Chapter 4
What Could Be More Inspiring Than a Trusted Channel?

How did Hallberg do it? By jumping aboard the Medicare Part D prescription drug bandwagon alongside some of the biggest insurers in the country—and then outperforming them by finding a better, more trusted channel for engaging with his company’s customers. The key to Hallberg’s outsized success was his decision to join with the nation’s mom-and-pop pharmacies to sign up Medicare patients for the drug program. The pharmacists make the seniors happy by lowering their costs, counseling them about their healthcare, and making sure their medicines don’t interact in dangerous ways. Now MemberHealth’s Community CCRx plan is the country’s fourth-largest Part D plan, with 63,000 pharmacies serving 1.2 million members. It is also ranked number one in the nation in customer satisfaction, based on a recent government-sponsored survey.

Living in Boston, I had no idea that about 24,000 independent pharmacies were still in business across America. In large, urban communities, the big chains—CVS, Walgreens, Duane Reade, Rite Aid, and the like—dominate the market. But as I learned in talking with Hallberg, independent pharmacies are still alive and well in the vast majority of the country.

Like his competitors, Hallberg still had to stay within the rigid rules of the Part D program, which Congress set up as part of the Medicare Modernization Act of 2003. But unlike his rivals, he managed to “align the interests of all the players” in the game; he told me: Medicare patients get better care and lower costs, the pharmacists get a good deal and the professional satisfaction of playing a real role in patient care, the government saves money on the cost of the program, and MemberHealth racks up phenomenal growth and a handsome profit, too.

For Hallberg, the alliance with the pharmacists was a natural move. As a young lawyer in the 1970s, he worked for the Revco pharmacy chain and soaked up its corporate culture. “Revco was a pioneer in discounting,” he says, “and its focus was on delivering service, quality, and price savings every day. That’s the same concept we use at MemberHealth.”

After a stint as vice president of a prescription benefit management company (PBM), Hallberg founded his own PBM in 1991, negotiating with pharmacies and drug manufacturers to get discounts for his members and corporate healthcare plans. The day after this company was sold in 1998, Hallberg started MemberHealth. With a $75,000 loan and an office in his basement, he built it into a solid business with 13 employees. Unlike his competitors, Hallberg explains, he passed on to his members the entire discount he negotiated with the drug industry. That was “relatively unknown methodology at the time,” he says dryly; other PBMs pocketed part of the savings.

His first big break came in 2002, when Ohio decided to offer its senior citizens a state-sponsored discount-drug plan. Hallberg’s little company made a bid for the contract and beat out several billion-dollar rivals. Certainly, MemberHealth’s reputation for treating its customers well helped it land the contract, but the key factor was this innovation: Hallberg proposed to give seniors a single membership card, the Golden Buckeye Card, that would be good for discounts on drugs from any manufacturer who agreed to participate.

At the time, many drug makers offered discount cards for low-income patients, but only for use on the card giver’s drugs. “Mabel might be on five medications from three different drug manufacturers,” Hallberg says, “but they have three completely different programs. For antitrust reasons, they can’t talk to each other.” The discount varied with each card, too, and some were good only on certain days of the week. Not surprisingly, many seniors were confused. It was up to the pharmacist to sort out which card applied to which drug. MemberHealth’s Golden Buckeye Card bundled all the discounts into one card. Hallberg likens it to a bank card: “You can use it at any ATM, and the computers will figure it out at the end of the day.” (Similar to the Zipcar case in the previous chapter, MemberHealth’s engagement strategy has strong components of convenience.)

Pharmacists loved the Ohio plan’s less-confusing and more-efficient arrangement, and so did the seniors. MemberHealth signed up 2 million members and expanded its staff to 20 people. It was still tiny compared to giant insurers such as Humana and UnitedHealthcare, but its Golden Buckeye success had emboldened Hallberg. When Congress voted in favor of the Part D drug program covering 40 million Medicare patients, he decided to bid again.

Early in 2004, when the federal Centers for Medicare and Medicaid Services (CMS) held a meeting in Baltimore to explain the rules for Part D, some 5,000 would-be plan directors showed up or joined by phone hoping for a piece of the action. Hallberg and his staff members ran into people they knew from Computer Sciences Corporation (CSC), a $15 billion technology giant with a proven track record as a federal contractor (and my previous employer). “We’d never partnered with the federal government, and they’d never done any drug programs,” Hallberg recalls. “It was a great marriage. (CSC was) awarded a contract for the first phase, and we were their subcontractor.”

The first phase of Part D involved a straightforward discount card that was to be used for 18 months before the full-scale drug insurance plan went into effect. “It was a marvelous idea,” Hallberg told me, “because it made a level playing field that allowed companies like ours to get into the game.” The two-phase structure also gave companies time to plan and gather staff to handle the huge new business they would take on in Phase II.

