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Tuesday, January
6, 1998
Oxford Health Plans
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Phone: 203-851-2308
Website: http://www.oxhp.com
Price (1/5/98): $18 1/4
HOW DID IT FIND TROUBLE?
Oxford Health Plans began its descent on October 27th with the shocking
announcement that discrepancies between its internal accounting system and
the actual expenses the company was incurring had caused it to overstate
net income by a wide margin. Glitches in the health maintenance organization's
billing system had it delaying payments to New York doctors while at the
same time failing to recognize premiums it had already collected.
By mid-December, Oxford had revealed that the combination of accounting boo-boos
described above had distorted the company's bottom line by a stunning $164
million, which to date is the combined amount of receivables, write-offs,
and reserves for non-payment of bills that the company has taken in order
to straighten out the accounting snarl. Wave after wave of negative information
about the company's accounting and potential growth have crushed the shares,
pushing them down from their all-time high of $89 in late July to their current
level around $18 1/4.
BUSINESS DESCRIPTION
Oxford Health Plans is a health maintenance organization (HMO) operating
in New York, New Jersey, Pennsylvania, Connecticut, and New Hampshire. The
company currently offers traditional HMO service, point-of-service plans,
Medicare/Medicaid plans, employer-funded plans, and dental plans. The healthcare
business is fairly competitive overall, with Oxford specifically competing
with various regional Blue Cross/Blue Shield plans, as well as big names
like Aetna <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: AET)") else Response.Write("(NYSE: AET)") end if %>, United Healthcare <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: UNH)") else Response.Write("(NYSE: UNH)") end if %>, Prudential,
and New York Life in the various markets it serves.
As a healthcare provider, the company operates using insurance accounting
standards. The company collects premiums in return for bearing the liability
of having to pay a fixed percentage of any healthcare costs. By providing
care through its own facilities and an established network of outside physicians,
Oxford pays its part of any medical expenses incurred by members and keeps
the difference.
FINANCIAL FACTS
Income Statement
12-month sales: $3993.6 million
12-month income: $25.4 million
12-month EPS: $0.30
Profit Margin: 0.64%
Market Cap: $1442.8 million
Balance Sheet
Cash: $7.1 million
Current Assets: $1148.5 million
Current Liabilities: $701.5 million
Long-term Debt: None
Ratios
Price-to-earnings: 60.8
Price-to-sales: 0.36
HOW COULD YOU HAVE SEEN IT COMING?
As an insurance entity, the biggest moving parts in Oxford's financial statements
are premiums paid for care provided and expenses incurred to provide that
care. Unfortunately, investors paying careful attention to these numbers
were deceived by the company's screwed-up accounting and only discovered
in late October what the real deal was. However, this sudden discovery that
policies had been mispriced and medical expenses were higher than what was
expected are an all-too-common feature on the insurance landscape. One of
the risks inherent in an insurance company is that the company misprices
policies and ends up paying out more than it takes in. Unlike a manufacturing
company or a retailer, an insurance company has to pay out expenses even
if it is going to lose money because it has promised coverage. Failure to
do so in an industry as heavily regulated as insurance would put the company
out of business.
Until October, Oxford Health appeared to be one of the few healthcare plan
providers to escape the negative impact of premium income growth that was
too sluggish to keep up with the rising expense of providing care. Many investors
believed Oxford had escaped this fate by concentrating on the relatively
high-margin pickings available in New York City. Instead, they later discovered,
it was because the company's own internal financial controls were virtually
non-existent. One giant warning sign that Oxford might face future problems
was the pricing irrationality and widespread problems among almost all of
the company's peers -- problems they had been experiencing since 1995 after
HMOs began to aggressive chase Medicare and Medicaid business.
For more astute investors, there were actually some other warning signs,
as well. Since late 1996, physicians in Oxford's independent provider ring
have complained of being paid late or not at all. Customers also complained
that they were not being reimbursed in a timely fashion. In March of 1997,
the New York Attorney General began to investigate the HMO with regards to
unpaid claims. Oxford reached a settlement in May of 1997, blaming its computers,
and agreed to pay 9% interest on all unpaid claims. Although most investors
were assuaged, Anne K. Anderson of Atlantis Capital put a "sell" on the stock
because information given to New York State regulators -- information available
to all investors through the state's Freedom of Information statutes -- did
not match up with what Oxford was telling investors.
WHERE TO FROM HERE?
Although Oxford has returned an average of 36% per year to investors since
it came public in 1991, much of the company's excess returns have been erased
in the past two months. Shares currently trade at levels not seen since 1994,
and the company trades at a sharp discount to its peers (looking at market
capitalization versus sales). However, Oxford's balance sheet was in sorry
shape in the third quarter, and another $36 million that the company is going
to add to reserves in the fourth quarter will not help. New York regulators
recently fined the company $3 million, ordering it to pay $500,000 to customers,
doctors, and hospitals. Combined with forecasts of slower membership growth
as the company grapples with its accounting problems, it doesn't paint a
very attractive picture.
With so much negative energy surrounding this company and its HMO brethren,
it remains unclear whether or not all of the bad news has been discounted
into the shares. Should the company straighten out its pricing, pay all past
due bills, and start to actually generate cash again, there is room for the
shares to appreciate. For every 1% the company can earn on $1 billion in
revenues, it will bring $0.13 per share to the bottom line. If Oxford can
keep revenues flat and have 0.4% net margins (as United Healthcare is currently
doing), the company will earn a mere $0.21 per share. However, if the industry
can return to half its historical net margins of 5% over the next few years,
there is plenty of potential upside.
Investors need to determine if pricing will stabilize in healthcare over
the next few years and decide whether or not Oxford represents one of the
most favorably priced ways to take advantage of this. Keep in mind that given
the relatively low margins and the poor internal financial controls, this
is not the quality company that everyone perceived two months ago.
-Randy Befumo
(TMF Templar)
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