Nine years ago, Tom Blair asked his wife to sit at a rented desk, next to a telephone that didn't work, and pretend she was a secretary. The reason: He and his partner Roger Jurgovan wanted to impress an official considering their fledgling consulting business for a contract to evaluate health maintenance organizations.
"When we started Jurgovan & Blair, it was totally undercapitalized," quips Blair. "The reason I say that is that we had no capital. Roger and I just showed up."
Today Blair and Jurgovan have installed plush red carpets on the floors and modern art on the walls of their Rockville headquarters to impress a new breed of client: the Fortune 500 executives who have started to walk through their doors.
One of those executives later this month will sign a check for $35 million and turn it over to Jurgovan & Blair Inc. (JBI), making millionaires out of the two founders who only a few years ago faced the possibility of losing their homes as the company loomed near bankruptcy.
Last month, the firm agreed to be sold to American International Group, a large insurance conglomerate, after a bidding process in which at least a dozen national firms expressed a serious interest in the company, according to investment bankers.
The sale will cap a period of frenetic growth in which the Rockville firm carved out a unique niche in the exploding HMO movement.
Jurgovan & Blair started out as a typical "Beltway bandit" dependent on government grants for its existence. But building on the expertise gained in consulting, the firm bootstrapped its way into almost all aspects of the HMO business. HMOs, which now count as members more than 20 million Americans, attempt to control medical-care costs by a closer review of expensive doctor and hospital services.
Today, Jurgovan & Blair is perhaps the leading provider of data processing systems that handle money matters and patient records for HMOs, with its programs in use by 75 of the estimated 500 plans now in operation. It also has taken over the actual management of five HMOs, including Network Health Plan in Northern Virginia.
Now the company seeks to apply its expertise to an entirely different line of business: running health-benefit programs for large employers.
It's a crowded market, and some experts outside the firm say they believe that Jurgovan & Blair will have a difficult time displacing the insurers and others who already provide this service. The firm's officials, by contrast, contend that their expertise in running HMOs will serve them in good stead as employers seek to manage their health-care costs using techniques popularized by HMOs.
Whether this new strategy pays off will be critical to whether Jurgovan & Blair can continue its strong growth record. The firm expects to report $50 million in sales this year, up from a little more than $3 million only four years ago. With 36 employes at the end of 1983, the firm's work force now numbers 420 in offices across the country. In five years under the wing of American International, some observers project that the firm's revenue could surpass $300 million.
The source of this wealth is clear and, as Blair tells it, largely unexpected. HMOs sprouted in the late 1970s and early 1980s as government and businesses sought to control health-care costs. In the past three years, as many of these programs converted to for-profit status and sold shares to the public for the first time, the growth virtually exploded when Wall Street turned bullish on prepaid health care.
"We weren't a visionary like Maxicare or United States Health Care Systems," said Blair, referring to the two most prominent for-profit HMO systems. "We knew the HMO business was a good business, but we did not think it would be as potentially rewarding as it was. It was only in the last couple of years that we sensed the potential."
At 42, Tom Blair essentially runs the firm's Rockville headquarters, while Jurgovan, eight years his senior, runs the firm's operations on the West Coast. The two met 10 years ago when they worked at Litton Industries, the Beverly Hills-based conglomerate, where Blair was in corporate development and Jurgovan was a director of Litton Bionetics, the firm's health-care subsidiary.
At the time, the federal government was dispensing huge amounts of money to groups seeking to develop and establish HMOs. But many of these groups, which included doctors, hospitals and community coalitions, had virtually no expertise in prepaid health care. Jurgovan and Blair started their business to provide technical assistance -- primarily financial planning and marketing services -- to these start-ups.
The company opened offices in Rockville, as Blair jokes, "to be near the source of all good" -- the federal HMO office located in the Parklawn Building on Fishers Lane.
Blair displays an oddball sense of humor that employes say he retained even in leaner days. He eagerly recounts the tale of his wife pretending she was a secretary the day a prospective client came to check out Jurgovan & Blair's offices.
The meeting went well, but as the official left, he stopped to use the telephone on Alice Blair's desk. The phone was not plugged in; the cord had simply been wrapped around the legs of the desk. Blair recalled that "Jurgovan turned green, grabbed the phone and said, 'Why don't you use my phone? This one has a lot of static on it.' "
The firm won the contract, as it would many more, and gradually built up a small consulting practice. But it also moved to diversify -- a critical step to survival as the government funds dried up in the early 1980s. Changing With the Times
Gino A. Nalli, president of MD-Individual Practice Association, a Rockville-based HMO which used some JBI services, noted that other consultants flourished in the heyday of government programs but subsequently were squeezed out. JBI, he said, "was sensitive to the changing environment -- to the government moving out and to the privatization, if you will, of the industry."
