800 King Farm Boulevard
Company Perspectives:
The Company operates and reports in two segments; pharmacy benefit ma nagement and supplemental health, and while both segments are profita ble, the Company's primary focus is the expansion of its pharmacy ben efit management business.
HealthExtras, Inc. is a Rockville, Maryland-based healthcare company that is primarily involved in the management of pharmacy benefits. Se rvices include claims processing, mail-order drug delivery, benefit d esign consultation, drug utilization evaluation, formulary management , and drug data analysis services. The company also operates a nation al retail pharmacy network of more than 54,000 pharmacies. All told, it serves more than two million members. A major factor in HealthExtr as' strong growth in this field is its full disclosure policy, reveal ing both the price it pays for drugs and the amount of profit it take s. In addition, HealthExtras sells supplemental health benefits insur ance, the company's original focus, through American Express and reta ilers such as J.C. Penney and Sears Roebuck. HealthExtras is a public company listed on the NASDAQ.
Launching the Business in 1997
HealthExtras grew out of the business of United Payors and United Pro viders, a preferred provider organization (PPO) and healthcare credit card company founded by Thomas L. Blair in 1995. From 1977 until 198 8 Blair was a partner at Jurgovan & Blair, Inc., developing and m anaging health maintenance organizations. In 1989 he founded America' s Health Plan, Inc., and then in 1992 became president of Initial Man agers & Investors, Inc., which was eventually folded into United Payors. Serving as his financial manager was his son, David T. Blair, who started his business career working for the management consultin g firm of Kelly, Anderson, Petchick and Associates. He left in 1994 t o cofound Continued Health Care Benefit Program to market health insu rance to people leaving the U.S. military. A year later this business merged with United Payors and Blair became financial manager. He was still in his 20s when he played a significant role in United Payors going public in 1996. Then, in October of that year he took the lead in a marketing research campaign for the development of a supplementa l benefits program. In July 1997 the Blairs launched HealthExtras, LL C, along with Edward S. Civera, a 25-year veteran of Coopers & Ly brand who joined United Payors in 1997 as chief operating officer and co-CEO. David Blair became the chief executive officer of HealthExtr as.
Market research and product development work continued in 1998 and th e company began offering insurance in January 1999, marketing directl y through its web site, www.health extras.com, and becoming the first company to offer a tax-free payment of up to $1 million in the e vent of a permanent accidental disability. HealthExtras actually assu med no underwriting risks; Reliance National Insurance provided the p roducts and another insurer provided the out-of-area coverage. These products included catastrophic disability; excess medical, supplement ing the limit on a member's primary health insurance coverage; organ transplant, to supplement limited coverage offered by many health ins urance policies; out-of-area expense reimbursement, to cover costs in curred when members were more than 100 miles from home; emergency eva cuation and repatriation, providing as much as $50,000 for air am bulance transportation; 24-hour nurse consultation; and provider netw ork access, allowing members to take advantage of discounts United Pa yors had arranged through its network of more than 2,500 hospitals an d 150,000 physicians. HealthExtras was also very much dependent on Un ited Payors for office space, equipment, and personnel. The start-up paid for these services on a cost basis until arranging a sublease in 1999 and eventually hiring United Payors personnel who worked on Hea lthExtras' business fulltime.
Early on, HealthExtras established a relationship with actor Christop her Reeve, best known for his film work as Superman, who had been par alyzed in an equestrian accident in 1995. He assumed that he had top- shelf health insurance, only to discover that his disability insuranc e coverage had a cap of $1.2 million. "He suffered the precise pr oblem that one of our products is designed to alleviate," David Blair told Advertising Age. As a result of his experience, Reeve be came the spokesman for HealthExtras in July 1997 (for a three-year te rm later extended to five), making the case that basic health insuran ce had its limitations and urging people to consider HealthExtras' su pplemental coverage to provide their families with financial security should they suffer a debilitating accident like his. Initial adverti sing efforts included an insert in Citibank statements featuring a pi cture of Reeve and the caption: "In an instant your life can change. Mine did."
