Introduction
We believe we are one of the largest suppliers of outsourced healthcare
professional staffing and administrative services to hospitals and other
healthcare providers in the United States, based upon revenues and patient
visits. Our regional operating models also include comprehensive programs for
inpatient care, anesthesiology, pediatrics and other healthcare services,
principally within hospital departments and other healthcare treatment
facilities. We have historically focused, however, primarily on providing
outsourced services to hospital emergency departments, or EDs, which accounts
for the majority of our net revenue before provision for uncollectibles.
Factors and Trends that Affect Our Results of Operations
In reading our financial statements, you should be aware of the following
factors and trends we believe are important in understanding our financial
performance.
General Economic Conditions
The continuation of the current economic conditions may adversely impact our
ability to collect for the services we provide as higher unemployment and
reductions in commercial managed care and governmental healthcare enrollment may
increase the number of uninsured and underinsured patients seeking healthcare at
one of our staffed EDs. We could be negatively affected if the federal
government or the states reduce funding of Medicare, Medicaid or other federal
and state healthcare programs in response to increasing deficits in their
budgets. Also, patient volume trends in our hospital EDs could be adversely
affected as individuals potentially defer or forego seeking care in such
departments due to the loss or reduction of coverage previously available to
such individuals under commercial insurance or governmental healthcare programs.
Acquisitions
We have historically been an acquirer of other physician staffing businesses and
related interests. During the year ended December 31, 2011, we acquired the
operations of four businesses for total cash proceeds of $125.8 million. In
April 2011, we completed the acquisition of certain assets of a medical staffing
group that provides emergency department staffing services to a hospital located
in Alabama. In September 2011, we completed the acquisitions of certain assets
and related business operations of an anesthesia staffing business located in
Colorado, an emergency medical staffing business located in Illinois and a
medical staffing group located in Tennessee. These acquisitions have broadened
our presence within these lines of business. The agreements relating to these
acquisitions have a contingent consideration provision pursuant to which, if
certain financial targets are achieved within a defined performance period, then
future cash payments currently estimated to be $36.1 million could be made at
the conclusion of the respective performance periods.
On April 20, 2012, we completed the acquisition of an anesthesia group in New
Jersey and effective May 1, 2012, we completed the acquisition of a physician
management and staffing business that provides emergency medicine, hospital
medicine, and urgent care in New York, Pennsylvania, Ohio and Texas. Total cash
outlay for these acquisitions was $121.3 million with an additional $40.2
million in estimated potential contingent payments that will be recognized as
contingent purchase compensation expense over the defined performance period.
The results of operations of the acquired businesses have been included in our
consolidated financial statements beginning on the respective acquisition
dates. Acquisitions contributed 9.4% of the increase in our net revenue in the
six months ended June 30, 2012 as compared to the six months ended June 30,
2011. Effective July 1, 2012, we acquired certain assets of a medical staffing
group that provides emergency department staffing services to a hospital located
in Virginia.
See Note 4 of notes to the consolidated financial statements for further
discussion of acquisitions.
Healthcare Reform
The Patient Protection and Affordable Care Act ("PPACA"), signed into law on
March 23, 2010, significantly affects the United States healthcare system by
increasing access to health insurance benefits for the uninsured and
underinsured populations, among other changes. On June 28, 2012, the U.S.
Supreme Court (the "Supreme Court") upheld the constitutionality of the
requirement in PPACA that individuals maintain health insurance or pay a penalty
(the "individual mandate") under Congress's taxing power. The Supreme Court
upheld the PPACA provision expanding Medicaid eligibility to new populations as
constitutional, but only so long as the expansion of the Medicaid program is
optional for the states. States that choose not to expand their Medicaid
programs to newly eligible populations in PPACA can only lose the new federal
Medicaid funding in PPACA but not their eligibility for existing federal
Medicaid matching payments. We believe that upholding the current PPACA law
means that there is an increased likelihood that there will be more people in
the U.S. who will have access to health insurance benefits. However, it is
unclear what the pricing will be for covered services under those health
insurance benefits.
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Medicare Fee Schedule Changes
The Medicare program reimburses for our services based upon the rates in its
Physician Fee Schedule, and each year the Medicare program updates the Physician
Fee Schedule reimbursement rates based on a formula approved by Congress in the
Balanced Budget Act of 1997. Many private payers use the Medicare fee schedule
to determine their own reimbursement rates.
The Medicare law requires the Centers for Medicare and Medicaid Services (CMS)
to adjust the Medicare Physician Fee Schedule (MPFS) payment rates annually
based on an update formula which includes application of the Sustainable Growth
Rate (SGR) that was adopted in the Balanced Budget Act of 1997. This formula has
yielded negative updates every year beginning in 2002, although CMS was able to
take administrative steps to avoid a reduction in 2003 and Congress took a
series of legislative actions (commonly referred to as a 'patch') to prevent
reductions each year from 2004 to 2011, and then again, most recently through
2012. However, absent regulatory changes or further Congressional action with
respect to the application of the SGR, Medicare physician services will be
subject to significant reductions beginning in January, 2013.
In November 2011, CMS released the final rule to update the 2012 MPFS. Included
in the final rule are changes in reimbursement that are overall budget neutral,
but redistribute payments between different medical specialties. We estimate
that the final rule will reduce 2012 reimbursement rates to emergency medicine
providers by 1.5% and will increase 2012 reimbursement rates to
anesthesiologists by 1%. We estimate the impact on our 2012 ED fee-for-service
revenue to be a decline of approximately $4.6 million. Also included in the CMS
regulations is a 0.5% reduction in the 2012 Physician Quality Reporting
Initiative (PQRI) bonus payments. The impact on our revenue is estimated to be a
$1.2 million decline as compared to 2011 revenue.
The most recent patch prevented a potential reimbursement reduction associated
with SGR in 2012 of an estimated 27.4%. Expiring in December 2012, absent
Congressional action for permanent repeal of the SGR or a further extension of
the patch, in January 2013 the SGR will result in estimated reimbursement
reduction of the MPFS of approximately 27.5%.
In July 2012, CMS released the proposed rule to update the 2013 MPFS. Included
in the proposed rule are changes in reimbursement that are overall budget
neutral, but redistribute payments between different medical specialties. The
proposed 2013 MPFS rule is not final and is subject to comment and revision,
however, if implemented, we estimate that the proposed rule would reduce 2013
reimbursement rates to emergency medicine providers by approximately 1% and to
anesthesia providers by approximately 3%. This proposed reimbursement reduction
would be in addition to any reduction associated with SGR changes in 2013.
Any future reductions in amounts paid by government programs for physician
services or changes in methods or regulations governing payment amounts or
practices could cause our revenues to decline and we may not be able to offset
reduced operating margins through cost reductions, increased volume or
otherwise.
Joint Select Committee on Deficit Reduction
The Joint Select Committee on Deficit Reduction was tasked with identifying
savings of $1.5 trillion over a ten year period beginning in 2012. While a
number of different proposals were made by various parties with different
impacts to companies and industries, no agreement was reached, and across the
board spending reductions (i.e., "sequestration") will be implemented beginning
in 2013 absent additional Congressional actions. If these reductions are
implemented, based on the Budget Control Act of 2011, cuts to Medicare providers
could be as much as 2%.
Military Healthcare Staffing
We are a provider of healthcare professionals serving patients eligible to
receive care in military treatment facilities nationwide administered by the
U.S. Department of Defense and beneficiaries of other government agencies in
their respective clinical locations. Our revenues derived from military and
government facility healthcare staffing totaled $40.9 million and $45.7 million
for the six months ended June 30, 2011 and 2012, respectively. These revenues
are generated from contracts that are subject to a competitive bidding process
which primarily takes place during the third quarter of each year. A portion of
the contracts awarded during the third quarter of 2011 will expire during the
course of 2012 and will be subject to a competitive rebidding and award process.
In the event we are unable to retain these expiring contracts, the operations
and financial positions of our military staffing business could be negatively
impacted.
