(FORTUNE Magazine) – A lot of people thought Jim Clark had finally laid his first egg. When he founded Healtheon four years ago, Clark boldly proclaimed that it would use the power of computing and the Internet to revolutionize the health-care industry, stripping away its inefficiencies and inequities and streamlining it for the new millennium. The goal was laudable, but the statement elicited smirks from jaded health-care professionals: Imagine taking on a system that had humbled even Hillary! Sure, Clark had launched two famously successful high-tech startups--Silicon Graphics and Netscape--but many believed he had blithely underestimated his new challenge.

Clark, never one to admit mistakes easily, concedes his vision was perhaps "a bit" too big and the industry more resistant to change than he had imagined. Healtheon/WebMD, as the company is now known, isn't what he imagined. It probably never will be.

But this isn't a story of a cocky billionaire getting his comeuppance. For one thing, these days Clark looks at Healtheon/WebMD from afar. He's still on the board, still gets involved in the biggest decisions, and still is the largest individual shareholder (nearly 12 million shares, worth more than $750 million). But he has already sailed off on other (less radical) projects: a startup to help rich people manage their finances on the Web; another to help consumers use the Web to organize their family photos; Hyperion, his $30 million computerized sailboat; and SmartPipes, his new networking company.

More to the point, Clark's egg has actually hatched, and he has nothing to be ashamed of. After a difficult four-year incubation, Healtheon/WebMD has emerged as a leader in areas as diverse as consumer health information on the Web and electronic transactions between doctors and health insurers. Since the merger closed in mid-November, Healtheon/WebMD has struck more than half a dozen deals, including:

--An alliance with Medibuy.com, a fast-growing online medical-equipment supplier, to help it sell basic supplies such as gauze, syringes, and stethoscopes directly to doctors' offices.

--A partnership with drugstore giant CVS to push everything from mascara to floss to aspirin to online consumers, and to link the chain's pharmacists with insurers via the Web.

--An alliance with managed-care network Humana to help doctors in the network transmit claims to insurers.

--A deal with drugmaker Eli Lilly to promote Prozac and other drugs to Web-surfing consumers.

--A $1 billion content and ad partnership with News Corp. that includes a cash investment by the media mammoth in an international joint venture to take WebMD overseas.

--The $2.5 billion acquisition of Envoy, a company that handles data exchanges among doctors, hospitals, and HMOs. Coupled with a string of similar acquisitions in 1999, the deal makes Healtheon/WebMD the largest processor of electronic transactions in health care, a business it plans to move to the Internet.

To investors, the promise of growth implied by such deals has more than outweighed both their scattershot nature and Healtheon/WebMD's financial results. In the three quarters leading up to the merger, Healtheon lost $53 million on $70 million in sales--and WebMD lost far more. But clearly Wall Street has come around. "There's been a distinct shift in my view of Healtheon from lukewarm to quite favorable," says Goldman Sachs health-care Internet analyst Steve Savas. Healtheon/WebMD stock shot up 75% in January, trading at around $65 a share at the end of the month, making it one of the few bright spots in a troubled market. What's more, institutional investors, which had shunned the stock, started to pile in. In January, Janus Capital, the Denver parent of the highly rated Janus funds, announced it would pump $930 million into Healtheon/WebMD.

Wall Street's new affection for Clark's creation is partly a function of the team he tapped to run the business while he moved on to other projects. Michael Long, 47, the chairman and chief operating officer, is a grizzled technology-consulting veteran who earned his stripes developing number-crunching programs for insurance companies. CEO Jeff Arnold, 30, is an Internet marketing hotshot who made his first $25 million at age 28. They have an improbable arrangement in which Arnold and Long work from different ends of the country--Arnold at corporate headquarters in Atlanta and Long at "technological headquarters" in Silicon Valley--with Long's experience taking an apparent back seat to Arnold's flash.

But the market is also applauding an underlying shift at the company from the messianic to the pragmatic, from a Hillary-esque slash-and-burn health-care crusade to something more incremental.

To understand that transition, you have to go back to the problems with Clark's initial vision. "If you compare the U.S. with almost any other country," he says, "with the exception of maybe a few Scandinavian countries, it spends more per capita on health care and more as a fraction of GNP." Clark estimated the overall waste in the industry at some $300 billion and predicted that Healtheon--simply by using the Internet to cut paper jams and seamlessly link patients, doctors, hospitals, pharmacies, and insurance companies--could capture a healthy piece of the savings. Coming from someone with Clark's record, the idea understandably attracted top-flight engineers, enormous buzz, and millions of dollars in venture capital. Healtheon's No. 1 backer: Kleiner Perkins chief John Doerr, who partly owed his reputation as a venture capital superstar to the firm's having funded Netscape.

So before Clark even approached a health-care company, Healtheon's future gleamed. The problem, as he now tells it, was that he never realized what he was up against. For one thing, most doctors don't like computers; local hospitals are filled with old mainframes and minicomputers that don't talk to one another, let alone to physicians' offices a mile away. Putting patients' medical records online also stirs panic over privacy and confidentiality issues that makes worry over online credit card fraud look trivial. And the health-care industry is one of the stingiest spenders on IT. What's more, says Clark, the system's wastefulness is entrenched. "That $300 billion a year is coming in as the top line at some companies, and they don't want to reduce that," he says. "That was the naive part."

