Spinning a wider web: The rising fortunes of WebMD

When WebMD Corp. stubs its toe, physicians howl.

Doctors around the country are feeling the pain as WebMD experiences problems transmitting HIPAA-compliant claims to insurers, creating serious cash flow problems. WebMD isn't the only company having that sort of trouble, but it's the biggest, so it's generating the most complaints.

The idea of WebMD having that impact on physicians seemed far-fetched a few years ago when it appeared the firm might be another dot-com bomb. Its corporate predecessor, Healtheon Corp., in 1999 promised to revolutionize health care with its consumer and physician health Web site, and at the company's peak had a multibillion-dollar market capitalization. Fortunately for the company, it put its sizzling stock to use in buying the practice management software and claims clearinghouse companies that form its core today, allowing it not only to survive the dot-com crash but become a powerful force in health care.

Elmwood Park, N.J.-based WebMD still is the biggest player in the online health information business for consumers and physicians. It also is the market leader in the physician practice-management software market. And it dominates the medical transaction market, processing more than 2 billion electronic transactions annually for more than 1,500 insurers and 300,000 physicians, hospitals, dentists and pharmacies.

"They are the 800-pound gorilla in those markets," said Mark Bard, president of Manhattan Research, a New York City consulting firm. "That's not going to go away and it's something that will increase year by year."

Following a two-year restructuring by a new management team, led by Wall Street darling Martin J. Wygod, that ended in 2002, WebMD has emerged as a more focused and stronger company seeking to extend its reach deeper inside the physician offices by selling new electronic medical record software applications and revenue cycle management services, said CEO Roger C. Holstein.

He said the sales of clinical programs as well as a new generation system called Intergy, which combines practice management software with electronic medical records software, are fueling a 10% growth in revenue derived from WebMD Practice Services unit, which covers physician office technology.

"Clinical is becoming an essential part of what we do," Holstein said. "About 40% of all sales [at its physician business unit] now include a clinical program."

WebMD says 30,000 sites representing about 185,000 physicians -- a third of the country's private practice doctors -- use its Medical Manager practice management software. Analysts aren't able to confirm those numbers, but they find WebMD is the largest practice management software vendor in terms of its physician customer base, offering it a big growth and cross-selling opportunity.

"They have a leadership position in that market," said David Francis, managing director at Jefferies & Co., Nashville, Tenn. "The trick for the company is to generate more revenue from those relationships than they currently are."

So far, market leadership hasn't translated into profits for WebMD, which has been unprofitable since its inception. For the years ended Dec. 31, 2000, 2001 and 2002, the company lost $3.1 billion, $6.7 billion and $49.7 million. It posted its second profitable quarter ever in the third quarter of 2003, reporting net income of $6.1 million on revenue of $250.6 million.

The company, which in 2002 had revenue of $926 million, has not yet reported results for the quarter and year ended Dec. 31, 2003. But Holstein said that the company will post its first annual profit in 2004.

The bigger they are ...

To reach that milestone, WebMD, among other things, will have to mend fences with clients unhappy about customer service.

Physician dissatisfaction has been simmering since WebMD acquired Medical Manager Corp. in 2000. That dissatisfaction boiled over when the Health Insurance Portability and Accountability Act electronic transactions rule took effect last fall and WebMD, which became a claims clearinghouse by acquiring Envoy Corp. in 2000, had trouble transmitting HIPAA-compliant claims to Medicare and commercial insurers.

The problem persisted late last month. Doctors around the country, including Arkansas, Connecticut, Florida, Indiana, Iowa, Nebraska, New Jersey, Rhode Island and Texas, have complained to the AMA that they are owed thousands to hundreds of thousands of dollars because WebMD lost or failed to transmit their claims to insurers, said James Rohack, MD, AMA chair-elect.

Physicians complained about other clearinghouses, but mostly about WebMD. That led the AMA and seven specialty and state societies to ask Holstein "to immediately redouble their efforts to resolve these claims management practices," Dr. Rohack said.

