Joe Anderson, CEO of Schaller Anderson, discusses GA's Cross Sectoral Expertise

06.02.04

General Atlantic is a leading investor in companies in which IT drives growth. In the following interview, Mark Dzialga and Braden Kelly, Managing Directors at GA, discuss how the firm has been able to leverage its expertise in business process outsourcing and its understanding of the healthcare marketplace to invest in Schaller Anderson, an industry-leading healthcare company that uses IT extensively. Joe Anderson, CEO of Schaller Anderson, comments on industry trends and the ways in which GA has been helpful as an active investor and partner.

Braden, you have been involved in the healthcare sector for a number of years. How do you evaluate opportunities in this sector?

BRK: There are certain fundamentals that we look for in any investment opportunity, and they apply to all of the deals we have completed in the healthcare sector over the last decade. Our first step is to identify the attractive market opportunities, which requires an understanding of the macro trends in healthcare, as well as the sub-sectors within the industry. We work to identify the highest quality management team that has deep knowledge of the industry with a meaningful understanding of the competitive dynamics, trends and key players. We then focus on companies that use IT as a differentiating element, a competitive advantage that we can make sustainable through our work. Our early healthcare investments were companies like Eclipsys, Envoy and Healthvision that provided information technology to the healthcare market, while our more recent investments – Schaller Anderson and Multiplan -- are healthcare companies that are significant users of IT.

How often in your work in this industry do you draw upon resources from other sector teams or experts within GA?

BRK: We draw upon various resources within GA any time we make an investment, and we do so in three ways. First, we tap domain knowledge across sectors, as when our healthcare team worked closely with our business solutions group to complete the investment in Schaller. Second, each of our sector groups leverages regional knowledge globally, and, likewise, regions draw upon our expertise in particular sectors. For example, our investment in CompuGroup, a healthcare IT provider based in Germany, involved close cooperation between our Düsseldorf office and our California-based healthcare team. Third, we draw upon our specialized expertise in technology (Partner Peter Bloom), finance (Partner Franchon Smithson) and other functional areas to assess investments and later to assist with supporting our portfolio companies.

Mark, how is this approach different in the business solutions sector, and where do you see attractive investment opportunities?

MFD: Across sectors, our general investment approach is similar, but the evolution of opportunities differs. Outsourcing, a sector in which GA was among the first private equity firms to focus as a major area of investment, provides a good example. Between 1998 and 2002, our strategy of investing in outsourcing was primarily focused on enterprise outsourcing services used by large companies. These services, which related to human resources, customer care, supply chain, finance and accounting, are in areas in which the front, middle and back offices share technology and processes. In 2002, we made a strategic decision to become vertical market-oriented as well, with a special focus on healthcare and financial services. Our work in the healthcare BPO area is an evolution of our strategy in the business solutions sector. This area represents a tremendous opportunity as both providers and payors look to utilize technology to improve quality of service at lower cost.

How did GA become an investor in Schaller Anderson?

MFD: In a joint effort between our healthcare and business solutions sectors, we started to identify promising companies that provide outsourcing services to large payors, health plans and corporations. We looked at back office requirements of payors -- including the revenue cycle or claims administration / adjudication process -- and administration services companies for managed care plans and other large health care payors. Because we understood that Medicaid programs were large and growing, we looked for administrators of these programs. We found Schaller Anderson, the largest non-risk-based company managing Medicaid programs, as a result of this market mapping effort.

BRK: Completing the investment in Schaller Anderson was a full team effort. Once we had identified the company, Mark and I had an introductory meeting with Joe, followed by meetings in which Joe was able to meet with other GA partners and learn more about our firm’s history and value added approach. With all of our potential investments, we encourage CEOs to call upon management teams that we work with to hear first hand about their experiences partnering with GA. Our current portfolio companies are our best references. In Schaller Anderson’s case, Joe really did his homework and spoke with many CEOs who were able to share their experiences in working with GA.

How were you able to leverage GA’s expertise in both the business solutions and healthcare sectors?

MFD: Like our other BPO investments, Schaller is an operationally intensive business that acquires and manages large contracts and applies technology to enable its services. Because GA’s sectors are general organizing principals rather than rigid divisions, they allow for a great deal of productive sharing of expertise among our professionals. While the healthcare team brought deep industry knowledge to these two transactions, the business solutions group contributed our understanding of the business model for processing firms.

BRK: Schaller is an excellent example of an investment resulting from the intersection of our expertise in different sectors. Mark and I worked together to evaluate the company and help complete and execute the transaction. Schaller is a very successful company that has been around for more than 15 years, but never had an outside investor. When we met Joe, Schaller was already very profitable and had a strong balance sheet. The key was convincing Joe of GA’s ability to help the company execute its strategic vision for the business, and that capital was really secondary to the value of the partnership. GA’s long track record and collective expertise helped make that possible.

Joe, what have you found to be unique about GA, and how has the firm been helpful to you?

