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Fast-growing companies are pioneering alternatives to the traditional suppliers of health-care services by attacking the problem of soaring medical costs

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Any robust business exists because of tensions in the market it serves," says Ethix CEO Stephen Gregg. "Tension makes customers seek alternatives." Gregg should know; he owes his company, and indeed his industry, to the vertiginous rise in health-care costs, the chain reaction of circumstances that propelled it, and the attempts to slow it -- what America has nicknamed the health-care crisis.

Ethix, in Beaverton, Oreg., ranks 373d on the 1993 Inc. 500. The company provides managed-care services to health-care insurers and to self-insured companies. That is, it enters contracts with hospitals and doctors, negotiates fees with them, and reviews each patient's medical record to make sure those providers prescribe reasonable treatments and charge reasonable fees. But any smart small business knows about managed care these days. Because as tension in the health-care industry reached the breaking point, payers -- the federal government, insurance companies, employers, and individuals -- demanded savings, and they hired companies like Ethix to find them.

That has created opportunities for all sorts of entrepreneurs who have responded quickly to the demand for cost containment. "Big companies had a revenue stream based on doing things one way," Alan Shusterman, CEO of CMG Health (#191), in Owings Mills, Md., explains. "We had nothing to lose." Entrepreneurs have pioneered alternatives to the traditional suppliers of health-care services and have helped traditional providers learn new efficiencies.

Our list reflects that. For instance, it includes several health-maintenance organizations and two home care companies, as well as more exotic alternatives to hospitalization, such as Princeton Executive & Management Associates (#46), in Fair Lawn, N.J., which manages time-share eye-surgery centers for ophthalmologists.

Other Inc. 500 companies are helping beleaguered and increasingly cost-conscious hospitals compete. Merritt, Hawkins & Associates (#485), in Irving, Tex., recruits doctors for hospitals. That has become more difficult as HMOs have begun to compete for doctors and offer more regular hours and other lifestyle benefits. Hospitals can certainly do the recruiting themselves, but it's more efficient to contract out the work. And Merritt's customers believe the contractor can do it better.

MediServe Information Systems (#289), in Tempe, Ariz., sells software that allows hospitals to track electronically much of the information previously shuffled around on paper, from inventories to patients' daily courses of treatment. A respiratory therapist can walk into a patient's room, scan the medical record with MediServe's bar-code reader, read the therapy to be administered, and enter vital signs before and after therapy. Such automation becomes more important as payers require hospitals to document every detail of treatment.

It's not only hospitals that are struggling. Undercapitalized HMOs that opened as the industry boomed are now stumbling. That means opportunity for CMG Health, which manages mental-health- and substance-abuse-treatment benefits for HMOs. Mental-health cost containment requires special knowledge; by specializing in that field, CMG believes it can work more efficiently than HMOs that do it themselves.

Mental-health care is a small part of any HMO's practice, and it might not have created much of a business opportunity for Shusterman if the use of mental-health benefits weren't increasing dramatically. What has caused the increase? Shusterman cites a wider awareness of the genuine need for mental treatment. But cost containment played a perverse role.

"If you squeeze health care in one place," Shusterman says, "it pops out somewhere else." So when the federal government started limiting what it would pay for other health benefits, hospitals sought to make up the difference with mental-health services, for which costs remained uncontrolled. They added beds, and treatment increased.

Similarly, workers' compensation costs have risen faster than regular health-care costs have lately, because although employers have limited their regular health-care benefits, they can't touch compensation benefits.

Corporate Health Dimensions (CHR; #461), in Troy, N.Y., addresses that problem. The company runs corporate medical facilities, many of them right at work sites, for Goodyear Tire, U.S. Steel, and others. If workers at those plants injure themselves on the line, they can go downstairs and get treated, instead of taking several hours to visit an HMO across town. CHR offers employees convenience and offers corporate clients greater control of workers' compensation and primary health-care costs.

Dennis Engel's words betray the excitement bred by tension in the market. Engel is a partner in Superior Pharmaceutical Co. (#172), in Cincinnati, which distributes generic pharmaceuticals. When the patent for a brand-name drug runs out, a half dozen generic-drug companies may copy it and market versions for half the price or less. "It's a commodity industry," Engel says, "enormously dynamic and fluid." And if pharmacists can buy smart, he says, they can make a profit. Superior helps them do that by providing information on prices and new products.

Although cost containment fueled the growth of Engel's market, government legislation created it. In 1984 Congress passed the Waxman/Hatch Act, which provided a route for Food and Drug Administration approval of generic drugs. Before that, there was no way to get the seal of approval, and the FDA could order a generic drug off the market with little warning. Generic drugs became dependable, just in time for cost containment. "It re-created the business," Engel says.

Now the government is about to reenter the neighborhood these companies inhabit, as unpredictably and as unstoppable as a force of nature. While no CEO professes to know what national health-care reform will leave in its wake, most bluff convincingly. Medical headhunter James Merritt says, "Clinton's planning to dump 40 million uninsured patients into a system that's already overloaded. It's going to choke the system." And while he takes no joy in that, he will take business from it. -- Michael P. Cronin