Hard Road

Hard Road

Chuck O'Neill has made inroads with Avalon Healthcare, but has a tough road to travel against industry health insurance giants.

INSURANCE by Dave Szymanski | Tampa Bay Editor

Energy and humor propel Chuck O'Neill, who moves around a breakfast meeting at the CEO Council in Tampa with a cup of coffee, talking with his peers.

The entrepreneur, founder and chief executive of Avalon Healthcare Inc. isn't far from the Avalon offices, a health insurance company in Tampa. But he is far from accomplishing his task of a larger market share on the Gulf Coast.

One of his former Tampa startup companies, Tech Health, an online health products company, started a Web site originally called AccessRoad.com, the path for people with disabilities.

The path for Avalon - from a Celtic word, meaning "heaven" - might be considered a tough road, or simply guts, industry executives say. That's because even though it has signed up about 10,000 members the past two years, Avalon is taking on established industry giants Blue Cross, United and Aetna, among others.

It is gutsy because to get into hospitals, an insurance company needs patients and pays a fee for access. To get patients, it needs to be known, have a good product and be in hospitals. The larger insurance companies, because of the number of patients, have leverage and can negotiate lower access fees, allowing them to offer competitive premiums.

Avalon says it has a good product, which offers many benefits choices to companies and consumers, but as a young company, its marketing dollars are limited. That isn't stopping O'Neill.

When he couldn't find venture capital money in Florida, he hit the road and found it in New York.

There has to be alternatives to Blue Cross and United, O'Neill argues. Like the car business, there's room for different brands. The more insurers a hospital has, the more leverage the hospital has when dealing with insurers.

"Not everyone likes Blue Cross and United," O'Neill says.

Idea for a company

O'Neill, 46, was raised in a large Catholic family in Rochester, N.Y., studied mass communication and initially pursued a career in public relations in New York.

After coming to Florida, he started a company in 1999 in Tampa called Tech Health which he left and which operates successfully today. However, like other dot.com companies, O'Neill had to close the Tech Health consumer Web site, AccessLife.com, and lay off part of the staff when he couldn't raise second-round financing.

He began thinking of starting Avalon in 2001, when he was a staff member at fellow insurer, Oxford Health.

In those days, a 1,000 people a day were moving to Florida. There were more than 40 health plans in the state. O'Neill wrote a business plan. But relationships with business partners fell apart.

He found a new partner, Drew Cassidy, and in early 2004, began raising capital. Its target was $6 million.

In 2005, O'Neill filed an application with Florida to start a health plan. It took more than a year to raise the capital. Florida approved Avalon's application April 6, 2006.

As a foreshadowing to its uphill battle, Avalon found it difficult to raise money. It eventually turned to family and private funds, such as the Interatlantic Group, a New York venture capital firm.

When Avalon opened its doors in 2006, it became the first statewide commercial health insurance plan in nine years. The dozens of health insurance companies in the state dwindled to 18. In its first month, Avalon sold five policies.

Picking a niche

Avalon is a commercial insurance company, so it doesn't serve Medicare and Medicaid patients.

It started selling more individual policies. Now its group insurance business is starting to grow.

After a little more than two years in business, Avalon pulls in about $1 million a month in revenue, but is not profitable. It expects to move into the black next spring. By next December, with more hospitals signed up, it expects monthly revenue of $5 million to $6 million.

Part of its strategy is low tech. Avalon has a live person answering calls from customers. It wants to help customers solve problems, with one quick telephone call. "We've put our money there," O'Neill says.

Its business model doesn't sell HMOs or government programs, like Medicaid or Medicare. Instead, it focuses on plans that provide $1,000 deductibles and higher. It gives customers options to help them manage their health care, such as letting them choose the best pharmacy plan for them or their family.

To be a successful health plan, Avalon knows its needs hospital contracts. Getting those is difficult because it has to pay higher hospital access rates than larger competitors like Blue Cross.

As its gets hospital contracts, Avalon wants to be aggressive in Fort Myers and Naples and is talking to Lee Memorial Hospital, where it is ready to sign a contract. The more contracts, the more Avalon can reduce premiums and sell at competitive rate.

"If I pay 70 cents on the dollar, and Blue Cross pays 20, I'm not going to win," O'Neill says. "Now, we are getting those discounts. They allow us to price in the competitive range."

It is getting established in the Tampa Bay area and down the coast, starting to negotiate with Sarasota Memorial Hospital. It is working on getting into Orlando, Jacksonville and Ocala, but has been unable to crack the Orlando market yet.

Beyond Florida, Avalon is looking at Pennsylvania, because its health insurance regulations are similar to Florida.

Avalon wants to have 90% of the hospitals in its markets. As it is establishing itself, Avalon is offering special plans, with unique coverage and rates, to certain markets. For example, it has the Sawgrass Plan for Fort Lauderdale residents and will launch a Beach Plan next year in Dade County.

"We're re-energizing the concept of health care as local," O'Neill says.

Avalon wants to continue to adjust to feedback from clients. It has made more than 100 changes to its product designs, co-pay options and coverage plans, so agents and brokers that sell the products can sign more clients.

"When you are small and nimble, decisions are made and implemented quickly," O'Neill says.

Lessons and challenges

The biggest CEO lesson O'Neill has learned was at Tech Health. The lesson was that a CEO has to take measured risks and be decisive.

As CEO, you can take advice from senior people, but when a decision needs to be made, make it, O'Neill says. Don't hesitate to decide. Your board and shareholders look to you to do this.

The biggest challenge for Avalon has been getting started. Before starting the company, it asked insurance brokers if Florida needed another health plan and they said yes, absolutely. Then they said they couldn't sell Avalon's products.

It wasn't until Avalon was in Florida a year that they could sell its coverage. A billboard campaign was effective last year, but the company doesn't have the capital to do that now.

Avalon is trying to raise another $5 million. It raised $3 million initially.

One of the biggest industry trends affecting Avalon and other companies is getting consumers to manage their own health. The company's slogan, "It's your health," reflects that.

"The consumer has to become more responsible," O'Neill says. "The whole concept of the paternalistic health plan is over."

This is O'Neill's third startup company. He is also busy at home as the father of five, including children he and his wife adopted from Africa, Cambodia and the United States.

REVIEW SUMMARY

Company: Avalon Healthcare Inc.

Industry: Health insurance

Key: Signing up hospitals on the Gulf Coast so it can be more competitive in its pricing and expand throughout Florida and beyond.

Beware of durational rating

Many CEOs or COOs dread dealing with health insurance benefits, but they need to know how their carriers structure their costs and avoid a carrier that practices durational rating, advises Chuck O'Neill, chief executive of Avalon Healthcare Inc. in Tampa.

Most domicile carriers like Avalon, Humana and Aetna put customers into an expandable risk pool, where they stay. New patients get added to the pool. As older patients age, the newer healthier members help support the risk in the pool.

Under durational rating, insurance companies sell a policy at a fixed rate, then, at the end of the year, close that pool of customers and start a new one with younger, healthier members.

As the original risk pool ages, people usually need more medical care. The insurance company raises their rate. Some people leave the pool and try to get insurance at a better price.

But if you're very ill, very few insurers will write your insurance. These companies don't follow Florida insurance regulations because they file their plans out of state.

These plans are known as durationally rated. The result is that there are an increasing number of sick people who can't get health insurance.

Some insurers say this is a fair practice. But by closing the block of those insured, an insurer limits the financial options for members.

"To me, this is the big secret in the industry," O'Neill says.