Healtheon's first big idea, to develop a system for linking insurers and corporate human resource departments, flopped. Insurers dismissed it as too expensive and HR departments shrugged. By 1997, a year into its quest, Healtheon was starting to seem clueless; its CEO, a Kleiner Perkins graduate, quit, leaving behind 75 dispirited employees.

That was where Mike Long came in. As longtime CEO of Continuum, an Austin, Texas, IT consulting company, he had overseen the company's 1996 sale to Computer Sciences for a handsome $1.4 billion. Long was staying on to help with the integration when Doerr, hunting for a veteran executive to save Healtheon's bacon, came calling. The antithesis of an Internet cowboy, Long is a soft-spoken, straitlaced man who has been married to his college sweetheart for 25 years and who had worked at Continuum for 19 years. He must have been one of the first executives ever to turn down a CEO offer from Doerr.

Long says he was tempted, even from the beginning. Healtheon "had fabulous engineers; it had access to capital, which was critical because this was going to be a very expensive endeavor; and there was the chance to work with national icons like Jim Clark and John Doerr, who gave very high visibility to a young company," he explains. "But we were going to be trailblazing in an industry that didn't historically have a record of accepting change." It took Doerr nearly a year to win him over.

Soon after signing on in 1997, Long got the okay from Clark, who was chairman, to take Healtheon in a radically different direction. Long shifted the focus from automating insurers to automating doctors, who, he reasoned, would prove nimbler and less beholden to bureaucracy. Within five months, Healtheon showed progress, forming an unusual R&D partnership with Brown & Toland, a large San Francisco network of 1,600 physicians. The goal was to develop software to let the doctors do things online, such as to check whether a patient was covered by an HMO or to put through a referral to a specialist. Healtheon followed that deal with its first acquisition, in February 1998: the $150 million purchase of ActaMed, a medical-records clearinghouse for doctors and insurers. Though not a dominant player in its industry, ActaMed provided Healtheon with customers and an actual revenue stream. Those were critical because Healtheon had begun planning an initial public offering.

Clark and Healtheon's venture capitalists were eager to catch what seemed like the ultimate wave of Internet IPOs, in which startups like VeriSign and Inktomi were going public at multimillion-dollar valuations (little did they know how the numbers would grow). But by the time Clark and Long took to the road in September to present Healtheon to institutional investors, demand for IPOs had evaporated; soon even Goldman Sachs would have to shelve its IPO plans. Worse, Healtheon's road show bombed. Investors just didn't get the company: While Clark still talked about using the Internet to revolutionize health care, Healtheon seemed little more than a mundane medical-data processor. Then, in October, the Wall Street Journal got on Healtheon's case, running a story that detailed delays and problems in the Brown & Toland project. The company claims the software glitches were routine; nevertheless, within two weeks the IPO was postponed.

Healtheon did go public four months later, in February 1999. But while it was able to convince investors that the software delays had been resolved, its larger problem remained--the gap between the $300 billion prize Clark had conceived of and the humdrum reality of what the company had become. One analyst pooh-poohed the stock as an "ActaMed IPO with the Healtheon vision and sparkle of Jim Clark and Kleiner Perkins." As a fresh wave of Internet startups like VerticalNet and Covad took off to huge valuations, Healtheon was priced as an electronic-data processor.

Healtheon might have just plodded along had it not been, ironically, for Microsoft. Its Internet-browser war had nearly crushed Clark's earlier creation, Netscape. So when Healtheon learned that Microsoft was on the verge of investing $100 million in an Atlanta online health startup called WebMD, Clark and Long foresaw a battle they wanted to avoid. Instead of fighting Microsoft, they made a deal valued at $6.5 billion to merge Healtheon and WebMD. (Microsoft went on to invest some $250 million in the company.)

In WebMD's founder, Arnold, the company got a brash young marketing-oriented CEO--the kind startup-hungry investors love. Arnold had founded his first health-care company at age 24 with $25,000 borrowed from his future in-laws. Called Quality Diagnostic Services, the company enabled people suffering from irregular heartbeats to relay their cardiac data over the phone to a Website, where a doctor could view it and respond in the event of trouble. Arnold sold the business in 1998 for $25 million.

His success at WebMD was already many times greater. The company was becoming known as a destination on the Web for consumers hunting for medical information. Arnold envisioned WebMD as a portal where both patients and doctors could get advice, communicate with each other, and eventually even create online medical histories. Scarcely a year old, WebMD had raised more than $720 million in long-term commitments from companies including Du Pont and CNN.

