jaybird, re DYII
Hope you're right about the change in billing method. In the last 10Q, the company didn't say that was the reason for the increased revenues/profits. I think the stock will get a nice pop if they post another .16/share in Q4. If you're confident they'll do .30, I hope you're loaded as the stock will at least double from here.
Found the Yahoo posts you were referring to. Maybe we can get an accounting type to look this over as I'm still confused...
Why DYII is worth between $16 and $20 per share (4 Ratings) 18-Jul-07 09:34 am 1. Dynacq is in a transition phase on two fronts as its core base of business is increasing (as evidenced by an increase in gross billings from $21MM to $26MM) due to the recruitment of additional doctors at its Garland surgical center. I have no opinion on this as I don't know whether bariatric (weight loss) related cases are increasing or decreasing but I would guess is increasing as Texas just keeps getting older and fatter.
2. Dynacq has traditionally been recording a large allowance against its billed revenues (of over 50%) as its ability to collect cash from insurance companies has been at this rate. Which is why net revenues (the revenues we see) are less than half of gross revenues. Recently, state legislation changes have allowed for Dynacq to start collecting on its old billings to the insurance companies (at a rate of recovery of about 70% of billings as opposed to the net revenue estimate of 40%). This change that has allowed them to collect more of their gross billings has begun to decrease the allowance rate as the methodology has been to use the trailing 12 months of actual collections versus billings as an estimate for how much of the gross billings in this quarter will be actually collected. We have just begun to see this in the most recent quarter as the allowance has decreased from 63% to 52%. This is HUGE! Dynacq is actually collecting about 70% of its gross billings (management estimate) but because of accounting methodology lag, only recorded 48% in the most recent quarter as net revenues. THAT MEANS THAT OF THE $26MM IN GROSS REVENUES RECORDED, IT WILL COLLECT 70% OF THAT OR $18.2MM VERSUS ITS NET REVENUES OF $13.7, which all falls to the BOTTOM LINE. It increases its bottom line from $2.6MM (or 16 cents per share) to over $7MM. Tax adjusted, that yields about 30 cents per share per quarter. At 15x earnings, that results in $18 per share in value.
3. There is another $4 per share in value from collecting on old receivables not reflected on the balance sheet.
WOW.
The NET revenue increase is two-fold:
First there has been a absolute increase in gross revenues billed due to the recruiting of new doctors and which is what lead to an increase in GROSS revenues from $21MM to $26MM:
"The Garland Facility had an increase in both bariatric and orthopedic cases due to recruitment of additional physicians. The increase in net patient service revenue is primarily due to a 53% increase in the inpatient cases, which typically have a higher average reimbursement per case."
The second reason for the increase in NET revenues as a percentage of GROSS revenues (which will continue to grow until it reaches 70%) is due to the change in the company's ability to collect more of its billed services from insurance companies due to a court decision in January 2007:
"Update on MDRs
The Company, in conjunction with most of the Texas hospital medical providers, continues its efforts to resolve the pending claims regarding payment for the treatment of injured workers under the Texas workers’ compensation laws. The Company exhausts all of its available avenues in collecting its accounts receivable (particularly in the workers’ compensation arena). This includes the appeal to the State Office of Administrative Hearings (“SOAH”) or the District Court for workers’ compensation cases where the insurance carrier failed to reimburse the Company in accordance with the rules of reimbursement mandated by Texas state law.
Historically, the Company had collected approximately 55% to 60% of its charges in “stop-loss” cases; however, around early 2000, certain carriers, including the largest, Texas Mutual Insurance Company, stopped paying the “stop-loss” rate and instead paid a much lower “per diem” amount, if they paid anything at all. As the cases made their way through the medical dispute resolution (“MDR”) process, appeals began to pile up at SOAH with few, if any, decisions, being issued. In 2004, the MDR process ground to a halt.
In 2005, the Texas Legislature passed House Bill 7, making substantial changes to the Texas Workers Compensation System. Among other things, the Bill altered the manner in which cases would proceed under the MDR process. Appeals to SOAH were eliminated and cases were appealed directly from the Division of Workers Compensation to the State District Courts of Travis County Texas. That portion of House Bill 7 was held to be unconstitutional by a Travis County District Court. The Texas Legislature has addressed this problem by passing legislation which will become effective September 1, 2007 and which returns SOAH to the process and will enable the MDR process to continue.
Vista Healthcare, Inc, (“VHI”), the ambulatory surgical center previously operated by the Company, has approximately 467 cases pending at SOAH, all of which involve contests relating to the methodology employed to determine “fair and reasonable” reimbursement for outpatient treatment. Historically, VHI recovered nearly 70% of
its billed charges. Again, the decision making process was abated for nearly four years. Now these cases are set on the SOAH trial docket and should be resolved over the next six to nine months. The Company is actively pursuing settlement of these cases as well and fully expects to make recoveries from the insurance carriers. Settlement discussions are occurring, and reasonable offers have been made by some carriers.
While there remain nearly 4,300 cases at the MDR level, the action by the Texas Legislature and the public statements made by Commissioner Albert Betts of Texas Department of Insurance Division of Workers’ Compensation indicate that the MDR process will restart in the immediate future and the decisions rendered will be in accord with the recent SOAH and Travis County District Court rulings.
Due to a number of factors outside the Company’s control, including a change in the Company’s reimbursement collection experience associated with potential changes in the reimbursement environment in which the Company operates, it is possible that management’s estimates of patient service revenues could change, which could have a material impact on the Company’s revenue and profitability in the future. It is very difficult for management to quantify with accuracy any reasonably likely effects that a change in estimate could have on the Company’s financial position and results of operations. However, management believes that the most reasonably likely effects that a change in estimate could have on the Company’s financial position and results of operations would be for the Company to collect amounts on accounts receivable greater than what is recorded on the books at May 31, 2007. The amount of such additional collections could range from zero to an amount that could approach $69 million, which represents the ultimate amount that the Company could collect on its MDR accounts receivable as of May 31, 2007 if all were settled in the Company’s favor. In accordance with the Company’s revenue recognition policy, accounts receivable are not written up to amounts ultimately expected to be collected until management can demonstrate that collections on an identifiable group of accounts are more than the revenue which was recorded on the identified group of accounts. Amounts are not written up to management’s estimated amounts due to the length of time it takes to ultimately settle the MDR accounts receivable and the current uncertainty associated with such settlements. Any change in this estimate would impact revenues in the statement of operations and cash in the statement of financial position."
The way accounting for NET revenues works (they book less than they receive) they take the previous 12 months AVERAGE actual recoveries on GROSS revenues and apply it to the most recent quarter's GROSS billings. Because they have only recently started collecting more and because of time lag, their NET as a percentage of GROSS will continue to grow from 37% a year ago to 48% this quarter trending up to 70% once they have a full year of the new change under their belt.
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