BBI Contributing Editor

LOS ANGELES, California – The advent of widespread availability of low-cost telecommunications technology, including Internet-based communications for both the workplace and the home, has spurred major investments recently in telehealth or e-health companies hoping to provide a solution to problems of inefficiency and high cost in the health care system. However, in spite of a total market valuation in the industry that exceeded $40 billion as recently as late last year, there have been few success stories. Companies including WebMD (Atlanta, Georgia), (also Atlanta), The Trizetto Group (Newport Beach, California), (Austin, Texas), Medscape (New York), (Bellevue, Washington), and PlanetRx (South San Francisco, California) have experienced major declines in market valuation over the past few months. Investors have become disillusioned by continued losses and by revenues that are often well short of projections. Nevertheless, efforts to implement viable and clinically useful systems are continuing, and some programs have begun to demonstrate cost savings compared to conventional patient management approaches, as well as improved patient outcomes.

The teleHEALTH 2000 conference, jointly sponsored by the Healthcare Information and Management Systems Society (HIMSS; Chicago, Illinois) and the University of California Davis Health System (Davis, California) and held here in early November, explored new developments in telehealth and telemedicine, and provided an opportunity for companies in this emerging market to demonstrate their products and technologies. Telehealth is generally defined as the delivery of health care services from provider to patient via telecommunications links, a concept addressed by companies such as WebMD, Trizetto, and Telemedicine, on the other hand, involves communication between providers, such as consults between primary care physicians and specialists, as well as on-line interaction between physicians and patients. As described at the conference, there are some programs in the public sector, as well as programs sponsored by insurers, that have succeeded in reducing overall costs of care and improving access of patients to healthcare services. Most programs are small in scale, and questions remain as to the feasibility of expanding such approaches to address the full range of patients. Nevertheless, there are clearly some segments of health care delivery where telemedicine can play a valuable role, and continued declines in the cost of telecommunications technology are expected to make widespread implementation more practical.

A number of companies are now developing systems that allow patients to be monitored remotely in the home and that provide two-way interaction between patient and caregiver. Such technology can potentially help reduce the number of home visits required and also provide more timely response to changes in patient condition, at least to a degree. Remote patient management is of particular value for chronic disease patients. Telepathology also is an important emerging field and has significant utility for providing advanced pathology services in the Third World from medical centers in the U.S. Telemedicine also has been successfully evaluated on a trial basis by Blue Cross of California (Newbury Park, California) for applications in primary care and found to be particularly useful for providing consults with various specialists. Barriers remain in insuring the security of patient information on-line and in providing adequate scope of services remotely. Continued advances in technology are expected to address many of those issues, allowing continued penetration of the market, although at a slower rate than most investors initially anticipated.

Not meeting market expectations

Telehealth so far has been a disappointment to many investors and to companies involved in the segment. As shown in Table 1,the total market valuation of a representative group of leading telehealth companies has dropped dramatically (by as much as 90% for some companies) since the beginning of 2000. Most companies have reported revenues well below forecast levels and have continued to sustain significant losses. In some cases, there have been major shifts in strategy, as well as in company management, that, while perhaps necessary in order to better position the company for success, have shaken investor confidence. For example, WebMD has decided to adopt a strategy of providing its web-based physician services via hand-held wireless devices vs. desktop computers. The strategy will require physicians to be equipped with hand-held devices, requiring an up-front investment for implementation. WebMD is developing the hand-held device to be a fully integrated solution for physicians but has not yet determined who would pay the cost of equipping physicians with hand-held units. WebMD also recently changed CEOs, and continues to wrestle with the integration of eight companies acquired within the past two years. The company's revenues have increased from $49 million in 1998 to $102 million in 1999 and are projected to rise to $831 million on an annualized basis. The projected annualized loss is approximately $3.4 billion after restructuring. In response, the company's stock price dropped from a high of approximately $70 in early 2000 to $8 in mid-October. However, the projected cash loss is only $45 million, indicating that WebMD may succeed in achieving its goal of break-even by Q401 once the restructuring is complete. After integration of the recently acquired companies, WebMD plans to generate approximately 41% of its total revenues from transaction services, 36% from physician services including subscriptions, 13% from portal services, and the remainder from other services. The company is processing 2.4 billion transactions annually and has a customer base comprised of 1,000 payers, 4,600 hospitals, 36,000 pharmacies and 300,000 doctors.

