A "healthcare case masquerading as an Internet case" has helped assistant professor Peter Coughlan get first-year HBS MBA students to learn about a subject they've been reluctant to approach.
"If one-seventh of the U.S. economy is healthcare, you'd expect one out of every seven cases that our MBA students learn in their required curriculum to be healthcare," said Coughlan. "Actually, there's very little on healthcare [in the first year].
"We were told that, historically, students are very confused by the healthcare industry. They don't understand it. They're reluctant to learn about it.
"So we said, 'Let's write a case on WebMD and tell them it's a B2B Internet case,' and they'll say, 'All right!' and they'll study it intently and in the process, they'll learn about healthcare."
No such subterfuge was needed among the industry professionals at the Alumni Healthcare Conference. But Coughlan used the case "Healtheon/WebMD" to spark a lively discussion about the Internet's impact on the industry.
The key questions, said Coughlan, center around value creation and value capture: Is the Internet going to make a difference in healthcare and, if so, how big a difference? And is someone going to make a buck? And if so, who is going to make it, and how?
The case at the center of the discussion focused on WebMD, the most talked-about of several companies trying to win a place as an Internet intermediary amid the billions of transactions — and billions of dollars — moving through the U.S. healthcare system.
The company, the result of a merger between Healtheon (founded by Netscape and Silicon Graphics legend Jim Clark) and WebMD, faced significant challenges at the end of the period covered by the case (April 2000). Since then, as Coughlan explained in an update, its problems have only intensified. Clark and WebMD founder and CEO Jeff Arnold have both resigned, and the stock price, once over 100, fell below 9 the day before the conference (and has continued to fall since).
"The market seems to be saying one of two things," said Coughlan in kicking off the case discussion. "I can look at this and say, 'we thought the Internet had great potential for the healthcare industry, but we were wrong.' Or we could say, 'no, the Internet does have great potential for the healthcare industry, but we just backed the wrong horse.'"
Looking back, asked Coughlan, why did Jim Clark choose to do a vertical portal in healthcare in the first place? "Jim Clark could have done a vertical portal in finance, in construction, in food. Why did it make sense to have a vertical portal in healthcare? Or why did he think it made sense?"
Fragmentation and inefficiency
"If you don't understand the business, it looks like an enormous market, very fragmented, with three basic players: providers, payers, and patients," said James McLane (HBS MBA '67). "With the fragmentation, you've got enormous inefficiencies in operating processes and economics.
"It looked like the Internet, as it was evolving, would create efficiencies between disparate units, and there was no industry that had more disparate units, and was as huge, as the healthcare industry. If you really didn't understand, it was a natural."
Elliott Barber (HBS MBA '75) said matching the promise of the Internet with the problems of the healthcare system made sense because information exchange is one of the industry's biggest challenges.
"Each one of the people needs to know who is going to pay whom and who's eligible for what," said Barber, vice president for operations at Decision Resources, Inc. "You've got varied and disparate kinds of people, and they've got different connections to their physicians, their hospitals, their payers, that all have to be reconciled before service is given."
Daniel Ginsburg (HBS MBA '87), president and COO of Massachusetts General Hospital-Massachusetts General Physicians Organizations, Inc., agreed. "When you come in for an episode of healthcare, there's a transaction for your visit to the doctor, a transaction for the blood work, a transaction for the x-ray, and so on. If you're in the hospital, there are hundreds of transactions a day, depending on the type of payment methodology."
In most industries, said Ginsburg, transactions represent less than 2% of costs; in healthcare, it's more like 20% or 30%. In a $1.3-trillion industry, that represents as much as a $400-billion opportunity.
Wolfgang F. Klietmann (HBS OPM 12), medical director at Mediconsulting, Inc., added that a more efficient method of handling these transactions would be all the more valuable because "in the processing of this data, there is a time element that can become critical. When it is about patient care or lab data, they are very critical for patient handling or therapy, and the value of this data decays over time."
The promise of the Internet in this arena, said Les Zendle (HBS AMP 151), comes not just from the power of the technology, but also from the potential for standardization. "Because there is not a common diagnostic language, at least one that is common to all the different coding systems and billing systems, there is a lot of room from someone or something to come in, like the Internet, and force everybody to call a sore throat a sore throat," said Zendle, associate medical director at Kaiser Permanente-Southern California.
Kleitmann agreed: "In a reverse influence," he said, "this new platform can also introduce new norms of how to communicate. Over time, this will allow streamlining in the system."
Unrealized potential?
If the Internet holds so much potential for the healthcare industry, asked Coughlan, why have the efforts of WebMD and others been so slow to bear fruit?
"The hope is on the fragmentation issue, but one of the ways that this industry is different from others is that it is intentionally fragmented, for regulatory and privacy reasons," said Deborah Cohen (HBS MBA '87).
"We're trying to streamline processes and make information flow more efficient, more effective, and less costly," said Cohen. "But you haven't changed behavior and the business processes and taken away the regulation. Doctors say, 'I still have to write out prescriptions on little pads of paper. I'm required to do that by law. I can't just put it on the Internet and zap it to drugstore.com.'
"The Internet's given us a tool, but we still have a big infrastructure and behavioral change that we haven't taken care of."
Ann Devon Giacalone (HBS MBA '77), a principal at TVM Techno Venture Management, talked about resistance to innovation among physicians. Besides, she noted, "You're not just talking about physicians. You're talking about nurses. You're talking about staff. You have a whole procedure set up of how you do billing, how you do claim settlement, and this is introducing a whole new level of complexity."
Cynthia Harris (HBS MBA '97) said it wasn't so much that physicians are resistant to innovation, but that they are "intolerant of things that aren't perfect.
"Technology vendors come in with the latest and greatest, and they're not perfect yet, so there's a lot of development to go," said Harris, vice president of strategic initiatives at Premier, Inc. "Physicians are less tolerant to working out the bugs and letting the vendors go to school on them.
"Microsoft has a much more willing market in the business community," she continued. "We're more willing to have Word crash on us during the day. But if your electronic medical record crashes and you have a patient in front of you, it can throw your whole day into a tailspin, especially if you're a primary care physician seeing a patient every 10 or 15 minutes.
"I think the technology has not offered the value proposition to physicians yet. It will come. I don't think they're resistant to innovation. I think they're just not going to be guinea pigs until the technology is ready for them."
Thomas McNaull (HBS OPM 25) said the nature of healthcare information plays a role in the slow adoption of new systems. "Clinical information is fault-intolerant," said McNaull, president and CEO of American MedTrust. "The penalty for making mistakes with patients is not the same as making mistakes with something else. The physicians are not going to accept it until they're sure it's going to be accurate."
There was a certain arrogance to Healtheon/WebMD's approach, said McNaull, a point echoed by TVM's Giacalone, who said the company created a lot of disincentive with their marketing tactics.
WebMD has had even bigger problems with the payers, said David St. Clair (HBS MBA '81), chairman and CEO of MEDecision, Inc. "I think the payers are enthusiastic about the Internet as a mechanism to reduce their costs tremendously. The one thing they aren't enthusiastic about at all is WebMD," said St. Clair.
"That's because what WebMD was trying to do — in every way, it was trying to stand between the payers and their patients and their members, to stand between the payers and the providers. Payers said, 'We're not going to be disintermediated.'
"That obviously was the cause for MedUnite [an online transaction system managed by a consortium of managed-care providers and introduced a few days before the conference].
"MedUnite was the payers' reaction, saying, 'We are not going to allow WebMD to get between us and our constituencies. We have to have our brand out front.' They are going to war now with WebMD."
Carol Emmott, a partner at Heidrick & Struggles, said that WebMD's efforts, despite its struggles, have had an impact. "I don't know if it will ultimately prove successful for WebMD," she said, "but I think what it demonstrates is that the sheer audaciousness of this concept is what's driving MedUnite and what will drive a whole lot of innovation in this field."
What next for WebMD?
Wrapping up the discussion, Coughlan offered some last ("but by no means definitive") thoughts.
"I don't think there's any question the Internet is going to have some impact on the healthcare industry," he said. "Is it going to change everything in the healthcare industry? No, it's not going to change everything. As long as you have third-party payment in the industry, as long as you have asymmetric information and asymmetric incentives … you're never going to solve some of the fundamental issues in healthcare."
Nevertheless, he said, there are several ways it could change the industry. One is the nature of competition on several levels — "lab vs. lab, payer vs. payer, provider vs. provider."
A second is change in the power relationships between different segments of the industry. "We talk a lot about consumer empowerment [via the Internet]. But a lot of that empowerment will come at the expense of somebody else."
Third is the role of the intermediary. "I heard all this about disintermediation. Why should I believe this industry will allow a new kind of intermediary to come in? That's kind of counter to the idea of disintermediation.
"Now you can have intermediaries if the intermediary has access to some scarce resource, or if there really is an advantage to aggregation of scale. In the short term, it's clear. In the long term it's not clear what that resource is."
As for WebMD, said Coughlan, its case illustrates the disadvantages of being a first mover.
"The idea is the first mover incurs tradeoffs," he said. "The first mover also has to deal with issues of demand, technology, and regulatory uncertainty. [Depending on] the extent to which they can customize their product offering, their technology, etc., to a particualr state and time, if the technology changes, if the demand from consumers changes, if the regulation changes, they may not be in position to adapt to that as a second mover.
"Five years from now this could be a story where WebMD [made] these tremendous efforts we talked about to get everybody online, to get doctors online, to market to them, to tell them what it's all about, to get consumers online, to get payers online. And then somebody, like maybe MedUnite, comes along and says, 'Thank you very much, we'll take it from here.'"
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