Last week I posted linkedin comments praising three very fine (and honest) vendors: Limeade, Redbrick, and Imagine Health. I was concerned this flurry of distinctly out-of-character activity might cause people to worry that pods had taken over my body. I then posted an assurance that was not the case. However, as someone subsequently pointed out, if pods had taken over my body, it’s quite unlikely they would admit it.
Point well taken.
Since my own protestations would therefore go for naught, the only way to put people’s minds at ease that I’m not a “pod person” would be to profile another vendor–in this case, Catasys. Catasys is in the depression wellness/disease management business. Here’s the way that business works: if you are a health plan customer of theirs, you round up your depressed members and try to convince them to use Catasys’ therapy.
If I were depressed, I doubt the first thing to come to my mind would be: “How can my health plan arrange some therapy for me with a vendor?” But maybe that’s just me. And I also doubt I would insist that said vendor be nearly bankrupt. (Once again, a preference for working with viable entities might just be a personal foible.)
The reason I know they are nearly bankrupt is that they say so in their 10-K (“substantial doubt as to our ability to continue as a going concern”). Yes, they file with the SEC because, yes, they are publicly traded — and that is what provides the inspiration for this post.
Specifically, one of their executives recently pitched their stock on Linkedin. You don’t see executives pitch stock on Linkedin in their own companies very often, or for that matter at all. Indeed, after I posted my comments, she removed “If you’re looking into investing in Catasys” from her post. Instead the posting now says only:
The $CATS got her tongue maybe because, oh, I dunno, it’s illegal for company insiders to solicit marks on Linkedin to buy their stock? Just a guess…
Nonetheless I decided to take her up on the offer. What I “learned” was that they still have a market value of $60MM, even though the stock has fallen about 2/3 from its IPO price. Notwithstanding this decline, shares sell at about 10x revenue, which, though so high as to be ridiculous, is not unusual in this field, where ridiculous is the new stupid. What is unusual is that for every dollar in revenue, they lose about $5. You can’t make that up in volume–and indeed, the more they’ve reported in revenues every year, the more they’ve lost every year.
Consequently, in order to claw their way to $5 million in annual revenue after 12 years in business, they’ve lost a cumulative $278 million dollars, a figure exceeding the GDP of several Pacific Island nations. The latter at least have the excuse that they are now largely underwater, though I guess that’s true of Catasys as well.
Don’t believe anyone could lose that much in this field? Here is the screenshot, keeping in mind that these quantities are expressed in $000:
As for their offering, naturally all their savings figures are made up. When they tried to pitch a client of mine several years ago, I checked them out, as is my wont when representing potential prospects against vendors. (It’s a strategy that benefits consultants should try someday. Oh, I know it sounds crazy but it just might work.)
I concluded that they must have read Why Nobody Believes the Numbers backwards, in order to learn how to use every sleight-of-hand measurement technique to create the appearance of saving money.
Their business model is to find the members with the highest claims that include depression or substance abuse and see if they are interested in participation. If they are, Catasys then interviews them to decide who is likely to improve the most through their intervention. Lucky depressed members who survive the interview qualify for the 52-week intervention. Some fraction of those lucky depressed survivors make it all the way through the program.
And that, finally, is the subset on which Catasys measures and reports savings.
Sure enough — leaving nothing to chance through regression to the mean, favorable selection bias and self-selection bias, and ignoring dropouts — Catasys shows savings of 50%. (What’s amazing, given all those biases, is that their alleged savings is only 50%.)
So next time someone approaches you with an offer to “learn” how to invest in Catasys, here is my recommendation:
However, there is a way to make some money on the stock.
The way the rules work is, you can lie about savings all you want to benefits consultants, brokers and prospects, but here’s where you can’t lie: in SEC filings. And yet, right on page 3 of the 10K:
Lying on SEC filings can get you sent to jail — if the lies aren’t disclosed. Disclosing “risk factors” solves just about every problem there is, for public companies. For instance, if your company’s C-Suite consists totally of convicted embezzlers, shareholders can’t sue you and you can’t go to jail if indeed your 10K discloses “hiring convicted embezzlers” as a “risk factor.”
Catasys’ 10K lists a whopping thirty-seven risk factors, many of which are pretty scary, including fee-splitting. Having read these risk factors, were I a shareholder, I’d be spooked enough to swap ’em all for a few swindlers for the corner offices.
And yet nowhere in this extensive “Risk Factors” section does it say anything like:
Our savings claims are the result of totally hilariously obvious fallacies. We know this because we were on the conference call when Al Lewis showed our half-witted Milliman consultant who had “validated” us exactly how and why our savings were total crap, but we chose to keep measuring this way anyway in order to look good. So a risk factor is that Mr. Lewis might blog about us if his panties get sufficiently in a bunch.
Back to the money-making part. You short the stock, announce that you are shocked, shocked that all their savings are fabricated, and then inform the SEC, which presumably will be equally shocked…
…and whose investigation will send shareholders running for the exits:
You can’t make this stuff up. I lose count of how many depression “solutions” I’ve seen over the years, from mood tracking apps to phone interventions to whatever. And frankly (as Jon so eloquently champions) most workplaces should make one depressed-it is a sign of normalcy.