JA: Because Schaller did not require capital, we were not really looking for an investment partner. Instead, GA found us. Since our first meeting, I have come to understand and appreciate the many ways GA is unique. GA’s long term focus and IT expertise are most notable in this respect. GA is not a firm that puts money into a company and then flips the investment two years later, and that was very important to me. I have found GA to be a steadfast partner that works closely with me and rest of the management team, and it has the long term vision and technology expertise that are critical to success in the healthcare field.

What opportunities do you see Schaller Anderson pursuing in the next few years? How is the industry evolving, and how are you positioning the company to take advantage of changes in Medicaid, healthcare delivery and constituents’ needs?

JA: In the years to come, healthcare will remain a central public policy issue, particularly as the aging population demands more from a system that is already strained. In this environment, payors and providers alike will need to address how to provide higher quality patient care in the most efficient and cost-effective manner.

At Schaller, we focus on bringing together highly skilled and motivated people to deliver the highest quality care in a streamlined way. Underpinning our strategy for growth is our medical management expertise combined with our extensive use of IT. Our core business in the managed Medicaid space will remain a priority. We will continue to pursue contracts like our $300 million per year contract with the state of Delaware to provide managed care expertise to health plans throughout the country, while new initiatives like the behavioral health business will continue to fuel the company’s growth.

MFD: Today about 41 million people participate in a Medicaid program. About half of that group is in managed Medicaid, Schaller’s target market, and that number continues to grow. Schaller has developed a way to use technology to bring together operational and clinical expertise to better manage high quality health outcomes. Increasingly, states struggling to balance their budgets recognize that, with so much inefficiency in a process that is mostly administrative in nature, better medical and clinical management provides higher quality outcomes for their constituencies at a lower cost. Schaller exceeds industry benchmarks, and empirical data shows that it provides higher quality care at lower costs than its competitors.

Why does the healthcare industry remain attractive to GA, and what do you see as future developments?

BRK: The healthcare landscape -- along with the industry’s approach to IT -- is evolving in a meaningful way. Rather than over-investing in IT in the mid to late 1990s like the financial services and telecommunications industries, the healthcare sector under-invested during that period. There will continue to be increased focus at all levels of government, the corporate world and among the many interested parties to drive greater efficiency while improving the quality of care. We believe that IT is one of the key ways to effect that change, and for that reason, we believe that there will continue to be many attractive investment opportunities in this area.

The sub sectors we are evaluating today include disease management, the healthcare supply chain, BPO within the provider setting and informatics or the provision, use and management of medical information / data. IT is driving efficiencies in both the medical and pharmaceutical landscape (management of clinical trials, efficiency of drug development, distributing information to physicians). In the coming years, there will be an explosion of digitized healthcare data, and the effective use of information will be crucial to business success. As the need to aggregate, analyze and distribute that information increases, new players will emerge.

Braden R. Kelly is a Managing Director at General Atlantic. Mr. Kelly worked in General Atlantic’s New York City and Greenwich offices from 1995 through mid-2001, at which time he relocated to California to open General Atlantic’s Palo Alto office. He has extensive experience with applications and services companies and has specific expertise working with healthcare related information technology companies. Mr. Kelly is a director of several public and private companies, including Eclipsys, Healthvision, ProxyMed, Inc., Schaller Anderson and Tickets.com.

Prior to joining General Atlantic in 1995, Mr. Kelly was a member of the Mergers, Acquisitions, and Restructurings Department at Morgan Stanley & Co. Mr. Kelly graduated with highest honors from the University of Notre Dame and received a Bachelors of Business Administration degree in Finance and Business Economics.

Mark F. Dzialga is a Managing Director at General Atlantic. Mr. Dzialga has extensive experience in enterprise software, information technology and business process outsourcing. In his capacity as a General Partner at General Atlantic, Mr. Dzialga is director of several public and private companies, including Exult, Daksh, Multiplan, Creditek, Schaller Anderson and UPromise.

Prior to joining General Atlantic in 1998, Mr. Dzialga was the Co-Head of the High Technology Mergers Group at Goldman Sachs. Mr. Dzialga was with Goldman Sachs from 1990 to 1998 and advised many of the firm’s largest technology clients on acquisitions, mergers, divestitures, joint ventures and restructurings. Mr. Dzialga graduated from Columbia University Graduate School of Business, and has a B.S. degree in Accounting from Canisius College.

Joe Anderson co-founded Schaller Anderson, Incorporated in 1986. Today, he oversees the management and administration of the corporation and its subsidiary companies located in Arizona, California, Missouri, Maryland and Tennessee. He serves as a member of the Center for Health Care Strategies' Medicaid Managed Care National Review Committee, funded by the Robert Wood Johnson Foundation, and is past president of the board of directors of Central Arizona Shelter Services, Inc. He was appointed by former Gov. Jane Hull to the Arizona Governor's 9/11 Memorial Commission in December 2002.

_{Interview conducted by Pat Hedley, General Atlantic}