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Medstat makes money by helping companies save.
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Author: Dietderich, Andrew1
| Medstat makes money by helping companies save |
Reducing health care costs prompts big growth for information firm
When Ernest Ludy
started Ann Arbor, Mich.-based Medstat Group Inc. in 1981, he had
$330,000 from friends and business contacts and a simple plan: Cut
health care costs for employers.
Twenty-three years
later and the mission of the company-now owned by Thomson Corp.-remains
unchanged. The difference between then and now? Medstat is bigger.
Analysts estimate
Medstat's annual revenue to be about $100 million. A spokesman for
Medstat declined to provide figures but confirmed that the estimates
were close.
Medstat's client
portfolio includes more than 1,400 companies. Medstat employs 700, with
about 400 in Ann Arbor. It offers about 30 health care cost-cutting
products and services and it's armed with the resources of
well-capitalized parent, Stamford, Conn.-based Thomson.
And Medstat continues
to land big employers: Wal-Mart Stores Inc. contracted with Medstat in
November, New York-based aluminum giant Alcoa Inc. did the same in
September. General Motors Corp. renewed its contract in July.
Medstat plans to push
three new product lines in 2004: one designed to help midsize companies
cut health care costs, one to collect and analyze medical errors for
investigative purposes and one to analyze the use of brand-name
medications.
``Our information
capabilities are designed to try and help industries manage the cost
and quality of health care more effectively,'' said Chief Executive
Officer Larry Hagerty. ``As economic pressures have grown, it's created
great demand for our products and services."
In mid-2000 however,
Medstat's future was uncertain: Thomson announced plans to sell it,
saying it didn't fit in with the Thomson Scientific & Healthcare
Group. Thomson changed its mind five months later and still owns the
company.
``Being for sale
creates uncertainty. It wasn't like, `Isn't this great? We've got this
great motivational tool,''' Mr. Hagerty said. ``The strength of the
organization really shows though because we met all our results during
that period and didn't get distracted."
Medstat announced
Nov. 3 that it landed a multiyear deal with Wal-Mart to help the
retailer cut health care costs for 500,000 employees. Terms were not
disclosed.
``We selected Medstat
because of its record of success integrating data from large, complex
organizations,'' said Greg Goggans, director of benefits for Wal-Mart.
``Their expert team and data-management tools will make it much easier
to analyze large amounts of information and to make appropriate
decisions. Medstat also provided the best value in terms of
consultative service and overall analytic support."
How has Medstat become what it is today?
By sticking to its core business, Mr. Hagerty said, while adapting quickly to always-evolving client needs and technology.
Mr. Ludy started
Medstat in 1981 with seed capital supplied by friends and business
contacts. He said he took the company public in 1983 with revenue of
$500,000 and no earnings.
Mr. Ludy said Medstat
targeted employers with more than 10,000 employees. Medstat collected
insurance claims from employers and built databases. Employers could
then pinpoint if costs were rising because of increased illness, higher
doctor fees or medicine costs.
Medstat promised to
cut an employer's projected growth in health care costs by half, Mr.
Ludy said. If costs were projected to rise 10%, Medstat promised 5%.
Chevron Corp. became Medstat's first customer, at an annual rate of $100,000.
Ford Motor Co.;
Sears, Roebuck & Co.; General Electric Co.; Marriott International
Inc.; and United Parcel Service Inc. soon followed.
Mr. Ludy said
insurance companies then began asking for the same information, with
the idea of offering a similar service to companies with fewer than
10,000 employees. Medstat couldn't justify serving the smaller
companies, he said, but it could justify serving the insurers.
Mr. Ludy said the
company saw another huge potential pool of new clients at the state
level, both in the number of employees most states have and in Medicaid
programs. By 1988, Medstat had contracts with 25 states.
Between September
1990 and September 1991, Medstat shares rose from $12.50 to $36.50.
Revenue had risen to more than $31 million by 1992.
In 1992, Medstat
bought the research operations of SysteMetrics, a subsidiary of
McGraw-Hill. SysteMetrics had proprietary methods to evaluate medical
practices and quality of care along with extensive experience in the
management and analysis of large-scale Medicaid and Medicare claims
databases. Medstat then set its sights on hospitals and physicians. Mr.
Ludy said health care providers could improve their services by having
access to Medstat's database. A physician could find out what the
average cost was to have an appendix removed in a specific region; a
hospital could predict how much would be spent on product lines in
specific ZIP codes.
Medstat Systems
became The Medstat Group on Feb. 25, 1993, when shareholders approved
its merger with Inforum Inc., which had a system that forecast demand
for hospital services.
``I expected that at
least one of the product lines would have problems,'' he said. ``But
that didn't happen. They all grew like crazy."
Medstat continues to
grow today and is part of Thomson's Scientific & Healthcare Group,
which had 2003 revenue of $760 million, up from $692 million in 2002.
``It's been one of
their best divisions,'' said Vince Valentini, analyst at TD Newcrest.
``They've had annual growth of about 10% over the past two years and in
an area they continue to have success."
'Our information
capabilities are designed to try and help industries manage the cost
and quality of health care more effectively.'
PHOTO (COLOR)
~~~~~~~~ By Andrew Dietderich
Some items on this website are used by permission granted
in the Fair Use guidelines of the 1976 U.S. Copyright Act.
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