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He struggled to convince about half a dozen investors to pitch $3 million into the Medicare HMO business, a money-losing industry hurt at the time by low reimbursement levels. But over the past five years, Fritch’s ability to focus on growing within the Medicare niche, with a management team well-versed in the business and with improved reimbursement, led to a substantial payoff for his “big bet on Medicare.”

Those initial investors, including Fritch, realized a huge return on their investment when in November 2004 they sold some of their shares to GTCR Golder Rauner, a Chicago-based private equity firm that recently made a $134 million equity investment and now owns slightly more than half of NewQuest. Fritch declined to discuss the company’s valuation but said NewQuest’s profit was just under the $70 million mark last year. Fritch expects to exceed $80 million in earnings this year.

So what’s next for this company now that GTCR has bought in? Fritch says he rarely plans more than a year or two ahead because the business changes so quickly, but without a doubt, NewQuest’s near future should prove just as dynamic as its past.

The company recently entered the underserved markets of Chicago and Memphis, where no other such Medicare plan operated, and most of NewQuest’s markets similarly provide plenty of room to grow without any geographical expansion or acquisitions. Only 11% of Medicare beneficiaries are enrolled in Medicare HMO plans, Fritch says. His company served 62,000 Medicare members at the end of 2004, and Fritch says he’s aiming for 100,000 by year’s end.

The opportunity also is attractive to Casey West at Memphis-based SSM Partners, which recently invested in a similar plan. “This is a very large market,” West says. “There’s a real need to manage the growing costs of Medicaid.”

Still, NewQuest has an eye on potential acquisitions, and it’s no surprise that Fritch is attracted to acquisition targets that have leading positions in their markets. He says the company doesn’t have a “war chest” to fund acquisitions, but now that GTCR is on board, that firm could help finance potential purchases.

While de novo growth drove the company’s expansion into Chicago and Texas, Fritch says he is less likely to start from scratch now that new Medicare rules, which go into effect next year, do not allow enough time for companies like NewQuest to enroll enough members to cover the startup overhead involved with de novo expansion. The new rules will require an annual open enrollment period instead of continuous enrollment and disenrollment, which thus far has allowed NewQuest to market to Medicare beneficiaries throughout the year. Now, it will be a challenge to keep a full-time sales force employed, Fritch says, adding that he worries that limited choices are not good for the Medicare beneficiaries.

“The nature of this business is one contract with the Federal government. If they change the rules, you have to be flexible enough to figure out how to make it work and nimble enough to do it pretty quickly,” Fritch says. Coinciding with the enrollment changes, the new Medicare drug card benefit will take effect in 2006, presenting opportunities and challenges to NewQuest and its competitors to capture the business provided by the cards.

In perhaps its biggest next step, the company also is considering an initial public offering. “If it weren’t for this change in the rules,” Fritch says, “I’d say we’re probably big enough and growing well enough.” Regardless, Fritch says it’s possible that NewQuest will attempt to conduct an IPO even before those changes take effect.

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