American Well CEO Shares Vision on Future of Virtual Doctor Visits and How Healthcare Reform Will Boost His Company

1/22/10

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Athenahealth here in Boston. Athenahealth I think, is ahead of the most of them. I think you are going to see EMR integration with online care very, very soon, even within 2010.

X: I don’t think you’ve ever said when American Well is going to become profitable by a certain date, but how close is the company to operating profitably? And would you consider doing an IPO? I know that’s two questions.

RS: Yes, but the two questions are closely tied. I think we are very fortunate, because our previous two ventures did very well, that we have a great group of investors that came together to do American Well. [Editor's note: Schoenberg and his brother, Ido Schoenberg, who is a co-founder and chairman of American Well, have each founded successful health IT companies. Roy Schoenberg founded CareKey, a provider of electronic health management systems that was sold to California's TriZetto in 2005, and Ido Schoenberg co-founded iMDSoft, a maker of software that enables hospitals to track patients and their records while they are in intensive care units. Ido was also an executive at CareKey/TriZetto.] One of the key decisions we had to make very early on, which obviously translated into the amount of money the company needed to have in place in order to do this, was the understanding that if we really believe that healthcare is going to be delivered through technology, the financial future of the company is not in selling the software but from generating revenue off the healthcare traffic that is going to be online. As a result, the contracting model for this technology has been from the ground up. There is obviously a licensing component; we are generating revenue from the licenses. And these are not trivial sums; they are in the multiples of millions of dollars. But in every contract that we sign there are two revenue streams going to American Well. One is the license, and transaction fees are the other source.

We see the revenue opportunity for American Well not so much from the license fees, which are important to maintain us at the early stage of the company, but from fees we get every time a physician interacts with a patient with our technology. From a Wall Street perspective, and this is why I think your questions are tied. We know that when you go into a public offering stage, Wall Street is very skeptical about the spiky revenue model of large enterprise software companies, where if you make a sale there is a larger influx of cash into the company. But until you make the next sale there are deserts—there’s nothing going on. That doesn’t lend itself to public offerings, because nobody knows when the next deal is going to be and how capable are you going to be to make those deals again and again and again. Whereas if you have a model that allows you to establish recurring revenue, so that you know that there’s traffic that is generated month in and month out, that generates revenue to American Well. The growth of recurring revenue is probably the most valuable asset that you can bring to Wall Street if you want to do an IPO. So this all ties together because that model of selling our products—really saying that we are more interesting in generating revenue from healthcare traffic than we are for giving the disks for the software—to do that effectively you have to be very well capitalized. It means that you’re looking at prospective growth because you’re not trying to make the company become profitable because of the software sale.

X: Does that mean that you’re looking at a long road before you become profitable?

RS: Absolutely not. We’re already doing very well. But I think it was a very good decision in hindsight to say that when we sell accounts, we will religiously require that the health plan will pay American Well per transaction in addition to the license fees, because that is where the revenue growth is going to come from. I’m very happy with the license revenue stream, but if online care is going to be the new way that healthcare is delivered, which is what Gartner and everyone else is saying, then from a future standpoint the revenue growth at American Well comes from the traffic. It doesn’t come from the license fee from the health plan.

X: What are your plans to gain adoption from other stakeholders in healthcare, other than health insurance plans?

RS: We are now seeing contracts that are being negotiated not only with health plans. We have delivery networks [or organizations with a network of healthcare clinics or hospitals], which are saying that they have physicians, so why not use their physicians to deliver care in their states of operation. So allow people to come in with a credit card and see, say, a cardiologist right now. And because of the way we see the world, it is a very solidified revenue model, because we don’t care whether the transaction happened between a doctor and a patient and was covered by the health plan or the delivery network. As long as the transactions are there, American Well generates cash.

X: How much does American Well make from each transaction?

RS: It kind of changes between the different contracts. There is a balance when we talk to an operator. We tell them that there is always going to be a license fee and a transaction fee, and depending on your strategy, you can shift the balance from one to the other. So you can pay very high license fees and a lower percentage in transaction fees, or you can pay lower license fees and then agree to higher transaction fees. Both of them will always be there.

X: Have you ever disclosed who your investors are and how much money you have raised?

RS: No, this is a private company and for every investor that we disclose we have to get their approvals to disclose their relative contribution. It’s painful. There’s no reason to do that.

X: Changing the subject then, what do you think will be the impact of the proposed healthcare reforms on American Well?

RS: I think in terms of healthcare reform itself, and the jury is out on how that’s going to end up, but one thing that is becoming very apparent is that one, you’re going to throw 35 million people into the healthcare system. These are people who were outside of the healthcare system, but you’re not going to be able to throw in the equivalent number of physicians into the system. There are just not enough physicians. We already have a great shortage of physicians, so they’re just not going to be there. So the reality is that the notion of traditional access to those physicians going to get much, much more difficult. In a world where access to physicians is difficult, alternative ways of getting care from physicians and better ways for physicians to … Next Page »

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