Mike,
<<That $650 mil. in cash is not "free" cash in that there are substantial medical payables
on the liability side of the balance sheet. The co. would need to use that cash to pay
future claims. Thus, you can't consider that cash total as free for discretionary spending
purposes.>>
I should've made this more clear in the article. Oxford expects
to pay medical costs payable out of accounts receivable over
time. Unlike most insurance companies, Oxford expects claims
to be filed and booked within 6 months. There is no long-term unknown
liability. It also expects accounts receivable to come in on
time. Hence, it expects to pay, on a running basis, claims out
of accounts receivable. This system gets out of whack when
the computer system fails like it did.
The cash, while not entirely free, is
not dedicated to medical accounts payable. It is there as
a "backup" for when AR cannot meet medical costs payable on an
operating basis. But this is what cash is for any company -
a backup of sorts to allow the company to continue operating in a
cash flow negative situation without borrowing.
This is why I backed out the cash. An argument can be made anytime
you back out cash on a cash-flow negative company that you
are backing out an asset that is diminishing in value. This
is a valid argument. I don't believe Oxford will remain cash
flow negative.
Further, to be perfectly strict, a more reasonable
way to back out cash for Oxford might have been to subtract (AP-AR)
from cash, and then back out the result, which is around
$450 million. My belief, from conversations with Oxford, is that
AR will more than fund AP going forward, so I used the more
aggressive version.
Good Investing,
Mike |
