case study, easy one.

_______

Senior L case. HB or illustr Copyrig write Ha photoco

B H A S K

L A U R A

N A E E M

ath He

I h preferr

On Massa restau had b annou Most public Boston ackno

Th call fo India, celebr the m Athen first In gainin additi (Clini (Colle might involv launch

1 Reve manag

_______________

Lecturer Bhaskar Ch BS cases are develo rations of effective

ght © 2010 Presiden arvard Business Sc

opied, or otherwise

K A R C H A K R A V O

A W I N I G

M A R A S T U

henahea ealthcar

hate being like red to channel

n February achusetts-bas urant in Pune been named unced by Fas

Innovative C cly held prov n Business J owledged for

he dinner had or a flight out , to visit inno rations, with

many awards na was a long nternet-based ng market sh ional bets on icals), a web-b ector), a web- t have been in ved in develo h of yet anoth

enue cycle mana ement and collec

_______________

hakravorti, Senior oped solely as the b or ineffective man

nt and Fellows of H chool Publishing, Bo

reproduced, poste

O R T I

alth: In re

the other guys my Napoleoni

4, 2010, Jo sed athenahe e, India. Barel a “Business t Company as Companies,

vider of Intern Journal articl the company

d gone until l t of Pune (Bus ovative e-hea the very sho the company

g way from be d physician p hare, but m new add-on

based electro -based revenu n a different p oping and m her new serv

agement was the ction of patient s

_______________

Researcher Laura W basis for class discu nagement.

Harvard College. T oston, MA 02163, o

ed, or transmitted, w

nnovati

s. I actually ha ic energies into

onathan Bush ealth Inc. (A y a month int of the Decad

s a member o to be highlig net-based bu e for its “a

y’s past ten ye

ate in the nig sh was to mak lth facilities i rt night ahea

y he had co-f eing able to re ractice manag

more slowly t services. The nic health rec ue cycle man place if they h

marketing Clin vice, athenaCo

e collection of a ervice revenue.

________________

Winig, Global Rese ussion. Cases are no

To order copies or or go to www.hbsp without the permis

ng in R

te head-to-head o parallel but n

Jonathan

h (MBA 19 Athena) celeb to the new ye

de” by the Bo of the magazi ghted in the siness service aggressive se ears as an ind

ght. Coupled ke a long jour in action), Bu

ad, he had ple founded had est on its laur gement and r than Bush w

e first of these cords service, nagement serv had focused

nicals. Indeed ommunity (C

administrative a

_______________

earch Group, and N ot intended to serve

request permission p.harvard.edu/edu ssion of Harvard Bu

Respon

d competition. not quite compa n Bush, presid

97), presiden brated with ear, Athena al oston Busines ine’s annual “ e magazine’s es to physicia ervice,” and ustry role mo

with jet lag a rney to Gidde ush did not g enty to rumin won for its i

rels. The comp revenue cycle

would like. N e was a decisi , even as thei vice, was gro on Collector

d, Bush was t Community) e

and clinical func

R E V :

_______________

Naeem Arastu (MBA e as endorsements,

n to reproduce mat cators. This publica usiness School.

nse to a

I was never g arable pursuits dent and CEO

nt and CEO colleagues

lready seeme s Journal and “Fast 50”—a

forthcoming an practices, w

d Bush was odel and inno

and his early erbaha in rura get much slee nate on. Desp innovative se pany had crea e managemen Nevertheless, ion to introdu ir core offerin owing. He wo and not allow troubled abo

even as Clinic

ctions that contr

9 - 8 1 0 - : S E P T E M B E R 1 9

________________

A 2010) prepared th , sources of primary

terials, call 1-800-5 ation may not be d

Crisis

good at it and a s.

O, athenahealt

O of Water and friends

ed to be on a r d was about list of the W

g issue. Athe was praised i

delighted t ovator.

morning wak al Punjab, nor ep. Away from pite the hono rvices, Bush ated the indu

nt1 service and , Bush had uce athenaCli ng, athenaCol ondered if A

wed the distra ut the prospe

cals was begin

ributed to the c

- 0 7 9 9 , 2 0 1 0

______

his y data,

45-7685, igitized,

in

always

th Inc.

town, at a

roll: it to be orld’s

ena, a in the to be

ke-up rthern m the

or and knew

ustry’s d was made nicals

llector Athena

action ective nning

apture,

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

810-079 athenahealth: Innovating in Response to a Crisis in Healthcare

2

to catch on. If successful, Community could cement Athena’s reputation as an industry innovator while dramatically growing its market share. Bush knew, however, that Community was a risky bet that on the downside could lead to cutting revenues in half without a compensating surge in sales. Yet, Bush said he was “inspired and excited by the idea of athenaCommunity” and was inclined to press on.

Despite validation of his vision for Athena by the press and his excitement about the new services, Bush had an even more basic question that, literally, kept him up at night: Why was the company’s brand awareness so low, despite all the recognition and ongoing investments in innovation and sales and marketing? More importantly what could they do about this lack of awareness? He wondered: “It just can’t be as hard as we are making it, and, if in the next two years we cannot grow awareness to 50% of physician practices, I think the problem is me.”