In addition, the process of awarding military and government facility healthcare
staffing contracts has shifted in recent years toward an increased bias to award
certain contracts to qualified small and minority owned businesses. Although we
participate in such small and minority owned business awards to the extent we
can serve as a sub-contractor, our revenues from these arrangements are limited
compared to an outright contract award, which has been a large contributing
factor in the financial performance decline of the military staffing division.
Approximately 39.2% and 33.1% of our military staffing revenue for each of the
six months ended June 30, 2011 and 2012, respectively, was derived through
subcontracting agreements with small business prime contractors.
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In December 2011, our military staffing division was directed by the Army
Medical Command to proceed with a contract originally awarded in 2009 and
subsequently re-awarded in June 2011 for completing the construction of and
providing clinical staffing and management services for two new Family Health
Centers (FHCs) in Northern Virginia. In July 2012, we began providing clinical
staffing and management services. Annual revenues under the contract are
estimated to be approximately $43.0 million.
Critical Accounting Policies and Estimates
The consolidated financial statements of the Company are prepared in accordance
with accounting principles generally accepted in the United States, which
requires us to make estimates and assumptions. Management believes the following
critical accounting policies, among others, affect its more significant
judgments and estimates used in the preparation of the Company's consolidated
financial statements.
There have been no material changes to these critical accounting policies or
their application during the six months ended June 30, 2012.
Revenue Recognition
Net Revenue Before Provision for Uncollectibles. Net revenue before provision
for uncollectibles consists of fee-for-service revenue, contract revenue and
other revenue. Net revenue before provision for uncollectibles is recorded in
the period services are rendered. Our net revenue before provision for
uncollectibles is principally derived from the provision of healthcare staffing
services to patients within healthcare facilities. The form of billing and
related risk of collection for such services may vary by customer. The following
is a summary of the principal forms of our billing arrangements and how net
revenue is recognized for each.
A significant portion (approximately 85% of our net revenue before provision for
uncollectibles in both the six months ended June 30, 2012 for the year ended
December 31, 2011) resulted from fee-for-service patient visits. Fee-for-service
revenue represents revenue earned under contracts in which we bill and collect
the professional component of charges for medical services rendered by our
affiliated contracted and employed physicians. Under the fee-for-service
arrangements, we bill patients for services provided and receives payment from
patients or their third-party payers. Fee-for-service revenue is reported net of
contractual allowances and policy discounts. Contractual adjustments represent
our estimate of discounts and other adjustments to be recognized from gross
fee-for-service charges under contractual payment arrangements, primarily with
commercial, managed care, and governmental payment plans such as Medicare and
Medicaid when our affiliated providers participate in such plans. All services
provided are expected to result in cash flows and are therefore reflected as net
revenue before provision for uncollectibles in the financial statements.
Fee-for-service revenue is recognized in the period in which the services are
rendered to specific patients and reduced immediately for the estimated impact
of contractual allowances in the case of those patients having third-party payer
coverage. The recognition of net revenue before provision for uncollectibles
(gross charges less contractual allowances) from such visits is dependent on
such factors as proper completion of medical charts following a patient visit,
the forwarding of such charts to one of our billing centers for medical coding
and entering into our billing systems and the verification of each patient's
submission or representation at the time services are rendered as to the
payer(s) responsible for payment of such services. Net revenue before provision
for uncollectibles is recorded based on the information known at the time of
entering of such information into our billing systems as well as an estimate of
the net revenue before provision for uncollectibles associated with medical
charts for a given service period that have not been processed yet into our
billing systems. The above factors and estimates are subject to change. For
example, patient payer information may change following an initial attempt to
bill for services due to a change in payer status. Such changes in payer status
have an impact on recorded net revenue before provision for uncollectibles due
to different payers being subject to different contractual allowance amounts.
Such changes in net revenue before provision for uncollectibles are recognized
in the period that such changes in payer become known. Similarly, the actual
volume of medical charts not processed into our billing systems may be different
from the amounts estimated. Such differences in net revenue before provision for
uncollectibles are adjusted in the following month based on actual chart volumes
processed.
Contract revenue represents revenue generated under contracts in which we
provide physician and other healthcare staffing and administrative services in
return for a contractually negotiated fee. Contract revenue consists primarily
of billings based on hours of healthcare staffing provided at agreed-to hourly
rates. Revenue in such cases is recognized as the hours are worked by our
affiliated staff and contractors. Additionally, contract revenue also includes
supplemental revenue from hospitals where we may have a fee-for-service contract
arrangement. Contract revenue for the supplemental billing in such cases is
recognized based on the terms of each individual contract. Such contract terms
generally either provides for a fixed monthly dollar amount or a variable amount
based upon measurable monthly activity, such as hours staffed, patient visits or
collections per visit compared to a minimum activity threshold. Such
supplemental revenues based on variable arrangements are usually contractually
fixed on a monthly, quarterly or annual calculation basis considering the
variable factors negotiated in each such arrangement. Such supplemental revenues
are recognized as revenue in the period when such amounts are determined to be
fixed and therefore contractually obligated as payable by the customer under the
terms of the respective agreement.
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Other revenue consists primarily of revenue from management and billing services
provided to outside parties. Revenue is recognized for such services pursuant to
the terms of the contracts with customers. Generally, such contracts consist of
fixed monthly amounts with revenue recognized in the month services are rendered
or as hourly consulting fees recognized as revenue as hours are worked in
accordance with such arrangements. Additionally, we derive a portion of our
revenue from providing billing services that are contingent upon the collection
of third-party physician billings by us on behalf of such customers. Revenues
are not considered earned and therefore not recognized as revenue until actual
cash collections are achieved in accordance with the contractual arrangements
for such services.
Net Revenue. Net revenue reflects management's estimate of billed amounts to be
ultimately collected. Management, in estimating the amounts to be collected
resulting from approximately ten million annual fee-for-service patient visits
and procedures, considers such factors as prior contract collection experience,
current period changes in payer mix and patient acuity indicators, reimbursement
rate trends in governmental and private sector insurance programs, resolution of
overprovision account balances, the estimated impact of billing system
effectiveness improvement initiatives, and trends in collections from self-pay
patients and external collection agencies. In developing our estimate of
collections per visit or procedure, we consider the amount of outstanding gross
accounts receivable by period of service, but do not use an accounts receivable
aging schedule to establish estimated collection valuations. Individual
estimates of net revenue by contractual location are monitored and refreshed
each month as cash receipts are applied to existing accounts receivable and
other current trends that have an impact upon the estimated collections per
visit are observed. Such estimates are substantially formulaic in nature. In the
ordinary course of business we experience changes in our initial estimates of
net revenue during the year following commencement of services. Such provisions
and any subsequent changes in estimates may result in adjustments to our
operating results with a corresponding adjustment to our accounts receivable
allowance for uncollectibles on our balance sheet.
The table below summarizes our approximate payer mix as a percentage of
fee-for-service volume for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2011 2012 2011 2012
Payer:
Medicare 23.0 % 23.3 % 22.9 % 23.6 %
Medicaid 27.2 25.8 27.3 26.1
Commercial and managed care 26.6 27.4 26.8 26.9
Self-pay 21.3 21.5 21.1 21.4
Other 1.9 2.0 1.9 2.0
Total 100.0 % 100.0 % 100.0 % 100.0 %
Estimated net revenue derived from commercial and managed care plans was
approximately 38% and 36% for the six months ended June 30, 2012 and 2011,
respectively. Estimated net revenue derived from the Medicare program was
approximately 17% of total net revenue in the six months ended June 30, 2012 and
18% in the six months ended June 30, 2011. Estimated net revenue derived from
the Medicaid program was approximately 10% of total net revenue in the six
months ended June 30, 2012 and 12% in the six months ended June 30, 2011. In
addition, net revenue derived from within the Military Health System ("MHS"),
which is the U.S. military's dependent healthcare program and other government
agencies, was approximately 5% in the six months ended June 30, 2012 and 2011.
