because doctors don't have to load the software onto their own computers or train their own IT staff to maintain it, John Hallock, a company spokesman, says.

The company caught the attention of some health providers last year when it announced a collaboration with Microsoft (Nasdaq: MSFT  ) to integrate Athena's electronic health record, athenaClinicals, with Microsoft's healthcare information exchange system, called Amalga, for Cook Children's Health Care System in Texas. One group that took notice was Caritas Christi Health Care, which had also adopted Microsoft's Amalga software, says Todd Rothenhaus, the chief information officer of Caritas Christi. Caritas Christi initially launched Athena's billing software and service in October and then revealed in January that it decided to offer the company's EHR to physicians, even though the organization was already a customer of eClinicalWorks. "If it weren't for Amalga, I think we would have struggled with the choice," Rothenhaus says.

To compete with larger firms in the EHR game, Athena has been trying to allay the concerns of many physicians that they will ultimately end up losing money by deploying the records systems. Bush says that Athena might be able to halve the amount that physicians pay to use its EHR if they participate in what is now a nascent effort at the company called "AthenaCommunity." Athena's EHR customers who opt to share their patients' data with other providers would pay a discounted rate to use Athena's health record software. Athena would be able to make money with the patient data by charging, say, a hospital a small fee to access a patient's insurance and medical information from Athena's network. For a hospital's part, this might be cheaper than paying its own staff to gather a patient's information through standard intake procedures. Hallock, Athena's spokesman, says the community is in development and is slated to launch later this year.

Still, the value of online communities often depends on the number of members they have, meaning Athena still has to raise its profile among the physicians. When I thanked Bush (and, yes, former President George W. Bush is his first cousin) for generously taking the time to talk to me about his firm's planned community, he was clear that our discussion was part of the company's efforts to raise its profile. "It's not generosity; it's selfish," he says. "Nobody's ever heard of Athena."

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Ryan McBride is Xconomy's correspondent. You can reach him at rmcbride@xconomy.com, or follow him on Twitter at http://twitter.com/Ryan_McBride.

Microsoft is a Motley Fool Inside Value recommendation. Motley Fool Options has recommended a diagonal calls position on Microsoft. The Fool has a disclosure policy.


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