Option Care Inc. Business Information, Profile, and History

Company Perspectives:

Our clinically-focused trained staff works with the patient, the patient's physician, and the national, regional, or local managed care organization to provide a simple, single solution for patient care.

History of Option Care Inc.

Bannockburn, Illinois-based Option Care Inc. provides specialty pharmacy services and infusion (IV) therapy to people in their homes through contracts with managed care organizations, hospitals, physicians, and other healthcare providers. In the early 2000s, the firm operated a network of 130 pharmacies--27 of which were company-owned and 103 of which were franchises--and two specialty distribution centers. While Option Care is a national operation, most of the company's locations are situated in the eastern half of the United States. Option Care's wholly owned subsidiary, OptionMed, contracts with managed care companies and physicians to provide injectable drugs and consulting services. A second subsidiary, Management By Information Inc., develops software applications for the home infusion business that automate different functions, including clinical documentation, distribution, financing, and marketing.

Beginnings

Although Option Care had become a large, public corporation by the early 2000s, the firm had humble beginnings. Michael Prime and Mitchell Hoggard, two California pharmacists, founded Option Care in 1979. At the time, Prime was part owner of the oldest retail pharmacy in Chico, California, and Hoggard was a pharmacist at a small community hospital 50 miles north of Chico.

The catalyst for Option Care's creation started with the needs of one patient--a young man who, because of injuries suffered in a car accident, required daily nutritional feedings by means of infusion through an intravenous catheter. At the time, the patient went to the hospital every day, seven days a week, to pick up sterilely prepared solutions that he administered at his home through a central line catheter to his heart. Via a pump, the solutions would take 12 hours to infuse. To improve the young man's quality of life, Hoggard proposed that his hospital prepare and deliver seven-day supplies of the solutions to the man's home. When the hospital's administration refused, Hoggard and Prime considered providing the service on their own.

Within two weeks, Hoggard and Prime had secured permission from the young man, his doctor at the UC Davis Medical Center in Sacramento, and the patient's insurance carrier to provide the service. After they found a pharmaceutical company that would sell them the necessary medications and solutions and purchased the equipment necessary for the aseptic (sterile) preparation of the solutions, the two pharmacists found a location for their new enterprise.

Clinical Development: 1980-84

By February 1980, the new facility had obtained a license, and Hoggard and Prime had formed a legal partnership. Operating under the company name CliniCare, they began preparing their first solutions. After submitting their first bill to the insurance carrier in April, the progressive pharmacists soon received another referral from their initial patient's doctor. They were on their way to trail-blazing a new healthcare industry segment.

In 1981, after Hoggard and Prime became comfortable servicing their first two patients, they began marketing their services to Chico-area physicians, positioning themselves as a home care company with a cheaper alternative to hospital care. As a result, the company began receiving more referrals to provide patients with total parenteral nutrition (TPN), or sterile nutritional intravenous solutions administered through a central line into a patient's heart. After learning everything they could about the care of the catheters and the maintenance of the infusion pumps being used, the pharmacists began receiving referrals from area physicians to provide intravenous antibiotics, chemotherapy, hydration, pain control, and enteral feedings.

The scope and complexity of CliniCare's services continued to increase. Physicians expected the company to train patients or family members in the administration and care of different therapies. Accordingly, CliniCare began to hire staff, adding its first nurse by the end of 1981 and a second nurse midway through the following year. It also became necessary for policies and procedures to be developed for clinical operations and the various therapies the company was providing. Hoggard and Prime brought on a minority partner named Tom Vickery, a clinical hospital pharmacist who could help to bring the services of pharmacy and nursing together. By the end of 1981, Prime was concentrating on patient care while Hoggard concentrated on marketing and future growth. Vickery, who lived near Sacramento and continued to work at his hospital pharmacy job, mainly acted as a consultant. By the end of 1982, policy and procedure manuals were completed, and CliniCare had developed training manuals for every therapy it advertised.

The firm began to develop license agreements in 1983 and by year's end had four locations up and running. Three were in California (Sacramento, Fresno, and Auburn) and one in Vancouver, Washington. When it was discovered that the name CliniCare could not be registered, the company's name was changed and registered as O.P.T.I.O.N. (Outpatient Parenteral Therapy and Intravenous Ongoing Nutrition) Care.

Toward the end of 1983 Sutter Community Hospital of Sacramento approached Option Care about a potential joint venture. They argued that, with Sutter's capital and resources, Option Care could develop a national franchise document and implement a marketing/development strategy. In April 1984, Option Care sold two-thirds of the company to Sutter Community Hospital.

"My fondest memories of this era are the patient care," recalled Michael Prime in an interview with the author. "Without a doubt, the greatest accomplishment during this period was our consistency of high quality patient care. Our physicians and patients loved us. All of our referrals at this time came by word-of-mouth. With one of my nurses, I personally trained every patient we had. I compounded and delivered all the supplies and medications. More than once I spent with them their first night home from the hospital until they became comfortable with their therapy. I firmly believe our main attraction to new franchises was our philosophy toward patient care."

