So Long HMO

So Long HMO

By Francis X. Gilpin

Associate Editor

Charles T. O'Neill didn't need all 12 minutes allotted for his pitch to venture capitalists. "I'd like to thank President Bush for basically giving my speech last night at the State of the Union," O'Neill began.

This spring, O'Neill expects to launch the first new health insurer approved to sell policies across Florida since 1997. Avalon Healthcare Holdings Inc. won't sell just any old insurance.

The Tampa insurer will offer high-deductible policies that complement the new health savings accounts that George W. Bush has been promoting.

O'Neill likes what he has heard from venture capitalists since his Feb. 1 presentation at a Florida Venture Forum conference in Ponte Vedra Beach. "The response was just fantastic," says the 44-year-old president and chief executive of Avalon.

Curiosity about the high-deductible policies comes as Bush pushes HSAs as a market-driven solution to the skyrocketing cost of America's workplace-based medical insurance system. "We're on the cusp of where the market is headed," O'Neill says. "The timing is perfect for us."

Yet O'Neill and his business partner, former Oxford Health Plans Inc. Chief Financial Officer Andrew B. Cassidy, struggled to find $5.75 million to get Avalon off the ground last year. O'Neill had worked at Oxford and raised $5 million in the 1990s to create TechHealth Inc., a medical-services network for the disabled and others.

"I had already raised capital for a company that was very successful," he says. "I had the Oxford pedigree, which was certainly helpful. And I was still having trouble, a lot of trouble raising money."

Avalon won't require a second round of venture funding for another year. O'Neill simply wants to keep Avalon's name in front of potential investors until he has to ask people again to write checks.

Although the political wind appears to be at his back, O'Neill isn't taking any chances. "Am I confident?" he asks during an interview at his Tampa Rocky Point office. "No. I'm going to go and fight, like I do every time I raise capital."

Health industry vet

Chuck O'Neill wanted to raise a television news reporter's microphone coming out of St. Bonaventure University. But the Rochester, N.Y., native couldn't bring himself to ask grieving relatives how they felt after losing loved ones to calamity.

Instead, O'Neill went to work at Burson-Marsteller, part of WWP Group PLC's stable of public relations agencies. O'Neill moved over to start the PR office at Oxford, an expanding Connecticut health maintenance organization. In 1997, Oxford sent him to Sarasota, where it had acquired Riscorp Inc.'s HMO business. He ran marketing for all of Florida.

But Oxford's antiquated information technology couldn't keep up with enrollment growth - from 50,000 members in 1994 to 2 million in 1997. Accounting problems sent CFO Drew Cassidy packing, and Oxford pulled out of Florida.

"That day, in a strange way, was the genesis of Avalon," O'Neill says.

As O'Neill planned the move back to Connecticut, a headhunter called him about running the marketing department at Tampa drug distributor PharMerica Inc. He stayed in Florida.

While at PharMerica, O'Neill and a co-worker lined up investors for what became TechHealth. Started in an Ybor City loft, TechHealth generated $45 million in revenue last year. The Tampa company enjoyed some renown with the late disabled actor Christopher Reeve on the board of directors.

In the early years of TechHealth, however, O'Neill wasn't getting paid. So he worked at an Oxford benefits management office in Tampa for three years while drawing up the Avalon business plan.

O'Neill says Oxford gave up too soon on Florida.

UnitedHealth Group Inc. bought Oxford in 2004. Further consolidation in the health insurance industry has created an opening in a growing state for an alternative to Aetna, Blue Cross and other big providers, according to O'Neill.

"My concern is not that we grow too slow," O'Neill of Avalon, "but that we grow too fast."

Ready for change

Avalon will write policies with annual deductibles ranging from $1,000 to $5,000. Customers can save for such outlays through contributions to Bush's tax-advantaged HSAs.