Going Public in 1999
To take full advantage of Reeve's celebrity and to drive traffic to i ts web site, however, HealthExtras needed more money, and in 1999 too k steps to make an offering of stock. In July 1999 HealthExtras, Inc. was incorporated in Delaware. An initial public offering of stock wa s then conducted, underwritten by Warburg Dillon Read LLC, PaineWebbe r Incorporated, Prudential Vector Healthcare, and SG Cowen Securities Corp. It was completed in December 1999, raising $55 million. He althExtras, LLC and HealthExtras, Inc. were then merged. The stock be gan trading on the NASDAQ at $11 but quickly lost value, dropping to the $5 range. In the letter to shareholders that accompanied the 1999 annual report, David Blair expressed his disappointment in t he stock's performance: "Unfortunately HealthExtras has been categori zed with a number of e-health companies that are focused on owning 's pace' rather than making a profit. HealthExtras has a sound business model, we do not sell information or banner ads; we sell a product th at is inherently profitable." But he would soon come to change his mi nd about the viability of the company's business model.
Some of the proceeds of the stock offering were used to pay off debt and $20 million to $25 million was earmarked for an integrate d advertising campaign featuring Reeve that was launched in the sprin g of 2000. It included three black-and-white, documentary-style telev ision ads in which Reeve talked about his immediate thoughts of suici de after his riding accident and then the realization that "the peopl e around you still love you and need you ... that, that's the first b ig breakthrough. ... But, having made that breakthrough ... and decid ed it's worth staying around ... you still have the problems of ... h ow are we going to make ends meet?" The tag at the end of these spots was as follows: "Even if you have health insurance, you need HealthE xtras." To some observers the ads were sensational and perhaps exploi tive. Advertising Age's longtime critic of commercials, Bob Ga rfield, opined, "Nobody wants to see the man's affliction turned into a cottage industry, and nobody wants to watch Christopher Reeve in a one-man freak show. But in this particular campaign from Focused Ima ge, Alexandria, Va., nothing freakish is afoot. It's just a man--a fa mous, handsome movie star--reminding you that what can happen to him can happen to anyone." The campaign also included radio, print, and I nternet elements, targeting women, upper-income families, and small b usinesses.
Due in large measure to Reeve's effort, HealthExtras signed up member s at a much faster than expected clip, and they not only signed up fo r the $10-a-month basic product but bought additional products as well. Despite selling a product with a high profit margin and facing little competition, David Blair had misgivings about the direction t he company was headed. According to a Washington Post profile in 2004, "The Internet, it turned out, was a poor place to sell insur ance to provide benefits after debilitating injuries or illnesses. Th e company spent about $100 in marketing costs, such as direct mai l and Web advertising, for each customer it signed up. It charged rou ghly that amount for an annual policy."
First Step in Prescription Management: 2000
It was at this point that the company changed gears, diversifying its revenue base and moving into the business of managing prescription d rug benefits. In November 2000 HealthExtras acquired International Ph armacy Management, Inc. (IPM) in a $9.2 million stock and cash de al. Based in Birmingham, Alabama, IPM offered pharmacy benefit manage ment services and operated a mail-order pharmacy. Launched in 1995, i t now had $30 million in annual sales. Blair commented in a press release, "The IPM acquisition gives our company the opportunity to f urther expand our reach from direct-to-consumer to direct-to-employer groups by highlighting a benefit which is increasingly valuable in e mployee recruitment and retention."
HealthExtras was now competing in a field that was dominated by three larger players: Caremark Inc., Express Scripts Inc., and Medco Healt h Solutions Inc. In order to compete, HealthExtras had to narrow its marketing focus. According to the Washington Post, "It chose t o court mid-size employers, promising strong customer service, flexib le prescription plans and big savings. Compared with its larger compe titors, Blair said, HealthExtras relies less on payments from major p harmaceutical companies promoting their drugs. 'It allows us to be ob jective,' said Michael Donovan, the company's chief financial officer ."