Company history

Bush had originally planned to be a doctor. He took an Emergency Medical Technician class and signed up to work on an ambulance crew in New Orleans during the summer of 1989. When his uncle, President George Herbert Walker Bush, launched Desert Storm in response to Iraq’s invasion of Kuwait, Bush was a student majoring in social studies at Wesleyan University. He enlisted in the Army as a medic but did not perform combat duty; neither did he become a doctor. In 1997, Bush and Todd Park, former consultants in the managed care practice of Booz Allen Hamilton, a provider of consulting services to businesses and the government market, raised $1.6 million—comprised of their life savings and seed capital from friends and family—to buy an obstetrics practice in San Diego. The practice used a holistic approach to medicine that incorporated preventive care and education in addition to offering traditional birthing services. Park and Bush were close friends: “he’s my brother from another mother,” said Park.2

Apart from their exposure to the industry through their consulting assignments at Booz Allen Hamilton, Bush and Park also had additional insight into the problems in the healthcare industry through Bush’s former wife, who was training to be a certified nurse midwife in the public health system in New York. Bush belonged to a well known political family—his grandfather was a senator and his uncle and first cousin had served as U.S. presidents—and Park’s family were immigrants from rural South Korea. Park’s father worked at Dow Chemical and, according to Park, had “more patents in Dow Chemical’s history except Dr. Dow himself.”3

The partners intended to build their obstetrics practice into a national franchise but, from the start, they were cash strapped, tied up in insurance red tape that resulted in delays in payments. “At the time, I did not get into the micro details of claims, etc. I thought revenue was cash. It isn’t. It seemed like such a minor detail!” said Bush. The practice soon ran out of cash. Bush explained:

We had a revolutionary model for delivering women’s healthcare. Traditionally, a lone physician screens a pregnant woman for disease throughout pregnancy and delivery and intervenes clinically when the need arises. In our model a team of nurse midwives, nutritionists and emotional-support staff engaged actively with pregnant woman to prevent the need for intervention. Physicians were only called in when patients were both pregnant

2 “HIStalk Interviews Todd Park, athenahealth Co-Founder,” HISTalk Healthcare IT News and Opinion, September 18, 2008, available http://histalk2.com/2008/09/15/histalk-interviews-todd-park-athenahealth-co-founder/ accessed March 5, 2010.

3 “HIStalk Interviews Todd Park, athenahealth Co-Founder,” HISTalk Healthcare IT News and Opinion, September 18, 2008, available http://histalk2.com/2008/09/15/histalk-interviews-todd-park-athenahealth-co-founder/ accessed March 5, 2010.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

athenahealth: Innovating in Response to a Crisis in Healthcare 810-079

3

and sick, actually quite a rare occurrence. Cesarean section rates dropped by half. Days spent in the newborn intensive care unit by new babies dropped 20%. Meanwhile, breast feeding increased dramatically. Furthermore, our doctors became far more accomplished surgeons, since they were only treating patients who were actually sick. We had a federal study showing that births in our model were significantly less expensive, even though we spent almost five times as much time with a patient as was the case with a normal physician-centric mode of obstetric care. But it did not matter because we could not make payroll. Not because our business model did not work, but because we could not get thousands of low dollar medical claims paid in time.

The partners found that health insurance companies and Medicaid/Medicare (payers) often took weeks or months to reimburse their practice for patients’ medical claims. As a result, Bush and Park were “growing broke”; revenue grew by 50%, but cash flow grew by only 10%.

The partners realized that they were far from alone; physician practices everywhere were struggling with the same problem. “In healthcare, the problem is that there aren’t many buyers. The government has 50% market share and the top ten insurance companies have the bulk of the rest. Really there is just a handful of them and you have to serve them all and learn their rules. You have no negotiating power,” said Bush.

By the end of 1998, Bush and Park knew the business—which by then had grown to 13 small clinics with 120 employees in California—was in serious trouble. While trying to raise venture capital, Bush demonstrated the company’s web service, athenaNet, to a potential investor from Dallas. Bush explained:

We used athenaNet to keep track of patients as they flowed through all of our clinics. Our employees did not all have high school educations, so we used it to coach them as patients came up to our various front desks for care. Over time, we used it to access the public website of the state Medicaid plan and we would use the software to extract, or screen scrape off, our patients’ insurance eligibility. Since Medicaid patients are enrolled and dis-enrolled from Medicaid based on their income levels, every month there was huge turnover, and this was the only way to determine if someone was insured at the time they came in for treatment.

The potential investor was not interested in the company, but he offered Bush $11 million for an unconditional, universal license for athenaNet. Though they turned down the offer, a few weeks later at Athena’s corporate retreat, the team decided to invest in its athenaNet platform and switch the company’s focus from clinical care to Internet-based medical billing. “Everyone was crying in my living room. We were exhausted. We decided to figure out how to do all the services we cared about through the Internet. We agreed that if we could not do it through the Internet, we were going to write it off,” said Bush. They sold off the obstetrics clinics but were determined to fulfill their original mission and vision: to build management infrastructure to help make healthcare work the way it should. “We wanted to build a focused factory,” said Bush. “We talked ourselves into the idea that we were still on that mission, even though we were moving to billing services. We weren’t an Internet company by any stretch, so that was unfamiliar ground to me. But the idea of serving all those opinionated doctors on a platform and service that was identical and inscrutable, or getting there, was like much-needed oxygen for a suffocating little Athena.”

