2008 Interview with: HealthSpring, Inc. (HS-NYSE), Executive Chairman, President and CEO, Herbert A. Fritch - featuring: their Continental Trade Exchange, one of the world's largest barter systems, which permits companies and individuals to exchange goods and services utilizing an electronic currency known as "trade dollars" (T$), which are used in lieu of cash to purchase the various offerings of other members of the barter network coordinated care plans focused on the Medicare Advantage market, with plans in Alabama, Florida, Illinois, Mississippi, Tennessee and Texas and also offering a national stand-alone Medicare prescription drug plan.

HealthSpring, Inc. (HS-NYSE)

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Medicare Advantage HMO HealthSpring Is Focused On Keeping People Healthier And Managing Chronic Disease Better With Its Incentive-Based Programs For Doctors That Keep Them Focused On The Patient

Health Care Plans

HealthSpring, Inc.

44 Vantage Way, Suite 300
Nashville, TN 37228
Phone: 615-291-7000

Herbert A. Fritch
Executive Chairman, President and CEO

Interview conducted by:
Lynn Fosse, Senior Editor
Published – August 22, 2008

Herbert A. Fritch

Chairman of the Board of Directors, President and Chief Executive Officer

Herbert A. Fritch, has served as the Chairman of the Board of Directors, President, and Chief Executive Officer of the company and its predecessor, NewQuest, LLC, since the commencement of operations in September 2000. Beginning his career in 1973 as an actuary, Mr. Fritch has over 30 years of experience in the managed healthcare business. Prior to founding NewQuest, LLC, Mr. Fritch founded and served as president of North American Medical Management, Inc., or NAMM, an independent physician association management company, from 1991 to 1999. NAMM was acquired by PhyCor, Inc., a physician practice management company, in 1995. Mr. Fritch served as vice president of managed care for PhyCor following PhyCor's acquisition of NAMM. Prior to NAMM, Mr. Fritch served as a regional vice president for Partners National Healthplans from 1988 to 1991, where he was responsible for the oversight of seven HMOs in the Southern United States. Mr. Fritch holds a B.A. in Mathematics from Carleton College. Mr. Fritch is a fellow of the Society of Actuaries and a member of the Academy of Actuaries.

Company Profile:

HealthSpring is based in Nashville, Tenn., and is one of the country’s largest coordinated care plans whose primary focus is the Medicare Advantage market. HealthSpring currently owns and operates Medicare Advantage plans in Alabama, Florida, Illinois, Mississippi, Tennessee and Texas and also offers a national stand-alone Medicare prescription drug plan.

Mr. Fritch:, what was your vision when you started HealthSpring?

Mr. Fritch: “HealthSpring started with a pretty basic concept. We didn’t have a lot of capital, and it was simple: find a small broken HMO that we could turn around and hopefully sell or increase the value substantially. We did that with a hospital-owned plan in Nashville that struggled financially for many years and the hospital finally decided it was a business that they really were not very good at and didn’t want to keep putting more money into it. Therefore, we were successful at buying that and implementing a plan to turn it around. Our basic strategy has been to realign incentives with physicians and to get them engaged in improving outcomes in quality. Our strategy also included managing the cost side of things, and that has proven pretty successful. As the company has evolved, we continue with that strategy, but what we have found is that we are now in six states and growing pretty substantially. We completed an IPO and are now publicly offered in the public market. We also kind of narrowed our focus; so that over 95% of our business is Medicare Advantage HMO business.”


CEOCFO: Why have you chosen to do that?

Mr. Fritch: “We find that successfully getting doctors engaged seems to work a little better in the Medicare markets. It really leverages the impact of that, whereas in the commercial markets, frankly it is primarily how big you are and how much clout you have in order to negotiate lower unit prices from providers. There is a whole segment of big national employers that, if you don’t service all of their sites, you are pretty much left out of consideration for coverage. Being a regional health plan, we don’t have any visions that will ultimately be national, whereas on the Medicare market it is localized, so if you have the right doctors and the right benefits in the local market, you can be very competitive. With our physician engagement model, pretty much none of the big guys do that, and we frankly think that gives us a pretty significant competitive advantage.”


CEOCFO: How do you engage the physicians?

Mr. Fritch: “It is a combination of creating some structure. All of our plans are primary care-based, so the member does need to go to the primary doctor for any non-emergency and get a referral from a physician. We organize physicians around local hospital systems, find leaders that serve on a board of directors and meet monthly and review financial performance. We get them a lot of data about individual physician practice patterns and try to improve outcomes. We get the doctors engaged in that process and then create bonus and incentive programs. Therefore, in our most mature models, three times a year we pay out bonuses for the physicians based on both the financial performance and simply improving the percentage of time that they comply with evidence-based medicine guidelines.”


CEOCFO: Is there much difference from state to state?
Mr. Fritch: “There are practice variation differences, cost and payment differences. The sophistication level of the physician varies state by state, largely depending on historical payer practices. If you go to California, the physicians are very organized and almost demand doing business the way we do it. Yet if you look at Tennessee and Alabama, where we have a lot of our membership, nobody else and none of the other payers engage the physicians this way. There are no existing groups that are organized or had experience like this; you kind of have to start from scratch and build a group.”


CEOCFO: Who is using your services?

Mr. Fritch: “We have about 155,000 Medicare beneficiaries across six states, and another 270,000 Medicare beneficiaries who use our stand-alone prescription drug plans.”


CEOCFO: Within that demographic, is there a typical client for you, and how do you reach them?

