Get into Health Insurance on the Ground Floor
By Michael Brush
June 9, 2005
Forget real estate. Given the skyrocketing costs of medical insurance and
the aging of the baby boomers, a better way to get rich might be to start a
health insurance company.
Tiny Q-Med (QMED),
based in Eatontown, N.J., has the same idea. The company currently advises
doctors on the best ways to treat their patients. But its ambitious plans to
move into health insurance could increase revenue five-fold or more in two
years.
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If so, this little $7.40 stock could double well before that, says one
analyst who covers the stock -- or perhaps in as little as a year as Q-Med’s
move into health insurance gains momentum.
Right now, Q-Med offers “disease management,” a service in which the company
collects comprehensive information on patients from doctors, crunches some
numbers, and then provides a guide to which kinds of therapies are most
suitable.
Believe it or not – given that many doctors don’t come off as the kinds of
people who like to be told what to do – more than 80% of doctors end up
following suggested treatments. Health insurance companies like Q-Med’s
service too, because the system saves them money.
All this suggests that Q-Med might make a decent insurance company itself
since it would know the best ways to cut corners -- presumably without
compromising patient care.
That’s what Q-Med thought when it launched plans to set up a demonstration
project a few years back to become a kind of Medicare health maintenance
organization (HMO) in South Dakota. Things seemed to be going smoothly until
April 11 when investors got the bad news that Q-Med’s plan was axed because
it no longer fit in with revised Medicare rules.
Now, instead of setting up a demonstration project, Q-Med hopes to create
another kind of Medicare HMO called a Medicare Advantage Special Needs Plan.
The change of plans threw uncertainty into the mix, and it means Q-Med’s
insurance premium revenue would ramp a bit more slowly. Investors hammered
the stock down to $7 from $11.
An Overreaction
But the news may not be as bad as investors think.
For one thing, Q-Med will be partnering with DAKOTACARE, a health insurance
company that pervades South Dakota. And while Q-Med doesn’t make any
promises, it could enroll enough people by mid-2007 to layer on $90 million
in annual revenue on top of current annual revenue of $20 million. If Q-Med attracts just
one sixth of the potential customer base it will enroll 5,000 clients –
enough to hit that $90 million figure. Insurance is a lower margin business
than disease management, but the potential revenue gains are enormous. Q-Med
may also launch similar Medicare HMO programs in other states.
Will it all work out? It’s hard for us, as outsiders, to know for sure –
that’s why we watch closely for the insider clues. And one Q-Med insider is
decidedly bullish. After the bad news broke in April, Q-Med director Richard
Levin put a cool half million dollars into the stock at $7.26, according to
Thomson Financial. He’s an accurate insider too – having sold $250,000 worth
of Q-Med stock for prices between $10 and $13.66 just six months before the
bad news struck in April. Let’s take his lead.
Bottom line: Q-Med should hear by mid-September whether it will get
the green light from the Centers for Medicare & Medicaid Services on its
Medicare HMO proposal for South Dakota. If so, enrollment won’t start until
early 2006, but progress along the way could make this a $14 stock in twelve
months, believes Miller Johnson Steichen Kinnard analyst Chad Simmer.
Disclaimer
At the time of publication, Michael Brush did not own or control shares in
any of the companies listed in this column. Mr. Brush is an independent
columnist for this web site.
For more on Insiders Corner disclosure, see the disclosure section in About
Insiders Corner:
http://www.investorideas.com/insiderscorner/. InvestorIdeas.com
Disclaimer:
www.InvestorIdeas.com/About/Disclaimer.asp. InvestorIdeas is not
affiliated or compensated by the companies mentioned in this article.
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