Definity Health In the News

Give Them A Stake
Zina Moukheiber, 05.13.02

Incentives matter. Definity Health aims to capitalize on that simple law of economics.

Opportunity can lie buried in the notes to consolidated statements. Anthony Miller was digging through the 1998 income statements of several HMOs when it dawned on him that nary a one was making money without raising prices above the averages. Digging deeper, he was even more startled to learn that 75% of Americans spend less than $1,000 a year on health care, even though employers were spending an average $3,800 per employee in 1998. In effect, the many young and healthy workers were subsidizing the few who frequently visited doctors.

What would happen if consumers had a more direct stake in medical costs? By giving them discretionary accounts for their health care, Miller thought most people would think twice before rushing to the ER to treat a bad cold. They would demand generic drugs over pricier branded ones. Doctors and hospitals, he figured, might be subjected to the same kind of comparison shopping as, say, DVD players. That's how Definity Health in St. Louis Park, Minn. came into being.

The plan works like this: A self-insured company typically gives an employee who is single $1,000 in pretax health care money to spend without restrictions ($1,500 for a childless couple, $2,000 for families). Exceed that amount and you're responsible for a $500 deductible, after which your employer picks up 80% to 100% of the bills. Unspent balances are rolled over for the next year.

Like HMOs, Definity lands discount deals with providers, including Beech Street and Private Healthcare Systems (which have combined networks of 400,000 doctors and 3,500 hospitals). For mail-order drugs it turns to Merck-Medco.

The idea is to give employees enough information to make reasonable choices. At Definity's Web site members can check their account balances, view claim transactions and compare prices. Want a consultation on your blood pressure? You can spend $45 to $61 in the provider network--or $67 to $73 by going outside it. A month's supply of the allergy medicine Allegra costs $33 at the pharmacy, versus $30 via mail order.

At 36, Miller is already an old hand at health care. He worked for HMO giant UnitedHealth, then quit to earn his M.B.A. at Cornell University. As a consultant at Deloitte & Touche he grew disillusioned when HMOs started nickel-and-diming doctors and patients. With two colleagues, Craig Swanson and Marcus Julian, Miller started looking for alternative models and fastened onto a federal law that encourages medical savings accounts for companies with fewer than 50 employees. The same kinds of defined contribution plans, they figured, could work at larger self-insured employers, even though these big companies and their employees would not get quite the same tax advantages.

In April 1998 they pitched the idea to UnitedHealth, then Deloitte, hoping for funding. No nibbles. "They told us three guys couldn't change health care," recalls Miller. Two months later they quit to form their own company, taking five colleagues with them, and nailed down the model. The Definity plan would cost companies $400 a month for each employee, versus $467 for an average HMO. Out of the $400 Definity would pocket up to 10% in fees.

Backers proved easier to find than customers. With an investment commitment from PricewaterhouseCoopers, Miller persuaded the likes of Kohlberg Kravis Roberts, Bain Capital and Merrill Lynch to cough up $48 million, leaving the founders and management with a 20% stake.

Miller caught a break in May 2000. Facing a 10% annual jump in its health care costs, medical device maker Medtronic invited Miller to meet with its HMO. Medtronic suggested the managed-care provider combine its network of doctors with Definity's personal-care accounts. No way, said the HMO; consumers had no interest in making medical decisions. Medtronic didn't appreciate the HMO's intransigence and ended up offering Definity's plan to 75% of its 20,000 employees (so far, 16% have enrolled).

To date, Definity has signed up 18,000 employees (42,000 members including dependents), up from 2,500 employees in 2001. Clients include Budget, the supermarket chain Hannaford Brothers, Louisiana State University and Textron. Miller claims that 97% of his members reenrolled in 2002, compared with 88% to 92% for HMOs.

The plan has made a discernible difference to Ridgeview Medical Center, a hospital chain in Minneapolis with 1,400 employees. Since January 2001, 85% of the 800 employees who get their health coverage at Ridgeview have signed on with Definity. Chief Executive Robert Stevens has seen radical changes in their choices: 28% of employees have rolled over their accounts into 2002, and 19% haven't even dipped into their accounts; 60% have used generics, up from 28% in 2001. His people are four times more likely to rely on Definity's nurse phone line to inquire about treatments before going to the doctor than they were under traditional plans. Stevens says Ridgeview saved nearly $500,000 through the first nine months of last year.

Miller needs lots more Ridgeviews. Though he insists that Definity will pull in $7 million in revenues this year, up from $500,000 in 2001, the company has never earned a nickel. Break-even, Miller hopes, will come next year, if the company can generate sales of $22 million.

A big if, even though the idea of personal medical accounts is catching on. This month the New York State Association of Health Underwriters is holding its first conference on the topic. According to a 2001 survey by consultancy William M. Mercer, 29% of companies with 20,000 or more employees are likely to adopt such plans within the next two years.

Others, naturally, are getting into the act. Courting the same customer, Lumenos in Alexandria, Va. has signed up 15,000 members. Aetna, Humana and, yes, UnitedHealth Group have recently launched similar plans or are about to. "This is the first truly new product in health care in 15 years," says Michael McCallister, chief executive of Humana. But, alas, there's no patenting a good idea.