Blair and Jurgovan, who were personally liable for some of the early bank loans the company took out, had a direct stake in these changes. "We were looking at initially living off the grant dollars, and that had a finite horizon of perhaps two, three, maybe five years," said Blair. "Given that Roger and I each had 25-year mortgages on our houses, that was a very sobering thought."
The new market they chose was data processing. As early as 1980, Jurgovan and Blair realized from their consulting that weak data-managing systems were a major problem for many start-up HMOs. But it was not until 1982 that the first software package was actually delivered -- to a Wisconsin HMO. The intervening years saw the company spend $1.5 million and nearly run into bankruptcy in order to develop one of the industry's first compehensive data systems, according to Blair.
But it was to be the turning point in Jurgovan & Blair's fortunes.
A good data-processing system, according to industry experts, is absolutely essential to the success of an HMO. The reason lies in the unique nature of the beast.
HMOs save money because they seek to control the unnecessary use of health-care services. Unlike normal indemnity insurance companies, which simply pay medical bills as they come in, HMOs seek to identify which doctors are practicing efficiently and which are not. To do this, they need a flexible computer-software system, which not only processes insurance claims but also tracks utilization and cost patterns, as well as other unique tasks for HMOs.
"You have to say to Dr. Jones that your average medical costs are $38 per member and the average is 50 percent less," said Blair. "You have to be able to box someone in and say here's why it appears your costs are high, Dr. Jones. Here's what you have to do to change."
Accordingly, the firm designed a comprehensive data-processing system that has become one of the standards for the industry. William R. Boyles, publisher of Health Market Survey, a newsletter that tracks the industry, said that antiquated data systems remain even today "one of the most critical drawbacks in the industry. There is a serious lack of sophistication in HMO data systems."
Consequently, industry experts say, demand has been high for the firm's software system, despite the relatively high price tag: $500,000. The system has been installed in HMOs run by some of the industry's biggest plans, including several Blue Cross and Blue Shield programs and HMOs being developed by Cigna Corp.
In 1982, at about the same time the data-processing business picked up, the firm moved into the management of HMOs when it signed a contract to run Virginia Health Plan, which has subsequently expanded into Maryland and the District under a new name, Network Health Plan. This management arm of the company has since expanded to account for about 45 percent of revenue, according to Blair, and is the fastest growing part of the business.
With sale of the company to American International, Jurgovan & Blair is entering a fourth and perhaps most uncertain stage of all.
Jurgovan & Blair began considering the possibility of going public or merging with a larger company last December -- a logical step, given the intense interest in HMOs evinced recently by Wall Street and the insurance industry. The idea of an initial public offering was fairly quickly discarded, according to the firm's officials and investment bankers.
Raising immediate capital, the reason for an offering, was not a major short-term need, Blair said. Financially, moreover, selling the firm in its entirety to another firm would be far more lucrative than selling off a portion of its shares on the open market, according to James Dwyer, a mergers and acquisitions officer at E. F. Hutton, the firm's investment banker. Seeking New Markets
Strategically, linking up with an insurer also made more sense for opening up a new market, according to Blair: running the health benefit programs of major coporations. The alliance with American International, a huge international financial services firm with more than $5 billion in yearly revenue, will give JBI access to important Fortune 500 accounts, the firm's officials said.
"Many employers are frustrated with health care. And they're sort of frustrated with HMOs," said Blair, who with Jurgovan will continue to run the company under the new owners. "They all went for-profit. Therefore, they're all reducing utilization and keeping profits, rather than passing the savings to the employer."
Under Blair's scenario, employers won't deal with HMOs per se. Instead, through JBI, they will negotiate direct deals with doctors and hospitals to provide health care for their workers. JBI also will set up programs to review utilization of health care and try to eliminate unnecessary services while retaining quality of care.
"I'll be very similar to an HMO, but I won't be calling myself an HMO," Blair said. "We're not abandoning the HMO business. We're complementing the business."
Outside industry experts express some skepticism about the idea. Douglas Sherlock, a health-care analyst with Salomon Bros. in New York, pointed out that most employers do not have a sufficient geographic concentration of employes to have leverage with health-care providers. Another HMO industry veteran, citing benefit consulting firms and insurance firms, said of JBI's plans: "There are already a lot of people who claim to do that. I don't think that there is a real growth market."
But Blair and American International officials are plowing ahead with their plans. "There are very few companies that are geared to helping organizations manage their health-care costs," said Douglas Paul, vice president for strategic planning at American International.
And Blair, noting that he is already close to agreement with two companies, simply said: "To be successful in this, I don't need 50 percent of the Fortune 500 companies. I need 1 1/2 percent. If I have seven or eight of the Fortune 500 companies, I'm at $500 million in sales."