New Internet Companies Target Clinical Lab Services

Internet start-ups recognize importance of lab data to entire healthcare system

CEO SUMMARY: During the coming transition from proprietary PC-based to web-based lab test ordering/reporting systems, it will be Internet start-up companies that have the competitive jump over traditional LIS vendors. There are many reasons why this is true. Here is a first look at the major players who will compete to provide Internet links between clinical laboratories and physicians, payers, patients, and hospitals.

TODAY’S LEADERS in the LIS industry may well find themselves also-rans in tomorrow’s race to use the Internet to connect clinical laboratories with their users.

Today, the field of lab information systems is dominated by such companies as Meditech, Sunquest, Cerner, HBO & Co., and SMS. The laboratory information system software they provide drives most of the nation’s largest commercial and hospital laboratories.

Unrecognized Phenomenon

But there is a new class of competitors gathering momentum in the marketplace. Among the leaders in this group would be Healtheon Corporation, Advanced Health Technologies, and Abaton.com.

It should be noted, however, that this new class of competitors is focused on a specific market opportunity. These are companies developing web-based products that connect the clinical laboratory to its users. They are not offering software to connect the laboratory’s internal functions. Instead, these companies are focused on connecting a laboratory with various external users, including physicians, payers, hospitals, and even patients.

As the table on page 10 shows, there are at least five different types of companies now in the marketplace with web-based solutions for connect- ing a clinical laboratory with physician offices. It shows that competition will be intense.

If there is a “big dog” in the fight to link clinical laboratories with physician offices, it would have to be Healtheon. Healtheon already has signed contracts with SmithKline Beecham Clinical Laboratories (SBCL, now owned by Quest Diagnostics Incorporated); Laboratory Corporation of America; DIANON Systems, Inc.; and UroCor.

With these contracts, Healtheon is positioned to offer connectivity to physicians affiliated with these labs. These contracts represent about $3.5 billion in lab testing revenues every year. Thus, Healtheon has already positioned itself as the designated web services provider for as much as 10% of the nation’s $30+ billion in annual diagnostic tests. Healtheon appears to be the first internet start-up to firmly establish a major presence in the commercial laboratory marketplace.

WebMD Also A Player

Healtheon is buying WebMD, Inc., an internet company which offers portal services to physicians. (See TDR, July 19, 1999.) WebMD, with 60,000 participating physicians, already has its own significant presence in the healthcare marketplace.

Advanced Health Technologies, Inc. (AHT) of Chicago, Illinois has a product familiar to many laboratorians. It owns Dr. Chart. In contrast to Healtheon’s focus on commercial laboratories, AHT wants to serve integrated delivery networks (IDN). Its web-based products are designed to address the laboratory testing needs of an IDN, which are different than those of commercial laboratories.

AHT has 60 contracts with IDNs that are currently operational. It also has a contract with LabCorp to provide “middleware” that will connect LabCorp with its IDN clients.

Thus, Healtheon has already positioned itself as the designated web services provider for as much as 10% of the nation’s $30+ billion in annual diagnostic tests.

Abaton.com represents a slightly different focus on the market. Technology used at this company was developed at the University of Minnesota and in close cooperation with United Healthcare Corporation. Abaton.com includes a data repository as part of its connectivity solution. Allina Healthcare System in Minneapolis and Centrex Clinical Laboratories of Syracuse, New York are early users of the Abaton.com product.

Not to be overlooked are the traditional LIS companies. These companies recognize the growing threat that web-based software services represent to their closed, proprietary software products. They are racing to add web-based features to their existing line of products. THE DARK REPORT is developing a full assessment of the specific plans these LIS vendors have for web-based laboratory software services.

It should be noted that the traditional LIS vendors face a challenging contradiction. Their revenue and operating profits are based on selling a software program to a laboratory client. That client also pays an annual service/maintenance fee.

Emerging Business Model

However, the emerging business model for internet-based software services is quite different. Basically, the vendor keeps and maintains the software. Clients and users use the Internet to access that software. Applets, similar to Java, are downloaded to the customer’s workstation, perform the desired work, and are closed out when the work is completed.

Under this model, it is the vendor who continues to hold the software and maintain it. The challenge for the large LIS vendors, such as Meditech, Cerner, Sunquest, and others, is to successfully make the transition from the old model of software services to this Internet-based business model.

Another class of competitors offering web-based laboratory test ordering/reporting are clinical laboratories themselves. Many hospital laboratories are familiar with the efforts of Specialty Laboratories, Inc. of Santa Monica, California. Specialty has committed a lot of resources to develop web-based solutions for its laboratory clients.

In Scranton, Pennsylvania, Clinical Laboratory, Inc. has offered its laboratory clients a web-based test ordering/reporting system for almost two years. This independent commercial laboratory demonstrates that even home-grown web solutions can provide added value to clients and customers of laboratory services.

The extensive line-up of companies committed to bringing web-based lab test ordering/reporting to the marketplace demonstrates that a serious effort is now under way to wean the lab industry from its current reliance on PC workstations and teleprinters.

The fact that Healtheon has already positioned itself to be the transaction provider for as much as $3.5 billion in annual laboratory testing proves that radical change is already occurring. It is just one reason why THE DARK REPORT confidently believes that all high-volume physician offices will be connected to their laboratory by the Internet within the next 24 months.

Laboratory executives and pathologists should confront this trend head-on. Every laboratory and pathology group needs an Internet strategy if it is to survive and prosper in the coming decade.

Competitors Lining Up to Offer Web-Based Laboratory Test Ordering/Reporting Services

When surveying the marketplace, at least five distinct types of entities seek to offer links between physician offices and clinical laboratories. Here’s how THE DARK REPORT sorts them out:

1. Transaction & Portal Firms:

Newly-founded companies which are designed totally around Internet technology. Healtheon and WebMD are the biggest and fastest-moving competitors in this category.

2. Information Consolidators:

Our name for companies which, in the process of providing healthcare information, want to aggregate it and create useful knowledge. Advanced Health Technologies (Dr. Chart) is an example. They are moving to combine their existing offerings in pharmacy with laboratory testing services.

3. Data Base Repositories:

Here’s a new class of companies which want to use Internet technology to create healthcare data repositories as part of their total service menu. Abaton.com represents an early leader in this segment. It provides web connectivity between laboratory and users, plus a data repository for clinical and other information.

4. Traditional LIS Companies:

Major LIS vendors will not cede this part of the clinical laboratory marketplace. All these companies are developing solutions to connect clinical labs with physician offices. Meditech, Sunquest, Cerner, SMS, and HBO are the major players in this category.

5. Independent Developers:

The American way is to let independent inventors bring their ideas to market. Already a number of laboratories have designed their own web-based solutions. Specialty Laboratories of Santa Monica, California; and Clinical Laboratory, Inc. of Scranton, Pennsylvania offer their laboratory services clients homegrown web services.

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