By spring 1999, the company found five physician practices willing to use athenaNet, and, within a year, they had broadened the offering to include workflow, billing and collections services (collectively referred to as revenue cycle management) and marketed Collector as a turnkey solution. Athena provided everything a physician practice needed to use its web-based service—including computer hardware. “We provided the computers, the printers, the people, a week of training and

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

810-079 athenahealth: Innovating in Response to a Crisis in Healthcare

4

set-up—everything,” said Bush. Athena charged no implementation or up-front fees for the service; instead, the company received on average 3% of each physician practice’s revenue on an ongoing basis, for as long as the practice used Athena’s service.

Though the company lost money through 2004, its new business model was working. “We were able to take something physician practices were doing and do it better and more cost effectively. Sure, we had a negative gross margin but all the key indicators were creeping up,” said Bush. By the end of 2004, Athena had signed up 4,300 physicians and earned $36 million in annual revenues.

Athena in 2009

Healthcare information technology was a $39.5 billion industry in 2008 and was projected to grow to $54.8 billion by 2014.4 Athena estimated that the market for its services was over $27 billion in 2009 and was forecasted to grow by 5.5% annually.5 In 2009, Athena generated revenues of $189 million (see Exhibits 1, 2 and 3 for Athena’s income statements, balance sheets and cash flow statements, respectively).

Revenue Cycle Management and athenaCollector

Growth in managed care had increased the complexity of physician practice reimbursement. Physician practices were burdened with understanding the claim processing requirements of multiple private health insurance and government plans to be paid for services provided to patients. Health insurers offered a wide range of benefit structures, many of which were customized to particular employer groups. This resulted in a myriad of rules regarding who was eligible for healthcare services, what healthcare services were eligible for reimbursement, and who was responsible for payment. Further, health insurers continuously updated their reimbursement rules based on ongoing monitoring of consumption patterns, in response to new medical products and procedures, and to address changing employer demands. (See Exhibit 4 for revenue cycle management process flow.)

To manage billing and collections in the face of this complexity, the majority of physician practices used one of three revenue cycle management (RCM) software or service options to handle their billing and collections: locally installed software, on-demand remotely hosted software or third-party billing services.

Installed and on-demand software required internal staff to enter and manage data and follow-up on claims denials. As the complexity and number of health benefit plan payer rules (the rules that governed how, when and if a payer, such as a health benefit plan, would reimburse a physician) increased, the ability of locally or remotely installed software products to keep up with new and revised payer rules lagged behind, leading to higher levels of unpaid claims and prolonged billing cycles.

Though superior to paper-based systems, software had disadvantages. Software was updated periodically, not continuously; since payer rules changed continuously, reimbursement systems required constant updating to remain accurate. Nearly 30% of U.S. physicians were using an RCM

4 Bernie Monegain, “Report: Healthcare IT Spending to Grow to $39.8 Billion by 2008,” Healthcare IT News, January 6, 2006, http://www.healthcareitnews.com/news/report-healthcare-it-spending-grow-395-billion-2008, accessed March 2010.

5 Athena’s estimate included salary and benefits for in-house administrative staff as well as the cost of third-party practice management and electronic health record software.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

athenahealth: Innovating in Response to a Crisis in Healthcare 810-079

5

product that was more than five years old and 10% had a system that was more than 10 years old; only one-third of practices reported being satisfied with their current system.6

Third-party billing services, which collected billing-related information from physician practices and input the information into a software system maintained by the service, were generally small, local companies who were most familiar with health-benefit plans operating within their geographic region. Billing services typically operated discrete databases and sometimes used separate processes for each of their clients, which afforded limited advantages of scale and therefore limited cost advantages to physician practices.

Athena had the largest and most comprehensive continually updated database of payer reimbursement process rules (the key drivers of claim payments and denials) in the U.S. The company collected health-benefit-plan-specific processing information so that the medical office workflow could be tailored to the requirements of each health benefit plan. Athena used a proprietary rules engine to update its database nightly (adding approximately 100 new rules per month). The complex database included over eight years of claims data from tens of thousands of health plans, and became more accurate and efficient as it grew in scale.

Payer rules were frequently unavailable from the payers and therefore had to be learned from experience. By 2009, the company dedicated over 500 full-time service staff who researched and implemented new rules in addition to coordinating with payers to ensure that client providers were properly set up for billing; checking the eligibility of scheduled patients electronically; submitting claims to payers; receiving and processing checks and remittance information from payers and documenting the result of payers’ responses; evaluating denied claims and determining the best approach to appealing and/or resubmitting claims to obtain payment; billing patients for balances that were due; and compiling and delivering management reporting about the performance of clients at both the account level and the provider level. Providing a back-office support function—which had Athena support staff participating in all key steps of a physician practice’s revenue workflow—was a unique Athena offering.

All of Athena’s clients simultaneously used the same version of the company’s software application (although some rules were unique to particular clients), which connected them to the payer rules database and the service team. Because its service depended upon influencing client behavior using athenaNet, the company rolled out six to eight new releases of software functionality each year, all of which were free; indeed, they were a required condition of the service. “Practices were used to being angry at software vendors for ‘nickel and diming them’ for every single new feature available for their practice,” said Bush. “With Athena, they didn’t have that problem. If anything, our clients were frustrated at all the changes we pushed into their lives with our new releases,” he said. The company employed 60 software engineers in the U.S. and also contracted for software development services from a third-party technology development provider in Pune, India, and with 41 of its own direct employees through a wholly owned subsidiary located in Chennai, India.

