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Firm Benefits From Changes in Record Keeping

BY VITA REED

Ask Wall Street: TriZetto Inc. is on a roll.

Some 19 months ago, shares of the Newport Beach health care information technology company hit a low of $3 a share, giving it a market value of $120 million.

TriZetto since has brought on veteran managers, tinkered with its internal operations and focused on selling software and services to health plan operators amid a push for better Web-based health care record-keeping.

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The result: A share price last week of $14.28, giving TriZetto a market value of $610 million.

“I think the fundamental performance of TriZetto is driving the stock price,” said Jeffrey Margolis, the company’s founder and chief executive.

The company was “unfairly placed in the post-dot-com penalty box” in the past, Margolis said.

TriZetto provides software and services for health plan insurers and benefits administrators. The company posted net income of $5 million on revenue of $73 million in the second quarter, compared with a profit of $400,000 on revenue of $68 million a year ago.

The company raised its profit guidance for the second time this year following the second-quarter earnings release.

Deals such as a software and services pact with Great-West Life & Annuity Insurance Co., whose health care unit provides plans for about 2 million members, have helped the company. TriZetto announced the Great-West deal in the summer.

Industry trends should continue to benefit TriZetto, according to Gene Mannheimer, a senior research analyst in the San Diego office of investment bank Caris & Co.

“Cost pressures, shortages of skilled IT personnel, technology complexity and the requirement to comply with (Health Insurance Portability and Accountability Act) regulations have led healthcare CIOs to increase spending on outsourcing as a percent of their budgets,” Mannheimer said in a research report.

The 1996 Health Insurance Portability and Accountability Act called for national standards for Internet-based health care transactions. It also created stricter regulations on the security and privacy of health data.

The goal of the act was to encourage more use of electronic data by the government, health insurers, hospitals and other health care providers.


New Software

TriZetto recently launched software for medical plan operators that provide coverage for Medicare recipients. The software will help insurance providers handle Medicare Part D, the plan’s prescription drug benefit that takes effect Jan. 1. TriZetto has 23 Medicare health plan customers.

Risks remain for TriZetto, Mannheimer said. A big one: continuing consolidation among health plans could reduce the number of its potential customers.

TriZetto’s customers include PacifiCare Health Systems Inc., the Cypress-based company that’s in the process of being acquired by Minnesota-based UnitedHealth Group Inc.

Other big combinations include Anthem Inc.’s buy of WellPoint Health Networks Inc. last year. The combined company, now known as WellPoint Inc., operates as a Blue Cross or Blue Cross Blue Shield licensee in 13 states, including California.

TriZetto counts about a third of the country’s Blue Cross and Blue Shield plans as customers.

Overall, TriZetto has more than 400 customers that provide health insurance for some 100 million Americans.


Change Is Inevitable

Margolis downplays the consolidation.

“Any time you work in the health care industry, the storm or challenge is change and the rate of change,” he said.

The turnaround of TriZetto’s consulting practice has been a factor in its improved results, Margolis said.

The consulting unit used to rely on several large fixed-fee consulting contracts as a way to establish credibility with big health plan customers.

Now that those deals have expired, fixed-fee contracts no longer are part of TriZetto’s business model.

“With the fixed-fee deals now in the past, (TriZetto) should continue to build off of this quarter as those consultants move on to other projects,” said K. Newton Juhng, a New York-based analyst with US Bancorp Piper Jaffray.

Analysts also point to management changes.

TriZetto’s senior management includes Kathleen Earley, the president and chief operating officer; James Malone, the chief financial officer; and Philip Tamminga, an executive vice president who heads the consulting practice. Earley joined TriZetto in November. Tamminga came on board in August 2004 and Malone was named permanent chief financial officer in March 2004.

“I see Jeff (Margolis) as the visionary for the company, who kind of sets the direction,” analyst Mannheimer said. “But what the company was missing was the strong, day-to-day leadership.”

In particular, Mannheimer said that Earley’s “big company experience” with companies such as IBM Corp. and AT & T; Corp., along with Malone’s experience at TriZetto rival IMS Health Inc., brought discipline to TriZetto.

(IMS once owned about 12.1 million shares of TriZetto, but the company teamed with San Francisco-based ValueAct Capital to buy back the stake in December for $81.7 million, based on its price of $6.75 a share at the time.)


Targeting Medicare, Consumer Plans

Some of TriZetto’s other initiatives include providing software for the so-called “consumer-driven” health care model, for managed Medicare and Medicaid programs, and for health plans that will participate in the upcoming Medicare Part D prescription drug benefit program.

One area that TriZetto’s taking a pass on: information technology for doctors.

“It’s difficult and expensive to sell technology services (to) physicians,” said Margolis, who noted that the market is “reasonably well served already.”

Margolis, formerly with FHP Inc. (now PacifiCare), founded TriZetto in 1997. The company has about 100 workers in Orange County and 1,400 overall.


Vita Reed writes for the

Orange County Business Journal.

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