HealthExtras, Inc.

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HealthExtras, Inc.

800 King Farm Boulevard
Rockville, Maryland 20850
Telephone: (301) 548-2900
Toll Free: (800) 323-6640
Fax: (301) 548-2980
Web site:

Public Company
Employees: 227
Sales: $521.3 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: HLEX
NAIC: 524298 All Other Insurance Related Activities

HealthExtras, Inc. is a Rockville, Maryland-based healthcare company that is primarily involved in the management of pharmacy benefits. Services include claims processing, mail-order drug delivery, benefit design consultation, drug utilization evaluation, formulary management, and drug data analysis services. The company also operates a national retail pharmacy network of more than 54,000 pharmacies. All told, it serves more than two million members. A major factor in HealthExtras' strong growth in this field is its full disclosure policy, revealing both the price it pays for drugs and the amount of profit it takes. In addition, HealthExtras sells supplemental health benefits insurance, the company's original focus, through American Express and retailers 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 Providers, a preferred provider organization (PPO) and healthcare credit card company founded by Thomas L. Blair in 1995. From 1977 until 1988 Blair was a partner at Jurgovan & Blair, Inc., developing and managing health maintenance organizations. In 1989 he founded America's Health Plan, Inc., and then in 1992 became president of Initial Managers & 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 consulting firm of Kelly, Anderson, Petchick and Associates. He left in 1994 to cofound Continued Health Care Benefit Program to market health insurance 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 supplemental benefits program. In July 1997 the Blairs launched HealthExtras, LLC, along with Edward S. Civera, a 25-year veteran of Coopers & Lybrand who joined United Payors in 1997 as chief operating officer and co-CEO. David Blair became the chief executive officer of HealthExtras.

Market research and product development work continued in 1998 and the company began offering insurance in January 1999, marketing directly through its web site,, and becoming the first company to offer a tax-free payment of up to $1 million in the event of a permanent accidental disability. HealthExtras actually assumed no underwriting risks; Reliance National Insurance provided the products and another insurer provided the out-of-area coverage. These products included catastrophic disability; excess medical, supplementing the limit on a member's primary health insurance coverage; organ transplant, to supplement limited coverage offered by many health insurance policies; out-of-area expense reimbursement, to cover costs incurred when members were more than 100 miles from home; emergency evacuation and repatriation, providing as much as $50,000 for air ambulance transportation; 24-hour nurse consultation; and provider network access, allowing members to take advantage of discounts United Payors had arranged through its network of more than 2,500 hospitals and 150,000 physicians. HealthExtras was also very much dependent on United 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 HealthExtras' business fulltime.

Early on, HealthExtras established a relationship with actor Christopher Reeve, best known for his film work as Superman, who had been paralyzed in an equestrian accident in 1995. He assumed that he had top-shelf health insurance, only to discover that his disability insurance coverage had a cap of $1.2 million. "He suffered the precise problem that one of our products is designed to alleviate," David Blair told Advertising Age. As a result of his experience, Reeve became the spokesman for HealthExtras in July 1997 (for a three-year term later extended to five), making the case that basic health insurance had its limitations and urging people to consider HealthExtras' supplemental coverage to provide their families with financial security should they suffer a debilitating accident like his. Initial advertising efforts included an insert in Citibank statements featuring a picture 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 its web site, however, HealthExtras needed more money, and in 1999 took steps to make an offering of stock. In July 1999 HealthExtras, Inc. was incorporated in Delaware. An initial public offering of stock was then conducted, underwritten by Warburg Dillon Read LLC, PaineWebber Incorporated, Prudential Vector Healthcare, and SG Cowen Securities Corp. It was completed in December 1999, raising $55 million. HealthExtras, LLC and HealthExtras, Inc. were then merged. The stock began 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 the stock's performance: "Unfortunately HealthExtras has been categorized with a number of e-health companies that are focused on owning 'space' rather than making a profit. HealthExtras has a sound business model, we do not sell information or banner ads; we sell a product that is inherently profitable." But he would soon come to change his mind 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 integrated advertising campaign featuring Reeve that was launched in the spring of 2000. It included three black-and-white, documentary-style television ads in which Reeve talked about his immediate thoughts of suicide after his riding accident and then the realization that "the people around you still love you and need you that, that's the first big breakthrough. But, having made that breakthrough and decided it's worth staying around you still have the problems of how 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 HealthExtras." To some observers the ads were sensational and perhaps exploitive. Advertising Age 's longtime critic of commercials, Bob Garfield, 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 Image, Alexandria, Va., nothing freakish is afoot. It's just a mana famous, handsome movie starreminding you that what can happen to him can happen to anyone." The campaign also included radio, print, and Internet elements, targeting women, upper-income families, and small businesses.

Due in large measure to Reeve's effort, HealthExtras signed up members at a much faster than expected clip, and they not only signed up for 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 the company was headed. According to a Washington Post profile in 2004, "The Internet, it turned out, was a poor place to sell insurance to provide benefits after debilitating injuries or illnesses. The company spent about $100 in marketing costs, such as direct mail and Web advertising, for each customer it signed up. It charged roughly 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 drug benefits. In November 2000 HealthExtras acquired International Pharmacy Management, Inc. (IPM) in a $9.2 million stock and cash deal. Based in Birmingham, Alabama, IPM offered pharmacy benefit management services and operated a mail-order pharmacy. Launched in 1995, it now had $30 million in annual sales. Blair commented in a press release, "The IPM acquisition gives our company the opportunity to further expand our reach from direct-to-consumer to direct-to-employer groups by highlighting a benefit which is increasingly valuable in employee recruitment and retention."

