The Possibility of Profitability WebMD passes test for health care on the Internet

by David Orenstein freelance writer

Yahoo! It is possible for health care on the Web to be profitable—almost.

WebMD, which for a while seemed like it would end up among the most notorious dot.com flops, now seems more like a survivor. Earlier this year it announced its first cash profit. A cash profit is not a net profit—don’t call the company “profitable” yet. But it does mean the company is capable of taking in more cash in a given quarter than it shells out, and that is good news—for more than just WebMD.

Other health Internet companies should care about WebMD’s financials because they finally provide market-tested evidence that the Web has something positive to offer the healthcare business world. Web advocates have assumed this for a long time, but hard-dollars proof was scant. Now the biggest Web-based healthcare company has achieved a level of profitability. We have a benchmark now.

Why does WebMD’s profitability validate the Web for the healthcare business? Simply this: WebMD can make money only if its customers believe that they make or save money by using WebMD’s services. WebMD’s financials, therefore, reflect the economic value of the Web to insurers, physicians, pharmacies, and suppliers of products.

WebMD services include “Medical Manager” practice management software and online services. WebMD also operates ad-supported online information and reference for consumers (WebMD Health) and for physicians via Medscape, which it acquired in December. Most importantly, WebMD’s “Envoy” service links insurers, physicians, and pharmacies so they can conduct transactions online. When done right, electronic transactions can be faster, cheaper, and easier to manage than those done on paper or over the phone.

Clearly, if WebMD’s earnings are indeed a barometer of the Web’s value, then not all Web-based healthcare services deliver the same amount of benefit to customers. The bulk of the economic value is in the Envoy service. In the first three months of 2002, Envoy brought in $118 million in revenues, Medical Manager raked in $66 million in sales, and Health/Medscape, brought in only $17.1 million in revenues. WebMD made money (on a cash basis, anyway) with Envoy and Medical Manager, but not with its online information sites.

The relative success of Envoy, and secondarily Medical Manager, seems to confirm what e-commerce analysts have been saying for years: The real money is in making business-to-business transactions more efficient. From January through March, WebMD says it processed 576 million transactions among national insurers and localized ones, such as United Healthcare of Texas–Dallas, Pacificare of Texas, and Texas Medicaid.

However, it would be wrong to infer from WebMD’s overall cash profits that the consumer information Web site is doing anyone any economic good. It may be a nice information resource for consumers, but pharmaceutical companies and other advertisers clearly don’t yet see enough benefit to pay WebMD what it needs to provide the service.

It also would be wrong to mistake WebMD’s current success for definitive proof of the Web’s value to health care. This data is from only one quarter. To be convincing, the company should start showing consistent net profits. Customers might abandon WebMD, for example, if prolonged use doesn’t continue to yield economic benefits, such as cost or time savings. Some customers might assume that WebMD saves or makes them money, when in fact it doesn’t. WebMD’s story sounds good now, but this is an early chapter.

Especially in these days of Enron and a shaky recovery, taming one’s optimism is a sound practice. But one shouldn’t be so cynical as to ignore evidence when it seems to have passed an early test. WebMD’s business proposition has passed such an early test and that means we can all be a little more optimistic that the Web is for real in the healthcare business.

David Orenstein is a technology and business writer in Silicon Valley. To learn more about a technology topic in Computing Care, e-mail him at davealli@attbi.com.