Another telehealth provider, CareScience (Philadelphia, Pennsylvania), said recently that its estimated revenue for 2001 would be between $13 million and $14 million, less than half the previously estimated level of $29 million. As a result, the company's stock dropped 44% in one day. CareScience provides Internet-based care management services to hospitals, health systems and health plans, and also provides proprietary online databases and analytic tools to pharmaceutical and biotechnology companies to optimize drug development., yet another business-to-business connectivity company, recently was delisted from the Nasdaq exchange because of the precipitous decline in its market valuation.

Nevertheless, the e-Health industry is now generating combined annualized revenues approaching $1 billion (WebMD's projected annualized revenues alone are over $830 million), and while the market opportunity is considerably smaller than many originally believed, a substantial industry has emerged that is continuing to grow. There are now some successful programs that demonstrate the value of the overall business concept of e-health, and companies that are able to restructure to address the viable opportunities in the market are likely to achieve profitability within the next few years.

Some telehealth programs have been established in the government sector that have proven valuable to participants, while expanding access to health care services and demonstrating cost savings. The Health Resources and Services Administration has established an Office for the Advancement of Telehealth (OAT), based in Rockville, Maryland, that is charged with funding new programs to evaluate the use of telemedicine technologies. About 60 programs at over 300 sites have been funded so far, mostly in rural locations. Funding to date has totaled $20.5 million. The goals of those programs are to improve the quality of health services for rural residents, and to reduce the isolation of rural practitioners through the use of telemedicine technologies. In addition, the programs have involved evaluation of the feasibility, costs, appropriateness and acceptability of rural telemedicine services and technologies.

Various settings have been targeted for the delivery of telemedicine services, including the home, prisons, nursing homes, rural clinics, schools and rural hospitals. Although the use of telemedicine to provide specialist consults for primary care physicians is one important aspect of most programs, the services have also included direct interaction between patients and specialists. Since it can be difficult or impossible to recruit certain types of specialists in rural areas, the focus has been on providing difficult-to-access specialist services via telemedicine. Clinical applications include mental health, speech therapy, radiology, dermatology and cardiology.

In a presentation on the OAT programs at the TeleHEALTH 2000 conference, Dean Puskin, director of the office, discussed some of the issues encountered in implementing such programs. By analogy to the evolution of telehealth in the commercial sector, there often is an overly optimistic assessment of the market potential initially, and as a result actual use falls well short of projections. In addition, telemedicine must integrate with current clinical practice and not require physicians to implement major changes in their approach to health care delivery. There are also difficult financial barriers to long-term adoption of telemedicine, since reimbursement remains an issue for most health care disciplines. Because the data to prove added value is limited, many insurers and other payers, including Medicare, are not yet prepared to provide reimbursement, except in certain limited situations such as rural telemedicine consults. For Medicare, the limitations on reimbursement are so stringent that only 260 consults have been covered since the telemedicine reimbursement program became effective as a result of the Balanced Budget Act of 1997. Even when attractive reimbursement is provided, as is the case in a pilot program operated by Blue Cross of California, there are requirements for primary care physicians to be present during all specialist consults, which many physicians find unnecessary. In addition, physicians, clinical nurse specialists and physician assistants are generally the only health care professionals who can be reimbursed, even though nurses typically provide most health care visits. Another issue is that existing grant and reimbursement programs are targeted at regions having a shortage of primary care physicians, with the goal of improving access to basic health care services, but telemedicine generally is most useful for providing specialized services.