HealthExtras also tried to diversify its supplemental insurance produ cts in 2001 by partnering with Oklahoma insurer Globe Life and Accide nt Insurance, taking advantage of its direct-mail program that reache d 2.5 million people, and with AtYourBusiness.com, a Rockville-based company that marketed insurance services to small businesses. But inc reasingly HealthExtras' focus was on growing its pharmacy business. T he company completed another acquisition in this sector in 2001. In N ovember it bought 80 percent of Catalyst Rx and Catalyst Consultants, Inc. in a transaction worth about $14.3 million. The remaining 2 0 percent would be purchased in early 2002. HealthExtras also began t o cut back on its investments in the development of new supplemental insurance products, as well as reducing its marketing budget. The com pany was now content to use the original thrust of the company as a b ase of revenues and, by reducing overhead, turned it into a cash cow to support the expansion of its pharmacy benefits business.
To fund expansion opportunities, HealthExtras in early 2001 decided t o make a private placement of about $30 million in stock and hire d SG Cowen to place the shares with investors, a so-called PIPE (priv ate investments in public equity) offering. As the Wall Street Jou rnal explained in a 2002 article, "These investors are offered sh ares at a discount because the new shares are unregistered. But the r isk with PIPE offerings is that if other investors hear of the offeri ng, they may sell the firm's shares short, betting that the deal will trigger a drop in the issuer's stock price. Because unregistered sha res are worth less than the publicly traded stock, opportunistic inve stors can take advantage of the price discovery." While Cowen was pla cing the shares, HealthExtras' shares lost about half their value on the NASDAQ, unlike the experience of its competitors. In October 2001 HealthExtras asked Cowen to investigate the matter. Four months late r Cowen reported that Managing Director Guillame Pollet had been shor t-selling HealthExtras shares and had been terminated. Not satisfied with Cowen's response, HealthExtras sued Cowen in federal court in De cember 2002, alleging that Cowen had profited by misusing client info rmation. The two parties reached a settlement in 2004, and then in Ap ril 2005 Pollet pleaded guilty to insider trading for short-selling H ealthExtras stock. The Securities and Exchange Commission next filed a civil lawsuit against Pollet, accusing him of fraud and insider tra ding involving ten companies in other PIPE offerings.
Revenues totaled $118.2 million in 2001 and more than doubled in 2002 to $248.4 million. HealthExtras also recorded its first prof itable year, with nearly $13.5 million in earnings. Much of the i ncrease in sales was the result of the Catalyst Rx acquisition, and H ealthExtras set itself up for even more growth by completing another acquisition late in 2002, paying $20.2 million for Raleigh, North Carolina-based Pharmacy Network National Corporation, which focused on the Carolinas and Tennessee.
Sales improved to $384.1 million in 2003 and net income totaled & #36;10.3 million. HealthExtras received a major boost in the spring o f 2004 when it won a contract from the state of Louisiana to manage p harmacy benefits for state employees and retirees, worth between $ ;40 million to $50 million in annual sales. HealthExtras also was reported to be on the short list for a similar and even larger contr act from the state of North Carolina, news that caught the attention of Wall Street, which bid up the price of HealthExtras' stock. The co mpany continued to build momentum in June 2004 when it acquired anoth er PBM, Florida-based Managed Healthcare Systems Inc. in a cash and s tock deal worth $44 million. On a sad note, Christopher Reeve die d in October 2004, leaving the company without its chief spokesperson . If HealthExtras had continued to focus on supplemental insurance, h is death would have likely caused serious problems. But, in reality, supplemental insurance accounted for just 10 percent of revenues, mak ing the impact of Reeve's loss decidedly more personal than financial for HealthExtras.
Revenues reached $521.3 million in 2004 while net income increase d to $16.4 million. In 2005 HealthExtras experienced a change in the boardroom, as Thomas L. Blair was replaced as chairman by Civera. Blair stayed on as a director, and the change was not likely to inte rfere with HealthExtras' pattern of steady growth.
Principal Subsidiaries: Catalyst Rx; Catalyst Consultants, Inc .; HealthExtras Benefits Administrator, Inc.; International Pharmacy Management, Inc.; Pharmacy Network National Corporation; Pharmacy Pro viders of Georgia, Inc.; U.S. Scripts, Inc.
Principal Competitors: Caremark Rx, Inc.; Express Scripts, Inc .; Medco Health Solutions, Inc.
Comment about this article, ask questions, or add new information about this topic: