Healing the Healthcare Business: Why the Internet is Not a Magic Pill

Internet World

Cover story
May 15, 2000

ANNA-LISA SILVESTRE MANAGES KAISER PERMANENTE ONLINE, AN EXTRANET FOR THE 11-state health maintenance organization that handles the medical needs of 8 million members. She keeps a bag under her desk filled with cans of beef broth and chicken bouillon. When welcoming a new employee, she hands over the bag and says, “Here are your stock options.”

Health care providers spent around $20 billion last year on IT systems and services, according to industry consulting firm Sheldon I. Dorenfest & Associates, which surveys thousands of hospitals and physicians’ offices annually. For perspective, that’s about the market cap of eBay even after mid-April’s market slide.

Silvestre is sadly aware that her staff can’t hope to make the same millions as their counterparts in fast-track Internet companies, even though they have the same skills and are cracking problems much more difficult than one-click shopping. Health care information technology has always been a poor relation to the IT of most other industries. It deals with the most complicated information flow imaginable, on budgets constrained by managed care, government spending cuts, and the general handicap of being in a basically not-for-profit sector.

But at Kaiser and many other health care organizations, from the largest teaching hospital to the smallest doctor’s office, the Internet is at last making it possible to harvest and distribute all those crucial bits of information–patient histories, lab reports, x-rays, prescriptions, appointment schedules, purchase orders, insurance claims, and lots more–in an efficient and economical way. In the process, it will utterly transform how health care is delivered.

Even without the big money, this notion of transformation has its appeal. “Developers are attracted to working here because it’s such a big, cool project, and they’re doing stuff with cutting-edge tools and tying in legacy systems that you just can’t do in a startup,” Silvestre says.

But those startups want to participate in the transformation, too, lured by the sheer size and complexity of the industry and the opportunities that are obvious to even the most casual observer. In the United States, health care consumes $1.1 trillion annually, or 13.5 percent of the gross domestic product. Dozens of health portals and online pharmacies vie for consumer attention, and on the provider side, there’s nary an exchange of information that some company isn’t trying to make its fortune by porting to the Net. Healtheon/WebMD may be the best known, with its slew of multibillion-dollar acquisitions, but many more firms are carving out their own health care niches. [See “The Sector’s Ever-Growing Gorilla,” p. 74, and “A Cornucopia of Niches,” p. 76.]

By many estimates, about $250 billion of the annual U.S. health care bill (almost $1,000 per person) is administrative waste–money that either wouldn’t need to be spent at all in a less appallingly inefficient system, or would pay for health care workers to actually deliver care rather than fussing with red tape. Most people have experienced that waste personally– waiting on hold for 10 minutes to make an appointment, chasing down a mistake on an insurance claim, or having their blood typed yet again because they’re in an emergency room that doesn’t have access to any of their records. An astonishing amount of health care recordkeeping still takes place on paper. For Net companies, it looks like a veritable orchard of low-hanging fruit.

The subtext to many business models goes something like: “Surely folks as smart as we are can figure out how to make [insert transaction here] radically more efficient using the Net. We share the savings with providers and consumers, and everyone is richer and happier.”

Maybe, maybe not. It’s harder than it looks. For one thing, there’s not enough ready cash on the providers’ side to make very many companies rich, unless they can find deeper pockets–i.e, insurance companies or medical suppliers–to sell to, or prove that their solution will save the provider more than it’s going to spend. Not easy to do with products that are still on the drawing board, or at best in beta.

For another thing, health care providers are used to buying IT systems and services from a relatively small and clubby group of specialized vendors, such as SMS, Eclipsys, Cerner, McKesson/HBOC, and IDX. They may not always move like lightning, but at least they understand the tangle of relationships and regulations that characterize the health care environment, and their customers know what to expect. They’re not about to replace those systems, or the support fees they pay for them, with something unknown.

“In the Internet space, it’s a lot less clear who the players are,” says John Glaser, CIO at Partners Health System, in Boston (the “partners” are two noted Harvard teaching hospitals, Massachusetts General and Brigham and Women’s). “Their business models are still being ironed out. The fog is not so dense you don’t know what to do, but it’s pretty dense.”

