Post of the Day
February 23, 2000

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Healtheon/WebMD

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Subject:  What HLTH is Becoming
Author:  drejt

Among the threads on this message board, I see confusion about what is being built by HLTH, and how the revenue streams are being developed. Let us together try to piece together several concepts on the development of this company. I would propose respondants to this post take portions of the post for commentary so that we can reconstruct a summary post after opinions and facts have been weighed in.

1. Revenues from insurance filing. HLTH has become the most competitive internet transaction broker in this arena. Officials at the company indicate they expect 20 to 49 cents per transaction. Lets count up the transaction potential thus far:
a.Aetna/UnitedHealthcare �
b.Coventry
c. Envoy
d. Other?
That's 5 million transactions per month, times $0.20 per transaction on a conservative estimate (number of transactions pulled off the HLTH web Site, and may not reflect the recent transaction acquisitions). Total yearly revenues = $12 billion dollars yearly. If average transaction revenues are at $0.30 per transaction, that comes out to 18 billion dollars yearly.

The advantage to doctors groups is a common claims submission format, eliminating expensive variance. Claims right now cost on average $15 to submit in employee time, postage if mailed, etc. Quite a lot savings could occur for MD groups, taking the transaction cost to as low as $2. The big insurance companies win because they process the bulk of their claims electronically as well. Imagine the insurance company paying all those clerks to process paper claims. Very expensive, not very productive. With this model coming into place, I see the insurance world narrowing to 5 or less major insurance companies, with the little companies needing to compete by adopting the same practice of electronic claims submission. Even more fuel for the financial fire of HLTH.

HLTH is also working seriously on On-Line eligibility determination, referral authorization, ordering of tests, and patient information data repository (a major source of current controversy by patient and privacy advocates)

Another arena is property and casualty claims processing. HLTH has a deal with HNC to process 540 million claims/ year. The industry itself is estimated at $291 Billion annually. The cost reductions per claim are estimated to go from $15 to $2/ claim. HLTHs transaction fee is unknown.

The timeline for realization of profits is near term, within this year. The length of time over which this revenue stream exists could be for a long time. It would be unpopular for insurance companies to switch if the claims formats adopted are proprietary to HLTH (I do not know if they are). The risk is in the narrowing of the number of insurance companies who ultimately deal directly with health care providers through their own electronic claims submission, like Medicare does through insurance mediaries.

2. Medical equipment and supply purchases The concept of bringing medical groups or hospital systems together with suppliers is ripe for the picking. Wholesalers of medical equipment and supplies place substantial markup on their sales. Medibuy.com is slated to pay $45.5 million over the next 3 years for the rights, with HLTH taking an unspecified transaction fee.

The timeline for effective implementation of such a strategy would be, I guess, over a 2 to 3 year period, with the life of the benefit for all involved being a very long time. Again, the revenue generated would be by acting as a transaction agent. Becoming the eBAY of medicine, but on a scale that is quite large. Estimates for medical capital equipment purchases are at an unknown to me, but are in the billions. Does anyone have a ready figure here?

3. Physician benefits. This area has generated some of the most negative commentary about physicians in general regarding the use of computers and the internet. The strategy by HLTH has been to enlist physicians by tie in through their practice management software (insurance transactions have been counted here already), or by encouraging hospital systems to finance the startup of physician subscription to the WebMD site. I can see the benefit of having a physician library, continuing medical education on line, etc. But this form of revenue will take a while to develop, and offers some risk to the company.

Revenues from this source include:
a.Banner advertising to physicians
b. Transaction costs for information materials
c. Subscription fees (a barrier for use of the site)

The timeline for this revenue stream is more difficult to predict. I am guessing that it will take 3-5 years to get MDs to directly interact with the site on a regular basis, and at a sufficient volume to make this predictably profitable.

Competition for this area is very limited.

4. Prescription/Pharmaceutical services. HLTH has given exclusive rights to develop prescription services to CVS/pharmacy. Their cut on the service would again be transaction related. CVS has 4100 stores, 55 million precription customers filling 280 million scripts. The number of scripts moving online is difficult to estimate, and is frought with more competition. The value to me is unknown. Any help out there?

5. Consumer Revenues The consumer site is developing along the lines of DrKoop.com. Resources are available for the healthy to promote better health. Disease specific information is also well organized. Values to consumers include a Virtual Health Center through excite@home, 24 hour health news through Newscorp, and eventual online access to one's medical history and record (? Security risk) Income from the site seems to be generated through
a.Banner advertising
b.Sales of items on line for prevention, sports, and other.

I need help here constructing a picture of what can be earned. I know the competition is more fierce here, but may be enhanced if physicians begin communicating to patients through webMD. Yet, that form of communication may be years in coming due to the reticence of MDs to sit in front of a computer to talk with patients.

Revenues I can judge now include
a. Healthsouth contract:
b. Eli Lily
c. Medtronics
d. Other?

Thus we can see the following revenues not yet accounted for in the earnings report due out 2/28/2000:

1. Insurance transactions � at least $12 billion annually
2. Medical equipment and supply purchases - ?billion
3. Pharmacy prescription filling fee - ?billion
4. Banner Advertising - ?billion
5. Consumer product sales - ?billion

Total = Lets await all the deals being made. None of this takes into account the cost of acquiring the business units now being assembled. The great challenge going forward is how all these services can be integrated into a working, cohesive, synergistic unit.

Lets look at the Gorilla Game as applied to this internet based company:

1.Switchboard/exchange position � Excellent position on insurance transactions, as long as the formats are proprietary. If the formatting is open, drift away will occur if the transaction costs are too high, the and insurance world indeed consolidates into fewer larger players. On a scale of H(igh) = 5, M(edium) = 3, L(ow) = 1, I would give HLTH a High for GAP (competitive advantage gap), and a Medium for CAP (competitive advantage period). That's a total of 8

2.Brand � Excellent position with the world of medicine, not so much yet with the world of consumers (although the recent advertising on the SuperBowl is an attempt to build here). For the medical world, I would give it a Medium for GAP, and a High for CAP. That's a total of 8.

3.Value Chain position. Very high potential here already by being first on the block, having no other clear competitors, and being very creative in their charge forward. High on GAP, High on CAP equals 10

4.Specialization. H on Gap, M on CAP = 8

5.Stickiness. A bit sticky to estimate. I would suspect HLTH might at some point be undermined on various fronts, especially the B2B business if the transaction fee is excessive, or sufficient consolidation occurs on the insurance side. That will take years to develop, but may truncate the CAP. Let me guess at High for GAP and Medium for CAP. Total = 8.

6.Low cost business design. Up front costs are "high". The long term of the portal model is nearly infinitely diminishing. No value for GAP, High for CAP. Total = 5.

7.Experience curve. Low and Low for GAP and CAP. Too many unknowns about the integration of all these services by one company. May stand significant chance of failure if the services are not seamless and effective. Total = 2

Thus the total score is as follows:

Score weight subtotal
1. Switchboard 8 10 80
2. Brand 8 8 64
3. Value Chain 10 8 80
4. Specialization 8 8 64
5. Stickiness 8 6 48
6. Low Cost 5 4 20
7. Experience 2 4 8

Total = 364

That's a tremendous value, but only an estimation on my part. Again, comment away, and take portions of this post to get us all a better idea of the value of HLTH. And has HLTH extended far enough through the chasm?

drejt

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