American Healthways, Inc.

3841 Green Hills Village Drive
Nashville, Tennessee 37215
U.S.A.
Telephone: (615) 665-1122
Toll Free: (615) 665-7697
Fax: (615) 665-7697
Web site: http://www.americanhealthways.com

Public Company
Incorporated: 1981 as American Healthcorp, Inc.
Employees: 1,511
Sales: $165.5 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: AMHC
NAIC: 624120 Services for the Elderly and Persons with Disabilities

American Healthways, Inc. is a publicly traded company based in Nashville, Tennessee, offering disease management and comprehensive care enhancement programs. The company is contracted by health plans, physicians, medical management organizations, and hospitals to help patients better manage their diseases. Registered nurses maintain regular contact to provide education, encouragement, and reminders. Moreover, American Healthways studies members' medical records looking for symptoms that might lead to a particular disease, such as diabetes, contacts those patients, and gives them a chance to enroll in a proactive, preventive program. More than a million people across the country are served by American Healthways programs. The approach has been called "professional nagging," but patients and nurses are known to develop close and caring relationships, and the effectiveness of the disease management programs in reducing medical costs and increasing worker productivity are positively reflected on an insurer's balance sheet. American Healthways has experienced tremendous growth since taking on its first contract in 1996. Clients now include CIGNA Healthcare, WellChoice, Oxford Health Plans of New York, Blue Cross and Blue Shield of Minnesota, Health Plus of Michigan, The Principal Financial Group, Lowe's, and US Bank.

Company's Founding in 1981

American Healthways was founded in 1981 as a hospital company called American Healthcorp, Inc. by Thomas G. Cigarran, senior vice-president of development at Hospital Affiliates International, along with four other executives from Hospital Affiliates: James A. Deal, Henry D. Herr, Robert E. Stone, and David A. Sidlowe. The new company then bought four hospitals in Tennessee and Virginia and in 1983 acquired an alcohol treatment company, Koala Centers. The following year the company branched into hospital-based diabetes programs under the name Diabetes Treatment Centers of America. Because of a consolidation trend in hospitals, American Healthcorp decided in 1984 to divest its hospital division and focus on disease management services for hospitals. Over the course of the next five years the company built up its alcohol treatment division, American Treatment Centers, but it was divested as well, in 1989. In that same year, the company paid more than $2 million to acquire MWM, Inc. and other assets of the Houston Center for Health Promotion.

American Healthcorp went public in 1991 and began trading on the NASDAQ. In November 1992 it acquired a controlling interest, 57 percent, in a newly founded Nashville company, AmSurg Corp., which would acquire, develop, and manage specialty outpatient surgery centers in partnership with physicians. The centers offered insurers and patients a less expensive alternative to surgery centers in hospitals, which were saddled with much higher overhead costs. AmSurg grew steadily over the next five years, and in March 1997 American Healthcorp elected to spin off the subsidiary in a tax-free distribution to its shareholders.

Launching a Population-Based Program in 1993

While AmSurg had pursued its niche in the healthcare field, its corporate parent concentrated on its diabetes management services. In 1993 American Healthcorp launched Diabetes Healthways, a population-based—rather than hospital-based—diabetes management program designed for health plans. Diabetes was a strong candidate for such a service because of the nature of the disease. It could not be cured, only managed, and if not properly cared for, a patient could develop a wide range of problems, including heart attacks, strokes, blindness, and nerve and kidney damage. Diabetes was also a leading cause of death in the United States. As a result, poorly treated diabetes put a strain on the entire healthcare system and drove up costs. American Healthcorp banked on health plan administrators recognizing that a diabetes management program would save money while offering patients better care.