Holstein said he has asked to meet with the medical societies. "I look forward to meeting with them because no one is more concerned about customer service, potential disruption in the system and ensuring a smooth implementation of HIPAA than we are."

The company has experienced some HIPAA-related problems "from time to time" but virtually everyone in health care has had problems making the transition to HIPAA," Holstein said. "There's nothing more important to us than ensuring the smooth flow of cash to [physicians]. That's what makes our business and we will do everything in our power to ensure that we facilitate that as we move forward."

The promise, however, comes too late for some practices planning to dump WebMD because they are upset and believe the company used its position as the leading claims processor to force them into using Envoy.

Take it or leave it

While those offices would have preferred that WebMD make its practice management software HIPAA-ready for electronic transactions, WebMD instead is offering a subscription service because it believes that's the better way for it -- and its customers -- to comply with the federal law.

Under the service, physicians and other providers submit noncompliant claims to Envoy, which then converts them into a HIPAA-compliant format and transmits them to insurers. For a fee.

That didn't sit well with four-doctor Middletown (Conn.) Surgical Group, which previously transmitted its claims directly to insurers for free.

But the practice grudgingly signed up to pay $89 monthly per physician after it learned that WebMD would not provide technical support if it chose to submit claims directly to insurers or via another clearinghouse.

"I don't like being strong-armed, which I felt I was," said Marilynn Kurpiewski, practice manager. "But we really had no other option. We all thought, 'Oh, God we've got to get our claims out.' "

When the HIPAA claims problem struck, the practice had difficulty getting service from WebMD, she said. The practice had tolerated a steady decline in service after WebMD bought Medical Manager, but the latest bout was the last straw, Kurpiewski said.

"I won't change the practice management software because that would be too expensive. But I'll change the way I submit electronic claims by bypassing WebMD," she said.

One physician had no choice but to bypass WebMD and submit paper claims to Medicare. It took WebMD almost three months before it was able to submit his claims electronically, said Lee Fischer, MD, a solo family physician in West Palm Beach, Fla. He looked into hiring another vendor, but it was cheaper to stick with WebMD, Dr. Fischer said.

His problems finally seem to be resolved, but perhaps Dr. Fischer shouldn't breathe too easily yet.

In documents filed with the Securities and Exchange Commission last November, WebMD warned that it anticipated further problems once insurers, including the Centers for Medicare & Medicaid Services, move to accept only HIPAA-compliant electronic transactions.

When that happens "we may not have enough technicians, programmers and customer service personnel to meet the demands placed on those functions by our customers and partners during that adjustment period," the documents from WebMD said.

Back to the future?

Still, WebMD is well-positioned to further wire not only physicians but also other parts of the health care system, observers said.

"They have the consumer, payer, hospital and physician pieces, but none of those are connected to each other yet," said Patrick Kennedy, a health care technology consultant based in Rockville, Md.

"Why can't consumers over time use WebMD to communicate and exchange information with its hospitals, insurers and physicians?" he said. "That's where I think the industry is going and that's why I think WebMD has a tremendous opportunity."

"The goal is to have a deeper product and deeper relationship with physicians," said John Souter, an analyst at Susquehanna Financial Group in Chicago. "Whether it be how they connect to the insurance company and patient, WebMD wants to have a role in it."

WebMD didn't disagree.

"Many types of transactions conducted today between physicians, their patients, other providers and payers are typically done by telephone or by paper," Holstein said. "Clearly, putting in place [electronic] channels of communication is what builds the business and creates for us, and I think for the health care system, a win-win."

If WebMD succeeds at that, it could become the most important player in health care, raising the question of whether it could dominate health care like Microsoft Corp. dominates its industry.

But some discount the possibility.

Unlike Microsoft, whose software runs on more than 90% of the world's computers, "WebMD doesn't have 90%-plus of anything," said Eric Brown, an analyst at Forrester Research Inc., Cambridge, Mass. Nor is it likely to grab such market share, he said, because the industry is too big, fragmented and competitive.