The situation may improve in the future. Legislation is pending to expand the types of facilities or service organizations that can be reimbursed for telemedicine. In addition, the requirement for existing Medicare reimbursement to be split in a 25% to 75% ratio between primary care and specialist physicians is to be revised, as that arrangement did not find favor with any party. Facilities eligible for reimbursement will include practitioner offices, rural hospitals and rural clinics. In addition, reimbursement is to be expanded to allow all Medicare practitioners to bill for a visit. The most compelling applications of telemedicine are in the treatment of patients with chronic diseases such as diabetes, congestive heart failure (CHF), hypertension and physical disabilities such as spinal cord injuries. In studies conducted by Mary Bondmass, RN, at the University of Illinois at Chicago (Chicago, Illinois), the use of telemedicine to monitor patients with CHF has resulted in a greater than 2.5-fold reduction in the readmission rate, and a reduction in length of stay for readmitted patients from 11.1 days to 4.9 days. In a group of patients with hypertension, the use of telemonitoring resulted in an 80% reduction in the number of patients with elevated blood pressure during the course of the three-month study. Another study, conducted by Leonard Goldschmidt, MD, PhD, of the Veterans Affairs Hospital (Livermore, California), exploring the use of telemedicine to manage patients with spinal cord injuries, demonstrated that care can be improved for such patients because of the greater ease of access to care that telemedicine provides. Forty-five percent of the patients involved in the study had not visited their local treatment center even though they had medical conditions. Seventy percent of patients and 75% of clinicians were able to avoid a visit to the treatment center by using teleconsultation. Additionally, the more frequent interaction with patients provided by teleconsultation allowed detection of clinical conditions earlier than with the previous care model.

Expansion driven by reimbursement

Changes in reimbursement policy will be crucial in allowing telemedicine to expand, particularly for home health care applications. Although recent studies, such as one published by Sam Burgiss, PhD, director of telemedicine at the University of Tennessee (Knoxville, Tennessee), have indicated that programs such as tele-home care can be highly cost-effective, reimbursement either by Medicare or by third-party payers continues to be limited. Medicare reimbursement is of particular importance for home care, since the study by Burgiss indicates that 70% of home care is funded by Medicare. One major issue is that the Medicare program is moving toward prospective payment for most types of home health care services, probably eliminating the opportunity for a specific reimbursement for telemedicine. Furthermore, pending legislation will not allow replacement of an in-person visit with a tele-visit, but only as a supplement to regular care. Consequently, the market may not be attractive to many suppliers.

However, the experience of Blue Cross of California with its pilot telemedicine project indicates that physicians will adopt the technology if an attractive reimbursement plan is offered. The Blue Cross program was established over a 30-month period to provide specialist consults to primary care physicians in rural areas. The program is intended to address issues including the disproportionate number of rural residents with chronic illnesses such as diabetes and hypertension, high infant mortality rates in rural areas, significantly higher death rates from injuries, lower ability to pay for health care and lack of access to state-of-the-art health care services in rural areas. The program has been funded in part by grants from the Managed Risk Medical Insurance Board and the California Telehealth Telemedicine Center (Sacramento, California). Forty primary care telemedicine sites have been established in California under the Blue Cross program, equipped with electronic stethoscopes, personal computers, video cameras and ENT scopes manufactured by Welch-Allyn (Skaneateles Falls, New York). Primary suppliers of equipment for the program include VirTx, now part of (Jacksonville Beach, Florida), for workstations, systems integration and technical support; VCON Telecom (Herzliya, Israel) for video conferencing equipment; American Medical Development (Lowell, Massachusetts) for medical devices; and Global Telemedix (Westford, Massachusetts) for web-enabled collaborative software development.

The rural sites are connected with specialists at Cedars-Sinai Medical Center (Los Angeles, California), Children's Hospital Los Angeles and the UC- Davis Medical Center (Davis, California). The primary care sites include independent clinics, county public health clinics, hospital-affiliated clinics and private clinics. Services include both live video teleconsultations as well as store and forward consults. Start-up costs have ranged from $32,000 to $60,000 per site, using a direct point-to-point ISDN network. An important element in the success of the program was the recognition at the outset that existing reimbursement models, such as the Medicare model, are inadequate. Medicare provides reimbursement only for a single physician visit, with the reimbursement sent to the specialist physician, who must then forward 25% to the primary care physician. Not only does such a model require both providers to provide services at less than their customary fees, but it also adds an administrative burden for the specialist. In contrast, the Blue Cross program provides reimbursement for the primary care physician for the office visit and reimbursement for the specialist for the consultation. The providers submit independent claims using standard billing forms. All types of specialists licensed in the state are credentialed, including more than 50 specialties and sub-specialties. As a result of the attractive structure of the program, teleconsults have grown from about 20 per month in July of 1999 to almost 140 per month in August 2000. The top specialties in terms of consults are dermatology, general pediatrics, psychiatry, neurology and endocrinology. About 42% of the consults are for evaluation and management of a chronic condition, 35% are for diagnosis, 19% are for evaluation and management of acute conditions and 4% are for other purposes such as prenatal care, medication management and pre-admission or follow-up exams.