HealthExtras was now competing in a field that was dominated by three larger players: Caremark Inc., Express Scripts Inc., and Medco Health Solutions Inc. In order to compete, HealthExtras had to narrow its marketing focus. According to the Washington Post, "It chose to court mid-size employers, promising strong customer service, flexible prescription plans and big savings. Compared with its larger competitors, Blair said, HealthExtras relies less on payments from major pharmaceutical companies promoting their drugs. 'It allows us to be objective,' said Michael Donovan, the company's chief financial officer."

Company Perspectives:

The Company operates and reports in two segments; pharmacy benefit management and supplemental health, and while both segments are profitable, the Company's primary focus is the expansion of its pharmacy benefit management business.

HealthExtras also tried to diversify its supplemental insurance products in 2001 by partnering with Oklahoma insurer Globe Life and Accident Insurance, taking advantage of its direct-mail program that reached 2.5 million people, and with, a Rockville-based company that marketed insurance services to small businesses. But increasingly HealthExtras' focus was on growing its pharmacy business. The company completed another acquisition in this sector in 2001. In November it bought 80 percent of Catalyst Rx and Catalyst Consultants, Inc. in a transaction worth about $14.3 million. The remaining 20 percent would be purchased in early 2002. HealthExtras also began to cut back on its investments in the development of new supplemental insurance products, as well as reducing its marketing budget. The company was now content to use the original thrust of the company as a base 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 to make a private placement of about $30 million in stock and hired SG Cowen to place the shares with investors, a so-called PIPE (private investments in public equity) offering. As the Wall Street Journal explained in a 2002 article, "These investors are offered shares at a discount because the new shares are unregistered. But the risk with PIPE offerings is that if other investors hear of the offering, they may sell the firm's shares short, betting that the deal will trigger a drop in the issuer's stock price. Because unregistered shares are worth less than the publicly traded stock, opportunistic investors can take advantage of the price discovery." While Cowen was placing 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 later Cowen reported that Managing Director Guillame Pollet had been short-selling HealthExtras shares and had been terminated. Not satisfied with Cowen's response, HealthExtras sued Cowen in federal court in December 2002, alleging that Cowen had profited by misusing client information. The two parties reached a settlement in 2004, and then in April 2005 Pollet pleaded guilty to insider trading for short-selling HealthExtras stock. The Securities and Exchange Commission next filed a civil lawsuit against Pollet, accusing him of fraud and insider trading 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 profitable year, with nearly $13.5 million in earnings. Much of the increase in sales was the result of the Catalyst Rx acquisition, and HealthExtras 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 $10.3 million. HealthExtras received a major boost in the spring of 2004 when it won a contract from the state of Louisiana to manage pharmacy 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 contract from the state of North Carolina, news that caught the attention of Wall Street, which bid up the price of HealthExtras' stock. The company continued to build momentum in June 2004 when it acquired another PBM, Florida-based Managed Healthcare Systems Inc. in a cash and stock deal worth $44 million. On a sad note, Christopher Reeve died in October 2004, leaving the company without its chief spokesperson. If HealthExtras had continued to focus on supplemental insurance, his death would have likely caused serious problems. But, in reality, supplemental insurance accounted for just 10 percent of revenues, making the impact of Reeve's loss decidedly more personal than financial for HealthExtras.

Revenues reached $521.3 million in 2004 while net income increased 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 interfere 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 Providers of Georgia, Inc.; U.S. Scripts, Inc.

Principal Competitors

Caremark Rx, Inc.; Express Scripts, Inc.; Medco Health Solutions, Inc.

Key Dates:

The business is launched.
Christopher Reeve agrees to serve as spokesman.
The company is taken public.
The first pharmacy benefit management acquisition is completed.
Catalyst Rx and Catalyst Consultants, Inc. are acquired.
Managed Healthcare Systems Inc. is acquired.

Further Reading

Barbara, Michael, "New Business Plan Led to Profitability," Washington Post, July 19, 2004, p. E10.

Benesh, Peter, "Pharmacy Benefits Manager Enjoys the Benefits of Being Small," Investor's Business Daily, November 3, 2003, p. A08.

, "Recent Deal Is the Right Financial Rx for Pharmacy Benefit Manager," Investor's Business Daily, June 1, 2004, p. A07.

Craig, Susanne, "HealthExtras Sues SG Cowen, Alleging Misuse of Private Data," Wall Street Journal, December 4, 2002, p. C9.

Garfield, Bob, "Christopher Reeve's Credibility Connects for Disability Insurer," Advertising Age, April 24, 2000, p. 101.

Goetzl, David, "Spokesman Reeve Stars in Effort for Disability Insurer," Advertising Age, February 21, 2000, p. 4.

Higgins, Marguerite, "Rockville, Md.-Based Pharmacy-Benefits Management Firm Sees Stock Price Rise," Washington Times, May 4, 2004.

Keaveney, Bob, "HealthExtras Poised for Growth," Daily Record, March 6, 2000, p. A1.

Lemke, Tim, "Christopher Reeve Symbolized Rockville's HealthExtras," Daily Record, October 12, 2004, p. 1.

"S.E.C. Accused Former Official at SG Cowen in Fraud Suit," New York Times, April 22, 2005, p. C6.

Thompson, Stephanie, "Insurers Direct Tactic: Buy or Beware," Brandweek, April 12, 1999, p. 50.

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HealthExtras, Inc.

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