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To
OTC Journal Members:
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Market
Comment |
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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:
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Background
Information |
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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 $1.1 million in fraudulently obtained assets.
In fact, according to the FBI, 548
defendants have been convicted of health care fraud since 1992.
The Clinton Administration has fought
against fraud, waste, and abuse in the Medicare and Medicaid programs.
In August of 1996 President Clinton signed the Health Insurance Portability
and Accountability Act (HIPAA). This Act provided funding for regulators
to aggressively pursue fraudulent billing practices within the health care
industry.
The 1996 HIPPA Act empowered the
Health
Care Finance Authority (HCFA) with the ability to investigate, levy
fines, exclude providers from participating in the Medicare and Medicaid
programs, and set up uniform coding requirements and strict billing guidelines
to Medicare and Medicaid claims.
The table below clearly demonstrates
the “zero tolerance policy", which has been implemented by HFCA since
the Clinton Administration took office. This chart represents a small number
of the total health care providers that were levied penalties since May
of 1999.
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Health Care Providers
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Penalty Amount
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Vencor
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$ 1.3 Billion
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Columbia/HCA
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$745 Million
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Fresenius Medical Care North
America
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$486 Million
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Community Health Systems
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$ 31 Million
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Medaphis Physician Services
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$ 15 Million
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Emergency Physicians Billing
Services
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$ 15 Million
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University of Chicago Hospitals
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$ 10.9 Million
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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.
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October
Profile: MedGrup Corporation (OTC BB: CODX) |
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Stock Listing: OTC BB: CODX
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Estimated Shares Issued and Outstanding:
5.541
million
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Estimated Public Float: 900,000
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Closing Price and Volume: $3.25 x
$3.3215 on 14,700 shares
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Market Capitalization: $18 Million
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52 High and Low: $3.25/$2
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Click
Here for a current stock chart
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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.
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The
MedGrup Formula- A Solution to the Problem |
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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:
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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.
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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.
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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.
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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.
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Competition |
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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.
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Financial
Performance |
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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:
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Time Frame
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1998
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1999
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1st Half 1999
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1st Half 2000
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June Qtr 1999
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June Qtr 2000
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Sales
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$980,431
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$1,986,596
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$821,702
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$1,835,410
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$447,067
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$935,870
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Profits
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$195,269
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$231,650
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$96,613
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$305,558
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$8,028
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$149,835
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EPS
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$.05
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$.05
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$.02
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$.06
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0
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$.03
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Revenue Growth Rate
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102%
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123%
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109%
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Market
Sizel |
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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.
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Growth
Strategy |
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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.
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Conclusion |
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From an investors point of view
MedGrup is compelling for the following reasons:
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The company has been profitable since
1997, and should continue to be profitable. This factor limits your downside
risk considerably.
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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.
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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.
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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.
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