Brentwood, Tenn.-based America Service Group has had a rough year. It canceled a business deal with MedPartners, saw its chief executive officer move to Columbia/HCA Healthcare Corp. and watched its stock price slowly decline.
The company, a publicly traded, for-profit provider of healthcare services at correctional facilities, says its business is thriving and calls such struggles temporary setbacks. Analysts say the falling stock price can be attributed to the general erosion of investor confidence in smaller companies.
ASG, one of about 25 companies that provide healthcare at prisons, serves 54,000 inmates at 110 sites in 14 states. Executives say they have an aggressive strategy for growth. ASG will focus on a new marketing plan led by Lawrence Pomeroy, who has been with the company since April. Previously, he was national director of behavioral health services for Nashville-based Columbia.
As ASG's senior vice president of marketing, Pomeroy is spearheading the company's business development. Since June, the company has acquired three new contracts and has two pending.
At each prison the company sets up infirmaries staffed by its own physicians and nurses. Most specialized care is provided through contracts with local hospitals.
Michael Catalano, ASG's new president and CEO, says the company's biggest struggle this year was the aborted deal with Birmingham, Ala.-based MedPartners. ASG planned to merge with the physician practice management company in a deal worth $59 million at the time. But in January, ASG called off the deal when MedPartners' stock price started to slide (Jan. 26, p. 12). Catalano says ASG had to put its growth plan on hold from the time of the merger announcement last October until January while it tried to work out the deal with MedPartners.
"We had setbacks in a number of ways," he says.
But since this spring, ASG has hired nine new marketing managers and two new top executives, including Gerard Boyle, who is president and CEO of the company's subsidiary, Prison Health Services. PHS' previous CEO, Jeffrey Bairstow, left in February to join Health Net, a Woodland Hills, Calif.-based managed-care company, as its new chief financial officer. PHS is the company that contracts with federal, state and local correctional facilities to provide comprehensive healthcare to inmates. Parent company ASG has no other subsidiaries.
Earlier this year, former ASG chief executive Scott Mercy turned down Columbia's offer to become senior vice president of managed care, citing significant business potential at ASG. But in August, he changed his mind, becoming chairman and CEO of Columbia's America Group-one of the two companies being spun off as part of the chain's reorganization plan. Mercy is still ASG's board chairman.
Catalano and other top ASG executives say Mercy's departure was a vote of confidence in the new staff, not an indication of reduced potential at the company.
To become more efficient and competitive, ASG is targeting areas where it can cut costs. One of those is offering more services on-site rather than contracting with local hospitals. Bringing an inmate to a hospital is expensive, from medical and security perspectives.
One common treatment ASG is now providing on-site is care for blood clots. Previously, inmates were taken to a local hospital, and the average length of stay was more than six days, Boyle says. Inmates now are given medication and monitored on-site, eliminating costly hospital stays. The savings totals about $7,000 per patient or about $420,000 annually, he says.
"Small steps can mean big returns," says company CFO Bruce Teal.
Boyle says ASG also has implemented a number of new tracking systems to monitor populations at each facility it serves and maintain data on areas such as personnel, pharmaceutical and laboratory expenses. It's also improving training for caregivers and providing more general health information to the inmate population.
Will all this help the company achieve its $145 million revenue target for this year? So far, the company's quarterly financials are strong, but its stock price doesn't reflect the good news.
For the second quarter ended June 30, ASG reported an 82% increase in net income, to just less than $1 million, or 27 cents per share, compared with net income of $547,000, or 15 cents per share, in the year-ago quarter. Revenues grew 16% to $28 million. For the six months, net income rose 166% to $2.5 million, or 67 cents per share, from net income of $940,000, or 28 cents per share, in the year-ago period. Revenues rose 16% to $55.8 million.
"We feel now we can take (revenues) to the next level, up 25%," Teal says.
Meanwhile, the company's stock, which has a 52-week high of $19.13 and a low of $7.44, was trading in the $9 range last week. Since April, the stock price has been slowly falling, from $14.50 on April 2 to its current level, which company officials attribute to the overall market downturn and the beating small-capitalization stocks like ASG have been taking as a result. ASG has a market capitalization of $35 million and has no debt.
"The current share price does not adequately reflect the company's earnings growth," says Michael Lamb, a healthcare analyst with Overland Park, Kan.-based Wealth Monitors. "ASG's share price has suffered along with many of its small-cap counterparts to a level that is totally irrational to its existing business value."
Boyle says ASG's emphasis on cost savings will help the company flourish in an industry positioned to grow. About 2 million people are in correctional facilities nationwide, and that number is expected to grow 5% to 8% annually during the next few years, Boyle says. In addition, an aging inmate population, coupled with a high incidence of illness among that group, including HIV infection, means more opportunities for companies like ASG, Boyle says.
"The market itself is just taking off," he says.