Online Portals Challenge WebMD As Patients%EF%BF%BD%EF%BF%BD%EF%BF%BD Source For Health Info


One of the first e-health concepts to really capture the popular imagination was the online pharmacy. The idea was that Internet-based pharmacies, with highly efficient operations and vast economies of scale, could offer prescription drugs at lower cost than local pharmacies could. Pharmaceuticals are a large industry and it was estimated that online pharmacies would be worth approximately $68 billion by 2003.[5] With the overall cost of prescription drugs spiraling upwards, these pharmacies seemed like an ideal niche for an e-health venture. Their Web servers could quietly provide cheap drugs to millions at any time of the day or night. and PlanetRx were both early entrants, and appeared initially to have all the elements necessary to become major players in the future of healthcare.

PlanetRx. PlanetRx launched its Web site in March 1999 after nearly 3 years of development. It sold vitamins, over-the-counter drugs, beauty products, and prescription pharmaceuticals. Having obtained world-class financial support from reputable venture capitalists, it had more than $100 million in cash by the end of 1999.

The company began an aggressive program of partnership and alliance integration in an attempt to attract customers. It closed multimillion-dollar marketing deals with AOL and iVillage, and agreed to give pharmacy management company Express Scripts $168 million in stock and $15 million annually for access to new customers.[6,7]

These deals were planned to enable PlanetRx to reach thousands of potential customers, but the arrangements failed to generate any significant revenues. The company attained $36 million in sales in 2000 but had costs of $304 million that same year. Despite the huge losses, investors initially maintained their support. When PlanetRx went public in October 1999, its market worth was $1.3 billion. As time passed, the company's value steadily declined. Several rounds of layoffs and restructuring couldn't change its fundamental flaws. By January 2001, PlanetRx was removed from the NASDAQ exchange. In March 2001 it closed its online store and referred customers to former competitor Later that month, the Board of Directors decided to liquidate the company.[8] was launched in February 1999. It sells an array of products nearly identical to that of PlanetRx. received venture capital funding from the same firm that funded Sun Microsystems, Netscape, and America Online in their early years.[9] sold stakes in itself to, Rite Aid, and General Nutrition Centers in 1999.[10] The deals were supposed to provide marketing exposure for the young start-up. Investors were encouraged. When went public in July 1999, it was valued at $2.1 billion. Despite advantages over its rival PlanetRx, including the hiring of ex-Microsoft senior executive Peter Neupert as the CEO,[11] market confidence soon slipped. It became clear that the millions of dollars that had been spent on advertising and marketing were not paying off. Fueled by layoffs, the closing of facilities, and the utter failure of competitor PlanetRx, stock dropped nearly 96% from its high, reducing the company's $3.9 billion valuation to about $160 million. continues operations but does not expect to approach profitability until at least 2003.[12]

Lessons from online pharmacies. PlanetRx and did poorly with the 4 fundamental factors we have identified ( Table 2 ). This made it very difficult for them to achieve any success. Their financial performance reflects this shortcoming (see Figure 1).

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Market value of and PlanetRx, 1999-2002. Note the precipitous decline in market value. Data from Yahoo! Finance, March 20, 2002.

Fundamental factor 1 - A compelling value: Although it was clear that people could purchase prescriptions online, it was not clear that they should do so. The online drugstores offer slight cost savings over local drug retailers, but they lack the convenience of the corner drugstore and the comfort afforded by a well-known local pharmacist. Corner drugstores are everywhere, and purchasing drugs online in many cases makes things more, instead of less, difficult.[13] Thus, a compelling, undeniable service value was never achieved.

Fundamental factor 2 - An unambiguous revenue model: Changing the ingrained buying habits of consumers is an important challenge for any start-up, and convincing consumers to buy online was a challenge that the online drugstores underestimated. Furthermore, the elderly, the group with the greatest need for pharmaceuticals, are unlikely to use the Internet to fill prescriptions. In 2000, both PlanetRx and had to spend 1 dollar in advertising and marketing to generate 70 cents in sales. Despite spending millions of dollars, the dismal sales numbers highlight the difficulty in convincing customers to buy pharmaceuticals online.

The online drugstores also failed to account for the reaction of insurance companies, who had the potential to be big customers. Steve Valenzuela, chief financial officer of PlanetRx, said, "In the pharmaceuticals market the insurance companies covered employees. They didn't want to cooperate with online pharmacies, because they view them as competition for their mail-order business."[14] By refusing to reimburse patients for online drug purchases, they effectively cut the online drugstores off from millions of potential customers. That left them to scrounge an existence from the remaining individuals who would pay out of pocket for prescriptions, a small market segment.

