PHILIP M. PEAD - PER-SE TECHNOLOGIES - (PSTI)
CEO Interview - published 04/02/01

DOCUMENT # MAA610

PHILIP M. PEAD is President and Chief Executive Officer of Per-Se Technologies, Inc., and a member of the company’s Board of Directors. He assumed these positions in November 2000, after having served in several other key senior management roles within the organization since 1997, when he joined the company. Most recently, he was Executive Vice President and Chief Operating Officer for Per-Se, where he was responsible for the strategic direction and comprehensive management of the company’s three business units. Prior to assuming the Chief Operating Officer role, Mr. Pead was President of Per-Se’s application software unit, where he consolidated the six heritage technology companies and significantly increased investments in research and development and customer service. In addition, he led the company in launching its e-Health Solutions division, thereby creating the third–largest medical transactions clearinghouse. Mr. Pead previously served as Senior Vice President of International Operations at Dun & Bradstreet Software, an enterprise application software company based in Atlanta. From 1994 to 1996, he was Vice President at Attachmate Corporation, where he was responsible for overseeing operations in the company’s Asian and Latin American markets. Mr. Pead held executive positions with Banyan Systems and Sun Data Systems and began his career at Comshare, an executive information systems company based in Ann Arbor, Mich. Mr. Pead earned a Bachelor of Science degree in Economics from London University.

Sector: Specialized Health Services

TWST: Could we begin with a brief historical sketch of the company and a profile of the company as it is right now?

Mr. Pead: Per-Se Technologies is the largest provider of business management outsourcing services to the hospital-affiliated physicians market. By that I mean we provide services to physicians to manage their reimbursement for services they provide to patients. Our business management outsourcing services are essentially a back office function performed for hospital-based physicians. The follow on businesses that we have created really focus on the front office for these physicians — the hospital. Our Application Software division moves the solutions into the hospital environment and our e-Health division focuses on solutions that tie the front office and back office together. Regarding the history of the company, it was previously called Medaphis. Medaphis had a roll up strategy in which they acquired a multitude of regional billing companies focused on physician services in the mid-1990s. As a result, the Physician Services division is a national provider of those services in the marketplace today.

TWST: You’ve mentioned that you are the largest in your field. How much of the market do you have?

Mr. Pead: We still have a very low percentage of the market. Revenues in the Physician Services business are around $225 million annually. The market as we see it for those services is about $7 billion. So, you can see that even though we are the only national player to offer these kinds of services, we still have a relatively small market share and a great opportunity to grow.

TWST: Would you comment on what you’ll do about your opportunity to grow?

Mr. Pead: We intend to grow our services business organically, given that there is still a significant opportunity for us in the marketplace. We are adding to our sales organization and leveraging our very large account management organization by capitalizing on word-of-mouth opportunities. The Physician Services market is a very referenceable market with references being a large source of opportunity. In the application software marketplace, it’s very competitive out there, but we have some significant competitive advantages in the market that should allow us, again, to grow organically in the double-digit range. For e-Health, we see ourselves as one of the market leaders. We are the third largest electronic clearinghouse for medical transactions and high-speed print and mail services in the healthcare industry. Our growth rate has been substantial over the last 18 months, when we formed our e-Health concept internally. We formally created the division in March of last year. Again, the market opportunity for transaction services is improving, especially as HIPAA becomes a business driver for us.

TWST: Can you comment on any other large-scale trends that you’ll be playing into?

Mr. Pead: Right now, our goal is to be very focused on providing the best possible service to our physician clients. It’s still a very challenging market for physicians’ reimbursement, given the complexity of reimbursement and the addition of HIPAA. In application software, I think one of our greatest opportunities is on the financial side. We have been clinically focused in our software. Business1, which is our new patient accounting system, has already attracted some very serious inquiries and we recently announced our first Business1 sale to the fourth largest public metropolitan health system in the US. There has been no new software system in the hospital patient accounting market for almost 18 years. When you think about what’s occurred in the reimbursement for healthcare during that period, these hospitals need assistance. Our new software will make a dramatic improvement, allowing hospitals to have a dramatic improvement in their cash flow just by virtue of its architecture. There is enough to do in the areas that we are focused on today. Clearly, there are other outsourcing services that we are going to take a look at over time that would provide us with an opportunity to leverage our unique skills and technology into some other market areas.

