How The SPIN Business Model Works...
For the “newbies” and refresher for those who forgot, let me repost this old post from last year explaining how the business model works using a hypothetical.
A hypothetical:
Background: A person gets into an accident that was not his fault and has a back problem from the accident. He gets an attorney to file a Personal Injury lawsuit on a contingency. The defendant has Liability Insurance. The attorney starts spending money on the case by first investigating the legitimacy of the claim through a private investigator. Once legitimacy is established, the attorney usually sends his client to Chiropractor or other spine therapist for about four to five months of Physical Therapy(PT). Patient still has the problem after the PT regimen is finished. Attorney then gets and pays for an MRI. Initial diagnosis from the MRI identifies probable problem areas on the spine.
At this point, after the attorney has a lot of “skin in the game”, he sends the client to one of SPIN’s Affiliated Centers and has his case reviewed by the Affiliate Spine surgeon. If the local affiliate decides to take the case, he has the attorney give him a Letter of Guarantee that states that should the case prevail in a Judgment for the plaintiff, then the Affiliate center will receive a share of the final judgment up to and including the fully billed amount. Usually the “Medical” share is around a third of the settled amount after expenses up to the total billed amount for the medical expenses. Once this LOG is executed, the local affiliate will cover the costs of the procedures involved relying on the expectation that a favorable judgment will ultimately be reached.
OK, so let’s say the Defendant in this suit has $200k of liability insurance. And let’s say that the decision was made by the local affiliate to take the first step for diagnostics which is the Facet Nerve block (Facet). The patient then is set up with an appointment on a specific day this local affiliate is doing these SPIN treatments. (usually just two to four days a month) The Facet nerve block procedure usually takes around ten minutes or so. From the MRI, specific points on the spine are identified to be the likely area of the problem which is the target of the nerve block procedure. Once the facet nerve block is completed, the patient is then asked if his pain has been relieved.(The nerve block is similar to getting a shot of Novocain at the dentist) If so, great the problem area has been identified, and a bill for the single procedure for around $5,500 is sent to the lawyer. If the pain is still there after the first shot, then the MRI is further reviewed for a second and/or possibly third problem area. And a second and/or third shot will be administered. Each shot will be additionally billed at the $5.5k. (three is the most that can be done at a single session)
So let’s say a “double” was done and a bill went out to the case for $11k. One of two things now happen; some SPIN affiliates have a second procedure available which is not for diagnostics, but for permanent treatment for certain specific problems like a “bulging disc”. This is called a Percutaneous Disc Decompression Injection (PERK). If this is done, then an additional $19,000 is billed to the lawsuit for this minimally invasive procedure making the total bill $30,000 ($11,000 for the double facet and $19,500 for the “Perk”.) If the Perk is not appropriate in this case, then just the $11,000 is all that is billed in this case.
But let’s say the Perk was done so in this “case” the suit was billed $30,000. So let’s say the case eventually settles for $100,000. The attorney takes for example $10k off the top for administrative expenses leaving $90k to be split up. And let’s say that the PT, MRI and any other medical portion was billed against the case for an additional $15k for a total of $45,000 medical. But a 1/3 of $90k is only $30,000 so all the “medical” shares in a “haircut” of around 1/3. In this case at settlement SPIN bill would collect $20,000 and the other med would prorata split the other $10k.
Going back the beginning of this hypothetical, the SPIN affiliate right after the time of the procedure, would effectively sell the whole billed amount (bill and LOG) of $30k to SPIN for lets say $6k cash. At this point, SPIN would put the whole $30k on its books as a “Gross Revenue” number. But based on 2.5 years of history of some 700 cases of around 2000 total taken to date, to satisfy the Auditors, SPIN puts a “haircut” of around 48% of the gross on its reported SEC financials which is what is shown on the financials as “Net Revenues”. The local affiliate is happy effectively selling the case and getting this “up-front” payment for two reasons; 1) because he got paid $6k for maybe a half hours worth of work and got his money right away and 2) if the diagnosis derived from the shot should show that surgery is required, the local surgeon could end up with a $100,000 surgery case through the referral which SPIN has no interest in participating. SPIN is happy because in this case would have more then tripled their investment in the case in just 10-12 months.
But let’s say the case was settled for the whole $150k, then SPIN would collect the whole $30k and be real happy. But if it only settles for $50k, then SPIN would only collect their percentage share of the medical or around $10k and still turn a good 66% return.
What is great about this type of PI suit is that unless the “Medical” LOG holders also sign off on the final settlement with the court, then the Judge won’t enter the Judgment. So SPIN knows that the attorney will not attempt to screw around with the final disbursement to SPIN since the attorney would like to get paid as well.
Let me add and remind here why it is so easy to get an accurate one year out “guidance” number.
As mentioned above, I understand that some 700 cases have now gone through the complete cycle. I have been told that of these 700 cases, only two ended up having to be written off by the Company. I believe the total “out of pocket” loss to SPIN for these two cases totaled under $8000. Again, from what I understand, these two cases were certainly legitimate cases, but what happened is the attorney and or client got greedy and decided to take the case to court and lost before a jury.
So you see any shareholder with minimum math knowledge now has the parameters to figure out approximate earnings for the next year just by looking at the recent reported SEC filing “AR”.
Collections = 52%
Collection time: 10-12 months
Failure rate .03%
Hopefully this will help you all to understand why this is such a great predictable business.