O'Neill expects to sell mostly to younger, healthier and wealthier workers with the most to gain from investing in HSAs. Avalon will use an interactive Web site to direct customers paying average yearly premiums of $3,000 to the cheapest health care providers who make the fewest medical errors. If an insured has to call Avalon, O'Neill promises a live person will answer.

"The opportunity in this Florida market against the big players, who traditionally have been less-than-friendly in the customer service area, will be huge for us," says O'Neill, who hopes to have one in 20 Floridians on Avalon's rolls by 2011.

Inter-Atlantic Group kicked in $3.5 million of the initial $5.75 million. What sold the New York private-equity firm was Avalon signing up 17 Florida insurance agents as both investors and brokers of the high-deductible policies.

"It offers us a distribution platform immediately to market," O'Neill says. Inter-Atlantic partners Frederick S. Hammer and Brett G. Baris, who sit on Avalon's board, say the willingness of the agents to invest validates the business plan.

"There's going to be a fundamental sea change in the health care market," O'Neill told the Florida Venture Forum crowd. "Whether any employer likes it or not, five years from now, we don't believe anyone will have first-dollar coverage, or very few people will have first-dollar coverage related to their health care."

Low co-payments are going the way of doctor's house calls. Amid the uncertainty, O'Neill agrees with Bush that consumers will order fewer medications and tests if they have to pay for them out of their own pockets.

The average American obtains 10.5 drug prescriptions a year, up from 1.3 prescriptions in 1990. Experts blame the onset of direct-to-consumer advertising for stoking demand for products to treat such heretofore little-known ailments as Restless Leg Syndrome.

O'Neill says Avalon will help reduce medical expenditures in Florida while delivering nice returns to early investors. For now, he doesn't see many other startups that can enter the market quickly to join Avalon in competing against dominant carriers.

"The state of Florida does not make it easy for you to become a carrier in this state," says O'Neill. "We probably have a two-year window."

Enough about the Mercedes

"Our business is high risk, but very high return," says Avalon Healthcare Holdings Inc. CEO Chuck O'Neill. "You're either going to lose it all, or you're going to get 100 times your money."

Venture capitalists who have reviewed the Avalon business blueprint, which forecasts profitability by 2007, calculate more like a 40-fold return from a best-case scenario. In either event, there were few takers in the Tampa Bay area.

"I talked to a lot of wealthy individuals in Tampa," says O'Neill. "Everyone loves the story. But no one necessarily understands health care, or they felt it was a phenomenally risky thing, opening a risk-bearing insurance company."

His lament is a familiar one. Whether it's health insurance or some other field, entrepreneurs struggle at fund-raising in the Bay area, which sorely lacks seed money from venture capitalists or wealthy "angel investors."

"We need more opportunity here in Tampa, or even on the west coast, where there is access to capital for the entrepreneur," says O'Neill, who partially blames the insularity of the Bay area's upper crust.

O'Neill's faith in Avalon was tested during the 500 to 600 conversations that he claims to have initiated with prospective investors. "I knew the Florida market was so ready for Avalon," he says. "Nobody could dissuade me otherwise."

Still, there were moments that infuriated him. "You're talking to a wealthy guy. You're really just trying to get 50 grand out of him," says O'Neill.

Nothing comes from the pitch, but O'Neill has to stick around for his host to brag about a Mercedes Benz SL600 in the driveway.

"You'd spend $130,000 in cash on a car," he recalls thinking, "and here's an opportunity that could turn your $50,000 into $1 million or $2 million. And you won't even take a chance."

O'Neill resisted the temptation to shout: "Don't start talking to me about your car because I don't want to hear it."

"You sit there and smile and you take it," he says. "But you're boiling inside."

O'Neill doubts his past employment at Oxford Health Plans Inc. and Riscorp Inc., which became entangled in respective scandals involving improper accounting and political fundraising, slowed the money spigots.

It's just the burden of being a Bay area startup, he concludes. "There's a tremendous challenge in Florida," he says. "We found a lot of our money in New York, sad to say."