July 23--VIRGINIA BEACH -- Sept. 28, 2005, was a dark day for Amerigroup Corp. -- possibly the darkest in the company's history.
For nearly a decade, the homegrown Virginia Beach organization had thrived, rapidly adding new states and members to its managed-care plans serving Medicaid recipients. Amerigroup's annual revenue had grown to $1.8 billion. It employed 2,800 people. Its stock had reached a high of $46.92 per share just two months before.
But something had gone terribly wrong.
The company had missed analysts' second-quarter earnings estimates, and now it was clear it would fall short in the third quarter, as well. Rather than posting a $24.7 million profit, it now looked as though Amerigroup would report a loss of $2.3 million for the quarter.
Jeffrey McWaters, founder and CEO, spun into overdrive. He met with investors and talked with board members, brought in outside actuaries and worked around the clock with his staff to target the malfunction.
He tried to be reassuring despite the lack of concrete answers, but he knew the mood was grim.
On Sept. 28, Amerigroup announced the expected loss. The next day, McWaters told securities analysts, "A problem like this makes you think we don't know what we're doing. I won't attempt to convince you otherwise."
Some responded by backing away from the Medicaid managed-care industry. Others scratched their heads.
By Oct. 27, Amerigroup's stock price had plunged to $15.45 per share.
Amidst the turmoil, McWaters turned to his chief operating officer. He'd known Jim Carlson for more than 20 years as a competitor, industry peer and colleague.
Now he charged Carlson with turning his company around.
"Almost every company sooner or later does what might be called 'hitting the wall.' Everything looks like it's going fine until it isn't," Carlson later said. "The company really got to a point of reconciliation between its success and its future."
As CEO seven years later, Carlson would be there to usher in Amerigroup's future: It would become a subsidiary of WellPoint Inc., one of the nation's largest insurers, in a $4.9 billion sale.
McWaters got to know Carlson's business instincts early in their careers.
Tasked by Cigna, his employer, to start a health plan in Florida in the early 1980s, McWaters picked Orlando. He opened a newspaper on his third trip there and felt a stab of surprise, sheepishness and grudging admiration.
The paper showed an artist's rendition of a beautiful new health center for Prudential. The location, on Maitland Boulevard and Interstate 4, was exactly the spot where McWaters wanted to build a new health center for Cigna.
"That was my introduction to Jim Carlson," McWaters said.
The men had a lot in common. Both were in their 20s with young families, both had been afforded the breathtaking freedom and responsibility of establishing health plans for large insurers in the Orlando market.
They had their differences, too: McWaters hailed from Kentucky with an accounting background, while Carlson grew up in Philadelphia'sNew Jersey suburbs and aspired to study pre-med before his distaste for chemistry prompted a switch to business.
Carlson admired McWaters' energy and charisma.
They competed from offices a block apart but saw little of each other. Their bond strengthened when they unexpectedly shared a tragic moment in January 1986.
Carlson was moving on to a job in California, and McWaters called to congratulate him. While they chatted on that crystal-clear day, both watched the launch of the space shuttle Challenger through their windows.
Their friendly conversation trailed off as they saw a streak in the sky, followed by an explosion.
"Is that what I think it is?"
"I think so."
"I've got to get off the phone."
They kept in touch sporadically.
Carlson founded HealthSpring, a physician group practice management company. He stayed on after it was sold, and remained after that company was acquired by UnitedHealthcare. Then he left to co-found another startup: Workscape, which offered Internet applications to help employees understand and manage their benefits.
McWaters also took the entrepreneurial route. He co-founded the company now known as ValueOptions in Norfolk, which coordinates behavioral health care.
He left in 1994 to build another startup, originally called Americaid Community Care. The goal, McWaters says, was to improve access to primary care physicians for a large number of low-income, underserved people -- a class of people he felt the health care system had abandoned.
Medicaid worked predominantly as a fee-for-service program. He felt that a managed-care organization would help patients receive better-quality health care while giving states someone to hold accountable. The company would reach out to members and emphasize prevention and education, and he thought it could make money.
"It's kind of like doing good by doing good," he said.
McWaters was ambitious: Medicaid existed in all 50 states, so Amerigroup had a lot of options. He researched each new market carefully, to be sure it was a fit.
The company expanded rapidly by buying existing plans and starting new ones.
"We knew we could be national," he said. "Everywhere there was a Medicaid patient, we knew we could deliver a better system of care."
McWaters always intended to take the company public. He wanted to pay back the original investors, offer stock options to keep good employees and give states a level of transparency to build their confidence.
It didn't happen when he first tried in 2000. There were too many hot dot-coms, even though some of those companies reported no revenues, much less a profit like Amerigroup.
Finally, Amerigroup became one of the first companies to go public after 9/11.
Carlson called to congratulate McWaters.
He'd retired from Workscape by then, although he wasn't more than 50. He spent a few years of downtime in Northern Virginia with his family.
Carlson wasn't quite sure what would come next, but he figured it would find him. Within two years, McWaters had recruited him for Amerigroup.
Carlson liked that the company was specialized, that it was public and that it was small.
He said, "I think there's something to be said for a business that's small enough that you can get things done, but big enough to have the resources to do them right."
McWaters learned of the third-quarter missed-earnings forecast in 2005 while on a short vacation on the Chesapeake Bay.
He felt a pang in the pit of his stomach. Then he followed one of his guiding principles: Run to the danger. Experience told him, if you think there's a problem, there probably is one, and you must deal with it immediately.
He raced back to Virginia Beach.