Mr. Fritch: “Through individual sales, referrals, direct mail, and word-of-mouth referrals from other HealthSpring members. They are all Medicare beneficiaries, so they are either disabled or over 65. The average age of our beneficiary is 73. Generally speaking, they are lower- to middle-income beneficiaries. The appeal of our programs is we will save the Medicare beneficiary usually $100 to $150 a month out-of-pocket. For the lower- and middle-income beneficiaries, that is pretty substantial. It is agreeing to use our network that is the barrier to the very wealthy Medicare beneficiaries. For the most part they can afford a couple hundred bucks a month for a supplement and don’t want any limitations on their network choices.”


CEOCFO: Who is using your stand-alone drug program, and how big a part of your business is that?

Mr. Fritch: “It only started in 2006. That year we had about 80,000 lives, so it has grown quite substantially. We expanded from five states to a national basis in 2007 and grew to about 140,000 lives, and this year we have grown again very substantially to 270,000. There are a couple of components to the stand-alone drug business. We play almost exclusively in the low-income subsidy market and, essentially, what occurs there is there is a premium rate that is below the average for a region and then you are included as an option. While members may select any of the plans that came in below these benchmarks, everybody is kind of auto-assigned on a random basis. Therefore, if there are ten plans in a region below the benchmark, everyone gets one-tenth of the low-income membership assigned to them and then the members have the option to switch plans. It is definitely the niche we play in: the auto-assignable low-income membership.”


CEOCFO: What is the financial picture for you today?

Mr. Fritch: “We are certainly profitable and have exhibited pretty good earnings growth over our history. It is always a challenge, but we are pretty happy with the results so far.”


CEOCFO: HMO and the medical industry in general are not always looked at favorably; what sets HealthSpring apart in terms of quality differentiation?

Mr. Fritch: “The thing is our relationship with the doctors. You don’t get there with every doctor but we certainly try. If the doctor is willing to get engaged with us, we actually provide meaningful incentives and support for them to improve their quality and outcomes and improve the income they get from Medicare patients. Ultimately, our expectation is that leads to a better care delivery system and the ultimate beneficiaries of that are the Medicare members.”


CEOCFO: It seems like such a basic and sensible concept; why is HealthSpring realizing that and others are not?

Mr. Fritch: “Historically, as I mentioned when I talked about the commercial business, relationships between payers and physician providers in particular aren’t great. The payers have taken the position that they are just going to use their clout to lower what we pay people, especially the primary care physician. Solo practices are in the worst position of all in the healthcare system from a leverage perspective. There might be five thousand of them out there in markets like Nashville, so if one or two don’t join because they don’t like your fees, that doesn’t matter too much and as a result they have gotten really squeezed on their fees. Medicare and Medicaid obviously are huge payers that set a very low fee. It has evolved into a system where in order to make a living, a primary doctor has to see a huge number of patients everyday. As a result, they literally just don’t have the time to spend with every patient they would like to or could, to really deliver quality care. We have tried to flip that equation around; we want to pay them more and in some instances, if their performance is good, they can make 150-200% of what they have been paid under Medicare fee-for-service, but to do that they need to take more time with patients to make sure they comply with evidence-based medicine. That is why I said, our methods seem to work well for Medicare because the dynamic is, in order to create value, Medicare already pays providers a pretty low rate; they have a lot of clout and set a low rate for Medicare patients. You are not going to create value by getting lower unit prices the way you do in the commercial markets. Many of the big payers are really good at it; they negotiate really low rates and providers don’t particularly like that. What we are saying is you create value with Medicare by keeping people healthier and managing chronic diseases better, and by better use and appropriate use of medical resources. That is our focus. If you are going to do that well, you have to have the doctors engaged and paying attention. That is our whole model.”


CEOCFO: Sounds like a win/win/win!

Mr. Fritch: “We think so. For the most part, we have pretty satisfied customers, although the healthcare system is complicated for everybody and doubly so for the elderly. We put a lot of effort into working with our docs and staff to try and provide the care and outcomes for them.”


CEOCFO: In closing, why should potential investors be interested in HealthSpring, and what might they miss when they first look at the company?

Mr. Fritch: “We are pretty unique in this engagement model, but we think in the long-run it positions us very well in the Medicare space. In particular, in the last two-and-a-half years, 60 or 70% of the growth of Medicare Advantage has been in something called Private Fee For Service, and essentially is an unmanaged care product. A lot of the other companies doing business in the public markets in Medicare jumped into that with both feet. It is a very fast-growing product. We didn’t do any of it because it is unmanaged; you don’t have any contracts with physicians. Members can go anywhere they want any time they want, and you just pay everybody a Medicare rate. It allows for fast growth because you don’t have networks and you don’t have to contract with providers, so you could declare you are going to be national although you are currently only state-wide, and next January you are national. Congress just recently recognized that these plans were not providing a lot of value, were growing fast and actually had payment levels substantially higher than other Medicare health plans. Therefore, the legislation that just got put on the president’s desk cuts a lot of those plans. To the unsophisticated investor, they look at congress cutting Medicare, and if they don’t know HealthSpring very well, they don’t realize that yeah, we have grown a little more slowly in the last three years, but we have no exposure to these cuts. It will be really hard for the other guys not to go backwards. We should be in pretty good shape, and we have tried to position the company for the long-run and in an environment where we think fewer Medicare health plans will survive in a difficult payment environment. However, by getting these doctors engaged, we think we are well positioned to survive in that.”


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“What we are saying is you create value with Medicare by keeping people healthier and managing chronic diseases better, and by better use and appropriate use of medical resources. That is our focus. If you are going to do that well, you have to have the doctors engaged and paying attention. That is our whole model.” - Herbert A. Fritch

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