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2015: THE NEWSMAKERS
JON COTTON
Meridian president oversees member, space growth for family-founded health company
By Jay Greene jgreene@crain.com
LOOKING AHEAD Cotton’s expectations for 2016
Nearly double Meridian’s Medicaid members to 1.2 million, double pharmacy benefit members to 2 million, increase Medicare members to 25,000 and add 400 employees to have a workforce of more than 2,500.
Continued consolidation of smaller, independent health plans.
Because of rising costs, Medicare could move in the next 10 years to a voucher system or privatization with about 30 percent of enrollment now in private managed care plans.
Continued movement to value-based contracting to reward quality and reduce overuse of services.
Hospital mergers will continue.
Jon Cotton had a busy year, overseeing Meridian Health Plan Inc. ’s 58 percent revenue growth to $3 billion, a 42 percent increase in employees to 2,100 and a move into new corporate headquarters at One Campus Martius in downtown Detroit. But Cotton, 38, president and COO of Meridian Health Plan of Michigan, also is enjoying the moment. “It is hard to think we’d be as successful as we are,” said Cotton, one of three siblings in the family business started by his father, CEO David Cotton. The elder Cotton, a gynecologist, founded Meridian in 1997 with his wife, Shery. Siblings include twin brother Sean and younger brother Michael. “Members want to choose our health plan, and customers like the story we have to tell,” said Cotton. “We deliver on our promises.” Even though Troy-based Molina Healthcare of Michigan made two acquisitions last year to add about 180,000 members, Cotton said Meridian will still be the largest Medicaid HMO in Michigan with 450,000 members. “They will not surpass us,” Cotton promised. But even Cotton acknowledged Meridian dodged a bullet of sorts two years ago when it was planning to
A headline from the June 15, 2015 issue of Crain’s tells of Meridian’s growth. build its own new $111 million, 16story, 320,000-square-foot corporate headquarters on 2 acres off Monroe and Woodward avenues. “Thank God it never happened. We delayed our decision” and bought the (old Compuware) building at One Campus Martius in “a solid deal” with a “discount on the price,” he said. “We would have been out of space with that (original) building.” In late 2014, Meridian and Dan Gilbert’s Bedrock Real Estate Services jointly purchased the 1.1 millionsquare-foot former Compuware building for an estimated $140 million. Since September, Meridian has been moving into its new headquarters, occupying five floors and about 300,000 square feet. But Cotton said employee growth necessitated keeping three floors at One Kennedy Square at 777 Woodward. “We initially thought the entire company would fit into the new headquarters,” Cotton said. “We
JAN GARFINKLE By Tom Henderson thenderson@crain.com
“Arboretum just keeps knocking it out of the park” has become a cliché in local venture capital circles. Arguably the most successful VC firm in the state in recent years, Ann Arbor-based Arboretum Ventures LLC, founded in 2002 by managing director Jan Garfinkle, has been making big headlines since 2008, when one of its portfolio companies, HealthMedia Inc., was sold to Johnson & Johnson for $200 million. Its most recent big headline came in September, when the firm announced it had finished raising the largest VC fund in state history, closing Arboretum Ventures IV LP at $220 million, which was $5 million more than the target it had announced when it filed notice of the fund in June with the U.S. Securities and Ex change Commission. The previous largest fund in state history was the $180 million Michigan Growth Capital Partners II, raised in 2013 by Farmington Hills-based Beringea LLC. Arboretum’s previous fund, raised in 2011, also was oversubscribed. It had been targeted at $125 million and On Sept. 14, 2015, Crain’s reported on Arboretum Ventures’ raising of the largest VC fund in state history.