Franchises: 1984-90

The majority of Option Care's franchise growth occurred from 1984 to 1990. An offering circular and franchise document was created and the firm converted its four license arrangements to franchises. Hoggard and Vickery began to market Option Care nationally and realized much success by speaking at state pharmacy association meetings. The franchise document required that the pharmacist owner and his or her primary nurse had to be trained by Option Care in Chico, California, prior to opening their business.

Option Care's franchises started to grow in numbers. In 1984, the firm opened six new franchises. In 1985, two full-time franchise salespeople were hired and Option Care started to advertise in national pharmaceutical and nursing magazines. That same year, the company added approximately 20 new franchises. In 1986, approximately 30 franchises joined the Option Care family, followed by about 60 in 1987. By 1989, Option Care had more than 215 franchises in 42 states. Training took place in Chico every other week. Staff grew from a mere handful in 1984 to more than 150 in 1989.

During the mid- to late 1980s, competition began to heat up as the home infusion market exploded. There was no limit on what a company could charge for a therapy, and more than 24 national companies and hundreds of independents appeared. According to Prime, Option Care always maintained a consistent and conservative pricing structure. This became important in the late 1980s, when Medicare and Medicaid began to ratchet down their allowances, and especially in the early 1990s, when managed care took hold. Although competition was fierce during this time, Option Care was the only firm with a franchise concept.

By 1988, Sutter had appointed Hoggard as president of Option Care. Prime hired a replacement for his Chico patient care responsibilities and became vice-president of pharmacy operations and franchise relations. Vickery was named vice-president of franchise operations. Prime continued franchise training in Chico and also traveled around the country to a growing number of franchise locations to develop a national network and professional relationships.

It was during the late 1980s that Dr. John N. Kapoor and his investment company, EJ Financial, began to display interest in Option Care as a network. With a background in the pharmaceutical manufacturing industry, Kapoor saw potential in Option Care's network as a distribution vehicle. A native of Amristar, India, Kapoor pursued undergraduate education at the University of Bombay and came to the United States in 1964 at the age of 21. In 1970, he received a doctorate degree in medicinal chemistry from the State University of New York. He started his career with a New York-based pharmaceutical company. By 1978, he had become vice-president and general manager of Lypho-Med Inc., a division of Chicago's Stone Container Corporation. He was named president of Lypho-Med in 1980. The following year, Kapoor spent $24,000 of his own money, along with venture capital, to purchase Lypho-Med for $2 million. Kapoor became chairman of the firm, which was re-named LyphoMed Inc. The firm's sales totaled $6 million in 1981. LyphoMed went public in 1983 and by 1989 had become the nation's largest generic drug company, with sales of $159 million. Kapoor sold LyphoMed to Fujisawa Pharmaceutical Co. Ltd. of Japan in 1990. According to Crain's Chicago Business, the value of Kapoor's investment had grown to $130 million at the time of the sale. Kapoor used his windfall to form venture capital firm EJ Financial Enterprises Inc., which would develop interests in a wide variety of different healthcare ventures over the years.

In October 1990, Sutter sold its interest to Kapoor's EJ Financial. In the end, Kapoor had obtained an 80 percent stake in Option Care for $22.4 million and Hoggard, Prime, and Vickery remained as minority owner-operators. In the July 29, 1991 issue of Crain's Chicago Business, Kapoor called the purchase his "biggest investment to date."

A Time of Change: 1990-92

A period of change would unfold between October 1990 and April 1992. Although the original partners remained for a time, Hoggard resigned in February 1991 and sold his stock to Kapoor. Prime unofficially became the man in charge in Chico. Since EJ Financial was located in Lake Forest, Illinois, Kapoor wanted Option Care's management team in northern Chicago. He brought a new chief financial officer on board, who relocated from EJ Financial, and in May 1991 hired Sheldon "Shelly" Asher as the new president and CEO of Option Care. When he joined Option Care, Asher gave up his role as executive vice-president of Caremark Homecare Inc., a subsidiary of Baxter International Inc. that was one of Option Care's major competitors. In the September 30, 1991 issue of Crain's Chicago Business, Asher indicated that Option Care's strategy would be to target rural regions with populations of less than 300,000 people, which bigger players like Caremark had not targeted. Supporting this strategy were 180 Option Care franchises in rural markets.

In July 1991, Asher leased new office space for Option Care in Bannockburn, Illinois. Around the same time, Vickery resigned. By October Asher began to transfer the company's departments from Chico to Bannockburn. By the year's end all departments were relocated to Illinois except for clinical services, franchise training, franchise sales, and Chico patient care. Prime remained in charge of what remained in Chico, along with his franchise relations role. In the 1990s, after managed care took hold, Option Care and many of its franchises began to explore relationships with home health care agencies, which was more cost effective than maintaining a nursing staff. The company went public in April 1992.

