The Rise and Fall of E-Health: Lessons From the First Generation of Internet Healthcare

In This Article


Editor's Note: This article ranks the performance of the largest publicly traded e-health companies prior to 2002. The authors hold no stock in any of the companies they assess, and received no consideration or additional information from WebMD, the publisher of TechMed, in the preparation of this article.

The $1.5 trillion healthcare system is the single largest segment of the US economy. Despite its size and importance, the system as a whole is often wasteful and costly. A recent report by the Institute of Medicine notes the lack of any real progress in fixing these issues over the past 25 years and suggests the widespread use of information technology as one of the most promising solutions.[1]

This opportunity did not escape the attention of the entrepreneurs and venture capitalists during the Internet Boom of the late 1990s. A new term emerged, "e-health," which came to mean "health services and information delivered or enhanced through the Internet or related technologies."[2] E-health companies emerged everywhere. Some aided physicians and health providers with clinical information, billing, and office management services. Others focused directly on patients, giving them new access to information about their specific problems and concerns. All these ventures used the new Internet medium to deliver products and services that they hoped would revolutionize healthcare. Companies like,, and rode the wave of investor optimism to Wall Street success. Since then the bottom has fallen out, and many of these former highfliers now lie in ruins (see Table 1 ).

History books will remember this as a time of rapid excitement and innovation followed by equally rapid collapse. Yet Internet technology continues to hold great promise for healthcare -- an information-intensive and prototypical service industry. To meet this need, a second generation of e-health companies is now emerging. To avoid repeating past mistakes, a careful analysis of the first generation is needed to discover what factors led to their failure, and in some extraordinary instances, their success.

We have studied the first generation of e-health companies and identified 4 critical strategic factors that tend to predict success or failure. Although learned from e-health, these factors are applicable to all Internet startups. Companies with a strategy that included these factors were usually successful, while those lacking them tended to fail. These factors can form a checklist for executives, entrepreneurs, analysts, consumers, and others interested in gauging the potential of new Internet ideas. These fundamental factors are:


  1. A compelling value

  2. An unambiguous revenue model

  3. Competitive barriers to entry

  4. Organizational structure for cost control


These 4 fundamental factors are not unique to Internet companies. Indeed, businesses in all segments of the economy use them. The important point is that for Internet companies, these factors are critical for success but difficult to achieve, whereas for traditional industries they hold less strategic importance and are historically easier to achieve. This difference is due to the unique characteristics of the Internet itself.


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