Collector was designed to help clients achieve faster reimbursement from payers, reduce error rates, increase collections, lower operating costs, improve operational workflow controls, and more efficiently manage clinical and billing information. Athena measured its success using two metrics:

6 Physicians Practice Web site, http://www.physicianspractice.com, accessed February 2010.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

810-079 athenahealth: Innovating in Response to a Crisis in Healthcare

6

average days in client accounts receivable, which had fallen from 65 days to 39 days between 2001 and 2009, and first pass resolve rate,7 which had gone from 75% in 2001 to 94% in 2009.

Bush and his team had invested in the infrastructure needed to serve small practices while the competition had primarily focused on large practices. “Serving the little guys requires so much more infrastructure and discipline than the big ones and the rewards come in teeny tiny packages,” said Bush. “That said, the two year project to build out the online sale and implementation infrastructure which initially was unpopular with our board, has turned out to be a real boon.”

Electronic Health Records and athenaClinicals

In 2007, Athena launched a new service, athenaClinicals, designed to help practices develop and maintain electronic health records (EHR) for their patients. “Good business logic would have said stay with Collector and ship the hell out of it but instead we distracted ourselves building athenaClinicals,” said Bush who nonetheless modeled the service after Collector, using the software- enabled services (SeS)8, Internet-based model, rather than hurrying to market with a software-only EHR product—the existing industry model.

Clinicals was a clinical cycle management service that automated and managed medical record management-related functions for physician practices and assisted medical groups with the proper handling of physician orders and related inbound and outbound communications. The service allowed physicians to create up-to-date and accurate online patient clinical records and was designed to improve clinical administrative workflow. Clinicals provided functionality that Athena believed physician groups expected from an EHR service including: entering data about patient encounters as they happened; delivering outbound physician orders such as prescriptions and lab requisitions; and capturing, classifying, and presenting inbound documentation, such as lab results, electronically or via fax.

Athena’s strong reputation within the small- and mid-size physician group market, cultivated by Collector sales, was beginning to translate into an opportunity for Athena to sell Clinicals under the same business model to those clients. Clinicals lost money for two years but eventually became profitable. By Q4 2009, Athena was serving 920 physicians and nearly 1,500 providers with Clinicals (compared to nearly 16,000 physicians and 23,366 providers for Collector in the same period).

Competitors

By 2009, Collector was ranked first or second in several ambulatory and billing scheduling categories,9 even though many of Athena’s competitors and potential competitors had significantly greater financial and technological resources. Indeed, Athena acknowledged that many of its competitors had stronger name recognition among physicians as well as more established distribution networks and relationships with healthcare providers.

7 The percentage of claims resolved (either paid or passed on to the patients) the first time they were submitted.

8 Software-enabled services was a service distribution model where a service provider used the Internet-based software to offer a range of services.

9 Rankings were issued in the “2009 Top 20 Best in KLAS Awards: Software & Professional Services” report by KLAS, a research firm that specialized in monitoring and reporting the performance of healthcare vendors. Source: company documents.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

athenahealth: Innovating in Response to a Crisis in Healthcare 810-079

7

Athena’s primary competition was the use of locally installed software to manage revenue and clinical cycle workflow within the physician’s office. Competitors included GE Healthcare, a division of General Electric with $17 billion in sales (2009); Sage Software Healthcare, Inc., a 25-year old company which provided medical software to 20% of U.S. physician practices; Allscripts-Misys Healthcare Solutions, Inc., an industry leader in the ambulatory market that provided software to 150,000 physicians and hospitals ($534 million 2009 revenue); Siemens Medical Solutions USA, Inc., a subsidiary of $100 billion Munich-based Siemens AG, a global electronics and engineering firm with a broad range of energy and healthcare products; and $1.7 billion Cerner Corporation. Each company competed directly with Athena (in RCM, EHR or both domains) but also offered additional software, devices, medical and related products and services to physician practices, clinics and hospitals. Smaller, “pure play” competitors included Eclipsys, a $500 million healthcare information technology firm founded in 1995, and Quality Systems, a $275 million software provider.10

Athena had successfully carved out a niche by taking advantage of the Internet to offer proprietary web-based software. As of early 2010, Athena had no other Internet-based competitors, though some had begun introducing services where the software was centrally hosted and services were provided from central locations. Competitors such as Allscripts were beginning to explore Internet-based options, but they lacked the in-house human resources that Athena had to handle “analog” data such as faxes, phone calls and mail.

Industry Pricing

There was no industry standard for pricing. Some vendors charged flat fees, some were per-diem or per-month/year based. Software companies that competed against Athena charged an average software licensing fee of $40,000 per doctor up-front plus an additional $2,000 in annual maintenance fees. Athena’s prices were 20%-30% less than billing services, which averaged over 8% of a practice’s revenue and could reach as high as 12%, and a little less than a physician practice’s internal costs (since most practices could lay off their billing staff once Athena was in place). “We’re a swap on cost there,” said Bush who noted that hospital-owned practices were an exception, due to their bureaucracy. “They are hard to sell to because they don’t mind that they lose money,” said Bush.

Athena’s fees varied by type of physician practice. For most specialties the fee for Collector was based on the average size of the claim. For example, pediatric practices with generally low claim sizes might pay 7% or 8%, while an orthopedic surgeon, with larger claim sizes, might pay 2%. The average was 5%. If clients also purchased Clinicals, it cost approximately 40% of the fee paid for Collector—an average of 2%.