Accounts Receivable. As described above and below, we determine the estimated
value of our accounts receivable based on estimated cash collection run rates of
estimated future collections by contract for patient visits under our
fee-for-service revenue. Accordingly, we are unable to report the payer mix
composition on a dollar basis of its outstanding net accounts receivable.
However, a 1% change in the estimated carrying value of our net fee-for-service
patient accounts receivable before consideration of the allowance for
uncollectible accounts at June 30, 2012 could have an after tax effect of
approximately $3.4 million on our financial position and results of operations.
Our days revenue outstanding at December 31, 2011 and June 30, 2012 were 62.3
days and 63.2 days, respectively. The number of days outstanding will fluctuate
over time due to a number of factors. The increase in average days outstanding
of approximately 0.9 days includes an increase of 6.2 days related to the
increase in estimated value of fee-for-service accounts receivable and an
increase of 2.5 days associated with an increase in estimated value of contract
accounts receivable. The increases were offset by a decrease of 7.8 days
resulting from an increase in average revenue per day. The increases related to
the valuation of fee-for-service accounts receivable and contract accounts
receivable are primarily due to timing of cash collections and valuation
adjustments recorded during the period. The increase in average revenue per day
is primarily attributed to an increase in gross charges and patient volumes and
increased pricing with managed care plans. Our allowance for doubtful accounts
totaled $302.3 million as of June 30, 2012.
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Approximately 99% of our allowance for doubtful accounts is related to gross
fees for fee-for-service patient visits. Our principal exposure for
uncollectible fee-for-service visits is centered in self-pay patients and in
co-payments and deductibles from patients with insurance. While we do not
specifically allocate the allowance for doubtful accounts to individual accounts
or specific payer classifications, the portion of the allowance associated with
fee-for-service charges as of June 30, 2012 was equal to approximately 92% of
outstanding self-pay fee-for-service patient accounts.
The majority of our fee-for-service patient visits are for the provision of
emergency care in hospital settings. Due to federal government regulations
governing the provision of such care, we are obligated to provide emergency care
regardless of the patient's ability to pay or whether or not the patient has
insurance or other third-party coverage for the cost of the services rendered.
While we attempt to obtain all relevant billing information at the time
emergency care services are rendered, there are numerous patient encounters
where such information is not available at time of discharge. In such cases
where detailed billing information relative to insurance or other third-party
coverage is not available at discharge, we attempt to obtain such information
from the patient or client hospital billing record information subsequent to
discharge to facilitate the collections process. Within hospital-based settings,
we do not attempt to collect from patients at the time of rendering such
services. Primary responsibility for collection of fee-for-service accounts
receivable resides within our internal billing operations. Once a claim has been
submitted to a payer or an individual patient, employees within our billing
operations have responsibility for the follow up collection efforts. The
protocol for follow up differs by payer classification. For self-pay patients,
our billing system will automatically send a series of dunning letters on a
prescribed time frame requesting payment or the provision of information
reflecting that the balance due is covered by another payer, such as Medicare or
a third-party insurance plan. Generally, the dunning cycle on a self-pay account
will run from 90 to 120 days. At the end of this period, if no collections or
additional information is obtained from the patient, the account is no longer
considered an active account and is transferred to a collection agency. Upon
transfer to a collection agency, the patient account is written-off as a bad
debt. Any subsequent cash receipts on accounts previously written off are
recorded as a recovery. For non-self-pay accounts, billing personnel will follow
up and respond to any communication from payers such as requests for additional
information or denials until collection of the account is obtained or other
resolution has occurred. At the completion of its active collection cycle, we
transfer selected patient accounts to external and internal collection agencies
under a contingent collection basis. The projected value of future contingent
collection proceeds are considered in the estimation of our overall accounts
receivable valuation. For contract accounts receivable, invoices for services
are prepared in the various operating areas of ours and mailed to our customers,
generally on a monthly basis. Contract terms under such arrangements generally
require payment within thirty days of receipt of the invoice. Outstanding
invoices are periodically reviewed and operations personnel with responsibility
for the customer relationship will contact the customer to follow up on any
delinquent invoices. Contract accounts receivable will be considered as bad debt
and written-off based upon the individual circumstances of the customer
situation after all collection efforts have been exhausted, including legal
action if warranted, and it is the judgment of management that the account is
not expected to be collected.
Methodology for Computing Allowance for Doubtful Accounts. We employ several
methodologies for determining our allowance for doubtful accounts depending on
the nature of the net revenue before provision for uncollectibles recognized. We
initially determine gross revenue for our fee-for-service patient visits based
upon established fee schedule prices. Such gross revenue is reduced for
estimated contractual allowances for those patient visits covered by contractual
insurance arrangements to result in net revenue before provision for
uncollectibles. Net revenue before provision for uncollectibles is then reduced
for our estimate of uncollectible amounts. Fee-for-service net revenue
represents our estimated cash to be collected from such patient visits and is
net of our estimate of account balances estimated to be uncollectible. The
provision for uncollectible fee-for-service patient visits is based on
historical experience resulting from approximately ten million annual
fee-for-service patient visits. The significant volume of patient visits and the
terms of thousands of commercial and managed care contracts and the various
reimbursement policies relating to governmental healthcare programs do not make
it feasible to evaluate fee-for-service accounts receivable on a specific
account basis. Fee-for-service accounts receivable collection estimates are
formally reviewed on a quarterly basis for each of our fee-for-service contracts
by period of accounts receivable origination. Such reviews include the use of
historical cash collection percentages by contract adjusted for the lapse of
time since the date of the patient visit. In addition, when actual collection
percentages differ from expected results, on a contract by contract basis,
supplemental detailed reviews of the outstanding accounts receivable balances
may be performed by our billing operations to determine whether there are facts
and circumstances existing that may cause a different conclusion as to the
estimate of the collectibility of that contract's accounts receivable from the
estimate resulting from using the historical collection experience.
Contract-related net revenue is billed based on the terms of the contract at
amounts expected to be collected. Such billings are typically submitted on a
monthly basis and aged trial balances prepared. Allowances for estimated
uncollectible amounts related to such contract billings are made based upon
specific accounts and invoice periodic reviews once it is concluded that such
amounts are not likely to be collected. The methodologies employed to compute
allowances for doubtful accounts were unchanged between 2011 and 2012.
Insurance Reserves
The nature of our business is such that it is subject to professional liability
claims and lawsuits. Historically, to mitigate a portion of this risk, we have
maintained insurance for individual professional liability claims with per
incident and annual aggregate limits per physician for all incidents. Prior to
March 12, 2003, we obtained such insurance coverage from commercial insurance
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providers. Subsequent to March 11, 2003, we have provided for a significant
portion of our professional liability loss exposures through the use of a
captive insurance company and through greater utilization of self-insurance
reserves. Since March 12, 2003, the most significant cost element within our
professional liability program has consisted of the actuarial estimates of
losses by occurrence period. In addition to the estimated actuarial losses,
other costs that are considered by management in the estimation of professional
liability costs include program costs such as brokerage fees, claims management
expenses, program premiums and taxes, and other administrative costs of
operating the program, such as the costs to operate the captive insurance
subsidiary. Net costs in any period reflect our estimate of net losses to be
incurred in that period as well as any changes to our estimates of the reserves
established for net losses of prior periods.
Our commercial insurance policy for professional liability losses for the period
March 12, 1999 through March 11, 2003 included insured limits applicable to such
coverage in the period. Effective April 2006, we executed an agreement with the
commercial insurance provider that issued the policy that ended March 11, 2003
to increase the existing $130.0 million aggregate limit of coverage. Under the
terms of the agreement, we will make periodic premium payments to the commercial
insurance company and the total aggregate limit of coverage under the policy
will be increased by a portion of the premiums paid. We have committed to fund
premiums such that the total aggregate limit of coverage under the program
remains greater than the paid losses at any point in time. During fiscal year
2011, we funded a total of $0.8 million under this agreement. For the six months
ended June 30, 2012, there were no amounts funded. We have agreed to fund
additional payments which will be based upon the level of incurred losses
relative to the aggregate limit of coverage at that time.
As of June 30, 2012, the current aggregate limit of coverage under this policy
was $158.9 million and the estimated loss reserve for claim losses and expenses
in excess of the current aggregate limit recorded by the Company was $3.8
million.
The accounts of the captive insurance company are fully consolidated with those
of our other operations in the accompanying financial statements.
The estimation of medical professional liability losses is inherently complex.
Medical professional liability claims are typically resolved over an extended
period of time, often as long as ten years or more. The combination of changing
conditions and the extended time required for claim resolution results in a loss
estimation process that requires actuarial skill and the application of
judgment, and such estimates require periodic revision. A report of actuarial
loss estimates is prepared at least semi-annually. Management's estimate of our
professional liability costs resulting from such actuarial studies is
significantly influenced by assumptions and assessments regarding expectations
of several factors. These factors include, but are not limited to: historical
paid and incurred loss development trends; hours of exposure as measured by
hours of physician and related professional staff services; trends in the
frequency and severity of claims, which can differ significantly by jurisdiction
due to the legislative and judicial climate in such jurisdictions; coverage
limits of third-party insurance; the effectiveness of our claims management
process; and the outcome of litigation. As a result of the variety of factors
that must be considered by management, there is a risk that actual incurred
losses may develop differently from estimates.
The underlying information that serves as the foundational basis for making our
actuarial estimates of professional liability losses is our internal database of
incurred professional liability losses. The Company has captured extensive
professional liability loss data going back, in some cases, over twenty years,
that is maintained and updated on an ongoing basis by our internal claims
management personnel. Our database contains comprehensive incurred loss
information for our existing operations as far back as fiscal 1997 (reflecting
the initial timeframe in which we migrated to a consolidated professional
liability program concurrent with the consummation of several significant
acquisitions), and we also possess additional loss data that predates 1997 dates
of occurrence for certain of our operations. Loss information reflects both paid
and reserved losses incurred when we were covered by outside commercial
insurance programs as well as paid and reserved losses incurred under our
self-insurance program. Because of the comprehensive nature of the loss data and
our comfort with the completeness and reliability of the loss data, this is the
information that is used in the development of our actuarial loss estimates. We
believe this database is one of the largest repositories of physician
professional liability loss information available in our industry and provides
us and our actuarial consultants with sufficient data to develop reasonable
estimates of the ultimate losses under our self-insurance program. In addition
to the estimated losses, as part of the actuarial process, we obtain revised
payment pattern assumptions that are based upon our historical loss and related
claims payment experience. Such payment patterns reflect estimated cash outflows
for aggregate incurred losses by period based upon the occurrence date of the
loss as well as the report date of the loss. Although variances have been
observed in the actuarial estimate of ultimate losses by occurrence period
between actuarial studies, the estimated payment patterns have shown much more
limited variability. We use these payment patterns to develop our estimate of
the discounted reserve amounts. The relative consistency of the payment pattern
estimates provides us with a foundation in which to develop a reasonable
estimate of the discount value of the professional liability reserves based upon
the most current estimate of ultimate losses to be paid and the reasonable
likelihood of the related cash flows over the payment period. As of December 31,
2011 and June 30, 2012, our estimated loss reserves were discounted at 1.9% and
0.7%, respectively, which was the current ten year U. S. Treasury rate at
December 31, 2011 and the current weighted average Treasury rate, over a 10 year
period at June 30, 2012, which reflects the risk free interest rate over the
expected period of claims payments.
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In establishing our initial reserves for a given loss period, management
considers the results of the actuarial loss estimates for such periods as well
as assumptions regarding loss retention levels and other program costs to be
incurred. On a semi-annual basis, we will review our professional liability
reserves considering not only the reserves and loss estimates associated with
the current period but also the reserves established in prior periods based upon
revised actuarial loss estimates. The actuarial estimation process employed
utilizes a frequency severity simulation model to estimate the ultimate cost of
claims for each loss period. The results of the simulation model are then
validated by a comparison to the results from several different actuarial
methods (paid loss development, incurred loss development, incurred
Bornhuetter-Ferguson method, paid Bornhuetter-Ferguson method) for
reasonableness. Each method contains assumptions regarding the underlying claims
process. Actuarial loss estimates at various confidence levels capture the
variability in the loss estimates for process risk but assume that the
underlying model and assumptions are correct. Adjustments to professional
liability loss reserves will be made as needed to reflect revised assumptions
and emerging trends and data. Any adjustments to reserves are reflected in the
current operations. Due to the size of our reserves for professional liability
losses, even a small percentage adjustment to these estimates can have a
material effect on the results of operations for the period in which the
adjustment is made. Given the number of factors considered in establishing the
reserves for professional liability losses, it is neither practical nor
meaningful to isolate a particular assumption or parameter of the process and
calculate the impact of changing that single item. The actuarial reports provide
a variety of loss estimates based upon statistical confidence levels reflecting
the inherent uncertainty of the medical professional liability claims
environment in which we operate. Initial year loss estimates are generally
recorded using the actuarial expected loss estimate, but aggregate professional
liability loss reserves may be carried at amounts in excess of the expected loss
estimates provided by the actuarial reports due to the relatively short time
period in which the Company has provided for its losses on a self-insured basis
and the expectation that we believe additional adjustments to prior year
estimates may occur as our reporting history and loss portfolio matures. In
addition, the Company is subject to the risk of claims in excess of insured
limits as well as unlimited aggregate risk of loss in certain loss periods. As
the Company's self-insurance program continues to mature and additional
stability is noted in the loss development trends in the initial years of the
program, we expect to continue to review and evaluate the carried level of
reserves and make adjustments as needed.
Based on the results of first semi-annual actuarial study completed in April
2012, we recorded an increase in prior year liability loss reserves of $5.2
million. $4.4 million of the increase in prior year loss reserves was related to
a change in the calculation of the discount rate used by the Company for
calculating its professional liability reserves. During the first quarter of
2012, the Company adopted a discount factor based upon the weighted average US
Treasury rates over a 10 year period. Prior to this change, the Company used the
10 year Treasury rate as a discount factor. We believe the use of weighted
average Treasury rates over a 10 year period is more closely aligned with actual
claim payment patterns. The remaining $0.7 million of the prior year liability
loss reserve change relates to unfavorable development on prior year loss
estimates since the most recent actuarial analysis. Of the total reserve
increase, approximately $6.7 million was associated with loss estimates
established in prior years for the self-insurance program covering the loss
occurrence periods from March 12, 2003 through December 31, 2010, partially
offset by a $1.5 million decrease associated with the estimated losses in excess
of the aggregate limit of coverage under the commercial insurance program that
ended March 12, 2003.
The following reflects the current reserves for professional liability costs as
of June 30, 2012 (in millions) as well as the sensitivity of the reserve
estimates at a 75% and 90% confidence level:
As reported $ 175.6
At 75% confidence level $ 183.5
At 90% confidence level $ 198.1
It is not possible to quantify the amount of the change in our estimate of prior
year losses by individual fiscal period due to the nature of the professional
liability loss estimates that are provided to us on an occurrence period basis
and the nature of the coverage that is obtained in the commercial insurance
market which is generally underwritten on a claims made or report period basis.
Even though we are self-insured for a significant portion of our risk, due to
customer contracting requirements and state insurance regulations, we still, at
times, must place coverage on a claims made or report period basis with
commercial insurance carriers. When evaluating the appropriate carrying level of
our self-insured professional liability reserves, management considers the
current estimates of occurrence period loss estimates as well as how such loss
estimates and related future claims will interact with previous or current
commercial insurance programs when projecting future cash flows. However, the
complexity that is associated with multiple occurrence periods interacting with
multiple report periods that contain risks and related reserves retained by us,
as well as transferred to commercial insurance carriers, makes it impossible to
allocate the change in prior year loss estimates to individual occurrence
periods. Instead, we evaluate the future expected cash flows for all historical
loss periods in the aggregate and compare such estimates to the current carrying
value of our professional liability reserves. This process provides the basis
for us to conclude that our reserves for professional liability losses are
reasonable and properly stated. Management considers the results of actuarial
studies when estimating the appropriate level of professional liability reserves
and no adjustments to prior year loss estimates were made in periods where
updated actuarial loss estimates were not available.