MemberHealth seized on the Medicare discount card to begin its partnership with the nation’s pharmacists, building on the relationship it had begun in Ohio with the Golden Buckeye Card. Hallberg’s earlier positive experience partnering with pharmacists led him to approach the National Community Pharmacists Association (NCPA), the trade group representing mainly mom-and-pop drugstores and small chains. The large chains, which were members of the National Association of Chain Drug Stores (NACDS), had already joined up with the mail-order discounter Express Scripts to administer their discount programs, and they wanted the NCPA to come under their tent. Hallberg, however, had other plans.

“I begged Bruce Roberts, the executive vice president of NCPA, to meet with me and my colleague from CSC,” Hallberg explains. “He was very polite, but, frankly, I wasn’t getting very good results. But after about the 18th phone call, he said, ‘I’ll give you 20 minutes over my lunch hour.’” That was enough. “We literally had a handshake that afternoon,” Hallberg recalls. “We went in, made a presentation, talked about our approach to the market, and Bruce stuck his neck out and agreed with us.”

Hallberg attributes his success to his understanding of the people who work in the retail pharmacy industry. He knew they wanted respect and a professional role in healthcare. State regulators require pharmacists to have advanced degrees, he reminded me, and they come out of school as sophisticated clinicians with a wealth of knowledge. Then they find a job and discover themselves being instructed, as Hallberg put it, to “count 30 pills and put them in the bottle, and let the computer do the rest.” Hallberg says, “They were being sidelined and marginalized. Part of our promise was, ‘We will deal you into the healthcare equation,’ and we’ve continued to do that.”

With the NCPA’s backing, Hallberg was able to enlist small-market pharmacists to help enroll seniors in the discount plan. That was particularly advantageous in little towns and rural communities where pharmacists are trusted healthcare consultants. The pharmacists were a great help, too, in assuaging the doubt and apprehension hanging over the whole Part D program. The media were full of foreboding about how seniors would cope with the complex new plans. “If you remember,” Hallberg says, “there was a concern whether anybody would show up and play. Everyone was hugely skeptical about the likelihood of success.” But it was natural and easy for people to ask their pharmacists for advice, and although the pharmacists were forbidden to favor any one plan, nothing could stop them from handing out applications and explaining how the individual plans would work.

Unlike some large rivals that printed millions of application forms and lost money in the process, MemberHealth controlled costs by mailing out small batches of applications to the pharmacists and sending more only as needed. “We enrolled 450,000 people,” Hallberg says, “and our discount-drug program was profitable. Not everyone’s was.”

Phase II of the Part D program augured a major role change for both MemberHealth and CSC. As discounters, they were still functioning as hired benefit managers and working on a cost-plus basis. In Phase II, they became insurers, taking on the risk that the members’ monthly premiums and the government’s payments for drugs might not cover their costs. “As a PBM, you don’t have any skin in the game,” Hallberg explains. “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.” And at the last minute, literally on the day their bid was to be submitted to the CMS, CSC decided that health insurance wasn’t its game. It would continue to supply technology if MemberHealth got the contract, but CSC’s managers didn’t want to take the lead.

“The thought that went through my head was, ‘Yahoo!’” says Hallberg. “We were mentally and intellectually ready to step into that role. But there was no time for high-fives.” His crew had to scramble to delete “CSC” wherever it appeared and substitute “MemberHealth” on several hundred pages of documents. It took all afternoon, and when they finally sped off in a car to hand-deliver the application to CMS, they were dangerously close to the 5 p.m. deadline. Leafing through the papers on the way, a staff member found one more place where “MemberHealth” had to be substituted for “CSC.” When no one in the car could produce a pen, she whipped out her mascara wand, crossed out CSC, and wrote in MemberHealth. The bid was submitted on time, mascara smudges and all.

MemberHealth was chosen as one of ten national contractors for Part D in a field of formidable competitors. For example, the AARP endorsed giant UnitedHealthcare, which was running a national ad campaign and television commercials. Hallberg had no marketing or advertising budget, just his plan and the pharmacists handing out brochures and applications. The guidelines prevented the pharmacists from becoming advocates, Hallberg told me: “There are very strict rules about what they can say and do, and we are rigorous about educating the pharmacists not to cross that line.” When new members were ready to sign up, CCRx agents went into stores to accept the applications. Nevertheless, Hallberg says that, without a doubt, the pharmacists helped.

The Secret (or Not-so-Secret) Recipe for Success

The “secret sauce” of the MemberHealth plan’s success, Hallberg told me, is his insistence on pleasing all parties involved in the transaction—the most important being the customer. “It is always about the beneficiary,” he says. “The retail pharmacy relies on that beneficiary coming into the store every month to buy drugs. We could have a wonderful pharmacy-centric system, but if we didn’t, first and foremost, start with the beneficiary, we’d never get to that second step.”

Hallberg deserves kudos. His customers are evidently happy with the plan: In a 2007 survey of 4,500 Part D members conducted by Wilson Health Information, CCRx ranked first in customer satisfaction.

The plan now fills 60 million prescriptions a year, serving nearly 7 percent of all the people enrolled in Part D plans. More telling still is what his customers say to others. And whatever it is, it must be powerful because 60 percent of MemberHealth’s new business comes through word-of-mouth referrals from existing customers.