Bush acknowledged, however, that Athena’s fees, over time, were higher. “The difference is, our competition’s software does not increase practice revenue and it is 18% slower,” said Bush. “Plus, they charge their fee all up front and we need nothing up front so there’s a benefit at the bake-off for us. But they get 90% margin. They’re selling software they wrote 10 years ago—great work if you can get it!” said Bush.

In 2009, business service fees accounted for 97% of Athena’s revenues and were based on client contracts that were typically one year in length; the remaining 3% of revenue was derived from fees for implementation services, training and support.

10 All revenue figures 2008 unless otherwise noted. Data provided by Capital IQ. 2009 revenue figures from company annual reports.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

810-079 athenahealth: Innovating in Response to a Crisis in Healthcare

8

Sales and Marketing

Athena expected its sales to grow by over 30% annually through 2014, driven by new physicians joining the Collector platform and cross-selling Clinicals to its existing client base of over 15,000 physicians.

To reach its sales goals, Athena maintained business relationships with individuals and organizations, called channel partners, that promoted or supported its sales within specific industries or geographic regions. Channel partners generally did not make sales but instead provided Athena with leads that its 64-member sales force used to pursue new business (see Exhibit 5 for details on Athena’s sales force). In 2008, channel-based leads drove approximately 50% of Athena’s new business.

Athena’s channel relationships included state medical societies, healthcare information technology product companies, healthcare product distribution companies, and consulting firms such as the Ohio State Medical Society, Eclipsys Corporation and PSS World Medical Shared Services, Inc. (PSS), the country’s largest provider of medical supplies to the physician market with a sales force of more than 750, which sold medical supplies and equipment to 100,000 practices across the 50 states, averaging two to three doctors each.11

In the case of PSS, which signed a sales and marketing agreement with Athena in 2007, PSS sales representatives earned upfront and trailing commissions based upon the estimated contract value of orders placed for Athena’s services, which were later adjusted to reflect actual revenue received by Athena from its clients. As part of this contract, PSS agree to distribute Collector as its exclusive revenue cycle solution and agreed to begin distributing Clinicals as its clinical cycle solution at a later date if certain milestones in development and certification of the service were reached. In turn, Athena agreed that it would not enter into a similar agreement with any business that had primarily distributed medical and surgical supplies to the physician ambulatory care market in the U.S. During the second year of the agreement, PSS urged Athena to create a dedicated team of sales representatives who would work with the PSS sales organization to generate leads. PSS subsidized the cost of this team for one year in order to demonstrate its benefits. As a result, lead volume increased substantially and by mid-2009, Athena was the sole revenue and clinical cycle solution sold by PSS. In an Athena press release, PSS’s CEO remarked, “We are seeing physician practices that are going from the verge of bankruptcy to profitability just through the use of the Athena revenue cycle product. So, it is the best out there. We are very, very joined at the hip with Athena and very excited about the prospects.”

Athena’s relationship with its channel partners was complicated in that they had the potential to become direct competitors. For example, in late 2008 Eclipsys acquired software for small/mid size physician practices and was in the process of scaling up the billing and practice management solution to address larger-sized physician groups, which would effectively put it in direct competition with Athena. In addition, Athena’s exclusive contracts with its channel partners prevented it from entering into similar arrangements with other distributors and suppliers to the ambulatory market.

Athena’s direct sales force was responsible for following up on leads and, once they scheduled face-to-face meetings with prospective clients, they were charged with understanding clients’ needs, developing service proposals, and negotiating contracts. “Our biggest obstacle in selling to a new practice is that it’s tough to get the meeting. Doctors are bombarded by companies. The problem for

11 Physician Sales & Service website, available http://www.pssworldmedical.com/pss/pss-about.html, accessed March 2010.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

athenahealth: Innovating in Response to a Crisis in Healthcare 810-079

9

Athena is: we’re not in there. I don’t fire anyone for not getting enough sales but for not getting enough meetings. When we get meetings, we get sales,” said Bush.

When physicians elected not to buy Athena, it was often because they stayed with their existing methods. “When the software companies see us coming, they make an expansion offer—perhaps an enterprise edition or special reporting packages for free, to keep doctors from de-installing them,” Bush explained.

Another obstacle that Athena faced was that the practice’s doctors were often not the buyers. “The people who choose the systems are not the doctors, they’re the practice managers, the billing managers or the CFOs. Since Athena will replace many of the staff that report to these buyers, there is often a strong incentive not to go with us,” Bush explained. Finally, some prospective clients expressed concern about patient privacy, since Athena retained all the data for its own records and use and had access to every detail of every claim.

Marketing Initiatives

Historically, Athena had focused its marketing initiatives on physician acquisition, focusing on channel partnerships and pay-per-click ads with low fixed and upfront costs but high variable costs. Through 2009, the company’s budgeted sales and marketing cost was 50% of its net new annual recurring revenue bookings target, which Bush considered low.

The tradeoff for the modest cost of sale, however, was low physician awareness. As a result, by 2010, Athena’s marketing efforts were designed to increase awareness of the company, demonstrate the benefits of its service model and build credibility with prospective clients. The company’s marketing initiatives, generally targeted towards specific segments of the physician practice market, primarily consisted of: pay-per-click search advertising and other Internet-focused awareness- building efforts, such as online videos and webinars; public relations activities aimed at generating media coverage; industry-focused trade shows; direct mail and telemarketing to physician practices; informational meetings (such as town-hall style meetings or strategic retreats with targeted potential clients at an event called the “Athena Institute”); and dinner series seminars.

In 2006, Athena mined its database to create an annual PayerView ranking report that it provided to clients. PayerView ranked payers’ performance based on a myriad of categories, which combined to provide an overall ranking aimed at quantifying the ease of doing business with the payer. All data used for the rankings came from actual claims performance data of Athena’s clients.

Despite these efforts, Bush considered marketing the company’s biggest challenge and the most likely explanation for physician’s low awareness of the company’s offerings. “I just can’t figure out what the problem is. Perhaps it’s just a simple numbers thing. We have fewer than 70 people in sales and our competitors have hundreds. We also have a firm rule about getting a dollar of annualized revenue for every fifty cents we spend on growth. It made a ton of sense before we were making money, but now?” Bush noted that the company had had a few false starts, including changes in marketing leadership and other setbacks that had slowed growth in market awareness. “We make things very complicated and we take a very long time to execute,” said Bush. He was most concerned with the company’s low level of awareness among physicians: 19% knew of Athena, up from 18% in 2008 after a year of intensive marketing efforts. “The vast majority of doctors, 80%, cannot pick us out of a lineup,” said Bush. “Our biggest obstacle is that they don’t know who we are and they don’t know that billing and medical records can be done on the Internet.”

Low awareness was common in the industry generally. “Awareness and favorability for everybody is horrendous. Doctors just don’t like IT vendors, but once they become customers, they

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

810-079 athenahealth: Innovating in Response to a Crisis in Healthcare

10

love us. Most of our customers, 87%, give us a top score in answer to the magic question, ‘I would refer Athena to my most trusted friend or colleague,’” said Bush. “Within the next two years we need to be at 50% awareness,” he added. (See Exhibit 6 for awareness among physicians.)

A significant opportunity for growth was enterprise-level deals. In 2009, Athena added two large enterprise customers, University Hospitals (450 providers) and Caritas Christi Healthcare (500 providers), to its Collector client base. University Hospital was one of the nation’s largest community-based health systems and represented Athena’s largest initial contract signing, while Caritas Christi Healthcare was the largest community-based health system in Massachusetts and the second largest healthcare system in New England. The Caritas Christi contract was awarded to Athena to replace GE. In June 2009 Athena announced a deal with MedNet, Maine’s largest independent provider organization with over 4,000 medical provider members, and in July 2009 Athena announced a deal with Cook Children’s Healthcare System (350 providers).

Performance Results

Physicians who joined Athena’s network increased their collections by an average of 6.5%. “We know this because the data is pooled, since everybody is on one application. None of our competitors have this data,” said Bush.

Athena also built practice performance review (PPR) into its service, allowing physician practice managers to compare their performance against their peer group or against Athena’s database. Once a month, Athena provided client executives and practice owners with a PPR report and recommendations and followed up with a call12 from their account manager who reviewed ten different performance measures and recommended action steps. “We have a very large benchmark set because everyone is on the same system. We can compare doctors to their own history, to the practice as a whole, to practices throughout the state, etc.,“ said Bush. Athena did not charge its clients for the PPR service. “If they do well, our revenue goes up, too,” he noted.

The Way Forward

Leveraging the HITECH Act

On February 17, 2009, President Obama signed the Health Information Technology for Economic and Clinical Health (HITECH) Act, as part of the government’s economic stimulus package to improve the health of the U.S. economy. The main goal of the HITECH Act was to encourage the adoption of EHRs by providing incentive payments to physicians. The Act was comprised of two parts: $23 billion was earmarked to fund healthcare connectivity initiatives and the physician incentives, and an additional $2 billion was set aside for new entities to establish standards and certify new privacy provisions.13 (See Exhibit 7 for the Congressional Budget Office’s estimates of HITECH Act spending through 2019.)

12 Practices with two or more physicians received calls from account managers.

13 Ana Shrank, “HIMSS 2009 McKesson: The Right Partner for Customer Success,” McKesson Corporation, undated, available http://phx.corporate-ir.net/External.File?item=UGFyZW50SUQ9OTI4fENoaWxkSUQ9LTF8VHlwZT0z&t=1, accessed March 2010.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

athenahealth: Innovating in Response to a Crisis in Healthcare 810-079

11

According to the Act, starting in 2011, physicians were eligible to receive up to $44,000 in total incentives from Medicare and up to $65,000 from Medicaid for the adoption and “meaningful use”14 of a certified EHR program. After Clinicals was certified by the Certification Commission for Health Information Technology (CCHIT)15 in June 2009, Athena guaranteed physicians that if they used Clinicals they would receive their Medicaid HITECH Act payment for 2011.

Bush believed that despite the established and emerging competition in EHR (more than 200 competitors were certified by CCHIT by mid-2009), the passage of the HITECH Act would significantly expand the market for everyone. “The HITECH Act is clearly an ideal opportunity for physicians who use EHRs effectively to be rewarded and to stimulate adoption for those who aren’t currently using EHRs,” he said.

