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HealthSpring: Seeing Advantage in Medicare Advantage

May 14, 2015

In 2003, Congress enacted the Medicare Modernization Act (“MMA”), the first significant piece of healthcare legislation since the Balanced Budget Amendment of 1997 (“BBA”). Looking to leverage GTCR’s deep experience in managed healthcare services, we targeted healthcare industry niches that would benefit from the MMA legislation and identified privately sponsored Medicare Advantage (“MA”) plans as one such area. While the BBA had significantly cut reimbursement to these plans in 1997, the MMA restored reimbursement in a number of ways that encouraged private plans to provide attractive options to seniors. At that time, officials at CMS, the federal healthcare regulatory agency, were supporting the continued privatization of Medicare, and we believed well-managed healthcare companies in the MA industry would enjoy strong growth and profitability over the ensuing years.

During 2004, GTCR searched for an industry leader with whom to capitalize on this attractive growth opportunity. Our work led us to Herbert Fritch, the founder and CEO of HealthSpring (formerly NewQuest), a private, rapidly growing MA and commercial health plan company. GTCR believed that Mr. Fritch was one of the most talented and knowledgeable executives in the MA industry and that HealthSpring was a strong industry platform, managing higher-quality patient care at lower costs.

In addition to Mr. Fritch’s strong leadership and the quality of his team, we found the HealthSpring platform to be attractive for several other reasons. First, HealthSpring’s presence in four states provided both a diversified membership base and the opportunity to expand into adjacent markets. Second, HealthSpring’s strong focus on healthcare physician partnerships aligned economic incentives and helped drive high-quality patient care. Finally, HealthSpring’s evidence-based disease-management programs enabled the company to provide better healthcare on a more cost-effective basis.

In March 2005, GTCR partnered with Mr. Fritch to recapitalize HealthSpring, acquiring a majority stake in the company. We worked closely with Mr. Fritch to transform the business operationally, adding key senior managers to the team (including Kevin McNamara as CFO), helping to identify geographic expansion opportunities and winding down the company’s commercial health plan business. Collectively, these efforts enabled Mr. Fritch and his team to manage the rapid MA membership growth more smoothly and to prepare for a potential public offering.

Within GTCR’s first year of ownership, HealthSpring’s MA membership had increased by nearly 60%. GTCR worked closely with management to evaluate strategic alternatives and determined that a public offering would facilitate the company’s acquisition-related growth plans. HealthSpring completed an IPO in February 2006.