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

Xconomy Boston — 

A little more than a year ago, American Well was still waiting for its first customer to launch its Web-based system, which enables real-time interactions between patients and doctors over the Internet. Then on January 15, 2009, after much anticipation, the system went live for the Hawaii Medical Service Association, the Hawaii franchise of Blue Cross Blue Shield.. It’s a day that American Well CEO Roy Schoenberg recalls fondly, the day when the now 4-year-old firm’s vision of online healthcare became a reality.

I spoke to Schoenberg at length last week to find out what his firm had learned about how patients use the 90-employee company’s technology, and also to get a preview of what’s in store for the firm and online healthcare in 2010. In general, the company’s well-greased PR machine has been very careful about when, what, where it shares information about its operations and the use of its technology. (And in large part due to the novelty of patients seeking care online, there have been no shortage of stories about American Well and its exploits.) But Schoenberg shared some interesting tidbits about where the company is headed that, while general in nature, provided a glimpse at what to expect in the year ahead.

To quickly recap the American Well story, the company made a big splash back in June 2008 when it announced that it had landed its first deal with the group in Hawaii and struck an agreement with Microsoft to integrate American Well’s system with Microsoft HealthVault, the online personal health records system. The company has since sold its system to the Blue Cross Blue Shield of Minnesota; OptumHealth, a unit of private health insurance giant UnitedHealth Group (NYSE:UNH); and then TriWest Healthcare Alliance, a Phoenix-based health plan for military personnel and their families. While four health plans isn’t many customers, Schoenberg has argued that his firm has found adopters of its system at an exceptional rate in the context of the healthcare industry, which often lags others in the implementation of new technology. (The CEO made this case last June in an interview with Wade.)

With the system in use for just over a year, Schoenberg has a wealth of information about the practice of online care. In fact, he dropped a few interesting facts about the use of online care during our interview: the majority of patients that have used the firm’s system have been women; slightly more than 50 percent of the online doctor visits are consults for allergies, aches, colds, and other routine ailments; and physicians from some 23 medical specialties are providing care on the system, to name a few things. Though the CEO declined to share traffic figures for the company’s system, he said that there are now hundreds of physicians offering treatment to tens of thousands of regular patient users of the online care platform.

I’ve saved what I view as the most interesting info from my talk with Schoenberg in the following Q&A.

Xconomy: How does American Well plan to further integrate its technology into the healthcare system this year?

Roy Schoenberg: One thing that has been illuminating to us is the fact that we originally thought that the system was going to be used for medical care proper. And we now see that the system is being used in behavioral health, for example, which we never envisioned. TriWest is using the system for behavioral health. I know that UnitedHealth [via OptumHealth] is going to try it as well on their system. We’re seeing applicability of the system in other areas, such as the use of the system to project additional services into the retail pharmacy. That is something you are going to see in 2010. And there are other areas such as use of the system in care management.

What is also true is that all these things are going to have an impact on what we do in 2010. We are no longer at the point where we are developing on whiteboards. This is a very real system that has a lot of traffic that enables us to learn and extend it in places where the use shows us there is value. We have very ambitious plans for expanding the application of online care immediately in 2010. One of these areas is the introduction of a team version of the system. Everything we’ve done up until now allows the consumer to acquire online healthcare from providers. The team addition, which is becoming commercially available at the end of the first quarter, will allow provider-to-provider consultations.

X: How would you make money from the use of your system for provider-to-provider consultations?

RS: Well, it means that primary care practices, instead of sending you a referral, they can call up a specialist in real time while you are at their office. That changes the whole notion of referrals, and that changes when you get the appropriate care. Even if you get a referral at the doctor’s office, you usually have to wait six weeks or so for an appointment. With our team edition, that goes away. The primary care provider stays more in touch with the care you are receiving, because they are physically there when that cardiologist or specialist is giving you that consultation. That is going to make a very significant impact on how care from specialists is delivered.

Later in 2010, we plan to offer the capability for providers to incorporate the delivery of online care services as part of their practice system, which means that the physician sitting in his or her practice could have the ability to manage two different waiting rooms in parallel; there’s going to be the physical waiting room, where there are going to be patients waiting, and then there is the virtual waiting room, where his or her patients are waiting at home to get care. The system will support the sequencing, so the front desk at the practice will be able to send a patient in the physical waiting room to see the physician or allow a virtual patient visit.

X: Now that you’ve seen the online healthcare phenomenon transform from a concept into reality, how do you see this field evolving?

RS: I think what we are going to see is two different parallel evolutions. First of all, I think we are going to see people become more comfortable using the system. It’s a word-of-mouth thing happening. I think that, to a degree, we’ll see more utilization as broadband continues its distribution across the country, even though it’s pretty prevalent already. You can’t buy a laptop today that doesn’t have a webcam built into it, and I think that’s going to be a great driver as well. Also, as patients and physicians get more comfortable with these technologies, you’ll see the impact of that on utilization and how this is a regular way of getting healthcare. This is change that we see happening from the ground up.

From the top down, the efforts that we are seeing to computerize [medical records] are also going to work extremely in favor of our system, because if you have the capability to tie more of the clinically relevant information about the patient and put it in front of the physician in the online care system, the better the care the physician can render to the patient. So with the adoption of electronic medical records, and with the adoption of electronic prescriptions, you’re going to see the value of online care growing and growing because the physician on the online care system will be much better informed about the patient. We see that as the most important factor that improves the level of care rendered in the system. The more the physician knows, the more comfortable they are in providing care.

X: Is American Well interested in forming partnerships with electronic medical records providers to integrate your online care system with their systems? Is that something that you would do, or will it be up to health plans to decide whether to integrate your system with an EMR?

RS: This is the interesting thing about the way the healthcare world looks like. Health plans have very little to do with what happens inside the practices of physicians. Whether it is small practices, hospitals, or healthcare delivery networks, health plans really deal with the financial coverage of the services. They have very little say about what happens in those places. So what you would see is the large electronic medical records systems from companies like Epic and GE are kind of not exposed to this, yet.

I can tell you that effectively this is going to change in 2010, because we’ve already seen and have been approached by some large EMR systems out there to establish integrations. And this is coming not because the health plans want it, but the physicians are saying that we understand that we are going to be caring for patients with this technology, and the sooner we bridge the two the better. Whether it’s going to be the giants like Epic or GE or whether it’s going to be very innovative companies like 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 use their time while they are at their homes from 7 o’clock to 9 o’clock in the evening, those types of interventions are going to become a requirement. This is something that we see happening in 2010. So in a nutshell, we see healthcare reform providing a huge boost to the use of our technology.

X: Has reimbursement been an issue for the company? I recall that the reimbursement rates that are applied to online visits aren’t as high as physical office visits.

RS: We thought the fact that the system allows physicians to operate without overhead was going to be a very important factor in their decision to do this or not to do this. The reality is that we don’t have a shortage of physicians. Physicians are on the system, they are happy to do this, and they are delivering services 24 hours a day. The reimbursement rates differ from market to market. The reimbursement rates in Minnesota are different than they are in Texas, and the rates in Texas are different than the rates in Hawaii. But the rates are adjusted to the point that it’s attractive to the physician. Health plans determine reimbursement rates. The system not only allows health plans to play around with reimbursement rates until they find a sweet spot [where doctors are willing to provide virtual consultations], it has the capabilities also to provide great sophistication in what the rates would be depending on who the patient is, who the provider is, and under which circumstances they come together.

So the payment rate may be different for an HMO product versus a PPO product. It may be different by time of day. And some plans are actually thinking about an advanced perspective, where they are saying that there are certain patients that are extremely expensive to cover because their care is poorly coordinated. The diabetic patients that do not go to their follow-up appointments, for example, tend to show up in the emergency room with different kinds of extreme complications of their disease. With our system, health plans have the capability of saying that for those patients, where we could really benefit from advanced coordination, the payments for those patients are going to be lower than for patients who are perfectly fine. In a way, it’s a really good thing because those patients who are badly cared for are given positive incentives to get treated [in a virtual visit], and that in turn has a tremendous effect on the medical costs of managing those patients.

X: How do you envision American Well being used outside the U.S.?

RS: Here’s something to consider, which I think is very contemporary. Just imagine that we could open online care in Haiti. Just imagine that the service would be available in those very large places where wounded people are concentrated, and we could make U.S. doctors available from their desktops in their office. And all these physicians would be available to patients in Haiti.

X: It sounds like you’ve thought about this scenario quite a bit. Do you want to make an announcement?

RS: I don’t want to make an announcement because I don’t know who’s going to pick this up. I can definitely say that if someone had picked this up, we would have made the system available, we would have contributed the system for that. But I think these things would be a reality. Online care is all about projecting care from one place where it is available to another place where it is needed. Here’s another example that no one ever thinks about, of how dramatic that effect could be. It’s too early in the game of online care for people to translate what it offers into these kinds of applications, but the world of online care is literally opening up in front of our eyes right now.

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