Since the passage of the HITECH Act, stock prices of the company’s two main competitors, Allscripts-Misys (25% market share) and Quality Systems, Inc. (10% market share), were up 76% and 36% respectively, while Athena had traded relatively flat, up only 16% (the S&P 500 ran up 39% during that same period).16

athenaCommunity

In early 2010, Athena was contemplating the launch of a new service it planned to call athenaCommunity (Community). The offering would be a repackaging and re-pricing of Clinicals, so that labs and hospitals that received electronic orders from doctors within physician practices on the network paid for approximately 50% of the overall service. The business model would allow Athena to earn revenue from both sides of the two-sided market that it sat between. Bush believed it was a fairer business model, allowing those who reaped the benefits of the service to pay a share of the costs. “Doctors pay 100% of the cost of being on Clinicals, but receive about half of the value. The labs, hospitals and other doctors who receive electronic orders from them receive the other half,” explained Bush.

Bush noted that to launch successfully, Athena would need to conduct market-dominating blitzes in each of the geographies it served. “There is a massive chicken and egg problem with the strategy,” said Bush. “But if we build out the network, it’s impossible for a point-to-point competitor to compete. It’s a bet that competitors can’t do it using a software-based approach, because they don’t take responsibility for delivering orders,” said Bush.

Launching Community came with many risks. “What if we find, after cutting our pricing in half, we cannot make it up either on volume or on the other side of the network? On the other hand, if we succeed, it could be a game changer,” said Bush. Some analysts wondered whether it was the right time to introduce Community, speculating that perhaps Athena should wait until it had a larger installed user base that was more fully devoted to its services. Bush was not sure and wondered if

14 The rule defined a "meaningful EHR user" as a professional or hospital that demonstrated meaningful use of certified EHR technology in a form and manner consistent with certain objectives and measures presented in the regulation. These objectives and measures included use of certified EHR technology in a manner that improved quality, safety, and efficiency of healthcare delivery, reduced healthcare disparities, engaged patients and families, improved care coordination, improved population and public health, and ensured adequate privacy and security protections for personal health information.

15 CCHIT was a non-profit organization recognized by the U.S. federal government as a certifying body that ensured EHR providers meet the HITECH Act’s “meaningful use” criteria.

16 February 17, 2009 through March 15, 2010.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

810-079 athenahealth: Innovating in Response to a Crisis in Healthcare

12

Athena should consider launching the service in small increments rather than in one fell swoop to hedge the bet.

One consideration: the rapid growth in the number of new customers strained the company’s ability to support its existing customers. Athena had more than doubled the number of physicians on athenaNet between 2007 and 2009 and Bush believed the company could double the customer base again before 2012. Athena’s customer satisfaction levels had been trending down and were below management’s goal of 90%. The declines in customer satisfaction during 2008 and the first half of 2009 had not yet impacted Athena financially and customer churn was low at 3% per year, but the trend was concerning.

Bush considered the market opportunities facing Athena and wondered how best to allocate his limited resources (see Exhibit 8 for Athena’s estimated market opportunities). Should he scale up his sales and marketing efforts to support the Clinicals service? On the other hand, he could move forward aggressively to launch Community. His phone rang. It was the wake-up call from the hotel reception.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

athenahealth: Innovating in Response to a Crisis in Healthcare 810-079

13

Exhibit 1 Athena Income Statements, 2007 to 2009 (in $ millions)

2007 2008 2009

Revenue: Revenue, business services 94.2 131.9 183.2 Revenue, implementation and other --3.4 --4.4 --5.3

Total Revenue 97.6 136.3 188.5 Expenses:

Direct operating costs 47.0 60.0 79.0 Selling and marketing 17.2 22.8 34.1 Research and development 7.5 10.6 14.3 General and administrative 19.9 29.3 36.1 Depreciation and amortization 5.5 6.0 7.8

Total Expenses 97.1 128.7 171.3

Operating Income .5 7.6 17.2

Other income (expense): Interest income 1.4 1.9 1.0 Interest expense (3.7) (.4) (1.0) Gain (loss) on interest rate derivative contract

0.0 (.9) .6

Other income (expense) (5.7) .2 .3

Total Other Income (expense) (8.0) .8 .9

Income (loss) before income tax (provision) benefit

(7.5) 8.4 18.1

Income tax (provision) benefit 0.0 23.2 (8.8)

Net Income (loss) (7.5) 31.6 9.3

Source: Company documents.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

810-079 athenahealth: Innovating in Response to a Crisis in Healthcare

14

Exhibit 2 Athena Balance Sheet, 2008 to 2009 (in $ millions)

Balance Sheet as of December 31: 2008 2009

ASSETS Current Assets:

Cash and Equivalents 28.9 30.5 Short-Term Investments 58.1 52.3 Accounts Receivable—Net 23.2 33.3 Deferred Tax Assets 10.0 5.5 Prepaid Expenses and Other Current Assets 3.6 4.7

Total Current Assets 123.8 126.4

Property and Equipment—Net 20.9 24.9 Restricted Cash 1.8 9.2 Software and Development Costs 1.9 2.3 Purchased Intangibles—Net 1.9 14.5 Goodwill 4.9 22.1 Deferred Tax Assets 13.7 10.3 Other Assets .7 1.4 Total Assets 170.0 211.1

LIABILITIES AND STOCKHOLDERS EQUITY Current Liabilities:

Current Portion of Long-Term Debt and Capital Lease Obligations 2.0 3.4

Accounts Payable .8 1.9 Accrued Compensation 10.2 15.8 Accrued Expenses 7.4 10.8 Current Portion of Deferred Revenue 2.8 4.0 Interest Rate Derivative Liability .9 .3 Current Portion of Deferred Rent 1.1 1.3