News of the merger brought Healtheon its long-sought Internet valuation. The stock soared to $105 a share, giving the new company, Healtheon/WebMD, a market cap of more than $15 billion. Yet even before the merger was complete, reality started to bite. For Healtheon/WebMD to succeed, it now had to convince investors that the best way to revolutionize health care was not the drastic change Clark had called for, but a more gradual two-pronged approach. The Healtheon side of the business could build sales and earn steady, if modest, profits by automating transactions; the WebMD side, meanwhile, could rake in money from advertising and e-commerce by catering to millions of consumers and doctors on the Internet. With any luck, the two would feed one another: If WebMD attracted doctors, for example, then Healtheon could sell them back-office services. Such synergies would enable the merged company to run rings around one-trick rivals such as drkoop.com (online medical content), Claimsnet (online insurance transactions), and drugstore.com.

The scheme, as it turned out, was a tough sell. As weeks passed, the stock ebbed from its $105 peak; by year-end it had sunk to $38. Health professionals, who had greeted Clark's reformist mission with skepticism, now charged that Healtheon had abandoned it. "The deal hyped its value on the stock market, but WebMD offered no practical benefit to the problem Healtheon was addressing," said Gerard Nussbaum, a senior manager at health-care consultant Hamilton HMC.

Yet even as the stock languished, the two-pronged strategy started to work. Healtheon has changed the way business is done, for example, at Davis Margolin Milligan Ma Yang, a seven-doctor office in San Francisco. On a recent January morning, office manager Elizabeth Schnarr explained how she and other staffers had formerly worked overtime writing as many as 50 physician referrals a day. Last October the office, which is in Brown & Toland's network, implemented Healtheon's online system. A referral now takes about 30 seconds to complete and send over the WebMD portal.

The improvements are even more evident at Hill Physicians Medical Group, another independent-practice association, which clears insurance claims for more than 2,500 doctors in Northern California. A year ago, 34 employees each entered about 150 paper insurance claims a day into computer databases. Huge manuals guided the employees through the clearing or denying of the claim. With more than 200,000 claims coming in each month, Hill was absolutely buried in paper. Today a third of its claims arrive on Healtheon/WebMD's network, which can process 3,500 claims in 45 minutes. The claims-processing staff has been cut to 25; Hill hopes to have 60% of incoming claims online by the end of the year.

WebMD, meanwhile, moved quickly to court patients and doctors online--as well as druggists, nurses, and health-care administrators. Today it ranks among the Internet's top five health-information sites, and its brand is so strong that media giant News Corp. recently negotiated a $1 billion exchange of advertising, content, and cash investment. For 1.7 million consumers each month, WebMD.com offers comprehensive advice, discussion groups, and live chats on diseases, medications, and nutrition. The site also has offbeat appeal, with features like Dessert Wizard, which tells how long you have to walk to burn off the calories from a six-ounce piece of cheesecake (two hours, 28 minutes). At My Health Record, consumers can create a history of medications, allergies, and doctors that can be printed out or sent online to a new doctor or school nurse.

WebMD competes ferociously for doctors' attention. Drug companies want to spend ad dollars on Websites that doctors are visiting, and doctors seek out sites that offer legitimate medical content. WebMD's archrival in this arena is Medscape, which provides peer-reviewed medical studies edited by a legendary former chief of the Journal of the American Medical Association. To raise its credibility, WebMD bought Greenberg News, a specialist in delivering breaking medical news to doctors.

Healtheon/WebMD may seem a strange mix of disparate businesses, but analysts say the result is a fairly sound financial strategy. This year about 40% of the company's expected $500 million in revenues will come from advertising and e-commerce, estimates Brian Kearns at Banc of America Securities. The balance of its sales will derive from the two billion data transactions it will process this year, billing between 20 cents and 50 cents for each. It's a potent brew. "With most content Internet companies, the business model relies on advertising revenue. But you run the risk of spending lots of money in advertising and brand building, hoping for future revenue," explains Kearns. "That's not the case with Healtheon. Its recurring revenues on a low-margin business support the more high-risk but incredibly high-margin businesses."

The recent spate of deals orchestrated by Arnold and Long has solidified Healtheon/WebMD's position on a number of fronts. The CVS alliance alone gives it an e-commerce partner and advertising dollars and moves more data transactions onto its network. The Envoy purchase leapfrogs Healtheon/WebMD over all other electronic health-care data processors.

With all these acquisitions and alliances, Healtheon/WebMD has a lot of momentum--in fact, Arnold recently said he expected the company to be profitable a year early, by 2002. But its scheme to move electronic transactions onto the Internet--even if pulled off flawlessly--won't be enough: Only 10% of the nation's health-care transactions are electronic. Healtheon/WebMD must bring more technology-challenged members of health care onto its network. And the barriers that Clark and the company have faced over the past four years--legacy hospital systems, limited IT budgets, privacy concerns--haven't gone away.

If you listen to CEO Arnold, you'd think the revolution was already over and that Healtheon/WebMD had won: "We're No. 1 in duration and time consumers spend on our site; we're No. 1 in content, with more than 30 full-time doctors and 70 journalists on our staff; we're No. 1 in brand awareness; we're No. 1 in partnerships; and we're No. 1 in actual transactions conducted over the Internet." Hype? Naturally. But even in the dot-com world, where hype springs eternal, you have to admit the kid's on a roll.