The American Hospital Association and other ground-floor investors in a patient-education company closely tied to prominent Dartmouth University researcher John Wennberg scored an impressive 880% return during a recent recapitalization.
The private for-profit company, Health Dialog Services Corp., raised $170 million from shares sold during a December 2005 financing deal. The changes in ownership added healthcare reinsurer American Re to its board of directors and netted the Chicago-based AHA, one of the company's original owners, an undisclosed profit that could total about $22 million.
Health Dialog, founded in 1995 to develop patient education and coaching tools, has enjoyed rapid revenue growth in a burgeoning healthcare niche: disease management.
But for the AHA, Health Dialog's success brings both a windfall and a potential conflict of interest. In August 2005, Health Dialog landed one of eight CMS pilot projects to help 20,000 Medicare patients manage congestive heart failure or diabetes. In theory, the AHA could use its influence to steer such business to Health Dialog.
AHA spokesman Richard Wade said Health Dialog will fully disclose the hospital group's financial ownership. The AHA did not discuss Health Dialog's pilot with federal officials and the association "will have no hand in promoting it," Wade said.
During the latest round of financing, the AHA scaled back its investment but did not exit Health Dialog completely, Wade said. The American Hospital Association put $2.5 million into Health Dialog in 1997, which totaled 7% of the company's then-$32 million budget. The association sold half its shares and retained less than 1% ownership in the company, Wade said, though he declined to say how much the deal grossed.
Wennberg, whose son, researcher David Wennberg, is president and chief operating officer of Health Dialog's analysis subsidiary, stands to gain from Health Dialog's success indirectly. The fast-growing disease-management company holds an exclusive commercial license on data and information generated by the Foundation for Informed Medical Decision Making, a not-for-profit that John Wennberg co-founded with Albert Mulley. The co-founders received $153,551 each in royalties and consulting fees from the Boston not-for-profit for the year ended June 30, 2004, tax records show. That's down from 2003, when the foundation reported paying each founder $176,033 in consulting and royalty fees. Dartmouth Medical School and Massachusetts General Hospital also receive royalties from the foundation.
The elder Wennberg, who is recognized for his research on wide variations in healthcare use, said the foundation organizes scientifically sound and unbiased information to help patients make choices about their care.
"Health Dialog has been successful in ways that many other efforts have not been in addressing variation and improving opportunities for patients to be involved in their care," John Wennberg said. "It's been a real success and one that I'm quite proud of."
The outlook for Health Dialog continues to be positive said George Bennett, co-founder, chairman and chief executive officer of Health Dialog. Projections put the company's revenue at $200 million for 2006, he said.
Inc. magazine ranked Health Dialog among its 500 fastest-growing private U.S. companies in the past three years. Bennett said Health Dialog is profitable but declined to give specific figures. The gains fueled interest from investors looking to acquire or gain a foothold in the company, prompting the recent recapitalization.
Health Dialog's performance delivered more than an 800% return to initial investors, according to Spencer Trask, a New York venture capital firm with a stake in the company. The hospital association remained an owner because of Health Dialog's strong performance and because of its focus on patient education, which is the reason AHA invested seven years ago, Wade said. As part of the company's original ownership, the AHA was able to appoint a board member and chose John King. King, former CEO of Legacy Health System, Portland, Ore., served as AHA chairman in 1998.
Health Dialog's CMS contract guarantees savings of 10% during the three years and early results from the pilot project have "been very encouraging," Bennett said.