Total Current Liabilities 25.3 37.5

Deferred Rent, Net of Current Portion 8.7 7.4 Deferred Revenue, Net of Current Portion 22.2 28.7 Other Long-Term Liabilities 0.0 1.2 Debt and Capital Lease Obligations, Net of Current Portion 8.4 9.0 Total Liabilities 64.5 83.8

Preferred Stock -- -- Total Preferred Equity -- --

Common Stock .3 .4 Additional Paid-In Capital 156.3 169.7 Treasury Stock (1.2) (1.2) Accumulated Other Comprehensive (loss) Income .3 (.1) Accumulated Deficit (50.8) (41.5) Total Stockholder’s Equity 105.0 127.3

Total Liabilities and Stockholder’s Equity 169.6 211.1

Source: Company documents.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

athenahealth: Innovating in Response to a Crisis in Healthcare 810-079

15

Exhibit 3 Athena Cash Flow Statements, 2007 to 2009 (in $ millions)

2007 2008 2009 Net Income (Loss) (7.5) 31.6 9.3 Adjustments to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities: Depreciation & Amortization 5.5 6.1 8.4 Accretion of Debt Discount 0.4 -- -- Amortization of Discounts on Investments (0.1) (0.9) (0.1) Financial Advisor Fee Paid by Investor 0.6 -- -- Provision for Uncollectable Accounts 0.6 0.4 1.0 Non-Cash Warrant Expense 5.0 -- -- (Gain) Loss on Interest Rate Derivative Contract -- 0.9 (.6) Deferred Income Taxes -- (23.8) 5.9 Excess Tax Benefit from Stock-Based Awards -- (0.5) (2.5) Stock-Based Compensation Expense 1.3 5.6 8.3 (Gain) Loss on Disposal of Property and Equipment 0.1 (0.1) 0.3 Changes in Operating Assets and Liabilities: Accounts Receivable (4.7) (9.3) (10.5) Prepaid Expenses and Other Current Assets (1.0) (0.9) (0.9) Accounts Payable 0.1 (1.2) 1.4 Other Assets 0.2 0.1 (0.2) Accrued Expenses 2.6 7.4 6.2 Deferred Revenue 4.6 7.1 7.4 Deferred Rent (0.1) (1.4) (1.1)

Net Cash from Operating Activities 6.8 21.1 32.3 Capitalized Software Development Costs (1.1) (1.4) (2.6) Purchases of Property and Equipment (2.7) (13.5) (10.3) Proceeds for Sales/Disposals of Prop/Equip 1.5 4.1 4.5 Purchase in Long-Term Investment -- (0.6) (.6) Proceeds from Sales/Maturities of Short-Term Investments 7.6 73.3 84.0 Purchases of Short-Term Investments (1.9) (129.9) (78.6) Payments for Acquisitions Net of Cash Reqd -- (6.7) (22.4) (Increase) Decrease in Restricted Cash 1.5 (0.1) (7.4)

Net Cash (Used in) Provided by Investing Activities 4.8 (74.8) (33.2)

Proceeds from Exercise of Stock Options and Warrants 2.5 5.2 2.7 Proceeds of IPO, Net of Issuance Costs 81.3 -- --

Debt Issuance Costs -- (0.2) --

Excess Tax Benefit from Stock-Based Awards -- 0.5 2.5

Proceeds from Long-Term Debt 4.2 6.0 --

Proceeds from Line of Credit 5.9 -- --

Payments on Long-Term Debt & Capital Lease Optns (24.8) (0.8) (2.5)

Payments on Line of Credit (13.1) -- --

Net Cash Provided by Financing Activities 56.0 10.8 2.7 Effect of Exchange Rate Changes on Cash and Cash Equivalents 0.1 0.0 (.2)

Net Increase (Decrease) in Cash and Cash Equivalents 67.7 (43.0) 1.6 Cash/equivalents At Beginning of Year 4.2 71.9 28.9 Cash/Equivalents at End of Year 71.9 28.9 30.5

Source: Company documents.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

810-079 athenahealth: Innovating in Response to a Crisis in Healthcare

16

Exhibit 4 Revenue Cycle Management

Source: Company documents.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

athenahealth: Innovating in Response to a Crisis in Healthcare 810-079

17

Exhibit 5 Athena Sales Representatives, Q3 2008 versus Q3 2009

Source: Company documents.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

810-079 athenahealth: Innovating in Response to a Crisis in Healthcare

18

Exhibit 6 Change in Athena’s Awareness Among Physicians, 2008 to 2009

Source: Company documents.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

athenahealth: Innovating in Response to a Crisis in Healthcare 810-079

19

Exhibit 7 Estimated Government Spending for Healthcare Information Technology under the HITECH Act (in $ billions)

Source: Adapted from “Estimated Effect on Direct Spending and Revenues of Title IV of Division B of the American Recovery and Reinvestment Act of 2009 (Public Law 111-5): Health Information Technology,” Congressional Budget Office, available http://www.cbo.gov/ftpdocs/101xx/doc10106/health1.pdf, accessed March 2010.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.

810-079 athenahealth: Innovating in Response to a Crisis in Healthcare

20

Exhibit 8 Athena’s Estimated Market Opportunity

Source: Company documents.

This document is authorized for use only by IBRAHIM BALHARETH ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies.