Health Risk Management, Inc.

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Health Risk Management, Inc.

8000 West 78th Street
Minneapolis, Minnesota 55439
U.S.A.
(612) 829-3500
Fax: (612) 829-3578
Web site:http://www.ihqi.com

Public Company
Incorporated: 1977
Employees: 950
Sales: $62.7 million (1997)
Stock Exchanges: NASDAQ
Ticker Symbol: HRMI

SICs: 6324 Hospital & Medical Service Plans

Health Risk Management, Inc. (HRMI) markets integrated healthcare services to both healthcare purchasers and providers. The company distinguishes itself from others in the managed-care field with its emphasis on entering the care management picture during instead of after the diagnostic process. HRMI’s range of services include: care review management, case management, price control management, claims administration management, and information services.

The 1970s: Medical Testing Lab Roots

Dr. Gary T. Mcllroy, a pathologist who received his medical training at University of California-Los Angeles and the Mayo Clinic, cofounded Midwest Laboratory Associates, a medical testing business, with his wife Marlene O. Travis in 1977. As a provider of services to corporate clients, in addition to hospitals and clinics, Mcllroy was approached with concerns about the medical system. Employers were noticing things like rapidly rising costs and inconsistencies in treatment assignments for similar diagnoses.

Mcllroy and Travis were well aware of those and other problems, such as duplication of testing caused by coordination of services among different care providers. “Information, and the availability of information at the point where decisions were being made, looked like the solution to us,” Travis said in a 1997 Minnesota Business & Opportunities article by Anthony F. Giombetti. But the medical community proved to be cool to their idea of using computer-based clinical practice guidelines to guide diagnostic and treatment decisions.

Mcllroy and Travis did find that large self-insured corporations and insurance companies were interested in their ideas, so they established a division within the lab business to design and develop an integrated medical information management system to serve that sector. In order to concentrate on developing the new business, Mcllroy and Travis sold the medical lab to Damon Corp., a national laboratory firm, in 1980.

The 1980s: A Move from Consultant to Service Provider

First, Health Risk Management, Inc. (HRMI) developed a pilot project with The Gillette Company in St. Paul. HRMI analyzed three years of their healthcare claims and found 40 percent of the services received by Gillette’s employees were deemed to be of questionable value based on the most current medical information. HRMI established a medical management program to guide the company’s healthcare decision-making and an employee wellness program to improve the general condition of their workers’ health.

HRMI was part of a national trend to cut healthcare costs. In the early 1980s, U.S. businesses became painfully aware of the changing marketplace: to compete on a global-level companies had to control costs. Healthcare costs were identified as an important barrier to the United States’ success in the world marketplace.

According to an October 1984 Corporate Report Minnesota article, HRMI’s average client employed 20,000 and spent about $30 million a year on medical payments. Mary Gunder-son wrote, “Despite the sharp rise in health-care costs, Mcllroy believes most companies can cut 20 to 30 percent from those payments without lowering the quality of care offered to employees.” HRMI employed specialists in biostatistics, epidemiology, medicine, benefits design, communications, accounting, computer science, and public health to help clients cut costs without compromising care.

Using the demographic information collected from clinics and hospitals around the country, HRMI was able to compare costs and services within a company’s given geographic area. With incidents of excessive payments or unnecessary services identified, HRMI could advise a company regarding its options to reduce costs, such as by setting limits on lab work or hospital stays.

HRMI switched from consultant to service provider during 1984 and 1985, as more clients requested implementation of the plans HRMI devised. The number of their employees jumped from 20 to 120 during the period. An infrastructure to handle healthcare inquiries from clients and their employees, as well as attending physicians, had to be put in place as well. HRMI also began to develop a strategy to electronically integrate four important components of the healthcare system: payments, care management, a national network of care providers and facilities, and information analysis. To finance the rapid growth, HRMI made a private stock placement each year from 1985 to 1989.

Pillsbury Company, Gillette, and Philip Morris were the first to sign on with large contracts. At first HRMI limited its marketing to Fortune 1000 companies in order to tap into the health benefits systems already in place and the large number of employees which were necessary for statistical analysis. HRMI sales reached $8.8 million in 1988.

1990s Begin with Public Stock Offering

In 1990, with sales at $12.2 million, HRMI offered stock to the public for the first time. The two million share initial public offering brought in $16.1 million to pay off accumulated debt, continue growth, and further the development of new products. The newly issued stock lost its early momentum when the company announced lower than expected earnings and a slowdown in client base growth a few months later.

Healthcare reform was a hot topic on both a state and federal level in the early 1990s with debates over issues such as “rationed” healthcare and universal coverage. The promotion of Health Maintenance Organizations (HMOs) via federal action in 1973 had changed the way medical services were provided, but the prepaid health plans failed to stop skyrocketing U.S. healthcare costs. Concerns over healthcare costs extended beyond the U.S.: HRMI sold its services to two Canadian provinces in 1991.