closed at $138 million. There’s no secret why investors eagerly write checks to become limited partners — the headlines, and profits, generated by other successful sales. In 2009, HandyLab Inc. of Ann Arbor was sold for $275 million; in 2011, Accuri Cytometers Inc. of Ann Arbor was sold for $205 million; and in 2014, Atlanta-based CardioMEMS Inc. was sold for $435 million. Then there were the initial public offerings of other portfolio companies: Ann Arbor-based Esperion Therapeutics Inc. (Nasdaq: ESPR) had an IPO of $73 million in 2013, had a secondary offering of $98 million in 2014 and had a third offering of $190 million last March; and Goleta, Calif.based Inogen Inc. had an IPO of $70.5 million last year. All of which is a far cry from Arboretum’s beginnings in 2002, when
hired up and had big growth.” Driving Meridian’s growth has been expansion of its Medicaid health plans in Michigan, Iowa and Illinois, but also its 4-year-old pharmacy benefit management company, MeridianRx Inc. MeridianRx now has 193 customers with more than 1 million members, up from about 50 clients and 50,000 members last year. Said Cotton: “The model is very scalable, and we have been growing because of consolidation in the (insurance) industry.” While Meridian’s Michigan health plan grew by about 150,000 members the past two years in part due to Healthy Michigan Medicaid’s expansion, Cotton said the largest increase was in Illinois, which grew to 250,000 members this year from 25,000 in 2013. Overall, Meridian, which also operates Medicaid plans in Illinois and Iowa, has more than 770,000 Medicaid managed care members. It
also has Medicare plans in Michigan, Indiana, Kentucky and Illinois. Cotton also is proud of Meridian’s ranking with the National Committee on Quality Assurance. It is the only HMO ranked in the top 10 in two states — Michigan at No. 9 and Illinois at 10. Meridian plans to expand Medicare operations into Pennsylvania and Nebraska in 2016 and grow its Medicare business starting in 2017. Because of the expansion, Meridian in 2015 added 880 employees to increase its workforce to nearly 2,000 in Detroit and 2,100 overall. Meridian plans to hire another 400 in Detroit. Besides business, Cotton and his family also are very much involved in civic affairs. Since 2011, the Cotton family has acquired more than 30 properties in working to create a business, dining and entertainment district in Grosse Pointe Park. Recent additions include a bakery and a “robot garage” for fledgling engineers. To boost neighborhood values and bring younger people into the area, the Cottons also created the Grosse Pointe Housing Foundation for students in college or in professional programs like medical residents. “We have 120 students. We certify the landlord properties to make sure they are nice,” said Cotton, who recently received an MBA in family business from Kennesaw State University.
State-record VC fund headlines another successful year for Arboretum
Garfinkle responded to a request from the Michigan Economic Develop ment Corp. , which was offering $250,000 to cover legal and other expenses for two new VC firms, contingent on their being able to raise $5 million. Arboretum got one award, and Birmingham-based Seneca Partners Inc. got the other. Garfinkle was able to raise the contingent money, but it took her until 2005 to close out the first fund of $24 million. She and partner Tim Petersen raised a second fund of $73 million in 2009. When asked if she ever imagined in the early days that her company would have exits as large as $435 million, or see portfolio companies raise $361 million in public offerings, or raise the largest fund in state history, Garfinkle said: “I wasn’t thinking that
way at all. I started Arboretum because I wanted to change health care. I thought we could drive cost out of the system by providing great clinical care.” Garfinkle, a past president of the Michigan Venture Capital Association , a member of the board of the National Venture Capital Association and a member of the health care advisory board at the University of Michigan , said Arboretum will stay the course. “We’ve been very focused on finding capital-efficient companies, and being in the Midwest has really helped us to do that. Rents, vendor costs and salaries here allow us to do that.” Overshadowed by news that Arboretum had closed on its recordbreaking fund was news the week before that the firm was part of a $39.5 million funding round for Plymouth Township-based Delphinus Medical Technologies Inc. , thought to be the largest single investment in a medical device company in state history. Delphinus has developed a device that uses ultrasound to detect breast cancer. That investment came out of Arboretum’s third fund. Garfinkle said the fourth fund has made one new investment and is doing due diligence on two more investments. “There are a lot of smart, really creative entrepreneurs out there.”
LOOKING AHEAD Garfinkle’s expectations for 2016
Arboretum is targeting at least three or four investments from its fourth fund this year.
It will continue to look for exit opportunities for current portfolio companies through acquisitions by larger companies.
Some portfolio companies funded from the third fund will continue to get follow-on investments as they hit designated milestones.
A trend in health care, according to Garfinkle, will be bundling payments for health care, reducing the number of procedures that are paid for by fee for service. Companies that offer technologies to support that trend will attract attention.