After the IPO: 1993-2000

After Option Care went public, the following seven or eight years would bring many challenges. A leading challenge involved Option Care's franchise-based business model. Balancing the interests and opinions of management, franchise owners, and stockholders was not always easy. Things also were difficult on the financial front. In 1993, Option Care's revenues reached $50.2 million. However, heavy pricing pressure caused the firm's income to fall by 95 percent late in the year. Revenues reached $59.4 million in 1994, but the company posted a $2 million loss, most of which stemmed from failed ventures in the areas of computer software and women's healthcare.

The early 1990s were characterized by many management changes. Asher resigned as Option Care's CEO in the summer of 1993. In his place, Kapoor hired Dave Anderson as chief operating officer. However, Anderson resigned after holding the position for less than a year. Option Care's next president and CEO was Erick "Rick" Hanson, who had served as Option Care's senior vice-president and had spent time with competitor Caremark International Inc., as well as Blue Cross-Blue Shield of Indiana.

Option Care's focus on the rural market was still going strong in 1995. By that time, the wide profit margins infusion once enjoyed had disappeared. In 1996, Option Care started to buy back some of its franchises and later began acquiring other competing firms and forging strategic alliances. That year, it added ten new home infusion firms to the fold. It also was in 1996 that Option Care acquired a home healthcare industry software company called Management By Information Inc. and began to focus on contracts with large HMO's and self-insured companies.

Michael Rusnak became Option Care's president and CEO in 1998. Rusnak had joined the company in 1997 and was serving as chief operating officer before the promotion. During his tenure, Rusnak focused on making Option Care a more profitable firm by concentrating on its primary business. Subsequently, in 1999 Option Care turned a profit of $4.6 million on revenues of $119.8 million. This followed a net loss of $691,000 on revenues of $114.4 million in 1998. As Crain's Chicago Business explained, "The company's major turnaround strategy included exiting low-margin businesses, improving distribution channels, operating more efficiently, improving contracts with customers, collecting unpaid bills and reducing debt."

Poised for Success in the New Century

In 2000, Option Care launched a specialty pharmacy and distribution subsidiary called OptionMed. According to Option Care, the purpose of the new operation was to "contract with managed care organizations and physician groups to provide biotech injectable drugs and provide pharmacy consulting services directly to physicians and patients." At that time, Option Care was building an e-commerce strategy in both the business-to-consumer and business-to-business arenas. It also was in 2000 that Option Care secured an additional $15 million in credit, giving the firm a total of $40 million for future acquisitions. Option care ended 2000 on a high note, reporting record revenues of $141.3 million and record earnings of $7.5 million.

In spring of 2001, Raj Rai was named CEO of Option Care. Rai joined Option Care in 1992 and held various positions in the areas of corporate finance and operations, including senior vice-president and executive vice-president. He became COO in August 1999 and assumed the additional role of president in June of 2000 after Rusnak left the company. Prior to becoming CEO, Rai was largely responsible for "double-digit growth in revenue and profit for the company's owned locations," according to a company news release. During 2001, Option Care continued to expand. One major acquisition involved Healix Health Services Inc. in November, which strengthened the company's foothold in Texas and bolstered its respiratory therapy services.

Although Option Care and the healthcare industry changed significantly since the company was established in 1979, co-founder Mike Prime, who retired in 1998, felt that many of the basic principals upon which the Option Care was founded still existed in the early 2000s. At that time, the patients Option Care served remained a focal point and many of the clinical staff from the firm's earlier years remained on-board.

Principal Subsidiaries: OptionMed; Management by Information Inc.

Principal Competitors: Apria Healthcare Group Inc.; Home Health Corporation of America Inc.; Lincare Holdings Inc.

Chronology

• Key Dates:
• 1979: Michael Prime and Mitchell Hoggard, two California pharmacists, found the company that will become Option Care.
• 1980: Hoggard and Prime form a legal partnership, operating under the company name CliniCare.
• 1983: CliniCare begins to develop license agreements and changes its name to O.P.T.I.O.N. (Outpatient Parenteral Therapy and Intravenous Ongoing Nutrition) Care.
• 1984: Option Care sells two-thirds of the company to Sutter Community Hospital.
• 1985: Option Care hires two full-time franchise salespeople and begins advertising in national pharmaceutical and nursing magazines.
• 1987: Option Care adds approximately 60 franchises.
• 1989: Option Care has more than 215 franchises in 42 states and staff grows to more than 150 employees.
• 1992: Company goes public.
• 1996: Option Care acquires home healthcare industry software company Management By Information Inc.
• 2000: Option Care launches OptionMed, its specialty pharmacy and distribution company.