In January 1992, HRMI purchased a third party claims administration business, Pension and Group Services Inc., of Kalamazoo, Michigan, for $7 million. Claims administrators process and pay healthcare bills for self-insured clients. The purchase helped boost sales to $27.8 million, but due to a restructuring charge and legal settlement, both one-time charges, the year ended with a net loss.

HRMI began marketing PC-based healthcare management software in conjunction with its practice guidelines, Qual-ityFirst, to large insurance companies, preferred provider organizations (PPOs), HMOs, and hospitals in 1992. In a September 1992 Star Tribune article Glenn Howatt noted views regarding computer-based guidelines still remained diverse: supporters saw a useful tool in bringing consistency of treatment to medical practice; detractors called the guidelines “cookbook” medicine.

Regardless of the opinion, the number of managed care providers continued to grow along with the types of services and products offered. Value Health Sciences, Inc. of Santa Monica, California, offered computer-based medical guidelines in direct competition with HRMI’s Quality First. But according to the Howatt article the Value Health product was based on academic findings, while HRMI guidelines were “designed in an actual user care setting.” In the same article analyst Ted Levy said, “From my review, I didn’t see any other guidelines as sophisticated, evidenced by the tremendous amount of money they spent.”

HRMI was confident in its products and claimed by tracking a sick or injured employee from diagnosis through treatment he or she would receive better care at a lower cost to the employer. In a November 1993 Twin Cities Business Monthly article by Phil Bolsta, Travis said, “We impact 23 percent of the cases that we review and can give clients as much as a 10-to-one return on the money they spend with us.” According to Bolsta, one HRMI client saved $4.2 million by avoiding duplicate claims processing and another saved $500,000 by monitoring 10 pregnancies at high-risk for premature delivery.

HRMI annual revenue leaped to $40.8 million in fiscal 1993 with net income of $2.3 million. But the rapid growth slowed the following year. HRMI lost some large clients. And across the nation, companies put healthcare service and product purchases on hold as the Clinton administration’s pending healthcare reform proposals were being debated. Although revenues for the year increased somewhat, net income fell. HRMI refo-cused its marketing strategy.

The Mid-to-Late 1990s: Coping with Market Changes

Healthcare reform on a state level was encouraging medium-sized companies to move to self-funded health plans, according to a February 1995 Minneapolis/St. Paul CityBusiness article by Carla Solberg. In response to the changes, HRMI trimmed back its utilization review department and bolstered the third-party administration and software development areas. And in an ongoing effort to refine its product and service offerings, HRMI became the first U.S. healthcare company to earn ISO 9000 certification for its claims subsidiary.

The health information market was estimated at $6.5 billion in the mid-1990s and was expected to continue to grow at a rapid pace. But for HRMI, business continued to lag. Fiscal 1996 ended with lower than expected revenues due to a scaled back agreement with a major client and delays in new customer development. Earnings fell for a second year.

In September 1996, HRMI said it had agreed to be acquired by HealthPlan Services Corp. of Tampa. The merger was expected to strengthen HRMI in the areas of distribution, customer base, product development, and capital funding. The $80 million deal was canceled in March 1997, following a sharp decline in HealthPlan stock, a consequence of activity involving two earlier mergers.

HRMI and HealthPlan agreed to continue a joint marketing agreement established at the time of the purchase deal: HealthPlan received managed care tools, and HRMI gained access to HealthPlan’s client base. HealthPlan also bought $2.5 million or 4.5 percent of HRMI shares outstanding.

Earnings for fiscal 1997 increased by 12 percent to $2.2 million and revenues climbed 15 percent over 1996 to $62.7 million. Care review and case management services—which included clinical and surgical procedures; mental health and chemical dependency treatment; prenatal care; and disability and workers compensation cases—brought in 41 percent of revenue. The claims administration division accounted for 39 percent of 1997 revenue. HRMI’s client list included self-insured employers, insurance companies, unions, government agencies, HMOs, PPOs, and hospitals.

As of September 1997 HRMI employed about 950, including approximately 300 physicians, nurses, and other health professionals. Another 150 physicians served as consultants. In addition to its branch offices around the country, HRMI held four wholly owned subsidiaries in the U.S. and one in Canada. HRMI competed directly with a large number of independent utilization review firms, insurance carriers, third-party administrators, and a small number of software vendors. The company’s managed care services competed indirectly with the HMOs and PPOs.

In its 1997 10K report, HRMI said its “principal competitive strengths are its medical expertise, medical and cost databases, QualityFirst healthcare practice guidelines, and proprietary software systems.” Of possible future concern to HRMI was its dependence on a small number of clients for a significant percentage of revenues: two clients brought in 33 percent of total revenues in 1997.