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October Profile: MedGrup Corporation (OTC BB: CODX)

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October 6, 2000
Volume III, Issue 85
Email : info@otcjournal.com
URL : http://www.otcjournal.com

To OTC Journal Members:
 

Market Comment

The post Labor Day blood bath in the NASDAQ spells opportunity for investors with courage. The NASDAQ is down nearly 1000 points since the 1st of September and taking no prisoners. However, investors with courage and clear heads recognize that we are closer to the bottom than the top. Stocks have more upside potential than downside from these levels.

A quick look at a chart of the NASDAQ from two years ago reveals similar conditions to today's market. In the Fall of 1998 we had a bear market triggered by the "Asian Flu" from July through October. This year the Bears are focused on the four E's: The Euro, Earnings, Energy, and the Election. In early November of 1998 a new Bull Market started that lasted fifteen months, and we believe that pattern could repeat itself.

Sir John Templeton, the Grandfather of the Mutual Fund industry summed up our feelings with the following quote:

"I Always Made The Most Money When I Bought At The Point of Maximum Pessimism"

If we are not at the point of maximum pessimism right now, we are very close. There are great values in small and microcap stocks right now. Through the month of October we will be very aggressive and bring you a lot of ideas. We are close to the bottom. Now is the time to take positions for meaningful profits in 2001.

Our best performing profile of all time, NetSol International (NASDAQ: NTWK), was under $4 on the Bulletin Board at this time two years ago. The stock hit a high of $75 sixteen months later. For those of you who like to buy at the wake and sell at the wedding, now's the time.

Here's the first in a series of new companies we feel have the potential to yield substantial returns:
 

Background Information

In 1999 twenty individuals were convicted for their involvement in a massive and sophisticated scheme to defraud Medicare. The convictions arose from an investigation of a home health agency that was the largest certified home health agency in Miami. The agency was paid approximately $120 million in Medicare funds for reimbursement of services, including nursing and home health aide visits. The convicted defendants received sentences ranging from 18 months imprisonment to, in the case of the highest level administrator, 12 years imprisonment. A single defendant returned $1.1 million in fraudulently obtained assets.

In fact, according to the FBI, 548 defendants have been convicted of health care fraud since 1992.

The Clinton Administration has fought against fraud, waste, and abuse in the Medicare and Medicaid programs.  In August of 1996 President Clinton signed the Health Insurance Portability and Accountability Act (HIPAA). This Act provided funding for regulators to aggressively pursue fraudulent billing practices within the health care industry.

The 1996 HIPPA Act empowered the Health Care Finance Authority (HCFA) with the ability to investigate, levy fines, exclude providers from participating in the Medicare and Medicaid programs, and set up uniform coding requirements and strict billing guidelines to Medicare and Medicaid claims.

The table below clearly demonstrates the “zero tolerance policy", which has been implemented by HFCA since the Clinton Administration took office. This chart represents a small number of the total health care providers that were levied penalties since May of 1999.
 

Health Care Providers
Penalty Amount
Vencor
$ 1.3 Billion
Columbia/HCA
 $745 Million
Fresenius Medical Care North America 
$486 Million
Community Health Systems
$ 31 Million
Medaphis Physician Services 
$ 15 Million
Emergency Physicians Billing Services
$ 15 Million
University of Chicago Hospitals
$ 10.9 Million
Source: Office of the Inspector General

In each of the high profile cases below, upcoding was a significant factor in the allegations against each provider.

Under existing Federal and state requirements, these providers must submit billings for Medicare and Medicaid reimbursement in a Coded Format.  Most private health insurers also require submission of billing information in this coded format. Until recently all charts for inpatients, outpatients, clinics, and doctors offices were Coded by an in-house clerical professional. The assigned code is used for reimbursement purposes.

Fraudulent Coding is the primary source of all the prosecutions and fines instigated by the HFCA.

Out of this paperwork nightmare and regulatory morass an entire new industry is growing rapidly. Health care providers are increasingly outsourcing their coding needs to isolate themselves from potential prosecution of fraud or abuse.

Colorado based MedGrup Corporation (OTC BB: CODX) has been growing dramatically since they opened their doors and has been profitable since 1997. MedGrup provides outsourced coding services for approximately 75 clients, and that number is growing rapidly.
 

October Profile: MedGrup Corporation (OTC BB: CODX)
  • Stock Listing: OTC BB: CODX
  • Estimated Shares Issued and Outstanding: 5.541 million
  • Estimated Public Float: 900,000
  • Closing Price and Volume: $3.25 x $3.3215 on 14,700 shares
  • Market Capitalization: $18 Million
  • 52 High and Low: $3.25/$2
  • Click Here for a current stock chart
  • Web Site: http://www.medgrup.com
We consider ourselves fortunate to present MedGrup to our valued members with the stock in the $3 range. If the Bear Market hadn't reared its ugly head in April, and then sunk its nasty teeth into investors during September, we believe this stock would probably be trading in the $6 range today based on their trailing profits, growth rate, and a very hot industry group.

MedGrup provides outsourced Coding services to hospitals and clinics. There is a chart created for every patient that gets health care regardless of whether the services are at a hospital, clinic, or doctor's office.

After the health care services are rendered the patient's chart ends up in the hands of a professional "CODER" who assigns a specific code associated with the treatment. That Code is the basis for reimbursement from Medicare, Medicaid, or the Insurance Provider.

Professional coders go to school for 2 to 4 years to obtain the proper credentials. Coders are in high demand and short supply because the job is mundane and has secretarial level compensation in spite of the required professional education. Enormous pressure is placed on these Coders as this administrative step is the last prior to reimbursement.

A practice referred to as UpCoding has been the source of hundreds of fines and prosecutions levied on health care providers by the HFCA. The fines have been so extensive and painful to the health care providers that the practice of DownCoding is now commonplace in order to avoid any hint impropriety.
 

The MedGrup Formula- A Solution to the Problem

The MedGrup business model is the ideal solution to the coding problem. MedGrup provides outsourced coding services to health care providers. Their method for providing these services is unique and sets them apart from the insignificant competition they have in their market.

MedGrup recruits Coders out of their dingy hospital basement offices and sets them up with a home based business. Patient charts are sent into the Coders home via high-tech secured fax line. A specially configured computer receives the charts, and MedGrup Coders are able to turn them around in 24 to 48 hours.

This business model is powerful. It allows the company and Health Care Providers to benefit from the following factors:

  • Over 90% of professional coders are women. Many are from two income households and have children. The home based business allows  MedGrup employees to make their own hours, eliminate day care expenses, travel time, and costs. The first ad MedGrup ran for coders in a professional trade journal yielded 500 responses immediately.
  • The Health Care Provider now has its coding done by an independent third party. This eliminates the inherent conflict of interest between the provider and reimbursement source. The "DownCoding" trend has cost health care providers money. MedGrup clients are typically realizing substantially higher revenues from accurately coded charts.
  • Health Care providers are now able to outsource Coding services, eliminating the high costs associated with the salaries and benefits of in-house employees. MedGrup charges on a per chart basis, thereby minimizing excess costs.
  • Coding Efficiencies Improve: The coder requires no geographic proximity to the health care provider, thereby allowing charts to be routed to a specialist anywhere in the country.
Competition

Very Limited- There are a few other outsourced Coding Services, but MedGrup pioneered the home based business model. This gives MedGrup a competitive edge when recruiting new Coders who are looking for a quality working environment. MedGrup only hires Coders with the proper credentials and at least five years work experience.
 

Financial Performance

This is the most exciting part of this profile. MedGrup has been profitable since 1997 and has doubled in size every year since it opened it doors. They are on track for $4 million in revenues this year, and their 100% annual growth rate could accelerate in 2001. They are bringing in new management, new infrastructure, and new technology. The chart below demonstrates comparisons of three separate time frames:
 

Time Frame
1998
1999
1st Half 1999
1st Half 2000
June Qtr 1999
June Qtr 2000
Sales
$980,431
$1,986,596
$821,702
$1,835,410
$447,067
$935,870
Profits
$195,269
$231,650
$96,613
$305,558
$8,028
$149,835
EPS
$.05
$.05
$.02
$.06
0
$.03
Revenue Growth Rate
 
102%
 
123%
 
109%
Market Sizel

In a word: enormous. MedGrup estimates the size of the market to be about $5 billion. This figure has been determined by multiplying the number of charts coded annually in the US by the average amount charged for outsourced coding.

As more health care providers realize that they can decrease their costs and increase their reimbursements by employing outsourced coding, MedGrup's opportunities for growth increase sharply.

On that basis 2% market penetration would put the company at $100 million in annual revenues. Investors with a one to two year time horizon could see this company and its stock price experience prolific growth.

MedGrup targets mid sized hospitals with about 150 beds. Their current customer base is concentrated in Texas and California. In August of this year the company had 60 clients. Today, MedGrup has 75 clients. Investors with a long term time horizon should consider where the stock might be when the company has hundreds of clients. The market is there, and based on their history, we believe they can penetrate that market.
 

Growth Strategy

MedGrup could continue to double in size annually for an indefinite period of time. However, management at the company is much more aggressive. The key to accelerated growth for MedGrup is an infrastructure build out coupled with an aggressive recruiting program of experienced Coders.

Customers seem to be no problem. Recruiting experienced Coders has not been a problem since MedGrup generally offers a salary increase and the opportunity to work in the pleasant environment of their own home. Medgrup also offers a stock option program for its Coders.

Growth should accelerate next year after MedGrup makes the transition from a faxed based technology to an Internet based technology. Medical charts are highly confidential, and security standards for transmission of the documents are strict. Regulators finally released security standards for Internet transmission of medical records in August.

As a result, MedGrup is now finalizing plans to create an infrastructure which will allow the secure transmission of charts between the Health Care Provider and the Coder over the Internet.

Once implemented this technology will lower costs and allow the company to expand more rapidly with less upfront expense. The company will grow faster and margins should improve. 2001 should be a blockbuster year for the company.

The company also plans to file the application for a NASDAQ listing in the first quarter of 2001. They almost qualify now. A few more assets and $4 stock price put them over the top.
 

Conclusion

From an investors point of view MedGrup is compelling for the following reasons:

  • The company has been profitable since 1997, and should continue to be profitable. This factor limits your downside risk considerably.
  • Even with these depressed market values many good growth companies are still trading at 50x trailing earnings. Based on the June quarter earnings the company is trading at 25x trailing earnings. An argument could be made that the stock is worth $6 today.
  • Health Care related stocks are one of the hottest groups on Wall Street this year in a tough market. The HMO group has done extremely well. MedGrup is a pure play with a unique market niche, and there are no public companies they can be compared to. However, continued good performance in this group could help carry MedGrup to higher levels.
  • There is a very limited supply of stock publicly traded. There are only 900,000 shares in the public float. This means the stock will be volatile to both the upside and downside on relatively low volume days and could lend itself to an excessively high valuation in a bull market.
As always we remind you to review our home page with our Mission Statement and our section on Rules for Successful MicroCap Investing.  You can get there by clicking here, or going to the button on the left hand menu bar at our home page. Pay particular attention to the Trading Strategies Section to maximize your profit potential and understand the nature of microcap investing.

By definition it is our opinion that any company we profile has the potential to yield 100% to 500% returns for investors with a one year time horizon. This one is a gem because of their virtually untapped unique market niche and history of profitability. Consider it for the speculative end of your portfolio. We will cover it for the next year and bring you news and updates as the company continues to grow.
 

Disclaimer
The OTCjournal.com Newsletter is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. All companies are chosen on the basis of certain financial analysis and other pertinent criteria with a view toward  maximizing the upside potential for investors while minimizing the downside risk, whenever possible.  Moreover, as detailed below, this publication accepts compensation from certain of the companies which it features.  Likewise, this newsletter is owned by MarketByte, LLC.  To the degrees enumerated herein,  this newsletter should not be regarded as an independent publication.

Click Here to view our compensation on every company we have ever covered, or visit the following web address:  http://www.otcjournal.com/disclaimer.html for our full profiles and http://www.otcjournal.com/trading-alerts/disclaimer.html for Trading Alerts. MarketByte LLC has been paid a fee of $40,000 and 40,000 shares of MedGrup stock for representing MedGrup for one year. The fee has been paid by SSP Management acting on behalf of MedGrup.

All statements and expressions are the sole  opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities  mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein.

The editor, members of the editor's family, and/or entities with  which they are affiliated, are forbidden by company policy to own, buy, sell or otherwise trade stock for their own benefit in the companies who appear in the publication.

The profiles, critiques, and other editorial content of the OTCjournal.com may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein.

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We encourage our readers to invest carefully and read the investor information available at the web sites of  the Securities and Exchange Commission ("SEC") at http://www.sec.govand/or the National Association of Securities Dealers ("NASD") at http://www.nasd.com. We also strongly recommend that you read the SEC advisory to investors concerning Internet Stock Fraud, which can be found at  http://www.sec.gov/consumer/cyberfr.htm. Readers can review all public filings by companies at the SEC's EDGAR page. The NASD has published information on how to invest carefully at its web site.


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The OTC Journal Newsletter is an electronic publication committed to providing our readers with useful information on publicly traded companies. The Newsletter contracts with publicly traded companies and receives compensation from them or third parties as payment for publishing information and opinions about the company and the trading market for their securities. Principals of the Newsletter may also purchase or sell securities of the companies in the open market from time to time. The positions, if any, that the Newsletter or its principals presently maintain in the securities of the companies are disclosed here (click here) and should be considered in making an investment decision regarding these companies securities. The Newsletter and its principals reserve the right to acquire additional shares or liquidate some or all of the positions they may hold in the issuer’s securities at any time in the future without further notice. These publications should not be considered to be independent publications concerning the company.

All statements and opinions expressed herein are those of the editors and are subject to change without notice. The Newsletter maintains editorial control over its publications and the companies profiled therein do not have any editorial rights concerning the information published about them. While we believe all sources of information provided by us and contained in our publication to be accurate and reliable, we cannot and do not guarantee the accuracy of information we received from third parties.

We encourage our readers to invest carefully and read the investor information available at the web sites of the Securities and Exchange Commission ("SEC") at http://www.sec.gov and/or the National Association of Securities Dealers ("NASD") at http://www.finra.org. We also recommend that you read the SEC advisory to investors concerning Internet Stock Fraud, which can be found at http://www.sec.gov/consumer/cyberfr.htm. Readers can review all public filings by companies at the SEC's EDGAR page. The NASD has published information on how to invest carefully at its web site.

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