Due to the complexity of the actuarial estimation process, there are many
factors, trends and assumptions that must be considered in the development of
the actuarial loss estimates, and we are not able to quantify and disclose which
specific elements are
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primarily contributing to the overall favorable development in the revised loss
estimates of historical occurrence periods. However, we believe that our
internal investments in enhanced risk management and claims management resources
and initiatives, such as the employment of additional claims and litigation
management personnel and practices, and an expansion of programs such as root
cause loss analysis, early claim evaluation, and litigation support for insured
providers, as well as the improved legal environment resulting from professional
liability tort reform efforts in certain key jurisdictions such as Florida and
Texas, have contributed to the favorable trend in loss development estimates
noted during the prior year occurrence periods.
Impairment of Intangible Assets
In assessing the recoverability of the Company's intangibles, we must make
assumptions regarding estimated future cash flows and other factors to determine
the fair value of the respective assets. If these estimates or their related
assumptions change in the future, we may be required to record impairment
charges for these assets.
Results of Operations
The following discussion provides an analysis of our results of operations and
should be read in conjunction with our unaudited consolidated financial
statements. Net revenue is an estimate of future cash collections and as such it
is a key measurement by which management evaluates performance of individual
contracts as well as the Company as a whole. The following table sets forth the
components of net earnings as a percentage of net revenue for the periods
indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2011 2012 2011 2012
Net revenue 100.0 % 100.0 % 100.0 % 100.0 %
Professional service expenses 76.6 77.6 76.3 77.6
Professional liability costs 3.5 3.3 3.6 4.0
General and administrative expenses 9.6 11.1 9.7 10.6
Other (income) expense - 0.1 (0.1 ) (0.1 )
Depreciation 0.8 0.7 0.7 0.7
Amortization 0.8 1.4 0.9 1.4
Interest expense, net 0.6 0.8 0.7 0.8
Transaction costs 0.2 0.2 0.1 0.2
Loss on refinancing of debt 1.4 - 0.7 -
Earnings before income taxes 6.5 4.7 7.3 4.8
Provision for income taxes 2.5 1.9 2.9 1.9
Net earnings 3.9 % 2.8 % 4.4 % 2.9 %
Three Months Ended June 30, 2012 Compared to the Three Months Ended June 30,
2011
Net Revenue Before Provision for Uncollectibles. Net revenue before provision
for uncollectibles in the three months ended June 30, 2012 increased $166.2
million, or 21.8%, to $930.2 million from $764.0 million in the three months
ended June 30, 2011. The increase in net revenue before provision for
uncollectibles resulted primarily from increases in fee-for-service revenue of
$148.2 million, contract revenue of $16.5 million and other revenue of $1.5
million. In the three months ended June 30, 2012, fee-for-service revenue was
85.5% of net revenue before provision for uncollectibles compared to 84.7% in
the same period of 2011, contract revenue was 13.6% of net revenue before
provision before uncollectibles compared to 14.4% in the same period of 2011 and
other revenue was 0.9% in both the 2012 and 2011 periods. The increase in
fee-for-service revenue before provision for uncollectibles was primarily a
result of a 14.9% increase in total fee-for-service visits and procedures and,
to a lesser extent, an increase in estimated collections per visit and
procedure. Estimated collections per visit increased due to annual increases in
gross charges and managed care pricing improvements. The increase in contract
revenue was due primarily to the impact of new and acquired contracts.
Provision for Uncollectibles. The provision for uncollectibles increased $87.2
million, or 25.9%, to $423.9 million in the three months ended June 30, 2012
from $336.7 million in the corresponding period in 2011. The provision for
uncollectibles as a percentage of net revenue before provision for
uncollectibles was 45.6% in the three months ended June 30, 2012 compared with
44.1% in the corresponding period of 2011. The provision for uncollectibles is
primarily related to revenue generated under fee-for-service contracts that is
not expected to be fully collected. The period over period increase in the
provision for uncollectibles is due primarily to annual increases in gross fee
schedules and increases in patient volumes and procedures. Changes in payer mix,
particularly the level of self-pay fee-for-service visits, also have an impact
on the provision for uncollectibles. For the three months ended June 30, 2012,
self-pay fee-for-service visits were approximately 21.5% of the total
fee-for-service visits compared to approximately 21.3% in the same period of
2011.
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Net Revenue. Net revenue in the three months ended June 30, 2012 increased $79.1
million, or 18.5%, to $506.3 million from $427.2 million in the three months
ended June 30, 2011. Acquisitions contributed 10.9%, same contracts contributed
4.6% and new contracts net of terminations, contributed 3.0% of the increase in
quarter-over-quarter growth in net revenue.
Total same contract revenue, which consists of contracts under management in
both periods, increased $19.8 million, or 5.0%, to $417.1 million in the three
months ended June 30, 2012 compared to $397.3 million in the three months ended
June 30, 2011. In the second quarter of 2012, same contract revenue benefited
from an increase in fee-for-service volume of 3.6% which resulted in growth of
2.7%. Also contributing to the increase in same contract revenue growth between
quarters were increases in estimated collections on fee-for-service visits in
the amount of 1.9% which contributed approximately 1.5% of same contract growth
between quarters. The increase in the estimated collections per visit was
attributable to annual increases in gross charges and managed care pricing
improvements, partially offset by decreases in average patient acuity levels and
changes in payer mix between periods. Contract and other revenue contributed
0.8% to same contract revenue growth. Acquisitions contributed $46.6 million of
growth between quarters and net new contract revenue increased $12.7 million
between quarters. We typically gain new contracts by replacing competitors at
hospitals that currently outsource such services, obtaining new contracts from
facilities that do not currently outsource and responding to contracting
opportunities within the military healthcare system. Factors influencing new
contracting opportunities include the depth and breadth of our service
offerings, our reputation and experience, our ability to recruit and retain
qualified clinicians, and pricing considerations when a subsidy or contract
payment is required. Contracts are typically terminated due to economic
considerations, a change in hospital administration or ownership,
dissatisfaction with our service offerings or, primarily relating to our
military staffing arrangements, at the end of the contract term.
The components of net revenue include revenue from contracts that have been in
effect for prior periods (same contracts) and from net, new and acquired
contracts during the periods, as set forth in the table below:
Three Months Ended
June 30,
2011 2012
(in thousands)
Same contracts:
Fee-for-service revenue $ 292,980 $ 309,523
Contract and other revenue 104,313 107,578
Total same contracts 397,293 417,101
New contracts, net of terminations:
Fee-for-service revenue 16,803 21,417
Contract and other revenue 11,918 19,974
Total new contracts, net of terminations 28,721 41,391
Acquired contracts:
Fee-for-service revenue 1,223 39,850
Contract and other revenue - 7,957
Total acquired contracts 1,223 47,807
Consolidated:
Fee-for-service revenue 311,006 370,790
Contract and other revenue 116,231 135,509
Total net revenue $ 427,237 $ 506,299
The following table reflects the visits and procedures included within
fee-for-service revenues described in the table above:
Three Months Ended
June 30,
2011 2012
(in thousands) Fee-for-service visits and procedures:
Same contract 2,122
2,199
New and acquired contracts, net of terminations 135
395
Total fee-for-service visits and procedures 2,257
2,594
Professional Service Expenses. Professional service expenses, which include
physician and provider costs, billing and collection expenses, and other
professional expenses, totaled $392.8 million in the three months ended June 30,
2012 compared to $327.1 million in the three months ended June 30, 2011, an
increase of $65.7 million, or 20.1%. This increase between quarters included an
increase
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of approximately $17.2 million associated with increases in the average rates
paid per hour of provider service and number of provider hours staffed on a same
contract basis. Increases in average rates paid reflect period over period wage
and benefit increases associated with the provision of clinical services. Also
contributing to the increase in expense was $66.6 million related to our
acquisitions and growth. The increases on professional service costs were
partially offset by reductions of $18.1 million due to contract terminations.
Professional service expenses as a percentage of net revenue less provision for
uncollectibles was 77.6% in the three months ended June 30, 2012 compared to
76.6% in the three months ended June 30, 2011.
Professional Liability Costs. Professional liability costs were $16.7 million in
the three months ended June 30, 2012 compared to $15.1 million in the three
months ended June 30, 2011, an increase of $1.5 million or 10.0%. The increase
is primarily attributed to an increase in provider hours. Professional liability
costs as a percentage of net revenue were 3.3% in the second quarter of 2012
compared to 3.5% in the second quarter of 2011.
General and Administrative Expenses. General and administrative expenses
increased $15.6 million, or 38.1%, to $56.5 million for the three months ended
June 30, 2012 from $40.9 million in the three months ended June 30, 2011.
General and administrative expenses included contingent purchase compensation
expense of $12.2 million for the three months ended June 30, 2012 and $2.5
million for the three months ended June 30, 2011. Excluding the contingent
purchase compensation expense, general and administrative expense increased $5.8
million or 15.1%, to $44.3 million for the three months ended June 30, 2012 from
$38.5 million in the three months ended June 30, 2011. The increase in general
and administrative expenses was due primarily to inflationary growth in salaries
as well as the impact of recent acquisitions, increases in performance-based
incentive and equity-based compensation costs. Total general and administrative
expenses as a percentage of net revenue were 11.1% in the second quarter of 2012
compared to 9.6% in the second quarter of 2011, but declined to 8.7% in the
second quarter of 2012 compared to 9.0% in the second quarter of 2011 excluding
contingent purchase compensation expense.
Other (Income) Expense, net. In the three months ended June 30, 2012, we
recognized other expense of $0.3 million primarily related to the change in the
fair value of assets related to our non-qualified deferred compensation plan
compared to $0.1 million of other income for the same period in 2011.
Depreciation. Depreciation expense was $3.5 million in the three months ended
June 30, 2012 compared to $3.3 million for the three months ended June 30, 2011.
Amortization. Amortization expense was $7.3 million in the three months ended
June 30, 2012 compared to $3.6 million for the three months ended June 30, 2011.
The increase of $3.7 million was a result of an increase in other intangibles
recognized in connection with our acquisitions in 2012 and 2011.
Net Interest Expense. Net interest expense increased $1.5 million to $4.0
million in the three months ended June 30, 2012, compared to $2.5 million in the
corresponding period in 2011, primarily due to an increased LIBOR spread on our
new credit facility effective in June 2011 compared to the previous credit
facility pricing and an increase in the revolver usage during the three months
ended June 30, 2012, offset by a reduction in deferred financing costs.
Transaction Costs. Transaction costs were $1.3 million for the three months
ended June 30, 2012 and $1.0 million for the three months ended June 30, 2011.
These costs relate to advisory, legal, accounting and other fees incurred
related to acquisition activity during the respective periods.
Loss on Refinancing of Debt. In 2011, we recognized a loss of $6.0 million in
connection with the refinancing of the term loan facility of $402.7 million. The
loss consists of the write-off of previously deferred financing costs as well as
certain fees and expenses associated with the refinancing.
Earnings before Income Taxes. Earnings before income taxes in the three months
ended June 30, 2012 were $23.9 million compared to $27.7 million in the three
months ended June 30, 2011.
Provision for Income Taxes. The provision for income taxes was $9.8 million in
the three months ended June 30, 2012 compared to $10.9 million in the three
months ended June 30, 2011.
Net Earnings. Net earnings were $14.1 million in the three months ended June 30,
2012 compared to $16.8 million in the three months ended June 30, 2011.
Six months Ended June 30, 2012 Compared to the Six months Ended June 30, 2011
Net Revenue Before Provision for uncollectibles. Net revenue before provision
for uncollectibles in the six months ended June 30, 2012 increased $287.5
million, or 19.4%, to $1.77 billion from $1.48 billion in the six months ended
June 30, 2011. The increase in net revenue before provision for uncollectibles
resulted primarily from increases in fee-for-service revenue of $256.0 million,
contract revenue of $29.2 million and other revenue of $2.4 million. In the six
months ended June 30, 2012, fee-for-service
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revenue was 85.1% of net revenue before provision for uncollectibles compared to
84.3% in the same period of 2011, contract revenue was 14.0% of net revenue
before provision for uncollectibles compared to 14.7% in the same period of 2011
and other revenue was 0.9% in 2012 compared to 1.0% in the same period of 2011.
The increase in fee-for-service revenue was primarily a result of a 13.5%
increase in total fee-for-service visits and procedures and, to a lesser extent,
an increase in estimated collections per visit and procedure. Estimated
collections per visit increased due to annual increases in gross charges,
managed care pricing improvements, increases in average patient acuity levels,
and ongoing improvements in revenue cycle processes. The increase in contract
revenue was due primarily to the impact of new and acquired contracts.
Provision for Uncollectibles. The provision for uncollectibles increased $142.3
million, or 22.1%, to $785.7 million in the six months ended June 30, 2012 from
$643.4 million in the corresponding period in 2011. The provision for
uncollectibles as a percentage of net revenue before provision for
uncollectibles was 44.4% in the six months ended June 30, 2012 compared with
43.4% in the corresponding period of 2011. The provision for uncollectibles is
primarily related to revenue generated under fee-for-service contracts that is
not expected to be fully collected. The period over period increase in the
provision for uncollectibles is due primarily to annual increases in gross fee
schedules and increases in patient volumes and procedures. Changes in payer mix,
particularly the level of self-pay fee-for-service visits, also have an impact
on the provision for uncollectibles. For the six months ended June 30, 2012,
self-pay fee-for-service visits were approximately 21.4% of the total
fee-for-service visits compared to approximately 21.1% in the same period of
2011.
Net Revenue. Net revenue in the six months ended June 30, 2012 increased $145.2
million, or 17.3%, to $985.0 million from $839.7 million in the six months ended
June 30, 2011. Acquisitions contributed 9.4%, new contracts net of terminations
contributed 4.0%, and same contracts contributed 3.9% of the increase in
period-over-period growth in net revenue.
Total same contract revenue, which consists of contracts under management in
both periods, increased $32.5 million, or 4.3%, to $791.8 million in the six
months ended June 30, 2012 compared to $759.3 million in the six months ended
June 30, 2011. In the six months ended June 30, 2012, same contract revenue
benefited from an increase in fee-for-service volume of 2.4% which resulted in
revenue growth of 1.8%. Also contributing to the increase in same contract
revenue growth between periods was a 2.9% increase in estimated collections on
fee-for-service visits which contributed approximately 2.2% of same contract
growth between periods. The increase in the estimated collections per visit was
attributable to annual increases in gross charges, managed care pricing
improvements, increases in average patient acuity levels and ongoing
improvements in revenue cycle processes, partially offset by changes in payer
mix between periods. Contract and other revenue contributed 0.3% to same
contract growth between periods. Acquisitions contributed $78.9 million of
growth between periods. Net new contract revenue increased $33.8 million between
periods. We typically gain new contracts by replacing competitors at hospitals
that currently outsource such services, obtaining new contracts from facilities
that do not currently outsource and responding to contracting opportunities
within the military healthcare system. Factors influencing new contracting
opportunities include the depth and breadth of our service offerings, our
reputation and experience, our ability to recruit and retain qualified
clinicians, and pricing considerations when a subsidy or contract payment is
required. Contracts are typically terminated due to economic considerations, a
change in hospital administration or ownership, dissatisfaction with our service
offerings or, primarily relating to our military staffing arrangements, at the
end of the contract term.
