PPD serves primarily individuals and small businesses. It is hard to imagine their approach having much success in big-time corporate America, but for small businesses it makes sense. They have had success marketing to certain groups as well. Targeting police officers, school teachers, etc.|
They take very little risk that expenses will be higher than expected. All memberships sold since 1987 have been "closed panel." This means that the insured must access benefits through one of the "plan" lawyers. The lawyers get a capitated fee per member covered. Just like the HMOs. But there's much less hassle from the government, since no one really cares what people pay for legal advice. Least of all Congress. This is because there is no Medicare/Medicaid equivalent to make it an issue. And that won't change anytime soon. As well, the cost of providing legal services is managed by only offering certain services. You can't go to a lawyer for just anything - only for what you are covered. The ethical wars are much less than the HMOs have to fight as well. 94% of its members were closed panel as of the end of December.
From what I understand, they expect quite a bit out of their lawyers, highest ratings and all that. But evidently the legal cost ratio is so favorable that lawywers want to do it. The kicker is, PPD doesn't bear any of the liability for potential negligence or fraud claims if a provider attorney screws up. It's in the contracts.
It's not all rah-rah, though. Evidently quite a few members quit. That's part of the "smells bad." If I just ignore everything else and look at the numbers, I'm ok with investing in it. If I think about the MMM structure, then I think I'll head for the exits at the first sign of significant insider selling. To date, insiders have been big holders and buyers.
I don't think this is a Buffett investment in the manner of Coke. But maybe in the manner of Kirby or Execujet. Mike