TWST: Can you mention any other competitive advantages that you might have?

Mr. Pead: On the Physician Services side, our national scale allows us to capture information that no regional or in-house solution provides. Essentially, because of the data that we capture for every claim that we submit to every payor, we’re able to store claims information in a large-scale database that allows us to subsequently report on that information. This data allows physicians to compare themselves in one state to another, in terms of the reimbursement for each procedure performed for a patient as well as what kind of reimbursement they receive from a similar payor. Therefore, the physicians are able to assess their productivity. They’re able to see what kind of denials they’ve had. They’re also able to see what their revenue per procedure is and compare that to the same specialty in a different state. None of this information has ever been available before simply because of the fragmented nature of the reimbursement process. Being a national player allows us to provide that information, more so than any other alternative. On the application software side, as I’ve mentioned, we’re the only company to offer the functionality our new patient accounting solution provides. This claim is being born out by some of the prospects’ comments that we have received. On the clinical system side, HIPAA, as you know, is certainly driving the hospitals to look at ways to protect patient data. The Institute of Medicine report regarding medical errors and the California legislation that was recently passed is driving hospitals to embrace an electronic patient record as the only solution to protect patients from the high incidents of medical errors in a manual environment. In our third division, e-Health, our competitive advantage is simply the breadth of the transaction infrastructure we have, particularly in the government claims area where we have more direct connects to payors than any of our competitors.

TWST: Can you comment on how you protect people’s records?

Mr. Pead: The issue for those healthcare providers that are not automated is that a paper patient chart is handed to many different providers during the course of a patient’s treatment. Knowing who’s reviewed that information and whether or not the chart information has been changed or removed is very difficult in a manual paper chart environment. In an electronic environment, such as the one provided with our clinical system called Patient1, it’s very easy to provide an audit trail for anyone, which includes the level of security for each individual looking at the information. A report can be produced instantly as to who has reviewed the information; when the last change occurred to that patient information and who has the right to review which piece of data associated with that patient’s care. That’s the kind of privacy that HIPAA is mandating will become law in 2003. We’re already doing that for all our customers and we’re seeing increased interest in hospitals that do not have such an environment. So our protection for patient privacy is essentially an automated one, particularly in our clinical systems. For our Physician Services, again, HIPAA is going to mandate the same level of field-level security. We are able to provide that with the technology in our Physician Services division better and more cost effectively than the physicians themselves or regional billing companies will be able to do.

TWST: From what you’ve just said, the prospects seem enormous.

Mr. Pead: The market size is certainly there. Obviously, the next step is to continue to execute on our strategy.

TWST: What will it take to execute in terms of the people you have working for you? What do you do to get the best people and to keep them at all levels of the company?

Mr. Pead: We primarily recruit from our marketplace because people in the industry are the ones who understand the physicians’ needs in terms of services, application software and e-Health. We have a very competitive compensation program. Per-Se is located in multiple states around the country with over 130 offices. So we are able to draw from the available labor pool in multiple markets. Given that we are a national leader in physician services, that we have an excellent customer reference base in our software area and that our e-Health division is one of the fastest growing businesses in the market today, we have not had a problem attracting really fine people.

TWST: Is your technology constructed in such a way that you can develop it as it goes along rather than replacing it? Could you explain that in layman’s terms a little bit?

Mr. Pead: It depends again on the solution that we are offering. In our applications software area, this is clearly an advantage that we have and what you are referring to is essentially the object-oriented architecture that technology provides today. Simply put, we are able to create objects that relate to solutions. This allows us to integrate those solutions so that as the need arises in our customer base, it’s relatively easy for us to develop, create and deploy those objects. As opposed to the previous method of development, which was in a client/server environment and was much harder to develop and deploy those applications as the market changed.

TWST: As your systems advance, how much need will there be for paper, or will there always be a certain amount of paper backup?

Mr. Pead: In the healthcare industry, people are always scared about not having some kind of backup for an electronic solution. I think that over time that fear will change. It has already changed in the airline industry, even though the change may be slow. We still have paper tickets out there, but more and more passengers are opting for an e-ticket solution because it’s easier to get your ticket at the airport rather than receive it in the mail. The same thing is true in the healthcare industry. As people become more and more reliant on automation and the systems become more and more reliable, I think there will be a natural trend toward less reliance on paper backup. In that vein, we have created a Web-based patient portal, called PerYourHealth.com. It allows you, a patient, to view your statement of medical charges online. If you have ever had any healthcare treatment, then you know how many bills you receive after a procedure. This portal allows you to go onto the Internet, type in a password and a control ID, and review your account online. You don’t have to rely on a paper statement to be delivered to your house. Anytime there is a change in your account, this allows you, as a patient, to either pay your bill online or change your demographic information, such as your address and insurance information. The major reason why patients are slow in paying their medical bills is because their demographic information is incorrect and they believe the insurance company should be picking it up.

TWST: Can you give us some idea then on how the company might grow over the next two or three years?

Mr. Pead: I really believe that there is a great opportunity for us to grow organically without acquiring market share based on what we’ve seen in market acceptance. With our current products and services offering, our national leverage within our market spaces, our focus and the talent of our employees, we should be able to grow in the double-digit range over the next three to five years.

TWST: With the national leverage that you speak of, it should mean that your operating margins should get wider and wider as time goes by, is that correct?

Mr. Pead: That’s definitely our goal. As far as our near term, we have an opportunity to dramatically improve our cash flow earnings as we have done over the last year. We’ve still got significant opportunities to improve over the next two to three years.

TWST: Within this picture, which is generally favorable, what difficulties lie in your way?

Mr. Pead: We need to maintain our intense focus on customer service in the Physician Services division. When Medaphis had their roll up strategy, customer service lost its focus and as a result, we saw a higher level of customer attrition than any of us would want. Our goal is to retain our customer base in the Physician Services division. In order for us to insure that this occurs, we need to have a significant, intense effort on customer satisfaction. That is primarily our goal for 2001 — to have the highest levels of retention in our customer base for Physician Services.

TWST: Will that be your own personal focus?

Mr. Pead: That’s actually a divisional focus, a company focus as well as my own personal focus.

TWST: What were the reasons for the difficulties that you had last year and what have you done about them?

Mr. Pead: It’s an interesting state of affairs that we have grown our EBIDTA from $5 million in 1999 to $22 million in 2000, and yet we saw an approximately 75% reduction in our market capitalization. Last year, we set very aggressive goals for improved profitability in our Physician Services business, which were to be achieved through significant cost reductions as well as top line growth. These aggressive targets caused us to focus less on customer service, and we realized, late in the year, we had to refocus on our customers. I think that all points to setting the right expectations. The market expected us to do better in the third quarter and we certainly led them to believe that. Unfortunately, sometimes growth is not necessarily linear. We missed our expectations in the marketplace and the market being what it is today punished us accordingly. So while we saw significant income growth in the first two quarters of last year and ended the year itself up dramatically over the year before, setting the wrong expectations created the resulting stock devaluation.

TWST: Do you feel that you have the management team in place right now to accomplish your goals?

Mr. Pead: I do. The management team is relative new in their roles but not new to the company with most having been with us for about four years. When we recently divisionalized each of our solutions in the marketplace, they took on new roles as Presidents of their divisions. In addition, we’ve recently made a change at the Chief Financial officer position. The management team is very focused and excited about their roles and I’m very happy with the group that we have in place today.

TWST: Could you give us the two or three best reasons why long-term investors should be interested in Per-Se Technologies?

Mr. Pead: If you look back at what has happened over the last three years, the company has achieved a significant turnaround, which now allows us to focus on profitable growth in our three divisions. We recapitalized our balance sheet, sold off non-core businesses to better invest those assets and refocused a fragmented business into three core divisions operating solely in the healthcare industry. The company has gone from EBITDA of negative $5 million three years ago to positive $22 million in 2000. In our largest business segment, Physician Services, we have no barriers for growth with respect to signing new business. Over the last two years, we have seen that the market opportunity for us to sell new business is very strong. As an investor, I would look at the levels of retention in the division’s existing customer base. Normalized retention levels, which we are working towards together with continuing to sign new business at the rate that we have in the past, positions Physician Services for both top line and bottom line growth. Also, while we continue our commitment to improving the profit margins of the division, we are now focused on improving processes rather than just direct cost cutting. In the fourth quarter of 2000, we launched our process improvement project in our largest processing centers. This project will focus on establishing standardized processes and procedures to ensure that we are meeting our customers’ needs through improved reporting and responsiveness, in the most efficient manner possible. In our Application Software division, we have among the highest margins in the industry, and certainly have shown our ability to hold our own, even with some larger companies out there offering competing solutions. If you look at our customer base, we can be very proud of that reference space and we will continue to leverage it into new opportunities. With both HIPAA and the Institute of Medicine requiring patient privacy and the automation of the patient record to prevent medical errors, privacy and the reduction of medical errors will be two significant business drivers for us over the next three years in selling our application software. In our e-Health division, the solutions we have, allowing physicians, providers and hospitals to look at information related to the claims they are processing is a significant competitive advantage for us. Again, no one else in the business today stores those claims in a large-scale database for providers to be able to report against. So our three divisions are poised for substantial growth over the next few years and given that there are no market limitations, we feel well positioned to capitalize on the market opportunities.

TWST: Is there anything we’ve left out of our discussion that you’d like to bring in or re-emphasize?

Mr. Pead: The other opportunity that we have over the next few years is in the international marketplace, particularly with our application software. Many of the governments overseas offer health care on a socialized basis, where the government is a single payor. Many of these governments are pushing hard to have an electronic patient record in place by the year 2005. We’ve operated in many of those countries for a substantial period and we think we are in a better position than our competitors to capitalize on this opportunity.

TWST: Does this mean that many of these foreign countries really haven’t done very much in your area and have not been well equipped?

Mr. Pead: The majority of the hospitals in these locations have a combination of some semi-automated and manual processes. They have not embraced or invested in integrated, patient-centric solutions to allow them to manage the care process. We’ve had a lot of experience in that, and given that we’ve operated in these countries for a long time, it gives these countries some level of comfort that we are not just an American company flying in and flying out, depending on the market swings. As such, given the level of automation that these hospitals have embraced over the years, their opportunity to improve the clinical process by utilizing Patient1 and Business1 has a substantial upside for them and us over the next few years.

TWST: As the CEO, what for you is the most important thing for you to do in the next few months?

Mr. Pead: Clearly, it has to be improved shareholder value and that has to come from demonstrating that we can grow our revenues while improving our profit margins. First, we have to retain our customers and have the highest levels of customer satisfaction in our Physician Services division. Secondly, we need to aggressively sell and implement our technology products and services in our Application Software and e-Health divisions. In the past, we focused on improving our earnings through cost cutting, which of course is important, but it has to be balanced by a greater focus on satisfying customers, which will lead to revenue generation. Our profit margins will increase by focusing on improving our business processes, and leveraging our infrastructure on a larger revenue base. In order for us to provide that shareholder value, retaining our customers in Physician Services and growing all three of our business segments by aggressively attacking the marketplace with new solutions and a larger, more focused sales organization is key for us.

TWST: Thank you. (MC)

PHILIP M. PEAD
 President & CEO
 Per-Se Technologies, Inc.
 2840 Mount Wilkinson Parkway
 Atlanta, GA 30339
 (770) 444-5300
 (877) 737-3773 - TOLL FREE
 (770) 444-4513 – FAX
 www.per-se.com
 e-mail: investors@per-se.com

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