Today we published a report on Corvel (CRVL). It can be found in its entirety at:
Below is a piece of the report. THE REPORT SHOULD BE READ IN ITS ENTIRETY AS THE SEGMENT BELOW ONLY CONTAINS HIGHLIGHTS AND THE APPROPRIATE REFERENCES ARE FOUND IN THE FULL REPORT:
The Curious Case of Corvel Corporation
Benjamin Button made for an enchanting story of a man whose aging process was reversed. While it was an enjoyable movie, the concept defied the laws of Mother Nature. Corvel Corporation (ticker: CRVL) seems to have a similarly enchanting story. It has managed to operate quietly, with no analyst coverage and minimal public market scrutiny, while generating financial results that would appear to defy the laws of business. We believe that with this report, the curious case of Corvel Corp may end poorly for shareholders of a company that has faced a multitude of serious allegations (including criminal) from numerous parties, including former employees.
Corvel operates in the grey area of ethical and legal business practices. On the surface there is a sexy story around cost containment for insurance companies. However, a deep dive into the shadows of Corvel reveals businesses that include what others have called a fraudulent silent PPO scheme and software that arbitrarily reprices medical bills. Some of the company's business practices and products should face significant scrutiny as they are finally exposed to public prosecutors and regulators. Should our research be the catalyst that changes, or even shuts down several of Corvel's businesses, it will unfortunately result in massive losses for existing shareholders. While we feel a certain kinship to the Erin Brockovich's of the world, exposing certain questionable practices that appear to be driven by simple greed, it is unfortunate that retail investors may suffer as a result. We believe that the impact on Corvel's business and stock price once its practices are publicly uncovered could be far worse than the impact Tenet's treacherous accusations had on Community Health Systems.
Scandals in the healthcare payor / provider world are not uncommon. The most recent example includes allegations of Medicare fraud at Community Health Systems (ticker: CYH). Given the contentious relationship between payor and provider, improprieties tend to be investigated and punished in short order. In CYH's case, the U.S. Department of Justice, the Office of Inspector General, and multiple U.S. attorney offices moved quickly to open investigations after Community Health's practices were exposed. CYH's stock is down nearly 60% since these allegations surfaced. Based on our findings, we would expect attorney generals, state insurance oversight bodies and even federal regulators to have reason to question the legitimacy of Corvel's business. We have forwarded our research and findings to some of these officials.
In this report, we attempt to synthesize the pieces of the unusual Corvel mosaic, while abstaining from any assertion that Corvel acts in a fraudulent manner. There really is no need for us to make that claim because the allegations of fraud, criminal acts, kickbacks, unethical behavior, and self dealing have already been made by industry experts, consultants, former employees, accredited journalists, physicians, lawyers, and a former client's internal audit report. In many cases, these are impartial reviews of Corvel’s business practices. However, most of the lawsuits involving Corvel need to be pulled from LexisNexis. The reason is the vast majority of these incendiary accusations have mysteriously failed to make it into Corvel's SEC public disclosures. As such, our suspicion is that most of Corvel's shareholders are completely unaware of these risks due to Corvel's shrewd ability to avoid the public eye (zero analyst coverage). After conducting extensive research on the company and its products, we have uncovered some alarming finding. In this report we will highlight:
I) A brief background and description of Corvel. Corvel provides managed care services for workers' compensation, accident and health, and auto insurance in the U.S. Its products aim to contain health care costs for clients, which typically include insurance companies, self insured entities and TPAs. Corvel provides a network of preferred providers, as well as claims management, bill review, utilization management, case management, and Medicare services. Corvel is paid based on the number of claims it manages and is often paid a percentage of the client's savings. This compensation scheme creates a perverse incentive to lower claim costs, by any means necessary to generate a higher profit for Corvel.
II) What is a silent PPO and are they illegal? Silent PPOs provide insurance companies with a back-door method to systematically underpay healthcare providers. These quasi-black market arrangements give a payor access to undeserved discounts at the expense of doctors, hospitals and other medical providers. The American Medical Association has categorically stated that silent PPO activity may be fraudulent. Further, multiple states have gone as far as instituting statutes that forbid Silent PPOs.
