How I Did It: Charles Hallberg, Founder and CEO, MemberHealth

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As told to Bobbie Gossage

Industry: Health

2007 Inc. 500 Ranking: 1

Three-Year Growth: 20,128.9%

Just five years ago, Charles Hallberg was running a little 13-person company with one goal: to help seniors get discounts on their prescription drugs. In 2003, when the federal government decided to create a prescription drug plan for Medicare, to be administered by private industry, Hallberg made the audacious decision to throw his company's name in the hat. And did it ever pay off. In May, MemberHealth announced it was being bought by Universal American Financial (NASDAQ:UHCO) for $630 million.

Under Hallberg, MemberHealth has grown to be the fourth largest Medicare Part D sponsor; it accounts for 7 percent of all enrollments. The company has competed against health insurance behemoths--and held its own. So what did it take to increase revenue by about $1 billion in one year? A strong relationship with independent pharmacies, a smart partnership, a lot of hard work, a little luck, and a tube of mascara.

I wanted to be a lawyer since probably age five. Sad, isn't it? I was an incessant talker. Everybody said I needed to go to law school. In college, I majored in philosophy and then went to law school. I started out life as a trial attorney, a plaintiff's lawyer, and did that for a couple of years.

My first experience in the drug industry was as a corporate lawyer for Revco drugstores. Revco was a pioneer in discounting, and its focus was on delivering service, quality, and price savings every day. That's the same concept we use at MemberHealth.

At Revco, I did mergers and acquisitions, so I met a lot of executives who were selling their companies to Revco. These guys were successful, making a lot of money, but I didn't think they were any smarter or sharper than I was.

In 1991, I left Revco to start a pharmacy benefits management company. PBMs negotiate with pharmacies and drug manufacturers to get discounts for the members in their plans. I sold that company in 1998 and started MemberHealth, another PBM, the next day.

I took out a $75,000 SBA loan and worked out of my basement in the corner of our exercise room. Back then there weren't many drug discounts for seniors. Either you got a plan from your company at retirement or you paid full price.

A major turning point came in 2002, when Ohio decided to offer its seniors a state-sponsored discount drug plan. We were a tiny company in Cleveland with 13 employees competing with billion-dollar companies. And we won the contract.

Part of what set us apart was that people in our plan needed only one card. There were a number of drug manufacturers that offered special discounts for people with lower incomes, but each drug had a different card. A senior might walk into the pharmacy with five or six different cards for different programs. One thing I learned at Revco is that time is a pharmacist's most precious commodity. So, instead of the pharmacists having to figure out which card to use, we said just use this one card, and we'll figure it out. That makes it so much easier for the consumer too. We enrolled more than two million people in that program.

In 2004, the Centers for Medicare and Medicaid Services [CMS] had a meeting in Baltimore to explain how they were going to administer Medicare Part D, the prescription drug coverage that was going to be offered to 40 million Americans. About 5,000 people were at the meeting. Everybody in the industry knew about it. The first phase of the program would be a Medicare discount drug card, the second phase a full health insurance plan for drugs.

At the meeting, we ran into the folks from Computer Sciences Corporation. They're a $15 billion company, a very large federal contractor. We'd never partnered with the federal government and they'd never done any drug programs. It was a great marriage. They were awarded a contract for the first phase and we were their subcontractor.

Our discount drug program was profitable--not everyone's was. Some companies spent too much on marketing and made other errors. One company printed millions and millions of application forms that nobody used. It literally lost millions of dollars in printing costs. We reached out to the retail pharmacy community, joined forces with the National Community Pharmacists Association, a trade group that represents mom-and-pop-type drugstores. We sent each of them a pack of application forms, maybe 35,000 total, and said, let us know if you run out. We managed our costs very carefully. We enrolled 450,000 people.

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