Fundamental factor 3 - Competitive barriers to entry: Both and PlanetRx underestimated the ease with which competitors could enter the online pharmacy industry. They initially planned to become the low-cost suppliers. Huge advertising budgets, bloated payrolls, and inefficient operations made them vulnerable to small, lean operators who could offer even lower prices. Examples of competitors that soon emerged include DestinationRx, VitalRx, ApexRx,,,, and With no real barriers, these competitors soon eroded's and PlanetRx's business.

Fundamental factor 4 - Organizational structure for cost control: Like many Internet companies, the online pharmacies fell prey to a binge of uncontrolled and unfocused spending. and PlanetRx had low gross margins, 8% and 4%, respectively.[15,16] In other low-margin industries such as the petroleum and steel industries, profitability depends on maintaining a large volume while deeply cutting costs. and PlanetRx failed to develop a means of cost control. They maintained huge operating expenses and spent heavily on marketing campaigns that did not generate returns. Loose spending soon depleted valuable cash reserves. Online Pharmacies Today. and PlanetRx were soon followed by a second generation of competitors from the more traditional drug retailers such as CVS and Walgreens. These newer entrants seem to be avoiding the mistakes of and PlanetRx, and are reinforcing their traditional bricks-and-mortar pharmacies with online offerings. This gives consumers the best of both worlds: the convenience of a neighborhood drugstore, the price savings of an online pharmacy, and choice of service interactions. Furthermore, the online offering supports the physical stores by aiding in information dissemination and customer relationship management.

Healthcare Information Portals

Healthcare information portals are Web sites that provide people with information rather than with services or goods. Health-related information is the third most searched for topic on the Web, exceeded only by sexually and financially related topics. Twenty-five million people, or 43% of all Internet users, searched for health-related information in 1999.[17] A plethora of Web sites, nearly 15,000 according to the Goldman Sachs group, has emerged to meet this insatiable demand for medical information. A few Web sites emerged as market leaders early on, including,, and Within a short period of time, millions of people were visiting these sites, looking for information on all types of illnesses and chatting with fellow patients. Wall Street gave these 3 companies a collective value of more than $3 billion at one point. However, unable to convert mouse clicks into dollars, these companies plummeted in value, losing more than 99% in 2 years. Founded in 1998, provides healthcare information to consumers in the areas of chronic illness, nutrition, fitness, and breaking medical news. The site gets its name from former US Surgeon General Dr. C. Everett Koop, one of the company's founders.'s strategy was to build a world-class health information portal that would attract millions of visitors, and to generate revenue from advertising and sponsorship. To attract visitors, spent hundreds of millions of dollars on advertising. Despite the huge expenditure, revenue was less than $11 million in 2000.'s business model was fundamentally flawed. The idea that advertising revenue alone could support a company with the bloated payroll of more than 200 employees that spent millions on self promotion just wasn't feasible. This was compounded by the fact that Internet-wide advertising rates were plummeting at the time. The management team further complicated matters with questionable business practices. In-house massages for employees cost $9000 per month, and free catered lunches on Fridays cost $15,000 each week, contributing to a monthly burn rate of $7 million.[18,19] The stock value has dropped more than 99.9% since July 1999. has become a popular icon symbolizing the excesses and subsequent downfall of the Internet bubble (see Figure 2).

(Enlarge Image) has become a poster child for "dot-bombs." This mousepad is sold on a Web site that features failed Internet companies. It shows an elderly couple with a caption that reads, "We invested our grandchildren's inheritance in" Image courtesy of

Ironically, DrKoop's stock is more highly valued as a memento of the go-go Internet days than as an actual investment (see Figure 3).

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DrKoop as an investment joke. This cancelled stock certificate was sold at auction on eBay. The seller's description read, "My investment disaster is now a piece of history! This is an authentic cancelled stock certificate. Here's your chance to own a page of history. Very hard to find collectable item!" It was sold for $56. That same day the price of DrKoop stock in the over-the-counter market was 13 cents. . The Web site provides consumers with performance ratings of hospitals, HMOs, and physicians. Its "report cards" give patients a "solid, scientific alternative" to relying on word-of-mouth for determining the quality of a physician or HMO. HealthGrades made the same primary mistake as DrKoop; it relied on banner advertisements for revenue.

The stock price reflected this mistake, dropping more than 99% off its high. Recently, the company changed its name again, abandoning ", Inc." in favor of "Health Grades, Inc." This desperate attempt to distance itself from its dot-com failure is not likely to save this once successful company. offers patients information about specific illnesses, current research, nutrition, therapies, and "community building" features such as online chat rooms. The company also provides services for physicians, and has managed to sign up a considerable number of physician users. Again, revenue was generated from banner advertisements. In 1999, the company had a market capitalization of $1.3 billion, and management used the overvalued stock to complete a number of multimillion-dollar acquisitions.[20,21]

When it realized that banner ads wouldn't support a billion-dollar company, Mediconsult changed its strategy. It focused on providing services to physicians, in particular hosting personal Web sites, a service that can be obtained elsewhere for free. The demise was inevitable. Spokesman Tom Peacock said, "The advertising model is one that just isn't producing the kind of revenue we need."[22] The company's value shrunk 99.8% to less than $3 million. In March 2001, the company announced its removal from the NASDAQ exchange. Later that month, Andrx Corporation, a pharmaceutical company that specializes in controlled-release drugs, acquired it. Not to be confused with its similarly named counterpart,, was founded as a joint venture between Mosby, W.B. Saunders, and other leading medical publishers. It provides online textbooks and journals for quick reference by clinical physicians. The service is particularly valuable to medical residents. These young and overworked physicians have the highest need for rapid access to medical references but have little time for research in the library. Medical residents are comfortable with the Internet, having used it extensively in medical school and college.

Because is backed by leading publishers, its content is robust, and since its launch in 1997, the St. Louis-based firm has built a user base of more than 200,000.[23] Subscription fees are modest, costing $10 per month for medical students and residents and $20 for established doctors. differs from the other companies discussed here in that it is focused on serving physicians and other providers, not patients. Also, it generates most of its revenue from subscriptions instead of banner advertisements. The combination of a unique and valuable service and a steady subscription-based revenue model has allowed MDConsult to build a successful business. Although exact financial numbers are unavailable, MDConsult's annual revenue is probably about $36 million (calculated from an average monthly fee of $15 and 200,000 users).

Lessons from healthcare information portals. Like online drugstores, the health information portals did not meet all of the 4 fundamental factors and in general fared poorly in the market. The 2 publicly traded companies saw breathtaking drops in value (see Figure 4).

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Market value for HealthGrades and, 1997-2002. Note the precipitous drop in value, particularly with DrKoop. Mediconsult and MDConsult are not publicly traded. Data from Yahoo! Finance as of March 20, 2002.

The exception to this trend is physician-information portal, which achieved each factor and has achieved remarkable success. A summary of performance for these firms can be found in Table 3 .

MDConsult's proven subscription-based revenue model was superior to the other firms' unproven banner advertising based model. Furthermore, MDConsult exhibited disciplined cost-control measures.

Fundamental factor 1 - A compelling value: Health information is a much sought-after commodity, and the health portals have done well in providing valuable, easy-to-understand, and useful healthcare information to millions of patients and physicians. Before the advent of the Internet, most of these people would have had no practical way of obtaining this information.

Fundamental factor 2 - An unambiguous revenue model:,, and did poorly. They relied on unproven banner ad revenue and watched as rates plummeted and traffic failed to materialize.[24] They did not have alternative revenue sources or strategies. On the other hand, MDConsult achieved great success in securing a steady revenue source. Spread by word of mouth among medical professionals, its $10 monthly fee was a great value for information-hungry and sleep-starved physicians. As the targeted customer base of residents signing on and using grew, subscription revenue rose.

Fundamental factor 3 - Competitive barriers to entry: The difficulty of creating high-quality medical content is itself a competitive barrier, requiring planning, expertise, partners, editors, and, in some cases, proprietary content. The health information portals did well in achieving this factor. went a step further, securing the identity of a well-respected and trusted American physician for its business.

Fundamental factor 4 - Organizational structure for cost control: The 3 patient-focused portals failed miserably here. They depended on a large amount of Web site traffic to generate millions of clicks for their advertisement-based business model to work. They freely spent money in a frantic race to build traffic and content. Lavish perks for employees were common. When revenue failed to grow as expected, there appeared to be no mechanism in place for cost control. The exception is MDConsult. Its target market is limited to medical professionals, which meant that advertising could be targeted, saving money and producing better results. Owned by mature publishers, MDConsult benefits from their financial support and organizational discipline.

