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HOW I DID IT

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

Medicine Man Charles Hallberg forged strong relationships with independent pharmacies.

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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.

When it was time for the next phase of Medicare Part D, we had planned to work with CSC again as its subcontractor. But the day the application was due, CSC decided it didn't want to get into the health insurance business. The thought that went through my head was, Yahoo! We were mentally and intellectually ready to step into that role. But there was no time for high-fives. We had to scramble and replace the CSC name on all the documents with ours. It was several hundred pages. It took all afternoon, and CSC was helping us.

You had to hand-deliver your application to CMS by 5 that day, and we were cutting it really close. There was only a little bit of time left when they jumped in the car and drove to CMS. As they were driving, one of them realized there was another place our name had to go. Nobody had a pen. So this one lady, honest to God, pulls out her mascara, and she crosses out CSC, and writes in our name--in mascara. And that's the document that was filed with CMS.

As a PBM, you don't have any skin in the game. You're basically adding a fee to every pharmacy prescription. As an insurance company, our skin is in the game. We are at risk, so if we do a good job, we'll make money. If we do a poor job, we'll lose our shirt. CSC didn't want to do it. We felt we could, and we have.

We worked with the pharmacies to sign up seniors for the program, which started in January of 2006. We had no advertising budget, no marketing budget. It was a grass-roots campaign. UnitedHealthcare had a relationship with AARP. It had lots of advertising and television commercials. We didn't. We leveraged our relationships with independent pharmacies, and they let us put agents in their stores and sign up their customers. About 60 percent of our enrollments came from word of mouth.

One of the reasons pharmacies like us is that we do not do mail order. Plans that do that take business away from the retail pharmacies and put it in their own pockets. Our beneficiaries can go to the pharmacy and get a three-month supply of their prescription drugs right there.

We ask the pharmacies to work very carefully with the beneficiaries to make sure they're on the right drugs and at the right price. For example, most of our beneficiaries' generics are free for them and a generic typically costs about 80 percent less than a brand drug, so it's very important that the pharmacist work with the doctor to see if a generic is appropriate. We pay the pharmacy twice as much to fill a generic as we would to fill a brand prescription. That way, the beneficiary saves money, we save money, and the government saves money. We've realigned the various interests.

We work to avoid the kind of situation where somebody walks into a pharmacy with a prescription, hands it to the pharmacist, and the pharmacist says, "That's not covered." People get angry. They're blind-sided. They say, "My doctor wanted to give me this drug, and now you're saying I can't have it?" We pay the pharmacists to have one-on-one consultations with beneficiaries as soon as they enroll to review the plan, to review their medications, and answer any questions. If there's a problem, the pharmacist can call us or call the doctor and get that squared away in advance. So instead of being angry, our customers are happy. Wilson Rx, a research group, did a survey of Medicare recipients, and we received the highest customer satisfaction rating of any Medicare Part D sponsor. We beat out UnitedHealthcare and Humana.

My entire company has a stand-up meeting every morning at 7:30. We go around the room and everyone says the one thing they need to get done that day and if there are any bumps in the road. So everyone knows what's going on. The information flows from the bottom up.

For the last couple of years, every day has been get up in the morning and run 100 miles an hour. This has put all of us under tremendous pressures. Change can be difficult but also very exciting.

Last time I sold my company I started another the next day. I won't be doing that again. At Universal American I'll stay on as CEO on the pharmacy side.

We have fun here. Not a goofy dot-com company kind of fun. Or a T-shirts and shorts kind of fun. It's business shirts and ties, serious kind of stuff. But it's fun.

IMAGE: darryl estrine
Last updated: Sep 1, 2007




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