Moreover, each health care organization has its own peculiar ways of handling information, and they won’t be changed overnight, even when a vendor thinks there’s a better way to go. “Every vendor you go to will give you a Net strategy; the question is, how compatible is it with your strategy?” says Tim Zoph, CIO at Northwestern University Medical Center, in Chicago. “It’s a specialized industry, with specialized data purveyed through specialty systems.” And it’s not that Northwestern isn’t ready to be fully Internetted; its newest building has 25,000 data outlets.

Nonetheless, health care IT experts are ecstatic that so many new Internet companies are devoting their precious venture capital to solving the sector’s toughest problems: communication between doctors and patients, availability of medical records, medication errors, slow payment of bills. “We’d rather partner than buy, and we’d rather buy than build,” says Bruce Goodman of Humana, an HMO serving 6.2 million people in 15 states. Since Goodman took over as CIO a year ago, Humana has racked up partnerships with Net vendors Healtheon/Web MD, TriZetto, ZirMed.com, and QualityMetric.

“We had to roll our own,” says Kaiser’s Silvestre. “We like the fact that off-the-shelf solutions are being developed.”

Mind you, providers aren’t saying the companies will succeed, but they’re happy to exploit any efforts on their behalf. “It’s the first time there’s ever been major investment in health care information-technology development,” says Steve O’Dell of First Consulting Group, which advises hospitals and other health care organizations on IT issues. “That’s fantastic! We should think about how to use these companies’ point solutions and integrate them, because it’s their money, not ours. Forget about whether they’re a solid business.”

On the bright side, Net companies may be in a better position than existing health care IT companies to exploit the opportunities, says Michael Davis, a health care consultant with the Gartner Group. “The big enterprise vendors don’t have anywhere near the same level of resources as a Healtheon does; most of them are publicly held and can’t just drop $400 million on developing this market.”

All observers agree that the Internet and health care are made for each other, and the union is only a matter of time.

In February, the National Research Council released a fat report, “Networking Health: Prescriptions for the Internet,” which observed that despite all the media attention given to health-information Web sites, they’re a “small sampling” of the possible ways that the Net could improve health care. The executive summary listed nine examples, including real-time video connections between homebound patients and their doctors, instantaneous approval for treatment from insurance companies, cross-country consultation among surgeons manipulating 3-D images as they discuss the best surgical approach, and early detection of water-supply contamination by public health officials, who can be notified of sudden spikes in the sales of antidiarrheal medications at local pharmacies.

“The Internet is the most powerful single change in patient care that we face,” says Don Berwick, M.D., president of the Institute far Healthcare Improvement and a noted crusader for improving the quality of medical care. His organization coordinates an ambitious initiative called the Idealized Design of Clinical Office Practices. More than 40 physicians’ offices worldwide are participating, and the Internet is a frequent thread running through their efforts. One recent project sought ways to use e-mail effectively; participants reported much faster turnaround on patient queries when they began routinely handing out their e-mail addresses.

Bruce Goodman, of Humana, agrees with Berwick. “Our fundamental strategy is to enable all our stakeholders to self-serve via the Web any place, any time,” he says. “When we get these folks to do that, we’re in a position to transform the business model. We can get out of the business of saying no and into the business of managing health care better.” He estimates that Humana will complete that metamorphosis within three years.

Goodman anticipates big savings from being able to keep better track of the 10 percent of Humana’s customers with chronic illnesses who account for 80 percent of the HMO’s costs. “We can identify these folks, put them on monitoring programs, help them comply with their treatments. They stay healthier, and we cut costs.”

“We don’t have an Internet budget,” says John Glaser, of Partners Health System. “‘What’s your Internet strategy?’ is a bizarre question. It’s ingrained into everything.”

Partners maintains 300 Web sites so far. Many are geared toward physicians, enabling them to buy supplies, conduct insurance transactions, answer patients’ questions, refill prescriptions, and share “best practices” information to improve care. Ten percent of the radiology images generated at Massachusetts General now travel over the network at some point.

The blossoming of the Internet has coincided fortuitously with a new set of federal regulations mandating, finally, a standard way of automating medical information in hospitals and doctors’ offices. [See “Law Gives Boost to Net Use,” p. 78]

And President Clinton recently called for systems aimed at minimizing medication errors, which by some estimates kill tens of thousands of people annually and put hundreds of thousands in the hospital, or keep them there longer. Physicians’ handwriting needs to be eliminated from the equation, and computer transmission is the obvious answer. “The Clinton proposal was born for the Net,” says Michael Barrett, who analyzes the health care-related Internet for Forrester Research.

Humana’s Goodman estimates that drug interactions account for up to 15 percent of admissions at some hospitals, a figure that could be radically reduced if physicians had ready access to a complete list of each patient’s medications. “People can’t remember all their medications,” he says. “[Using the Net], we can get more information to doctors and flag things for them.”

If physicians could routinely receive prescription requests via e-mail, check their patients’ records, and in turn e-mail their orders directly to the hospital or pharmacy–even from a Palm VII or a Net-enabled cell phone–that single change would eliminate dozens of calls per day to the average physician’s office and reduce medication errors dramatically.

Forrester’s Barrett released a report in April, “Why Doctors Hate the Net.” His thesis is that not enough Net vendors understand the pressures on physicians’ time, and that physicians will shun Web services that don’t give them dear benefits.

But when they see those benefits, they’re not shy about demanding them, and quickly. Baylor Health Care System, a not-for-profit chain of six hospitals in Dallas, has 200 internal and external Web sites, with 40 or 50 more Web projects in the works, and another 100 waiting in the wings. “When we talk to doctors, they say, ‘Can we have it [on the Web] next week?”‘ says MaryLynn Henry, who manages many elements of Baylor’s Web effort. “Lab results, radiology images, census data-they want everything.”

Consumer expectations are on the rise as well. Baylor saw where things were headed when it first put up baby photos on the Web from its newborn nurseries three years ago. One proud grandpa sent a sizable donation to the Baylor Foundation all the way from New York. And another, a member of the organization’s board, checked the Web 12 hours after his granddaughter was born and called the hospital demanding to know where the photo was.

Kaiser Permanente enrollees can already use Kaiser Permanente Online (KPO) to request appointments (confirmed later by e-mail), choose a physician, and participate in online discussions. Later this year, members in some regions will be able to book appointments in real time and request prescription refills, and eventually they’ll be able to check their test results on the Web. Silvestre’s staff is also figuring out the most efficient way to answer patients’ queries by e-mail without swamping their busy physicians.

Only about 2 percent of the health plan’s members have taken advantage of KPO so far, but Silvestre looks forward to the day when the phones are quiet because the Web site is so busy, and she predicts that Kaiser overall will flourish. “Our bet is that it will be such a competitive health plan that we’ll have growth without hiring a lot of extra people.”



“In other sectors, you have a buyer and a seller,” says Daren Marhula, an analyst with U.S. Bancorp Piper Jaffray, who recently released a report estimating that the health care system could save $11 billion annually by switching to Internet-based procurement for supplies. “In health care, you have the patient, the doctor, the employer, the insurance company, the group purchasing organization, the distributor, the supplier–there’s not a nice one-on-one.”


There’s not an operating system, programming language, or piece of hardware thought to be obsolete that’s not in use somewhere, and a typical large hospital may have dozens of incompatible systems with patched-together interfaces. And they all harbor data that by law can’t be thrown away. They’ll slowly age out, but the operative word here is “slowly.”


“There’s major money to be made in middleware,” says Steve O’Dell of First Consulting Group. “Those who enable legacy Web connections will be winners.” Now that Y2K is over, all those Cobol and Fortran programmers can be dusted off again and retrained to work on hospital-to-Net middleware. If you’re lucky, a provider will still have systems that depend on paper, and you can start from scratch.


One of the oldest and most popular health care information services on the Net is PubMed, a place to search the National Library of Medicine’s enormous Medline database of journal abstracts. It’s free. There are no ads. “I love PubMed,” says David Bates, M.D., chief of general medicine at Brigham and Women’s Hospital. There’s no shortage of physician-oriented portals, including Medscape and Physicians Online, but Bates says they do a poor job of delivering the information he needs while eliminating the information he doesn’t need.


Getting doctors to communicate with patients by e-mail sounds like, and is, a great idea. It could slash the number of expensive office visits while speeding needed help to patients. But a doctor in a fee-for-service environment gets paid for office visits, and not for answering e-mail. On the other hand, doctors who have so-called “capitated” contracts with HMOs–where they get paid a fixed amount per year per patient–have the incentive to be as efficient and economical as possible.


The high-tech culture, with its passion for patents and trade secrets, can be at odds with the health care culture, which has more in common with the old not-for-profit Internet. “There can be a problem with reconciling the needs of venture capitalists and providers,” says Don Berwick, M.D., of the Institute for Healthcare Improvement. Providers facing recordkeeping laws need to know the underlying structure and logic of the systems they use, even if a developer thinks these things should be proprietary.


The federal Health Care Financing Administration has slashed costs by receiving Medicare and Medicaid claims electronically over leased lines. HCFA chief information officer Gary Christoph says that moving to the Net would save the agency an extra $10 million–out of a budget of $1.5 billion. “It’s still worth looking at,” he says, in a tone that suggests it’s not at the top of his list.

Indeed, concerns about confidentiality and reliability will keep medical applications off the public Internet until providers are sure they’re robust and unhackable. In other words, maybe forever.


NO COMPANY HAS A CLEARER VISION OF the Internet-enabled health care system than Healtheon/WebMD, which was launched as Healtheon Corp. in 1995 by Netscape founder Jim Clark. Healtheon’s basic concept is elegant, though hardly original. Many who work in health care have mused about one big network that would handle the dozens of clinical and financial transactions associated with providing medical care.

In the early 1990s, some health care provider groups tried to put such networks together, although they cost a bundle because they relied on value-added connectivity vendors and proprietary software. Hampered by the cost structure and by political issues among their users, community health information networks (or CHINs) never got far. Then along came the Internet, which whittled the cost of networks and software to a minimum, and it suddenly seemed as if a large health information network not only could be built but could make somebody a lot of money.

The political issues haven’t changed. Doctors still need to trust the system, and hospitals are still reluctant to introduce anything doctors haven’t embraced. So Healtheon’s success may still rest on how well it woos the various players.

Healtheon’s acquisition binge [see chart] has given it a huge head start over would-be competitors, analysts say. “There’s no doubt that Healtheon is the gorilla,” says Daren Marhula, a health care stock analyst with U.S. Bancorp Piper Jaffray. “They’ve done a good job building their brand and trying to gather strategic partnerships. The big hurdle now is to move to a transaction-based company.”

Starting with a merger with WebMD, a health care information portal that gave it an entree into medical content and advertising revenue, the company has spent a grand total of almost $12.7 billion beefing up its content properties and buying leaders in electronic transaction processing, such as Envoy Corp.

If the Envoy deal closes in June as expected, Healtheon will boast 2 billion transactions a year–still a small fraction of the 30 billion annual health care transactions–including payments, treatment approvals, prescriptions, lab orders, and reports of test results.

Pavan Nigam, the company’s chief technology officer, says Healtheon makes anywhere from 10 cents to 50 cents per transaction, depending on the transaction’s complexity. So even on the low end, a fully networked health care system of 30 billion transactions could throw off $3 billion a year in transaction fees. And health care IT experts estimate it could save providers several times that amount in increased efficiency.

This assumes, however, that Healtheon will be able to overcome the security and confidentiality issues that make some health care providers leery of working with the company. Of particular concern is its agreement with Quintiles Transnational, the former parent company of Envoy, to provide “de-identified” transaction data that some doctors say is of poor quality and fear will be used by insurers to dictate what treatments are covered. “Our doctors won’t budge on this issue,” says Bob Pickton, chief information officer at Baylor Health Care System. “That’s what’s keeping us from signing the contract.”

COMPANY              ANNOUNCED           PRICE [*]              DESCRIPTION
WebMD                       May 1999                  $3.9B             Health information portal
Mede America            May 1999                  $460M          Claims processing
Medcast                       July 1999                  $215M            Medical news service
Kinetra                         December 1999        $300M          Physician transaction
Envoy Corp.              January 2000               $2.5B                Claims processing
Medical                      February 2000            $5.0B               Physician’s office
Manager/CareInsite                                                            software/Net services
OnHealth                   February 2000            $313M             Health information portal



SOME COMPANIES ARE AIMING TO CUT BIG swaths in the Internet healthcare market: Healtheon/Web-MD, with its ambition to be the industry’s transaction network; MedicaLogic and Medscape, which are merging in an effort to make a one-stop shop for physicians’ information needs; and many that are targeting the multi-billion-dollar segment of supply purchasing. [Try differentiating Buy-medical, Medicalbuyer, and Medibuy, just to name a few.]

But no corner is so small that there isn’t someone trying to create an Internet company to serve it. At its heart, providing health care is a matter of communication, and the more that communication moves to the Net, the more efficient the system will be. Will enough providers pay for that efficiency to support the many who hang their hopes on this market? We’ll see. It’s safe to say that many of the current niche players will be acquired in the next few years and integrated into larger solutions, if they survive at all, so now is the best time to spot them in all their individual glory.