The failure of many e-health information portals will not eliminate the demand for consumer health information. Rather, demand will likely increase as more people become accustomed to the Internet. The companies that will survive to provide health information tomorrow will not depend on advertising as their sole source of revenue.

A Comprehensive E-health Site - WebMD

Comprehensive e-health sites differ from the other segments discussed in that these companies target both consumers and providers across multiple industry segments. Several firms started as comprehensive e-health sites in the mid 1990s, but rapid consolidation has left only 1 real entity in the segment: WebMD. WebMD offers an extremely broad set of services, including healthcare information to consumers and physicians, billing and transaction processing for physician practices and hospitals, and handheld services. This diversity puts WebMD into a class of its own -- that of an e-health conglomerate, capable of offering a variety of valuable services in a single package that no other competitor can assemble.

Founded by Jim Clark, who also founded Silicon Graphics and Netscape, WebMD was originally called Healtheon. The company didn't bother to build its own products and services. Rather, it used its highly valued stock to finance acquisitions of leading companies in the industries it targeted (see Figure 5). In 1999, it acquired and OnHealth, both leading health portals, giving it access to the consumer health market.[25] In 2000, it acquired Envoy and CareIsite, capturing a huge chunk of the medical claims processing industry in one swoop. Other purchases include Medical Manager, which makes practice management software for doctors, and recently, the Web site of longtime competitor Medicalogic/Medscape. In all, WebMD's network reaches 15 million consumers and more than 500,000 doctors.[26]

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Market value of WebMD and Medscape, 1999-2002. WebMD's value soared in 1999, even eclipsing General Motors for a brief period of time. Medscape, WebMD's primary competitor and a multibillion-dollar company itself, was still dwarfed by its larger rival. WebMD used its valuable stock to finance multiple acquisitions. Data from Yahoo! Finance as of March 20, 2002.

As a result of this multibillion-dollar shopping spree, WebMD has managed to accomplish what no other company has managed to date: bringing a vast array of healthcare services, including medical information, charge capture, physician practice management, and electronic claims processing, under one roof. The fact that WebMD accomplished this with nothing more than over-inflated stock valuation makes it even more extraordinary. The challenge now is execution. Can it integrate each of these unique technologies into a single, cohesive union? Low-margin transaction processing and slowing e-commerce and advertising revenue are unlikely to fuel its future growth.[27] The physician practice management business will be encumbered by the fact that about 50% of American physicians work in small practices that cannot afford a fancy WebMD system. Most importantly, the company has a huge burn rate. However, if it can contain costs and integrate its acquisitions, WebMD has the potential to be the dominant player in the healthcare industry.

Lessons from WebMD, a comprehensive e-health provider. WebMD performed moderately well by the 4-factor analysis (see Table 4 ), achieving all factors except 1.

Fundamental factor 1 - A compelling value: WebMD's diverse assets allow it to package clinical information and charge capture and transaction processing over the Internet, thus offering a compelling value. If it can successfully execute on its integration, then doctors, hospitals, and insurers will have to pay for it.

Fundamental factor 2 - An unambiguous revenue model: WebMD succeeds with this factor even though it has had difficulty securing enough revenue to support its large infrastructure. The company has diversified revenue sources that protect it from disturbances in any one of its industries and will contribute to long-term stability.

Fundamental factor 3 - Competitive barriers to entry: WebMD benefits from its size and the great variety of comprehensive services that it offers. Such large collections of services are difficult to imitate. Smaller niche competitors will arise, but competitors that can offer equivalent service packages seem unlikely.

Fundamental factor 4 - Organizational structure for cost control: This is WebMD's one potential weakness. It is burning tremendous amounts of cash and lost a staggering $3.1 billion last year. WebMD stock dropped sharply with other dot-com issues amid worries of future profitability. Still, it has nearly $600 million in cash. This huge hoard gives it lots of leeway as it strains to control costs. If WebMD can control costs and pull its diverse collection of technologies into a cohesive whole, it has the potential to be tremendously successful.

Source :

The Rise and Fall of E-Health: Lessons From the First Generation of Internet Healthcare
Pharmaceutical Decisions and the Net:
Code Blaze Resources for UAB Medicine/Physicians
Code Blaze Resources for UAB Faculty & Staff
Becker's Hospital Review E-Newsletter
The Rise and Fall of E-Health: Lessons From the First Generation of Internet Healthcare
Pharmaceutical Decisions and the Net:
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