Although CCRx isn’t the cheapest plan in terms of monthly membership fees, its basic service is near the bottom of the price scale in most states. What the beneficiaries want, Hallberg explains, is “someone of authority to help them sort through complex issues. They don’t necessarily need to know that this is the cheapest or the best. They want to know, ‘Is this okay? Is this good for me? Am I okay with this one?’ They want the comfort.”

At MemberHealth, that comfort begins with its formulary, the list of drugs that qualify for discounts. To guarantee the formulary’s fairness and objectivity, the company farmed it out to an independent group of experts at a prestigious pharmacy school. Their mandate, Hallberg says, was to “forget the manufacturers. Build us a formulary that is the purest, most clinically appropriate.” The result was a list that included 98 percent of all the drugs on the Medicare master list, thus assuring members that it had been compiled for their benefit, not the Big Pharmaceuticals’. Companies whose drugs were excluded had the option of coming back to MemberHealth to negotiate supply of those medications at a lower cost.

All new members of the CCRx plan are given a “Welcome Review,” which consists of a one-on-one consultation with a pharmacist to explain how the plan works, review their medications and make sure drug combinations don’t cause dangerous reactions, and look for generics that can substitute for more expensive brand-name drugs. Unlike most plans, CCRx dispenses generics free to its members. MemberHealth says 66 percent of its prescriptions are filled with generic drugs, among the highest percentages of any Part D plan. In the first year of the program, CCRx members saved themselves $1.1 million a month by switching to generic prescriptions.

As for the pharmacists who serve the CCRx plan members, they get the satisfaction of providing actual care to their customers. What is more, they are freed from the chore of charging copayments for generic drugs that, in most cases, amount to little more than a dollar per prescription. To make up for the revenue lost in switching away from expensive brand-name drugs, MemberHealth pays pharmacists a larger dispensing fee for generic prescriptions than the dispensing fee for the brand drugs. Additionally, MemberHealth pays quarterly bonuses if they increase their percentage of generic prescriptions. Pharmacists also benefit from the fact that, unlike most of its competitors, MemberHealth doesn’t offer a cut-rate mail-order service that steals business from local pharmacies. And CCRx’s success even engaged the big drugstore chains; now these chains are joining up with MemberHealth and its mom-and-pop pharmacies.

The government is the third party in Part D transactions, and it, too, benefits from the CCRx plan. On average, generic drugs cost just 20 percent as much as brand names, so every prescription switched to a generic saves the taxpayers money. Over time, Hallberg says, MemberHealth’s emphasis on using generic drugs will save the government tens, if not hundreds, of millions of dollars. “CMS loves our plan, big time,” Hallberg told me—and no wonder.

As for MemberHealth, it’s doing well by doing good. “I hate to say it, but we have built-in growth,” Hallberg explains. “Every year, more people take more medications.” That’s to the general good, he argues, as new drugs prolong lives and keep people out of the hospital. But it’s an inescapable fact of life that the longer people live, the more illness they will have and the more medicines they will need. “We’re dealing with an infirm population,” he told me. “They’ve all got something wrong.” And CCRx helps make it better.

Hallberg owes his success primarily to the passage of the Medicare Modernization Act, he told me; it created the opportunity that MemberHealth could exploit. But Hallberg had a lot of competition, and he bested those rivals because he had a valuable store of knowledge that he used to create advantage, a sound business plan, and great execution. “We really knew our content and our subject matter. We knew the market,” he admits. “Second, we had a plan, and we knew how to execute on it. I knew we had the right approach with the retail pharmacy channel because I know those people.”

At the beginning of Phase II, he says, “we told our investors that we would enroll a million people in the first year. They thought it would be a home run if we did maybe 600,000. They said, ‘Wow, that would be out of the park.’ And we did, in fact, enroll a million people. ...I have to say that my team (executed our plan), in my opinion, damn near flawlessly.”

At this writing, MemberHealth is looking for expanded space in the Cleveland area to house a workforce that has grown to 160 employees and about 600 contract workers. The company also manages discounts for corporate health plans and retiree groups. And its pharmacist consultations are being expanded to more formal Medication Therapy Management services, which will emphasize prevention, wellness, and medications taken correctly. Hallberg is trying to establish the concept of a “primary-care pharmacist” who can help patients by making them healthier, heading off adverse drug interactions, and improving their lives.

MemberHealth’s spectacular growth caught the attention of corporate suitors early on, and in 2007, Universal American Financial Corporation, a health-and life-insurance-holding company, acquired it for a dazzling $630 million. The combined company now serves more than 2.1 million people and has $5 billion in revenue. Hallberg is staying on as the CEO of the MemberHealth operation.

“We have fun here,” he told me. “Not a goofy dot-com company sort of fun. It’s serious stuff, but it’s fun. Every day, we look at each other and realize we have 1,300,000 people whose lives we are helping. And we can do that and make money at the same time. Goodness gracious, how cool is that?”

Rules of Engagement