The components of net revenue include revenue from contracts that have been in
effect for prior periods (same contracts) and from net, new and acquired
contracts during the periods, as set forth in the table below:
Six months Ended
June 30,
2011 2012
(in thousands)
Same contracts:
Fee-for-service revenue $ 560,492 $ 590,969
Contract and other revenue 198,790 200,831
Total same contracts 759,282 791,800
New contracts, net of terminations:
Fee-for-service revenue 47,118 63,549
Contract and other revenue 32,108 49,518
Total new contracts, net of terminations 79,226 113,067
Acquired contracts:
Fee-for-service revenue 1,223 66,708
Contract and other revenue - 13,386
Total acquired contracts 1,223 80,094
Consolidated:
Fee-for-service revenue 608,833 721,226
Contract and other revenue 230,898 263,735
Total net revenue $ 839,731 $ 984,961
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The following table reflects the visits and procedures included within
fee-for-service revenues described in the table above:
Six months Ended
June 30,
2011 2012
(in thousands) Fee-for-service visits and procedures:
Same contract 4,064
4,163
New and acquired contracts, net of terminations 376
877
Total fee-for-service visits and procedures 4,440
5,040
Professional Service Expenses. Professional service expenses, which include
physician and provider costs, billing and collection expenses, and other
professional expenses, totaled $764.4 million in the six months ended June 30,
2012 compared to $640.7 million in the six months ended June 30, 2011, an
increase of $123.7 million, or 19.3%. This increase between periods included an
increase of approximately $31.9 million associated with increases in the average
rates paid per hour of provider service and number of provider hours staffed on
a same contract basis. Increases in average rates paid reflect period over
period wage and benefit increases associated with the provision of clinical
services. Also contributing to the increase in expense was $97.7 million related
to our acquisitions and net growth. Professional service expenses as a
percentage of net revenue were 77.6% in the six months ended June 30, 2012
compared to 76.3% in the six months ended June 30, 2011.
Professional Liability Costs. Professional liability costs were $39.0 million in
the six months ended June 30, 2012 compared to $29.9 million in the six months
ended June 30, 2011, an increase of $9.1 million, or 30.4%. Professional
liability costs for the six months ended June 30, 2012 included an increase in
prior year liability loss reserves of $5.2 million. Excluding the prior year
reserve adjustment in the six months ended June 30, 2012, professional liability
costs increased $3.9 million, or 13.1%, between periods. The increase was
primarily attributable to an increase in provider hours. Excluding the prior
year revenue adjustment in the six months ended June 30, 2012, professional
liability costs as a percentage of net revenue were 3.4% in the six months ended
June 30, 2012 and 3.6% in the six months ended June 30, 2011.
General and Administrative Expenses. General and administrative expenses
increased $23.2 million, or 28.4%, to $104.9 million for the six months ended
June 30, 2012 from $81.7 million in six months ended June 30, 2011. General and
administrative expenses included contingent purchase compensation expense of
$18.6 million in the six months ended June 30, 2012 and $5.1 million in the six
months ended June 30, 2011. Excluding the contingent purchase compensation
expense, general and administrative expenses increased $9.7 million, or 12.6%,
to $86.3 million for the six months ended June 30, 2012 from $76.6 million in
the six months ended June 30, 2011. The increase in general and administrative
expense was due primarily to increases in salary and benefit costs, the impact
of recent acquisitions and increases in equity-based compensation costs. Total
general and administrative expenses as a percentage of net revenue were 10.6% in
the six months ended June 30, 2012 compared to 9.7% in the same period of 2011
and declined to 8.8% in the six months ended June 30, 2012 compared to 9.1% in
the same period of 2011 excluding contingent purchase compensation expense.
Other Income, net. In the six months ended June 30, 2012, we recognized other
income of $1.2 million primarily related to the change in the fair value of
assets related to our non-qualified deferred compensation plan compared to $0.7
million for the same period in 2011.
Depreciation. Depreciation expense was $6.7 million in the six months ended
June 30, 2012 compared to $6.3 million for the six months ended June 30, 2011.
The increase of $0.3 million was primarily due to growth in capital
expenditures.
Amortization. Amortization expense was $13.4 million in the six months ended
June 30, 2012 compared to $7.3 million for the six months ended June 30, 2011.
The increase of $6.2 million was a result of an increase in other intangibles
recognized in connection with our acquisitions in 2012 and 2011.
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Net Interest Expense. Net interest expense increased $1.7 million to $7.5
million in the six months ended June 30, 2012, compared to $5.8 million in the
corresponding period in 2011, primarily due to an increased LIBOR spread on our
new credit facility effective in June 2011 compared to the previous credit
facility pricing and an increase in the revolver usage during 2012, offset by a
reduction in interest rate hedging and deferred financing costs.
Transaction Costs. Transaction costs were $2.5 million for the six months ended
June 30, 2012 and $1.2 million for the six months ended June 30, 2011. These
costs relate to advisory, legal, accounting and other fees incurred related to
acquisition activity during the respective periods.
Loss on Refinancing of Debt. In 2011, we recognized a loss of $6.0 million in
connection with the refinancing of the term loan facility of $402.7 million. The
loss consists of the write-off of previously deferred financing costs as well as
certain fees and expenses associated with the refinancing.
Earnings before Income Taxes. Earnings before income taxes in the six months
ended June 30, 2012 were $47.8 million compared to $61.5 million in the six
months ended June 30, 2011.
Provision for Income Taxes. The provision for income taxes was $19.2 million in
the six months ended June 30, 2012 compared to $24.5 million in the
corresponding period in 2011.
Net Earnings. Net earnings were $28.5 million in the six months ended June 30,
2012 compared to $37.0 million in the six months ended June 30, 2011.
Liquidity and Capital Resources
Our principal ongoing uses of cash are to meet working capital requirements,
fund debt obligations and to finance our capital expenditures and acquisitions.
We believe that our cash needs, other than for significant acquisitions, will
continue to be met through the use of existing available cash, cash flows
derived from future operating results and borrowings under our senior secured
revolving credit facility.
Cash flow provided by operations for the six months ended June 30, 2012 was
$30.7 million compared to $24.2 million in the same period in 2011. Included in
operating cash flow were contingent purchase price payments of $2.0 million in
the six months ended June 30, 2012 and $7.2 million in the six months ended
June 30, 2011. Excluding the impact of contingent purchase price payments, the
operating cash flow increased $1.3 million period over period principally due to
an increase in non-cash charges, and a reduced level of accounts receivable
funding offset by an increase in the funding of working capital liabilities and
tax and interest payments. During the six months ended June 30, 2011 and 2012,
total net cash used for acquisitions, including contingent payments reported in
operating cash flow, was $120.9 million and $7.5 million, respectively. Cash
used in investing activities in the six months ended June 30, 2012 was $132.6
million compared to $4.4 million in the same period of 2011. The $128.2 million
increase in cash used in investing activities was principally due to our
acquisitions and an increase in capital expenditures between periods. Cash
provided from financing activities in the six months ended June 30, 2012 was
$105.6 million compared to a use of cash of $1.2 million in the six months ended
June 30, 2011. The change in cash associated with financing activities was
primarily due to increased revolver borrowings associated with our acquisitions.
We spent $9.6 million in the first six months of 2012 and $4.1 million in the
first six months of 2011 for capital expenditures. These expenditures were
primarily for billing and information technology investments and related
development projects along with projects in support of operational initiatives.
On June 29, 2011, we completed the financing of new senior credit facilities,
consisting of a $175.0 million Five-Year Revolving Credit Facility, a $150.0
million Five-Year Term A Loan Facility and a $250.0 million Seven-Year Term B
Loan Facility, with a syndicate of financial institutions. We used borrowings
under the new credit facilities and existing cash to repay the outstanding
balance of $402.7 million under the term loan as well as $7.8 million of fees
and expenses associated with the refinancing. In December 2011, under the
provisions of the accordion feature of our new senior credit agreement, we
increased the amount of our revolving credit facility to $225.0 million. The
terms of the revolving credit facility, including pricing and maturity, did not
change. See Note 9 of the notes to the consolidated financial statements.