American Healthcorp may have been the leading diabetes disease management company in the hospital market, but its management team was convinced that the future was in the managed care market and elected to invest $12 million in the development of a managed care product. The cost would grow to $20 million, the company would suffer in the short term, much to the concern of investors, but management remained committed to making the transition. In late 1995 American Healthcorp signed its first managed care diabetes contract to Principal Health Care, a part of Principal Financial Group. To service the contract, American Healthcorp centralized its call-center operations in 1996, a key step in the growth of the company. Not only was it able to house more nurses, the company gained the advantage of spreading its overhead over a number of contracts, thereby allowing it to price its service more advantageously. American Healthcorp had seen revenues for its hospital-based diabetes service peak in 1994 at $41.1 million; then sales fell to $30.5 million in 1997 as the company began to make the switch to a population-based approach. During 1997, 91 percent of the company's revenues still came from hospital contracts and just 7 percent from health plan contracts. A year later, 60 percent of revenues came from hospitals and 39 percent from health plans. The company lost $2.3 million in 1998 but revenues returned to the 1994 level and, more important, the company was now well positioned for a return to profitability and long-term growth. In 1999 health plan revenues exceeded hospital revenues for the first time, 54 percent versus 45 percent. The company also was gaining credibility. American Healthcorp was able to document the clinical as well as financial success of its approach in a large-scale, multi-site study, confirmed by third parties and subjected to peer review.

American HealthCorp began to expand beyond diabetes. It launched a comprehensive cardiac disease management program called Cardiac Healthways, and followed up with Respiratory Healthways, a program to manage respiratory diseases. To further promote "Healthways" as a recognizable brand, the company late in 1999 decided to change its name from American Healthcorp to American Healthways, Inc., which took effect at the start of 2000. In addition, the Diabetes Treatment Centers of America name was phased out and the company's hospital contracts were now folded into the new brand. A new product also would adopt the Healthways tag in 2000, Myhealthways, which was subsequently changed to Care Enhancement. This program moved American Healthways beyond chronic disease management to providing a positive healthcare relationship between health plans and all of its members. Another important step in 2000 was the signing of the first multiple-disease contract. Because a large number of patients suffered from more than one serious ailment, and it was unwieldy to assign a separate nurse to work with a patient on each disease, there was a clear need for a program that could provide one-call, comprehensive disease management. A further milestone for American Healthways in 2000 was the company's issuance of the first set of disease management standards in the United States. By now, annual revenues topped the $50 million mark.

In 2001 American Healthways sold a number of major contracts. Of particular importance was a ten-year contract, the first of its kind in the industry, to provide a total-population care enhancement program for Blue Cross and Blue Shield of Minnesota. The program would focus on the 15 percent to 20 percent of the members responsible for 75 percent to 80 percent of medical costs. To accomplish this task, American Healthways adopted a multiple-disease approach, with the capability of dealing with 17 chronic conditions. Later, the Care Enhancement approach would be rolled out to the plans of more than two million members, helping them to prevent disease and maintain a healthy life. To help achieve these lofty goals, American Healthways added to its capabilities by way of acquisition. That May American Healthways used stock to purchase two-year-old CareSteps Inc., a healthcare management firm that had developed a health risk appraisal tool. Shortly after the CareSteps deal, American Healthways added to its Care Enhancement program by acquiring Empower Health, a Connecticut-based compiler of market research data.

Johns Hopkins Approval in 2002

Because the healthcare industry had for the past decade offered up numerous cost-saving strategies that were also supposed to provide better care, doctors and patients alike needed reassurance that the Care Enhancement program was more than just hype. Johns Hopkins University's Outcomes Verification Program was brought in by American Healthways and Blue Cross and Blue Shield of Minnesota to study the new program, both in terms of cost savings and improved health for members. Johns Hopkins would then be free to publish its findings, favorable or not, in medical journals. In May 2002 the advisory board of Johns Hopkins's Outcomes Verification Program approved American Healthways' cardiac and diabetes care enhancement programs, the first such approvals since the university established the program in 2001. American Healthways received further commendation in June 2002, becoming the first organization to be issued accreditation under the new Disease Management Accreditation program administered by the National Committee for Quality Assurance (NCQA). American Healthways also would be certified by the other major healthcare accreditation bodies. URAC (Utilization Review Accreditation Commission) issued a full, two-year accreditation for the company's care enhancement programs, and JCAHO (Joint Commission on Accreditation of Healthcare Organizations) also accredited the program. As a result, American Healthways became the first company to be certified by all of the country's leading healthcare accreditation bodies. Moreover, in 2002 Ernst & Young LLP completed a study that confirmed savings from 20 to 29 percent in total healthcare costs for congestive heart failure patients.