Clearly, the long-term success of such programs hinges on overall cost-effectiveness of the telemedicine approach. Proponents contend that the savings achieved by providing more intensive management of chronic disease, leading to improved long-term outcomes, coupled with more effective treatment and improved efficiency of care, more than outweigh the costs of the telemedicine service and the costs of consultation. While there is of course a payback period related to the up-front investment in equipment, studies have shown that, at least in some cases, the overall cost of care can be reduced while improving patient outcomes. Savings may be particularly attractive in the home health care segment. A study published by Burgiss in February 2000, conducted in rural Tennessee using telephone communication to provide home care services, indicates that tele-home care is financially attractive for insurers. Nevertheless, due in part to widespread fraud and abuse issues that have plagued the U.S. home health industry in recent years, government payers, and to a lesser extent private payers, are likely to move slowly to implement the technology in the home setting.

Leading companies in the telemedicine industry at present are listed in Table 2, along with their telemedicine products. The companies include a number of suppliers of devices and software for home-based care delivery. For example, Hom MED LLC (Brookfield, Wisconsin) has introduced the Sentry system, a home-based monitor that connects either via modem or a wireless interface to the Observer system in the clinic. The system has been on the market for about two years, and approximately 200 have been placed in the U.S. The Sentry technology can allow monitoring of up to 128 parameters, and the existing system monitors oxygen saturation, blood pressure, temperature, heart rate and body weight. Glucose monitoring and spirometry are to be added later. The system is provided under a five-year lease at $150 per month. Hom MED does not provide the monitoring service, but instead partners with health care providers for that service. A standard PC is used for the central monitoring station.

Another leading supplier in this market is CyberCare Technologies, a unit of CYBeR-CARE Inc. (Boynton Beach, Florida). CYBeR-CARE holds a number of patents on real-time transmission of video, audio, and medical data, plus patents covering encryption methods. The company's Electronic HouseCall System has been installed in Taiwan, Japan and Hong Kong, as well as in the Mayo Clinic (Rochester, Minnesota) and some Veterans Affairs hospitals in the U.S. The system is leased to providers over a three-year period for between $180 and $450 per month depending on features. A unique aspect of the CyberCare service is the ISDN-connected network operated by the company, which the company believes provides an extra measure of security as compared to public Internet-based connections.

Another key supplier is American TeleCare (Eden Prairie, Minnesota), with its AVIVA Systems for home monitoring. American TeleCare recently announced an agreement with Gentiva Health Services (Melville, New York) to provide clinical installation, training and call center staffing for the IDEATel diabetes telemedicine project. American Medical Development (AMD; Lowell, Massachusetts) is a leading supplier of devices and diagnostic peripherals for telemedicine systems worldwide. The company does not manufacture its equipment, but partners with various equipment suppliers to integrate best-of-kind devices for telemedicine systems. Diagnostic devices supplied by AMD include electronic stethoscopes, vital signs monitors, ECG equipment, ENT scopes, spirometers, colposcopes and other devices. Equipment suppliers partnering with AMD include Welch Allyn, American Telecare and Cardionics (Webster, Texas).

Another segment of the telemedicine market, and one that is exhibiting strong growth in adoption, is products for physician information management at the point of care. Key suppliers of hand-held physician information devices include ParkStone (Weston, Florida), AllScripts (Libertyville, Illinois), PocketScript (Mason, Ohio), iScribe (Redwood City, California), MedicaLogic/MedScape (Hillsboro, Oregon) and ePhysician (Mountain View, California). Many experts in the telemedicine field have noted that physician information and ordering systems that are PC-based are typically not used, even though some physicians have acquired such systems. Instead, hand-held systems are gaining favor because they do not interfere with established workflow patterns in physician practices.