As of June 30, 2012, we had $518.4 million in aggregate indebtedness consisting
of our term loans and borrowings under our senior secured revolving credit
facility with an additional $96.6 million of borrowing capacity available under
our senior secured revolving credit facility (without giving effect to $6.0
million of undrawn letters of credit). Under our new senior credit facility,
outstanding Term A loan borrowings mature on June 29, 2016 and Term B loan
borrowings mature on June 29, 2018.
Our new senior credit facility agreement contains both affirmative and negative
covenants, including limitations on our ability to incur additional
indebtedness, sell material assets, retire, redeem or otherwise reacquire our
capital stock, acquire the capital stock or assets of another business and pay
dividends, and require us to comply with a maximum first lien net leverage
ratio, tested quarterly.
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At June 30, 2012, we were in compliance with all covenants under the new senior
credit facility agreement. The new senior credit facility is secured by
substantially all of our and our U.S. subsidiaries' assets.
Subject to any contractual restrictions, the Company and its subsidiaries,
affiliates or significant shareholders (including The Blackstone Group L.P. and
its affiliates) may from time to time, in their sole discretion, purchase,
repay, redeem or retire any of the Company's outstanding equity securities in
privately negotiated or open market transactions, by tender offer or otherwise.
As of June 30, 2012, we had total cash and cash equivalents of approximately
$13.6 million. There are no known liquidity restrictions or impairments on our
cash and cash equivalents as of June 30, 2012. Our ongoing cash needs for the
six months ended June 30, 2012 were met from internally generated operating
sources and our revolving credit facility. As of June 30, 2012, there was $128.4
million outstanding under the revolving credit facility.
We have historically been an acquirer of other physician staffing businesses and
related interests. For the six months ended June 30, 2011, total net cash used
in acquisitions was $120.9 million, which consisted of $2.0 million of
contingent payments on prior year acquisitions reported as operating cash flow.
As of June 30, 2012, we estimate future contingent payment obligations to be
approximately $77.9 million for acquisitions made prior to June 30, 2012, which
we expect to fund over a period of two years. $29.8 million is recorded as a
liability on our balance sheet as of June 30, 2012, while the remaining
estimated liability of $48.0 million will be recorded as contingent purchase
compensation expense over the remaining performance period. See Note 4 of notes
to the consolidated financial statements.
We are in discussions with certain physician staffing businesses regarding
potential acquisition opportunities. If we consummate these potential
acquisitions, we would expect to fund such acquisitions using our existing cash,
through borrowings under our revolving credit facility, or through the issuance
of additional debt or equity.
Effective March 12, 2003, we began providing for professional liability risks in
part through a captive insurance company. Prior to such date, we insured such
risks principally through the commercial insurance market. The change in the
professional liability insurance program initially resulted in increased cash
flow due to the retention of cash formerly paid out in the form of insurance
premiums to a commercial insurance company coupled with a long period (typically
2-4 years or longer on average) before cash payout of such losses occurs. A
portion of such cash retained is retained within our captive insurance company
and therefore is not immediately available for general corporate purposes. As of
June 30, 2012, the current value of cash or cash equivalents and related
investments held within the captive insurance subsidiary totaled approximately
$96.7 million. Investments of the captive insurance subsidiary are carried at
fair market value and as of June 30, 2012 reflected $5.1 million of net
unrealized gains. See Note 6 of the accompanying consolidated financial
statements for a discussion of the investments held by our captive insurance
subsidiary.
Effective June 1, 2012, we renewed our fronting carrier program with a
commercial insurance carrier through May 31, 2013. In connection with this
renewal, we have paid cash premiums of approximately $9.3 million to the
commercial insurance carrier. For the six months ended June 30, 2012, we funded
approximately $17.5 million of premiums to our captive insurance subsidiary. For
the six months ended June 30, 2012, we did not fund any amount to a commercial
insurance provider in order to meet our obligation for incurred costs in excess
of the aggregate limits of coverage in place on the commercial insurance policy
that ended March 11, 2003. We will fund additional payments which will be based
upon the level of incurred losses relative to the aggregate limit of the
coverage at that time as additional claims are processed.
We present Adjusted EBITDA as a supplemental measure of our performance. We
define Adjusted EBITDA as net earnings before interest expense, taxes,
depreciation and amortization, as further adjusted to exclude the non-cash items
and the other adjustments shown in the table below. We present Adjusted EBITDA
because we believe it assists investors and analysts in comparing our
performance across reporting periods on a consistent basis by excluding items
that we do not believe are indicative of our core operating performance.
Adjusted EBITDA is not a measurement of financial performance or liquidity under
generally accepted accounting principles. In evaluating our performance as
measured by Adjusted EBITDA, management recognizes and considers the limitations
of this measure. Adjusted EBITDA does not reflect certain cash expenses that we
are obligated to make, and although depreciation and amortizations are non-cash
charges, assets being depreciated and amortized will often have to be replaced
in the future, and Adjusted EBITDA does not reflect any cash requirements for
such replacements. In addition, other companies in our industry may calculate
Adjusted EBITDA differently than we do or may not calculate it at all, limiting
its usefulness as a comparative measure. Because of these limitations, Adjusted
EBITDA should not be considered in isolation or as a substitute for net income,
operating income, cash flows from operating, investing or financing activities,
or any other measure calculated in accordance with generally accepted accounting
principles.
34
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Table of Contents
The following table sets forth a reconciliation of net earnings to Adjusted
EBITDA.
Three Months Ended Six Months Ended
June 30, June 30,
2011 2012 2011 2012
(in thousands)
Net earnings $ 16,848 $ 14,116 $ 36,968 $ 28,540
Interest expense, net 2,513 3,974 5,790 7,531
Provision for income taxes 10,888 9,806 24,546 19,223
Depreciation 3,264 3,531 6,315 6,650
Amortization 3,638 7,332 7,276 13,449
Other (income) expenses(a) (113 ) 283 (660 ) (1,174 )
Contingent purchase compensation expense(b) 2,454 12,242 5,071 18,585
Loss on refinancing of debt(c) 6,022 - 6,022 -
Transaction costs(d) 1,041 1,277 1,195 2,505
Employee equity-based compensation expense(e) 782 1,738 1,388 2,861
Insurance subsidiary interest income 567 548 1,165 1,112
Professional liability loss reserve adjustments
associated with prior years - - - 5,165
Severance and other charges 135 223 927 1,294
Adjusted EBITDA $ 48,039 $ 55,070 $ 96,003 $ 105,741
(a) Reflects gain or loss on sale of assets, realized gains on investments, and
changes in fair value of investments associated with the Company's
non-qualified retirement plan.
(b) Reflects contingent purchase compensation expense associated with earnout
arrangements on acquisition transactions.
(c) Reflects the write-off of deferred financing costs of $1,654 from the
previous term loan, as well as certain fees and expenses associated with the
debt refinancing.
(d) Reflects expenses associated with acquisition transaction fees.
(e) Reflects costs related to options and restricted shares granted under the
Team Health Holdings, Inc. 2009 Stock Incentive Plan
Inflation
We do not believe that general inflation in the U.S. economy has had a material
impact on our financial position or results of operations.
Seasonality
Historically, our revenues and operating results have reflected minimal seasonal
variation due to the significance of revenues derived from patient visits to
emergency departments, which are generally open on a year-round basis, and also
due to our geographic diversification. Revenue from our non-emergency department
staffing lines is dependent on a healthcare facility being open during selected
time periods. Revenue in such instances will fluctuate depending upon such
factors as the number of holidays in the period.
Recently Issued Accounting Standards
See Note 3 of the notes to the consolidated financial statements for a
discussion of recently issued accounting standards.