Over weeks and months, McWaters and his executives figured out what had happened.
The Medicaid managed-care market in Fort Worth, Texas, had dwindled to Amerigroup and one other competitor. When the second plan folded, Amerigroup took on its members at the state's request.
Those patients hadn't been receiving medical management for a while under the flagging plan, McWaters said, and they ended up needing more care than Amerigroup had anticipated. In particular, some women in advanced stages of pregnancy hadn't received adequate prenatal attention, so their pre-term infants needed expensive care.
What's more, the company had sped up the processing of some claims as it switched to a new computer system, which resulted in expenses hitting the books earlier than expected.
Thomas Carroll, a Stifel Nicolaus analyst who follows Amerigroup, offers an alternative explanation. He points to a study showing that the number of claims from Medicaid patients drop immediately after a hurricane as people deal with the aftermath. The claims spike a few months later, as people go to the doctor to catch up on routine complaints and get attention for storm-related ailments, such as asthma exacerbated by mold growth.
In 2004, Florida -- one of Amerigroup's markets -- experienced the effects of four major hurricanes. The resulting ebb and flow of claims may have interfered with the company's ability to meet its forecast, Carroll said.
Whatever the reason for Amerigroup's earning revision, the company wasn't alone: Two of its main competitors experienced the same thing around that time, Carroll said.
In September 2005, one skittish analyst called the companies "overvalued" and wrote that "we now suggest investors avoid the Medicaid managed-care space altogether unless they have a time horizon longer than the 12 months on which we generally base our ratings."
Looking back, Carroll attributes the failures to meet estimates to a slowdown in revenue growth as the pace of acquisitions diminished. The companies then had to dip into their earnings to bolster their reserves.
"It was the first big decline after the stock had really worked well," Carroll said of the public Medicaid managed-care companies. "Post-'05, the companies all really invested themselves -- kind of remade themselves, so to speak -- and came out of that period of time stronger and better able to operate."
Amerigroup leaders recognized a time for transition.
John Littel, executive vice president of external relations, saw that period as a stop in the classic evolution of a company from small and entrepreneurial to maturing and mid-sized.
"It's good to have a healthy dose of self-awareness," Littel said. "That was sort of a reminder that we need to be very aware of all of the components to success and not to just say, 'Because it was successful in the past means you're going to be successful in the future.'?"
Carlson dug deep into Amerigroup's core and started making changes.
"I figured out that the people who do this successfully get a very tight agenda of what they are trying to do, and they repeat it over and over again," he said. "They measure it, and they do it until they get what they need."
He looked at how the company credentialed providers, how its employees interacted with plan members and its program for complying with thousands of regulations across numerous states.
Amerigroup reviewed its claims processing and re-evaluated all of its contracts. And Carlson started the delicate process of assessing his workforce, making sure the right people were in the right jobs. The chief financial officer left before the end of 2005.
Carlson brought in more-experienced people who he felt would still be comfortable in their roles years in the future, when the company was even bigger. Amerigroup did better in the fourth quarter and for the year of 2005 than expected, but it took several months for the company to recover fully from its third-quarter miss.
The rocky years weren't over yet.
An ex-employee along with the state of Illinois and the federal government sued Amerigroup, claiming that the company had defrauded the government by discouraging women with advanced pregnancies from enrolling. Amerigroup maintained that the state had agreed that it was a bad idea for those patients to switch care; however, a federal jury ruled against the company. Amerigroup agreed in 2008 to pay a $225 million settlement.
In 2007, Amerigroup agreed to pay $5 million to settle a suit filed by shareholders, who contended that they had been defrauded after the company's share price tanked on news that it lost money in the third quarter of 2005.
McWaters stepped down as CEO in August 2007.
He was 51. He wanted a good, healthy decade with his family and some time to actively pursue his next endeavor. He talked about focusing on presidential politics and advocating for improvements in health-care coverage. In 2010, he was elected to the Virginia Senate, where he still serves.
He had no doubt who his successor would be.
McWaters hadn't consciously hired Carlson to take over the company, and Carlson hadn't taken the job with an eye toward becoming CEO.
But many of the top executives by then were Carlson's hires, so they were comfortable with him. So was the board. So was Wall Street.
It helped that the two men, both former internal auditors, saw many things the same way.
"In business, you don't want necessarily everybody around you that thinks like you," McWaters said, "but the person that's going to replace you, that's pretty good if they think kind of like you think."
In the past five years on Carlson's watch, Amerigroup increased its workforce to 6,600 and expanded to serve more than 2.7 million members in 14 states. Its revenue grew to $6.3 billion in 2011.
The company broke into the Fortune 500 in 2010, and it created a National Advisory Board of advocates and scholars promoting appropriate long-term care services for seniors and people with disabilities -- a relatively new market for Medicaid managed care that holds great growth opportunities.
On July 9, Carlson joined the CEO of WellPoint to announce Amerigroup's sale for $4.9 billion.
The combined company is poised to serve 4.5 million people in 19 states' public health insurance programs, making it one of the largest Medicaid managed-care providers at a time when the industry verges on stratospheric growth.
Under the agreement, WellPoint would pay $92 per share in cash to acquire about 48.5 million outstanding Amerigroup shares.
Carlson said last week that he couldn't yet speak freely about the details of the deal, but that he was optimistic about Amerigroup's future as a WellPoint subsidiary.
"This is probably the most dramatic thing we can do to really secure the future of our people here," Carlson said. "They've built something great here, and it's going to be able to go forward for a long time."
Amy Jeter, 757-446-2730, email@example.com
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