Advances in telepathology

Another area of development in telemedicine is telepathology systems that allow physicians in rural or remote locations to obtain the analytical services of expert pathologists without the need to mail slides or send the patient for an in-person consult. One new system has been developed by Hamilton Health Sciences (Hamilton, Ontario, Canada). The system employs a robotic microscope station, operated by software developed by Apollo Software (Falls Church, Virginia). A direct comparison was performed at the Los Angeles conference between exams performed at three different remote sites using the Hamilton telepathology system and conventional light microscopy exams performed at the primary laboratory. While light microscopy was found to be more accurate, the difference was relatively small. Telepathology analysis took significantly longer than light microscopy, and some types of slides, such as those containing sections of lymph nodes with metastatic carcinoma, benign breast biopsies with calcification and intramucosal carcinoma in large bowel biopsies, were diagnosed less accurately by telepathology.

One supplier of telepathology systems is, a broad-based provider of telemedicine products and services. e-MedSoft's MedMicroscopy system consists of a Slide Server located at the microscopy station, and Slide Viewer software running on a PC at a remote site. Using e-MedSoft's Digital Slide Technology, pathologists at the remote site can navigate a slide faster than with conventional microscopy. That feature results from the use of a unique 3-D data set. The use of IP Multicasting capabilities allows an unlimited number of viewers to simultaneously view images in real-time. The e-MedSoft system is installed at Memorial Sloan Kettering Cancer Center (New York), as well as at a number of industrial sites at companies, including Pfizer (New York), Quest Diagnostics (Teterboro, New Jersey), and Aventis (Parsippany, New Jersey). All data is transmitted over a standard 56k or faster Internet connection, providing low cost and simple installation. The system allows analysis of frozen sections in real time and works with any microscope. The cost for hardware and software for a single site ranges between $10,000 and $25,000. An important feature of the e-MedSoft system is its ability to perform real-time analysis, vs. most other systems that use a store- and-forward approach. Other suppliers of telepathology systems and components include (Irvine, California) and Polaroid (Cambridge, Massachusetts).

As telemedicine applications including telepathology and teleradiology expand, a number of issues are becoming increasingly important related to regulation of the industry. Credentialing of users, privacy of patient data, antitrust and anti-kickback issues and issues with providing health care on-line are all attracting increased attention. The first licensure law pertaining to telemedicine was just adopted in Malaysia. It has resulted in the establishment of a certification process for health care professionals who practice telemedicine. There are also emerging issues regarding the international practice of telemedicine, a field that is largely unregulated at present, but that almost certainly will fall under increased scrutiny as utilization expands. At present, it is easier for a U.S.-based telemedicine service to operate in other countries than it is for that service to operate in other states. But that situation is changing, as standards for telemedicine are already under development in Europe and elsewhere that are intended to ensure the quality of services provided across national borders. Europe is ahead of the U.S. at present in the use of e-health, even though it lags in terms of Internet usage, with only 12% of the population using the Internet in Europe vs. 45% in the U.S.

There undoubtedly is strong demand for international telemedicine services, particularly in the Third World countries. As related by Yadin David, PhD, of Texas Children's Hospital (Houston, Texas), director of a telemedicine program that already is serving almost 20 countries in Latin America, the superiority of American medicine is a given in most foreign countries. As a result, if access to U.S.-based specialists can be provided affordably to patients overseas via telemedicine, there is ready acceptance limited primarily by the availability of the necessary telecommunications infrastructure.

Viable business models can also be developed based on providing health care services to employees of multinational corporations, to improve the quality of care, reduce the number of visits to the U.S. for specialized care and to minimize the length of stays in the U.S. for patients who must return home for care. As costs for telemedicine technology continue to decline, and the telecommunications infrastructure expands worldwide, telemedicine suppliers are expected to experience growing demand and a significant expansion in applications of the technology.