Company Perspectives:

Improved health is the outcome.

Because American Healthways had proven it could deliver both good healthcare and save money, there was no wonder that the company began to enjoy a robust business. In 2001 it posted net income of $3.2 million on sales of $75.1 million. Those numbers improved to $10.4 million in earnings and $122.8 million in revenues. In 2003 revenues advanced to $165.5 million and net income grew to $18.5 million. Estimated sales for 2004 were $255 million. As a result of this impressive record, American Healthways was ranked fifth by Fortune magazine in its 2003 list of the nation's 100 Fastest Growing Companies, and was also ranked by Fortune as the number one fastest growing publicly traded small business in the United States. In addition, American Healthways cracked BusinessWeek magazine's 2003 list of America's top 100 "Hot Growth" companies, and was added to the Standard & Poor "S&P SmallCap 600 Index." Also in 2003, American Healthways continued to grow externally. It paid $65 million to acquire Status One Health Systems, provider of health management services to high-risk health plan customers.

After more than 20 years of heading American Healthways, Cigarran stepped down as chief executive, while retaining the chairmanship. His replacement, Ben R. Leedle, although just 42, was well prepared to take over in September 2003. Leedle had played an important role in the company's transformation from a hospital-based to population-based company and steadily rose through the management ranks after that. After being named senior vice-president of operations from September 1997 to September 1999, he served as chief operating officer and added the presidency in May 2002, when he was made Cigarran's heir apparent. He was groomed for the top position over the next year and a half. Tapped to make presentations and meet with investors, Leedle also took a course at Harvard Business School to improve his knowledge of international markets. Because its methods could be applied elsewhere in the developed world, American Healthways was already beginning to look to foreign markets for foreign growth.

In the meantime, there were plenty of opportunities in North America. The disease management approach to healthcare was still very much in its infancy, but American Healthways' success was already impressive. In 2003 the company saved Blue Cross and Blue Shield of Minnesota $40 million, which allowed the health plan to reduce its cost increase by three percentage points. Wall Street estimated that disease management would soon grow into a $20 billion business, a huge increase over the $600 million in combined sales for the industry in 2002. As a consequence, of course, American Healthways would face greater competition, both from other third-party companies and internal programs launched by health plans. But start-up costs would be high, and many insurers would rather outsource the operation to a proven company like American Healthways, which was well positioned to garner a significant share of this growing market.

Principal Subsidiaries

American Healthways Services, Inc.; Arthritis and Osteoporosis Care Center, Inc.; American Healthways Management, Inc.; CareSteps.com, Inc.; Axonal Information Solutions, Inc.; StatusOne Health Systems, Inc.

Key Dates:

1981:

American Healthcorp is founded to run hospitals.

1984:

The Hospital division is divested; a hospital-based diabetes care program is launched.

1991:

The company is taken public.

1995:

The first population-based diabetes management contract is signed.

1999:

The company name is changed to American Healthways.

2001:

CareSteps Inc. and Empower Health are acquired.

Principal Competitors

Express Scripts, Inc.; Landacorp, Inc.; Matria Healthcare, Inc.

Further Reading

Alva, Marilyn, "American Healthways Inc. Nashville, Tennessee News Flash: Staying Healthy Can Save Money," Investor's Business Daily, January 8, 2002, p. A08.

Lau, Gloria, "American Healthways Inc./Nashville, Tennessee Sick of HMO's? These Guys Might Have Cure," Investor's Business Daily, April 26, 2001, p. A08.

Reeves, Amy, "American Healthways Inc. Nashville, Tenn.; Job Should Be a Cinch for Chief in Waiting," Investor's Business Daily, June 13, 2003.

Russell, Keith, "Firm Finding Success Through Managed Care Market," Nashville Business Journal, January 12, 1999.

Stires, David, "RX for Investors," Fortune, May 3, 2004, p. 158.

—Ed Dinger