III) Corvel appears to operate a Silent PPO. During the course of our research, we found a litany of lawsuits that accuse Corvel of operating a silent PPO. One lawsuit that we examine later blatantly stated that Corvel was "running a silent PPO scheme" and "many doctors are completely unaware that they are losing thousands each year to the silent PPO scheme." Another lawsuit accused Corvel of "defrauding" doctors by paying discounted rates while never delivering contracted patient referrals. A third case alleged that Corvel and its clients "exploited the CorCare and other PPO networks as Silent PPOs…embarking on the unlawful practice known as a 'Silent PPO.'" Corvel has been richly rewarded in its network business, as it collects a percentage of these potentially illegal savings.
IV) Corvel sells other questionable products aimed at providers and individuals. Corvel's alleged dubious Silent PPO is almost matched in ethical gymnastics by its software that "reprices" medical bills. These software products have been accused of arbitrarily lowering reimbursement payments to doctors, healthcare providers and even individuals. By its own admission, Corvel also makes "recommendations about the appropriateness of providers’ proposed medical treatment plans for patients." One would hope the immense responsibility of deciding what medical procedures are permissible would not be the responsibility of a company with completely perverse incentives. To the contrary, various lawsuits allege that Corvel applies extremely aggressive software to reprice bills lower for insurance customers. It is hard to believe that there will not be a flood of District Attorney and Attorney General subpoenas requesting more information about its "biased and arbitrary computer software [used] to review medical providers’ bills"… on behalf of Corvel's clients who in turn pay Corvel a percentage of the savings generated from the lower bills.
V) Former employees alleged Corvel engaged in "Unethical and Criminal Acts" in the Boatman Case. The Boatman lawsuit was filed against Corvel in 2011, and should be mandatory reading for any shareholder, regulator, client, or health care provider that touches Corvel. In the lawsuit, former Corvel employees accused Corvel of engaging in "unethical and criminal acts" such as false submissions to insurance regulators, overstating its network by knowingly including physicians that were dead, underpayments to healthcare providers, providing questionable software, and applying retroactive discounts through backdating. What is even more indicative of the need for DA or AG involvement is that this former Corvel employee said he "sought to have the systemic underpayments corrected and was told that he should 'shut his mouth' because it would cost Corvel millions of dollars if word got out that the software was programmed to provide underpayments." The suit alleged that these actions allowed Corvel to skim "off large profits" for themselves. Further, the lawsuit alleged that an employee who would not "play ball" with the illegal acts was promptly fired. If true, these accusations suggest pervasive unethical, and perhaps even criminal activity, has occurred at Corvel.
VI) An in-depth Broward audit of Corvel’s business practices revealed harrowing results that led an industry expert to question if a kick-back scheme had existed. Broward County School Board audit provides one of the most in-depth reviews of Corvel's operation and questionable business practices. Corvel's former client found the problems with their work "were not subtle or a matter of interpretation, but were substantive, overt, and revealed a fundamental breakdown in processes and accountability." The audit succinctly details how Corvel charged its client over $2.7 million with a failure to deliver on plan metrics. Further, the audit found that despite Corvel's "wildly excessive" fees, the program still produced poor results. Why? According to the audit, Corvel was primarily focused on "obtaining a large quantity of discounted medical services rather than facilitating quality care." The basic perverse incentives meant larger discounts on medical bills resulted in higher fees for Corvel. The audit details how Broward paid a Corvel case manager $2,800 to accompany an asthma patient at the doctor's office. In another example, a Corvel claims investigator billed for “working more than 24 hours a day, three times in one month.” Following the reports, an industry expert questioned whether Corvel and Broward's TPA were involved in a kickback scheme.
