Divide and conquer Featured

5:05am EDT November 2, 2005
When Jerry Meach's seat was upgraded from back-room finance guy to front man for American Community Mutual Insurance in 1997, he could only describe his new view as a very ugly picture in a financial scene that was "totally out of control."

More than 80,000 backlogged insurance claims each stagnated for about 80 days before clearing. Employees renamed the pending claims file "the black hole" because follow-up on these incomplete claims was rare. A stubborn attitude toward change characterized an operation steeped in tradition.

"When I took over, that was the worst you could do -- change something," says Meach, president and CEO of the Livonia, Mich.-based health insurance company.

At the time, a seemingly healthy $450-million revenue and piles of unprocessed claims hid the company's internal financial turmoil as American Community was losing $1 million each month.

The company simply wasn't keeping pace with the industry. Meanwhile, outdated pricing and past-due paperwork were dragging down its reputation with subpar ratings from benchmarking organizations such as A.M. Best.

"We were rated C-plus-plus, meaning very vulnerable at that time," Meach says. "And we did a lot of talking to get that."

Insiders involved in financials and accounting operations had no idea just how badly the company's balance sheet was suffering. Even Meach, who led the accounting department as treasurer, didn't discover the financial damage until his appointment to president opened up the big picture.

By then, American Community was in desperate need of a significant overhaul.

"In that year before 2000, this company just about hit the wall," Meach says, reflecting on how the business has gone from survival mode to profitable growth mode since he took the helm. "I've had faith that this place could be something because I know the people who are here -- they are hard-working and dedicated. They needed direction and leadership. We just kept on going."

It is said that reconstruction is a time of dynamic creativity, a time to adjust to modern times, adapt and reinterpret tradition. For Meach and American Community, 1997 marked an operational and financial point break.

Today, the company pays claims in eight days, its customers are solid and a "safer risk," and its smaller size -- $378 million in revenue in 2004 -- makes it a nimble player in a competitive industry.

The reconstruction era
Meach faced a series of managerial tests in 2000 when he initiated an aggressive turnaround plan to reroute American Community's financial direction. Most of these challenges centered on claims, pricing and rewriting policies -- basic discipline and attention to detail, he says.

Rather than taking an aerial view of the business, Meach examined each process, specific files and even individual cases.

Meanwhile, clearing a mountain of backlogged claims unearthed a tunnel system of financial tangles. Changes had to be made at every level.

The most difficult time for Meach was in 2001, shortly after he introduced change to the company and realized that he must sacrifice certain parts for the good of the whole. In this case, the antiquated parts were eight managers who were not interested in growing the new way.

"There were still 350 people whose jobs depended on this company being able to survive, and we weren't going to survive if we didn't [release some people]," Meach says.

Clerical staff was reduced by 10 percent and Meach let go some of his closest colleagues -- he had worked closely with each for no fewer than 15 years.

"I had an outside attorney by my side and an ex-state policeman sitting in the closet with a gun in his pocket," Meach says of the sensitive time.

He knew that those who were not willing to participate in rebuilding and restructuring the organization would only weigh down the company's progress.

"We knew we couldn't get to the next level without changing," he says.

The claims system also needed to be cleaned up. A lagging claims process frustrates customers and sparks litigation and an "unpaid" pile that sits for six months or more skews pricing. Cost of goods is predicted based on claims that are incurred, not those reported. American Community had plenty of reported claims, but they were unprocessed and, therefore, not figured into the claim payment history, which insurance companies use to price products.

"When you drag out the payment process, you can't price products properly," Meach says. "We found out that we were woefully undercharging for our products. In 2000, we had a $14 million surplus supporting $450 million of premium. If you look at that multiple, it's about 20-to-1. An acceptable multiple is a 4-to-1 [ratio of] surplus-to-premium."

Essentially, this is how Meach discovered that American Community was losing $1 million a month because of inaccurate pricing.

His first step was to speed up claims processing so it met the industry standard, which today is about eight days. Meach set what seemed at the time to be a lofty goal: To efficiently process clean claims and turn them around in 10 working days or fewer. That meant skimming a good 70 days off the claims turnaround time.

Now, 90 percent of claims are processed electronically.

"You can immediately load them into the system, and someone doesn't have to do data entry," Meach says. "They can adjudicate the claim and either get it paid, denied if it is not covered or pended it if needs additional information."

Transferring the once-manual process to an electronic system reduced the number of unprocessed claims to 3,500 the first year and eventually whittled the pile down to nothing.

"We cleaned up that black hole," Meach says.

Pricing discrepancies became more obvious once Meach mopped up the claims mess.

"We knew there were problems, but no one knew they were as bad as they were and how they could compound," he says.

"You view claims statements as a procedural issue," he says. "But that became a financial issue when we couldn't see our reserves properly."

American Community had changed payment patterns for the better but its improved procedures voided out past payment history. In effect, American Community could not recycle past product prices as an accurate and fair cost for its services unless it wanted to continue losing money.

That's when the "Dear Valued Agent" letters mailed.

"We described our progress, our plans, and when we made changes, we gave [agents] as much notice as we could so they could keep customers advised of what would happen," Meach says.

Ninety days after one particular letter, agents' customers noticed new prices for premiums and plans, as well as trimmed benefits in some cases.

"We [instituted] rate increases to bring rates to where they should be, which was not popular with our agents or insured," Meach says.

American Community lost some agents and customers during this time, but "safe risk" customers and loyal agents stayed on board.

"A lot of that [lost] business was not business you want," Meach says. "And, we weren't charging enough for [our services], so we were losing money on that business."

The pricing readjustment paid off. A complete financial makeover resulted from a combination of clean claims processing, new technology and readjusted rates. Rather than losing $1 million each month, American Community made $250,000 one month after it instituted its aggressive plan.

The next month, revenue increased to $600,000 and eventually, the company was up to $1 million a month.

"Then, things took off and we started to rebuild our surplus," Meach says.

With rates in line and claims in the clear, American Community could focus on ways to secure more business. But its cross-functional approach to selling its suite of products was not concentrated enough to convince customers of its quality products.

"Individual and group services were lumped together, sales was all together and employees were selling both sets of products," Meach says.

Instead, he wanted employees to specialize and hone their knowledge in either individual or group health insurance sales.

"Group and individual health insurance are two separate products, and they needed to be dealt with separately," he says. "The key was to establish disciplines so employees could pay attention to all of the details of their product lines."

This theory falls in line with Meach's divide-and-conquer rebuilding strategy.

"It is important to have that big picture, but that big picture won't materialize if you don't have the discipline to pay attention to details throughout the entire organization," he says.

Now, American Community is powered by a senior management team and mid- and lower-managers who oversee operations in two departments: Individual or group health insurance. Frequent all-staff meetings and internal communication through written announcements and face-to-face meetings help connect employees and cultivate a team-oriented culture.

And most employees don't mind when Meach wages a challenge in the conference room.

"During one of the very first employee meetings I held, I tried to get across the fact that the company hadn't changed in the past and that was why it had difficulties," Meach says. "I told them they could do two things: Either change or leave. I got a round of applause that lasted one minute."

The path to growth
With 350 employees and $378 million in revenue, American Community is a PT boat in a sea of battleships, according to Meach. And that's a position he prefers.

"It takes forever to turn a battleship around, but we can change directions and be far more nimble," he says.

Coming off a four-year period of significant reconstruction, Meach attributes American Community's quick reaction time to its modest size. He's not interested in competing with the 1,200-pound gorillas that negotiate bare-bones prices with providers, drive discounts that compromise physicians' cost of doing business and compete on cutthroat fee structures.

Those large health insurance firms want more market share, and in the process, they drive many smaller competitors away from the bargaining table, Meach says.

"We are that smaller company, so that is where the pressure comes," Meach says.

Meach knows he can't fight every battle, and he doesn't want to, anyway.

"We have to differentiate ourselves based on customer service," he says. "We have to take care of our agents, and the way we do that is by providing personal customer service the way it used to be done -- the way big companies refuse to do it."

Meach says his agents are his No. 1 customers, and he treats them as such. American Community's business cards supply direct-dial phone numbers so agents can reach underwriters -- not an industry norm. A Web site allows agents to track claims progress and access information that their customers might need after-hours.

Further, Meach makes a point to call on his agents. He travels often, booking appointments from 8 a.m. to 9 p.m., and ensures that he has enough time to ask agents questions and gather their feedback.

"Repeatedly, [agents] say, ™I've been in this industry for 30 years, and I've never had a company president in my office," Meach says.

Meanwhile, American Community's focus on consumer-driven health care plans and a department dedicated to these innovative products will help put the company on the map with small groups and individuals who want choice and control in their health insurance decisions. For example, The Secure Step Plan will roll out in December to provide a flexible option for those who might not invest in health insurance.

Customers who purchase this program can upgrade coverage as they see fit, which Meach says will appeal to consumers with a show-me-the-value attitude.

Still, the health savings account market continues to feed growth for American Community and it has introduced a consumer-friendly twist -- a plan-year deductible HSA that allows customers 12 months from the date of plan purchase to meet their deductibles as opposed to setting a January premium date, which could mean only three months to meet the deductible if a customer purchases the HSA in September.

"We feel very strongly about the consumer-driven health care movement," Meach says. "It is a good thing for America. We've developed a set of plans with an intention to bring affordable insurance to the large, uninsured population out there."

Also important to future growth is offering customers a diverse selection of health plans.

"You can't paint a whole wall with one brush," Meach says. "Different consumers want different things. But the main thing they want is affordable coverage, and the only way you can give that to them is to provide them with [consumer-driven] programs where they can make decisions and have control over their own coverage."

As American Community considers what consumers want, it will stretch its geographical reach to provide products to as many groups and individuals as possible. Meach is expanding the company's eight-state battle ground to include 15 more it does not now serve. His goal is to color in a new state on American Community's service map each year.

"We'll pick states with favorable markets and offer products and distribution in those areas to expand our top-line growth profitably," Meach says.

His goal is to double the company's revenue to $700 million in five years.

"There is always something new around the corner at this place," he says, hinting at the sense of adventure that has kept him excited, positive and constantly pushing toward success.

"I like to make something new happen," Meach says, "to take something that is working well, tinker with it and make it better."

How to reach: American Community Mutual Insurance, (800) 991-2641 and www.american-community.com