The following companies are a selection from among those that happened to send us mail in the past few months, or that have exhibited recently at health-industry trade shows. No representations are made as to the quality of their products one way or the other, or to the completeness of this list. As a matter of fact, we’re sure this is only a small fraction of what’s out there.

FUNCTION                                           COMPANY
Appointment scheduling                     Scheduling.com
ASP for physicians’ offices                  Cybear, Medrium, Nuesoft
ASP for hospitals, physicians’ offices, Asterion.com, IntraMedX, and
and HMOs                                                    MedServe Link
Automated pharmacy dispensing           Omnicell.com
Finding a physician                                 1-800-Doctors.com
Industrial safety training                         Complient
Local extranets over private networks   Pointshare
Management of chronic disease           RXVP, Active Health Management
Net-based telemedicine                  MDVista
Online lab results                      Caresoft
Physicians’ practice management         VPManager.com
Purchasing contract management          iMany.com
Report cards on providers               SearchPointe, HealthGrades.com
Smart-card access to health records     Humetrix
Web sites for physicians                Medem


EVEN THOUGH THE UNITED STATES DOESN’T FORMALLY HAVE NAtional health insurance, the government still pays about half the bills, and that economic clout allows it to regulate providers pretty much any way it wants. So any company seeking to offer Web-based services to U.S. health care providers had best keep up with the doings of the Health Care Financing Administration, the federal agency that oversees Medicare and Medicaid.

HCFA is currently developing regulations for the single biggest change in health care recordkeeping since the invention of file folders. It’s described in the “administrative simplification” sections of the Health Insurance Portability and Accountability Act of 1996 (HIPAA). This law’s main goal is to make sure people can easily keep their health insurance when changing jobs, but it has some earthshaking side effects for the maintenance and transmission of medical information, which must become just as portable as insurance.

For the first time, the federal government is mandating how electronic health records are to be stored and handled, addressing such issues as security, privacy, and the validity of electronic signatures. It also standardizes formats for attachments, as well as the codes used on medical bills to describe diagnoses and procedures. Odd as it may seem, there’s been no national or industry standard in general use on most of these matters; they’ve been governed, if at all, by a hodgepodge of state regulations and insurance company requirements, generating a level of inefficiency and waste that’s excruciating to contemplate. And much of the information is still created and stored on paper. But as it moves to the computer, it will be subject to HIPAA (pronounced “HIP-pah”).

“This is one of the areas where the government can be a useful catalyst,” says Gary Christoph, HCFA’s chief information officer. “It’s going to cost something to move to a new system, but once we do, the potential savings to the country are immense. Standardizing attachments and codes will be like standardizing on the seven-digit phone number.” HCFA has tried to base its standards on those already being developed in the industry, when it can find them, and as a result there’s been relatively little public criticism on many of the regulations, according to Christoph.

Final regulations to implement HIPAA are still being hammered out and should be established by the end of the year. Within two years after that, or three for the smallest organizations, the transformation should be complete. When HCFA says “Jump,” health care providers ask “How high?” During the agency’s Y2K preparations, it decreed that after a certain date, Medicare and Medicaid claims with two-digit dates would no longer be processed. At the time of the order, 17 percent of health care providers had switched over to four digits; by the deadline, only two months later, compliance was up to 90 percent.

HIPAA compliance opens up major opportunities for vendors, since virtually all health care providers will have to spend something to overhaul their information systems, and many will be searching for new ways to transmit their data.

“Any e-commerce company who intends to do business with health care providers will have to have a thorough knowledge of HIPAA,” says Bill Roach, an attorney with the Chicago firm Gardner, Carton & Douglas who specializes in medical records issues.

HIPAA may affect Internet-oriented vendors in ways they don’t expect, accustomed as they are to an everything-on-the-Net way of life. “A lot of people are out there selling things and glossing over what the risks are,” Christoph says. “We tried to put due diligence into writing.”

For example, a doctor’s office that harbors patient information on a PC may need a firewall if it has a dial-up connection to an ISP. Or the PC may just have to lose its modem. An application service provider for doctors or hospitals might have to eschew the Internet in favor of a private network, unless it can ensure security to HIPAA standards–and vendors can expect those standards to be written into any contract by hospital attorneys.