VII) If Corvel is exposed, what are the potential liabilities? The potential liability from Corvel's business practices is difficult to measure, but it would appear to be significant based on other precedents. At a very minimum, we believe none of these risks are known/understood, let alone discounted in Corvel's premium valuation multiple. If only a handful of the shocking allegations in Corvel's undisclosed lawsuits are correct, we believe an unquantifiable liability exists that could permanently impair the business and the stock price. If the most extreme accusations are true, it is not unimaginable to see a scenario where future liabilities could wipe out Corvel's equity value.
VIII) Even more peculiarities and red flags. Corvel's lawsuit scandals are accompanied by forensic red flags that warrant attention. Corvel has somehow managed to deliver consistently picture perfect financial results despite one of its most important business drivers being in secular decline for 20 years. We also find it strange that Corvel's complex web of businesses is covered by a tiny auditor with just two offices listed on its website. Excluding Corvel, this auditor only completed five audits for public companies in the past fiscal year, with two of them containing going concern risks. The combined market cap of its auditor's other public clients is less than $125 million. One possible breakdown of this relationship has been Corvel's consistent failure to disclose significant accusations and litigation in its filings. Perhaps the main reason Corvel has been able to hide all of the issues from the public's eye is cloaked in its veil of secrecy. Despite having a gaudy market cap of $600 million, not one sell side analyst has chosen to follow Corvel. Further, the company has requested confidential treatment from the SEC at an alarming rate. In September 2011 alone, the company requested confidential treatment on twelve exhibits in their financial statements.
To be clear, we are not questioning the existence of the earnings and cash flow of Corvel's business. Many frauds do not have real cash flow or financial results (we do not think Corvel is a financial fraud). Let us stress, Corvel absolutely does have real financial results. The problem is that the businesses that drive the financial results could vanish if/when they come under regulatory or legal attack. Drug cartels and prostitution rings are highly profitable businesses. They may be unethical and illegal, but they generate good cash flow. However, that cash flow is precariously created and its sustainability is highly uncertain with risk of disappearing overnight. Clearly the accusations that have been leveled against Corvel are not akin to the dangerously illegal businesses of drugs and prostitution. However, a more appropriate example may be online poker operators. The online poker industry was highly profitable until the U.S. government began enforcing existing laws. Today, online poker appears to be a broken business model as many companies are seeking distressed capital to stay afloat, and one prominent site has been exposed as a ponzi scheme. Along the way, many public gaming companies saw massively profitable financial models destroyed. If allegations against Corvel are true, it's cash flow model could become impaired overnight and shareholders may face a similar outcome.
Much like the online poker industry, other healthcare reimbursement scandals like home healthcare, or even Community Health, Corvel's shareholders and management team have been richly rewarded. Corvel's shares have outperformed 95% of the market over the past five and ten year periods, with the share price more than doubling. Today, the market capitalization of the company is a formidable $600 million. The company's remarkable ability to deliver financial results has led to a generous P/E and free cash flow multiple. However, Corvel has faced minimal public scrutiny of its business practices. We believe there is a high probability that most, if not all, of Corvel's shareholders are completely unaware of its questionable business practices. As a result Corvel's stock price could suffer greatly as the potential legal and regulatory risks are finally exposed. As such, even if Corvel escapes the long tail risk outcomes, its extremely lofty valuation is at risk. At a low double digit earnings multiple, Corvel's shares face 50% downside. If in fact some of their business practices are found to be illegal, the unquantifiable liability could permanently impair the business, resulting in our inability to set an appropriate downside price target.
IMPORTANT Disclaimer – You should do your own research and due diligence before making any investment decision with respect to securities covered herein. As of the publication date, the author of this report has a short position in the company covered herein and stands to realize gains in the event that the price of the stock declines. The author does not discuss unpublished reports, or provide any advanced warning of future reports to others. Following publication of this report, the author may transact in the securities of the company, and may be long, short, or neutral at any time hereafter regardless of our initial opinion. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind – whether express or implied. The author of this report makes no representations, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. All expressions of opinion are subject to change without notice and the author does not undertake to update or supplement this report or any of the information contained herein. This is not an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction.