RESULTS OF OPERATIONS
Cautionary Statement
This Form 10-Q includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements
regarding the Company's expected future financial position, results of
operations, cash flows, financing plans, business strategy, budgets, capital
expenditures, competitive positions, growth opportunities, plans and objectives
of management and statements containing the words such as "anticipate,"
"approximate," "believe," "plan," "estimate," "expect," "project," "could,"
"should," "will," "intend," "may" and other similar expressions, are
forward-looking statements.
Such forward-looking statements are inherently uncertain, and stockholders and
other potential investors must recognize that actual results may differ
materially from the Company's expectations as a result of a variety of factors,
including, without limitation, those discussed below. Such forward-looking
statements are based upon management's current expectations and include known
and unknown risks, uncertainties and other factors, many of which the Company is
unable to predict or control, that may cause the Company's actual results or
performance to differ materially from any future results or performance
expressed or implied by such forward-looking statements. These statements
involve risks, uncertainties and other factors discussed below and detailed from
time to time in the Company's filings with the SEC. Factors that may affect the
Company's plans or results include, without limitation:
• the impact of healthcare reform, which will initiate significant reforms
to the United States healthcare system, including potential material
changes to the delivery of healthcare services and the reimbursement paid
for such services by the government or other third party payors, including
reforms resulting from the Patient Protection and Affordable Care Act and
the Healthcare Education and Reconciliation Act (collectively, the "ACA").
Healthcare reform is affecting certain of the Company's businesses and the
Company expects that it will impact all of them in some manner. There is
also the possibility that implementation of the provisions expanding
health insurance coverage or the entire ACA will be delayed, revised or
eliminated as a result of efforts to repeal or amend the law. The U.S.
Supreme Court recently upheld the constitutionality of the ACA. Future
court proceedings, the 2012 presidential election and pending efforts in
the U.S. Congress to repeal, amend or retract funding for various aspects
of the ACA create additional uncertainty about the ultimate impact of the
ACA on the Company and the healthcare industry. Due to the substantial
regulatory changes that will need to be implemented by CMS and others, and
the numerous processes required to implement these reforms, the Company
cannot predict which healthcare initiatives will be implemented at the
federal or state level, the timing of any such reforms, or the effect such
reforms or any other future legislation or regulation will have on the
Company's business, financial position, results of operations and
liquidity,
• the impact of the rules issued by CMS on August 1, 2012 (the "2012 CMS
Rule") which, among other things, will reduce Medicare reimbursement to
the Company's LTAC hospitals in 2013 and beyond by imposing a budget
neutrality adjustment and modifying the short-stay outlier rules,
• the impact of the 2011 CMS Rules which significantly reduced Medicare
reimbursement to nursing centers and changed payments for the provision of
group therapy services effective October 1, 2011,
• the impact of the Budget Control Act of 2011 which will automatically
reduce federal spending by approximately $1.2 trillion split evenly
between domestic and defense spending. At this time, the Company believes
this will result in an automatic 2% reduction on each claim submitted to
Medicare beginning February 1, 2013,
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Cautionary Statement (Continued)
• changes in the reimbursement rates or the methods or timing of payment
from third party payors, including commercial payors and the Medicare and
Medicaid programs, changes arising from and related to the Medicare
prospective payment system for LTAC hospitals, including potential changes
in the Medicare payment rules, the Medicare Prescription Drug,
Improvement, and Modernization Act of 2003, and changes in Medicare and
Medicaid reimbursements for the Company's LTAC hospitals, nursing and
rehabilitation centers, IRFs and home health and hospice operations, and
the expiration of the Medicare Part B therapy cap exception process,
• the effects of additional legislative changes and government regulations,
interpretation of regulations and changes in the nature and enforcement of
regulations governing the healthcare industry,
• the impact of the Medicare, Medicaid and SCHIP Extension Act of 2007 (the
"SCHIP Extension Act"), including the ability of the Company's hospitals
to adjust to potential LTAC certification, medical necessity reviews and
the moratorium on future hospital development,
• the impact of the Company's significantly increased levels of indebtedness
as a result of the RehabCare Merger on the Company's funding costs,
operating flexibility and ability to fund ongoing operations, development
capital expenditures or other strategic acquisitions with additional
borrowings,
• the Company's ability to successfully pursue its development activities,
including through acquisitions, and successfully integrate new operations,
including the realization of anticipated revenues, economies of scale,
cost savings and productivity gains associated with such operations, as
and when planned, including the potential impact of unanticipated issues,
expenses and liabilities associated with those activities,
• the failure of the Company's facilities to meet applicable licensure and
certification requirements,
• the further consolidation and cost containment efforts of managed care
organizations and other third party payors,
• the Company's ability to meet its rental and debt service obligations,
• the Company's ability to operate pursuant to the terms of its debt
obligations, and comply with its covenants thereunder, and its ability to
operate pursuant to its master lease agreements with Ventas,
• the condition of the financial markets, including volatility and weakness
in the equity, capital and credit markets, which could limit the
availability and terms of debt and equity financing sources to fund the
requirements of the Company's businesses, or which could negatively impact
the Company's investment portfolio,
• national and regional economic, financial, business and political
conditions, including their effect on the availability and cost of labor,
credit, materials and other services,
• the Company's ability to control costs, particularly labor and employee
benefit costs,
• increased operating costs due to shortages in qualified nurses, therapists
and other healthcare personnel,
• the Company's ability to attract and retain key executives and other
healthcare personnel,
• the increase in the costs of defending and insuring against alleged
professional liability and other claims and the Company's ability to
predict the estimated costs related to such claims, including the impact
of differences in actuarial assumptions and estimates compared to eventual
outcomes,
• the Company's ability to successfully reduce (by divestiture of operations
or otherwise) its exposure to professional liability and other claims,
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Cautionary Statement (Continued)
• the Company's ability to successfully dispose of unprofitable facilities,
• events or circumstances which could result in the impairment of an asset
or other charges, such as the impact of the Medicare reimbursement
regulations that resulted in the Company recording significant impairment
charges in 2011,
• changes in generally accepted accounting principles or practices, and
changes in tax accounting or tax laws (or authoritative interpretations
relating to any of these matters), and
• the Company's ability to maintain an effective system of internal control
over financial reporting.
Many of these factors are beyond the Company's control. The Company cautions
investors that any forward-looking statements made by the Company are not
guarantees of future performance. The Company disclaims any obligation to update
any such factors or to announce publicly the results of any revisions to any of
the forward-looking statements to reflect future events or developments.
General
The accompanying unaudited condensed consolidated financial statements,
including the notes thereto, should be read in conjunction with the following
discussion and analysis.
The Company is a healthcare services company that through its subsidiaries
operates LTAC hospitals, IRFs, nursing and rehabilitation centers, assisted
living facilities, a contract rehabilitation services business and a home health
and hospice business across the United States. At June 30, 2012, the Company's
hospital division operated 118 LTAC hospitals (8,448 licensed beds) and six IRFs
(259 licensed beds) in 26 states. The Company's nursing center division operated
224 nursing and rehabilitation centers (27,196 licensed beds) and six assisted
living facilities (341 licensed beds) in 27 states. The Company's rehabilitation
division provided rehabilitation services primarily in hospitals and long-term
care settings. The Company's home health and hospice division provided home
health, hospice and private duty services from 52 locations in eight states.
RehabCare Merger
On June 1, 2011, the Company completed the RehabCare Merger. Upon consummation
of the RehabCare Merger, each issued and outstanding share of RehabCare common
stock was converted into the right to receive the Merger Consideration. Kindred
issued approximately 12 million shares of its common stock in connection with
the RehabCare Merger. The purchase price totaled $963 million and was comprised
of $662 million in cash and $301 million of Kindred common stock at fair value.
The Company also assumed $356 million of long-term debt in the RehabCare Merger,
of which $345 million was refinanced on June 1, 2011. The operating results of
RehabCare have been included in the accompanying unaudited condensed
consolidated financial statements of the Company since June 1, 2011.
Operating results in the second quarter of 2011 included transaction costs
totaling $19 million, financing costs totaling $12 million and severance costs
totaling $15 million related to the RehabCare Merger. Operating results for the
six months ended June 30, 2011 included transaction costs totaling $23 million,
financing costs totaling $14 million and severance costs totaling $15 million
related to the RehabCare Merger. In the accompanying unaudited condensed
consolidated statement of operations, transaction costs were included in other
operating expenses, financing costs were included in interest expense and
severance costs were included in salaries, wages and benefits.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
General (Continued)
Discontinued operations
In recent years, the Company has completed several strategic divestitures to
improve its future operating results. For accounting purposes, the operating
results of these businesses have been classified as discontinued operations in
the accompanying unaudited condensed consolidated statement of operations for
all periods presented. Assets not sold at June 30, 2012 have been measured at
the lower of carrying value or estimated fair value less costs of disposal and
have been classified as held for sale in the accompanying unaudited condensed
consolidated balance sheet.
Critical Accounting Policies
Management's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires the
use of estimates and judgments that affect the reported amounts and related
disclosures of commitments and contingencies. The Company relies on historical
experience and on various other assumptions that management believes to be
reasonable under the circumstances to make judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ materially from these estimates.
The Company believes the following critical accounting policies, among others,
affect the more significant judgments and estimates used in the preparation of
its consolidated financial statements.
Revenue recognition
The Company has agreements with third party payors that provide for payments to
each of its operating divisions. These payment arrangements may be based upon
prospective rates, reimbursable costs, established charges, discounted charges
or per diem payments. Net patient service revenue is recorded at the estimated
net realizable amounts from Medicare, Medicaid, Medicare Advantage, other third
party payors and individual patients for services rendered. Retroactive
adjustments that are likely to result from future examinations by third party
payors are accrued on an estimated basis in the period the related services are
rendered and adjusted as necessary in future periods based upon new information
or final settlements.
Collectibility of accounts receivable
Accounts receivable consist primarily of amounts due from the Medicare and
Medicaid programs, other government programs, managed care health plans,
commercial insurance companies, skilled nursing and hospital customers, and
individual patients and other customers. Estimated provisions for doubtful
accounts are recorded to the extent it is probable that a portion or all of a
particular account will not be collected.
In evaluating the collectibility of accounts receivable, the Company considers a
number of factors, including the age of the accounts, changes in collection
patterns, the composition of patient accounts by payor type, the status of
ongoing disputes with third party payors and general industry conditions. Actual
collections of accounts receivable in subsequent periods may require changes in
the estimated provision for loss. Changes in these estimates are charged or
credited to the results of operations in the period of the change.
The provision for doubtful accounts totaled $6 million and $8 million in the
second quarter of 2012 and 2011, respectively, and $13 million and $14 million
for the six months ended June 30, 2012 and 2011, respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
Allowances for insurance risks
The Company insures a substantial portion of its professional liability risks
and workers compensation risks through its limited purpose insurance subsidiary.
Provisions for loss for these risks are based upon management's best available
information including actuarially determined estimates.
The allowance for professional liability risks includes an estimate of the
expected cost to settle reported claims and an amount, based upon past
experiences, for losses incurred but not reported. These liabilities are
necessarily based upon estimates and, while management believes that the
provision for loss is adequate, the ultimate liability may be in excess of, or
less than, the amounts recorded. To the extent that expected ultimate claims
costs vary from historical provisions for loss, future earnings will be charged
or credited.
Provisions for loss for professional liability risks retained by the Company's
limited purpose insurance subsidiary have been discounted based upon actuarial
estimates of claim payment patterns using a discount rate of 1% to 5% depending
upon the policy year. The discount rate was 1% for the 2012 and 2011 policy
years. The discount rates are based upon the risk free interest rate for the
respective year. Amounts equal to the discounted loss provision are funded
annually. The Company does not fund the portion of professional liability risks
related to estimated claims that have been incurred but not reported.
Accordingly, these liabilities are not discounted. The allowance for
professional liability risks aggregated $278 million at June 30, 2012 and $264
million at December 31, 2011. If the Company did not discount any of the
allowances for professional liability risks, these balances would have
approximated $281 million at June 30, 2012 and $267 million at December 31,
2011.
As a result of deterioration in professional liability and workers compensation
underwriting results of the Company's limited purpose insurance subsidiary in
2011, the Company made a capital contribution of $9 million during the six
months ended June 30, 2012 to its limited purpose insurance subsidiary.
Conversely, as a result of improved professional liability underwriting results
of the Company's limited purpose insurance subsidiary in 2010, the Company
received a distribution of $3 million during the six months ended June 30, 2011
from its limited purpose insurance subsidiary. These transactions were completed
in accordance with applicable regulations. Neither the contribution nor the
distribution had any impact on earnings.
Changes in the number of professional liability claims and the cost to settle
these claims significantly impact the allowance for professional liability
risks. A relatively small variance between the Company's estimated and actual
number of claims or average cost per claim could have a material impact, either
favorable or unfavorable, on the adequacy of the allowance for professional
liability risks. For example, a 1% variance in the allowance for professional
liability risks at June 30, 2012 would impact the Company's operating income by
approximately $3 million.
The provision for professional liability risks (continuing operations),
including the cost of coverage maintained with unaffiliated commercial insurance
carriers, aggregated $20 million and $17 million in the second quarter of 2012
and 2011, respectively, and $39 million and $35 million for the six months ended
June 30, 2012 and 2011, respectively.
Provisions for loss for workers compensation risks retained by the Company's
limited purpose insurance subsidiary are not discounted and amounts equal to the
loss provision are funded annually. The allowance for workers compensation risks
aggregated $182 million at June 30, 2012 and $171 million at December 31, 2011.
The provision for workers compensation risks (continuing operations), including
the cost of coverage maintained with unaffiliated commercial insurance carriers,
aggregated $16 million and $14 million in the second quarter of 2012 and 2011,
respectively, and $31 million and $27 million for the six months ended June 30,
2012 and 2011, respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
Accounting for income taxes
The provision for income taxes is based upon the Company's estimate of annual
taxable income or loss for each respective accounting period. The Company
recognizes an asset or liability for the deferred tax consequences of temporary
differences between the tax bases of assets and liabilities and their reported
amounts in the financial statements. These temporary differences will result in
taxable or deductible amounts in future years when the reported amounts of the
assets are recovered or liabilities are settled. The Company also recognizes as
deferred tax assets the future tax benefits from net operating and capital loss
carryforwards. A valuation allowance is provided for these deferred tax assets
if it is more likely than not that some portion or all of the net deferred tax
assets will not be realized.
The Company's effective income tax rate was 41.4% and 34.3% in the second
quarter of 2012 and 2011, respectively, and 41.1% and 43.6% for the six months
ended June 30, 2012 and 2011, respectively. The variances in the effective
income tax rates for both 2012 periods compared to the same periods in 2011
primarily related to the impact of lower pretax earnings in 2011 and the impact
of the nondeductible income tax treatment of certain transaction costs in 2011
incurred in connection with the RehabCare Merger.
There are significant uncertainties with respect to capital loss carryforwards
that could affect materially the realization of certain deferred tax assets.
Accordingly, the Company has recognized deferred tax assets to the extent it is
more likely than not they will be realized and a valuation allowance is provided
for deferred tax assets to the extent that it is uncertain that the deferred tax
asset will be realized. The Company recognized net deferred tax assets totaling
$17 million at June 30, 2012 and net deferred tax liabilities totaling $0.2
million at December 31, 2011.
The Company is subject to various federal and state income tax audits in the
ordinary course of business. Such audits could result in increased tax payments,
interest and penalties. While the Company believes its tax positions are
appropriate, there can be no assurance that the various authorities engaged in
the examination of its income tax returns will not challenge the Company's
positions.
Valuation of long-lived assets, goodwill and intangible assets
The Company regularly reviews the carrying value of certain long-lived assets
and finite lived intangible assets with respect to any events or circumstances
that indicate an impairment or an adjustment to the amortization period is
necessary. If circumstances suggest that the recorded amounts cannot be
recovered based upon estimated future undiscounted cash flows, the carrying
values of such assets are reduced to fair value.
In assessing the carrying values of long-lived assets, the Company estimates
future cash flows at the lowest level for which there are independent,
identifiable cash flows. For this purpose, these cash flows are aggregated based
upon the contractual agreements underlying the operation of the facility or
group of facilities. Generally, an individual facility is considered the lowest
level for which there are independent, identifiable cash flows. However, to the
extent that groups of facilities are leased under a master lease agreement in
which the operations of a facility and compliance with the lease terms are
interdependent upon other facilities in the agreement (including the Company's
ability to renew the lease or divest a particular property), the Company defines
the group of facilities under a master lease agreement as the lowest level for
which there are independent, identifiable cash flows. Accordingly, the estimated
cash flows of all facilities within a master lease agreement are aggregated for
purposes of evaluating the carrying values of long-lived assets.
The Company's intangible assets with finite lives are amortized in accordance
with the authoritative guidance for goodwill and other intangible assets using
the straight-line method over their estimated useful lives ranging from one to
20 years.
As a result of the RehabCare Merger, the Company acquired finite lived
intangible assets consisting of customer relationships ($189 million), a trade
name ($17 million) and non-compete agreements ($3 million) with estimated useful
lives ranging from two to 15 years.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
Valuation of long-lived assets, goodwill and intangible assets (Continued)
On July 29, 2011, CMS issued the 2011 CMS Rules. In connection with the
preparation of the Company's operating results for the third quarter of 2011,
the Company determined that the impact of the 2011 CMS Rules was a triggering
event in the third quarter of 2011 and accordingly tested the recoverability of
its nursing and rehabilitation centers reporting unit goodwill, intangible
assets and property and equipment asset groups impacted by the reduced Medicare
payments. The Company recorded pretax impairment charges aggregating $27 million
($16 million net of income taxes) in the third quarter of 2011. The charges
included $6 million of goodwill (which represented the entire nursing and
rehabilitation centers reporting unit goodwill) and $21 million of property and
equipment. In addition, the Company recorded pretax impairment charges
aggregating $2 million ($1 million net of income taxes) in the fourth quarter of
2011, $0.3 million ($0.2 million net of income taxes) in the second quarter of
2012 and $1.2 million ($0.7 million net of income taxes) for the six months
ended June 30, 2012 for necessary property and equipment expenditures in the
same nursing and rehabilitation center asset groups. These charges reflected the
amount by which the carrying value of certain assets exceeded their estimated
fair value. The impairment charges did not impact the Company's cash flows or
liquidity.
During the fourth quarter of 2011, the estimated negative impact from changes in
the reimbursement of group rehabilitation therapy services to Medicare
beneficiaries was greater than expected, and as a result, the Company lowered
its cash flow expectations for the Company's skilled nursing rehabilitation
services reporting unit, causing the carrying value of goodwill of this
reporting unit to exceed its estimated fair value in testing the recoverability
of goodwill. The Company recorded a pretax impairment charge of $46 million ($43
million net of income taxes) in the fourth quarter of 2011. The Company also
reviewed the other intangible assets and long-lived assets related to the
skilled nursing rehabilitation services reporting unit and determined there were
no impairments of these assets. The impairment charge did not impact the
Company's cash flows or liquidity.
In accordance with the authoritative guidance for goodwill and other intangible
assets, the Company is required to perform an impairment test for goodwill and
indefinite-lived intangible assets at least annually or more frequently if
adverse events or changes in circumstances indicate that the asset may be
impaired. The Company performs its annual goodwill impairment test at the end of
each fiscal year for each of its reporting units. A reporting unit is either an
operating segment or one level below the operating segment, referred to as a
component. When the components within the Company's operating segments have
similar economic characteristics, the Company aggregates the components of its
operating segments into one reporting unit. Accordingly, the Company has
determined that its reporting units are hospitals, nursing and rehabilitation
centers, skilled nursing rehabilitation services, hospital rehabilitation
services, home health and hospice. The carrying value of goodwill for each of
the Company's reporting units at June 30, 2012 and December 31, 2011 follows (in
thousands):
June 30, December 31,
2012 2011
Hospitals $ 747,777 $ 745,411
Nursing and rehabilitation centers - -
Rehabilitation division:
Skilled nursing rehabilitation services 107,899 107,026
Hospital rehabilitation services 168,019 167,753
275,918 274,779
Home health and hospice division:
Home health 49,429 49,254
Hospice 15,255 15,211
64,684 64,465
$ 1,088,379 $ 1,084,655
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
Valuation of long-lived assets, goodwill and intangible assets (Continued)
As a result of the RehabCare Merger, goodwill was assigned to the Company's
hospital reporting unit ($534 million), skilled nursing rehabilitation services
reporting unit ($151 million) and hospital rehabilitation services reporting
unit ($168 million).
The goodwill impairment test involves a two-step process. The first step is a
comparison of each reporting unit's fair value to its carrying value. If the
carrying value of the reporting unit is greater than its fair value, there is an
indication that impairment may exist and the second step must be performed to
measure the amount of impairment loss. Based upon the results of the step one
impairment test for goodwill for hospitals, hospital rehabilitation services,
home health and hospice reporting units for the year ended December 31, 2011, no
goodwill impairment charges were recorded in connection with the Company's
annual impairment test.
Since quoted market prices for the Company's reporting units are not available,
the Company applies judgment in determining the fair value of these reporting
units for purposes of performing the goodwill impairment test. The Company
relies on widely accepted valuation techniques, including discounted cash flow
and market multiple analyses approaches, which capture both the future income
potential of the reporting unit and the market behaviors and actions of market
participants in the industry that includes the reporting unit. These types of
analyses require the Company to make assumptions and estimates regarding future
cash flows, industry-specific economic factors and the profitability of future
business strategies. The discounted cash flow approach uses a projection of
estimated operating results and cash flows that are discounted using a weighted
average cost of capital. Under the discounted cash flow approach, the projection
uses management's best estimates of economic and market conditions over the
projected period for each reporting unit including growth rates in the number of
admissions, patient days, reimbursement rates, operating costs, rent expense and
capital expenditures. Other significant estimates and assumptions include
terminal value growth rates, changes in working capital requirements and
weighted average cost of capital. The market multiple analysis estimates fair
value by applying cash flow multiples to the reporting unit's operating results.
The multiples are derived from comparable publicly traded companies with similar
operating and investment characteristics to the reporting units.
The Company has determined that during the six months ended June 30, 2012 there
were no events or changes in circumstances since December 31, 2011 requiring an
interim impairment test. Although the Company has determined that there was no
other goodwill or other indefinite-lived intangible asset impairments as of
June 30, 2012, adverse changes in the operating environment and related key
assumptions used to determine the fair value of the Company's reporting units
and indefinite-lived intangible assets or declines in the value of the Company's
common stock may result in future impairment charges for a portion or all of
these assets. Specifically, if the rate of growth of government and commercial
revenues earned by the Company's reporting units were to be less than projected
or if healthcare reforms were to negatively impact the Company's business, an
impairment charge of a portion or all of these assets may be required. An
impairment charge could have a material adverse effect on the Company's
business, financial position and results of operations, but would not be
expected to have an impact on the Company's cash flows or liquidity.
The Company's indefinite-lived intangible assets consist of trade names,
Medicare certifications and certificates of need. The fair values of the
Company's indefinite-lived intangible assets are derived from current market
data and projections at a facility level which include management's best
estimates of economic and market conditions over the projected period including
growth rates in the number of admissions, patient days, reimbursement rates,
operating costs, rent expense and capital expenditures. Other significant
estimates and assumptions include terminal value growth rates, changes in
working capital requirements and weighted average cost of capital. Certificates
of need intangible assets are estimated primarily using both a replacement cost
methodology and an excess earnings method, a form of discounted cash flows,
which is based upon the concept that net after-tax cash flows provide a return
supporting all of the assets of a business enterprise.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies (Continued)
Valuation of long-lived assets, goodwill and intangible assets (Continued)
At December 31, 2011, the carrying value of the Company's certificates of need
intangible assets exceeded its fair value as a result of declining earnings and
cash flows related to five hospitals and two co-located nursing and
rehabilitation centers in Massachusetts, all of which were acquired in 2006. The
declining earnings and cash flows were attributable to a difficult LTAC
operating environment in Massachusetts in which the Company was unable to
achieve consistent operating results, as well as automatic future Medicare
reimbursement reductions triggered in December 2011 by the Budget Control Act of
2011. In addition, the Company decided in the fourth quarter of 2011 to close
one of the five hospitals. The pretax impairment charge related to the
certificates of need totaled $54 million ($33 million net of income taxes). The
Company reviewed the other long-lived assets related to these five hospitals and
two co-located nursing and rehabilitation centers and determined there was no
impairment. Based upon the results of the annual impairment test performed for
the year ended December 31, 2011 for indefinite-lived intangible assets other
than certificates of need intangible assets discussed above, no impairment
charges were recorded.
As a result of the RehabCare Merger, the Company acquired indefinite-lived
intangible assets consisting of trade names ($115 million), Medicare
certifications ($76 million) and certificates of need ($8 million). The annual
impairment test for these indefinite-lived intangible assets was performed as of
May 1, 2012. No impairment charges were recorded in connection with this annual
impairment test.
Recently Issued Accounting Requirements
In September 2011, the FASB issued authoritative guidance related to testing
goodwill for impairment. The main provisions of the guidance state that an
entity has the option to first assess qualitative factors to determine whether
the existence of events or circumstances leads to a determination that it is
more likely than not that the fair value of a reporting unit is less than its
carrying amount. If an entity determines it is not more likely than not that the
fair value of a reporting unit is less than its carrying amount, then performing
the two-step goodwill impairment test is unnecessary. However, if an entity
concludes otherwise, then it is required to perform Step 1 of the goodwill
impairment test. The guidance is effective for all interim and annual reporting
periods beginning after December 15, 2011. The adoption of the guidance is not
expected to have a material impact on the Company's business, financial
position, results of operations or liquidity.
In July 2011, the FASB issued authoritative guidance related to the presentation
and disclosure of patient service revenue, provision for bad debts, and the
allowance for doubtful accounts for certain healthcare entities. The provisions
of the guidance require healthcare entities that recognize significant amounts
of patient service revenue at the time services are rendered, even though they
do not assess a patient's ability to pay, to present the provision for bad debts
related to those revenues as a deduction from patient service revenue (net of
contractual allowances and discounts), as opposed to an operating expense. All
other entities would continue to present the provision for bad debts as an
operating expense. The guidance is effective for all interim and annual
reporting periods beginning after December 15, 2011. The adoption of the
guidance did not have an impact on the Company's business, financial position,
results of operations or liquidity.
In June 2011, the FASB issued authoritative guidance related to the presentation
of other comprehensive income. The provisions of the guidance state that an
entity has the option to present the total of comprehensive income either in a
single continuous statement of comprehensive income or in two separate but
consecutive statements. The statement(s) should be presented with equal
prominence to the other primary financial statements. The guidance is effective
for all interim and annual reporting periods beginning after December 15, 2011.
The adoption of the guidance did not have a material impact on the Company's
business, financial position, results of operations or liquidity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Recently Issued Accounting Requirements (Continued)
In December 2011, the FASB amended its authoritative guidance issued in June
2011 related to the presentation of other comprehensive income. The provisions
indefinitely defer the requirement to present reclassification adjustments out
of accumulated other comprehensive income by component in both the statement in
which net income is presented and the statement in which other comprehensive
income is presented, for both interim and annual financial statements. All other
requirements of the June 2011 update were not impacted by the amendment which
remains effective for all interim and annual reporting periods beginning after
December 15, 2011. The adoption of the guidance did not have a material impact
on the Company's business, financial position, results of operations or
liquidity.
In May 2011, the FASB issued authoritative guidance related to fair value
measurements. The provisions of the guidance result in applying common fair
value measurement and disclosure requirements in both United States generally
accepted accounting principles and International Financial Reporting Standards.
The amendments primarily change the wording used to describe many of the
requirements in generally accepted accounting principles for measuring and
disclosing information about fair value measurements. The guidance is effective
for all interim and annual reporting periods beginning after December 15, 2011.
The adoption of the guidance did not have a material impact on the Company's
business, financial position, results of operations or liquidity.
Results of Operations-Continuing Operations
Hospital division
Revenues increased 23% to $729 million in the second quarter of 2012 compared to
$593 million in the same period in 2011 and increased 30% to $1.5 billion for
the six months ended June 30, 2012 from $1.2 billion for the same period in
2011. Revenue growth in both periods was primarily a result of the RehabCare
Merger and, to a lesser extent, favorable reimbursement rates and the increase
in same-facility admissions. Revenues associated with the RehabCare Merger were
$171 million and $349 million in the second quarter of 2012 and for the six
months ended June 30, 2012, respectively, and $51 million in the second quarter
of 2011. Aggregate admissions increased 26% in the second quarter of 2012 and
33% for the six months ended June 30, 2012 compared to the same respective prior
year periods, primarily as a result of the RehabCare Merger. Aggregate
same-facility admissions increased 3% in both the second quarter of 2012 and for
the six months ended June 30, 2012 compared to the same respective prior year
periods.
Hospital operating margins increased in the second quarter of 2012 and for the
six months ended June 30, 2012 compared to the same respective prior year
periods, primarily as a result of favorable reimbursement rates and cost
efficiencies associated with volume growth. Operating income included severance
and other miscellaneous costs related to the closing of a regional office and
three LTAC hospitals, the cancellation of a sub-acute unit project and
employment-related lawsuits totaling $8 million and $10 million in the second
quarter of 2012 and for the six months ended June 30, 2012, respectively.
Operating income associated with the RehabCare Merger was $36 million and $76
million in the second quarter of 2012 and for the six months ended June 30,
2012, respectively, and $11 million in the second quarter of 2011.
Average hourly wage rates were relatively unchanged in both the second quarter
of 2012 and for the six months ended June 30, 2012 compared to the respective
prior year periods. Employee benefit costs increased 23% in the second quarter
of 2012 and 31% for the six months ended June 30, 2012 compared to the
respective prior year periods, primarily as a result of the RehabCare Merger.
Professional liability costs were $11 million and $8 million in the second
quarter of 2012 and 2011, respectively, and $21 million and $17 million for the
six months ended June 30, 2012 and 2011, respectively. The increase in both
periods was primarily a result of the RehabCare Merger.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations-Continuing Operations (Continued)
Nursing center division
Revenues decreased 6% to $536 million in the second quarter of 2012 compared to
$569 million in the same period of 2011 and decreased 5% to $1.1 billion for the
six months ended June 30, 2012 from the same period in 2011. The decline in
revenues in both periods was primarily a result of the 2011 CMS Rules and a
decline in admissions. Same-facility admissions declined 4% in the second
quarter of 2012 and 1% for the six months ended June 30, 2012 compared to the
same respective prior year periods. Same-facility patient days declined 3% in
the second quarter of 2012 and 2% for the six months ended June 30, 2012,
compared to the same respective prior year periods, primarily as a result of
declines in Medicare average length of stay.
Nursing center operating margins declined in the second quarter of 2012 and for
the six months ended June 30, 2012 compared to the same respective prior year
periods, primarily as a result of the 2011 CMS Rules.
Average hourly wage rates were relatively unchanged in both the second quarter
of 2012 and for the six months ended June 30, 2012 compared to the respective
prior year periods.
Professional liability costs were $9 million and $8 million in the second
quarter of 2012 and 2011, respectively, and $17 million for both the six months
ended June 30, 2012 and 2011.
Rehabilitation division
Skilled nursing rehabilitation services
Revenues increased to $255 million in the second quarter of 2012 compared to
$161 million in the same period in 2011 and increased to $511 million for the
six months ended June 30, 2012 from $276 million for the same period in 2011.
Revenue growth in both periods was primarily attributable to the RehabCare
Merger and, to a lesser extent, growth in the volume of services provided to
existing customers. Revenues associated with the RehabCare Merger were $141
million and $280 million in the second quarter of 2012 and for the six months
ended June 30, 2012, respectively, and $46 million in the second quarter of
2011. Revenues derived from unaffiliated customers aggregated $198 million and
$103 million in the second quarter of 2012 and 2011, respectively, and $395
million and $161 million for the six months ended June 30, 2012 and 2011,
respectively.
Operating margins declined in the second quarter of 2012 and for the six months
ended June 30, 2012 compared to the respective prior year periods, primarily as
a result of the 2011 CMS Rules. Operating income associated with the RehabCare
Merger was $13 million and $22 million in the second quarter of 2012 and for the
six months ended June 30, 2012, respectively, and $5 million in the second
quarter of 2011.
Hospital rehabilitation services
Revenues increased to $74 million in the second quarter of 2012 compared to $39
million in the same period in 2011 and increased to $148 million for the six
months ended June 30, 2012 from $61 million for the same period in 2011. Revenue
growth in both periods was primarily attributable to the RehabCare Merger and,
to a lesser extent, growth in new customers and the volume of services provided
to existing customers. Revenues associated with the RehabCare Merger were
$45 million and $89 million in the second quarter of 2012 and for the six months
ended June 30, 2012, respectively, and $16 million in the second quarter of
2011. Revenues derived from unaffiliated customers aggregated $46 million and
$18 million in the second quarter of 2012 and 2011, respectively, and $92
million and $19 million for the six months ended June 30, 2012 and 2011,
respectively.
Operating margins increased in the second quarter of 2012 and for the six months
ended June 30, 2012 compared to the respective prior year periods, primarily
attributable to improved operating efficiencies associated with the RehabCare
Merger. Operating income associated with the RehabCare Merger was $10 million
and $19 million in the second quarter of 2012 and for the six months ended
June 30, 2012, respectively, and $4 million in the second quarter of 2011.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations-Continuing Operations (Continued)
Home health and hospice division
Revenues increased to $29 million in the second quarter of 2012 compared to $11
million in the same period in 2011 and increased to $57 million for the six
months ended June 30, 2012 from $19 million for the same period in 2011. Revenue
growth in both periods was primarily attributable to two acquisitions completed
after the second quarter of 2011. Operating margins increased in the second
quarter of 2012 and for the six months ended June 30, 2012 compared to the
respective prior year periods. Operating margins in the second quarter of 2011
and for the six months ended June 30, 2011 were negatively impacted by start-up
and overhead costs in connection with the development of this business segment.
Corporate overhead
Operating income for the Company's operating divisions excludes allocations of
corporate overhead. These costs aggregated $44 million in the second quarter of
both 2012 and 2011, and $87 million and $82 million for the six months ended
June 30, 2012 and 2011, respectively. The increase for the six months ended
June 30, 2012 was primarily attributable to increased costs of assuming the
RehabCare operations. As a percentage of consolidated revenues, corporate
overhead totaled 2.9% and 3.4% in the second quarter of 2012 and 2011,
respectively, and totaled 2.8% and 3.3% for the six months ended June 30, 2012
and 2011, respectively.
Transaction costs
Operating results included transaction costs totaling $0.6 million and $20
million in the second quarter of 2012 and 2011, respectively, and $1 million and
$24 million for the six months ended June 30, 2012 and 2011, respectively,
primarily related to the RehabCare Merger. Transaction costs in all periods were
included in other operating expenses. Operating results in the second quarter of
2011 and for the six months ended June 30, 2011 also included severance costs
totaling $15 million related to the RehabCare Merger. Severance costs in both
periods were included in salaries, wages and benefits.
Capital costs
Rent expense increased 12% to $107 million in the second quarter of 2012
compared to $96 million in the same period in 2011 and increased 15% to $215
million for the six months ended June 30, 2012 from $187 million for the same
period in 2011. The increases in both periods resulted primarily from leases
acquired in the RehabCare Merger, contractual inflation and contingent rent
increases. Rent expense in the second quarter of 2012 and for the six months
ended June 30, 2012 included lease cancellation charges of $1 million and $3
million, respectively, incurred in connection with the closing of three LTAC
hospitals.
Depreciation and amortization expense increased 32% to $50 million in the second
quarter of 2012 compared to $38 million in the same period in 2011 and increased
40% to $99 million for the six months ended June 30, 2012 compared to $71
million for the same period in 2011. The increase in both periods resulted from
the RehabCare Merger and the Company's ongoing capital expenditure program and
hospital development projects.
Interest expense increased to $27 million in the second quarter of 2012 from $23
million in the same period in 2011 and increased to $53 million for the six
months ended June 30, 2012 from $29 million for the same period in 2011. The
increase in both periods was primarily attributable to increased borrowings
associated with the RehabCare Merger and higher interest rates compared to the
same periods in 2011. Interest expense included $12 million and $14 million in
the second quarter of 2011 and for the six months ended June 30, 2011,
respectively, of financing costs related to the RehabCare Merger.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Results of Operations-Continuing Operations (Continued)
Consolidated results
Income from continuing operations before income taxes aggregated $26 million in
the second quarter of 2012 compared to losses from continuing operations before
income taxes of $10 million in the same period in 2011. Income from continuing
operations before income taxes aggregated $57 million for the six months ended
June 30, 2012 compared to $28 million for the same period in 2011. Income from
continuing operations aggregated $16 million in the second quarter of 2012
compared to losses from continuing operations of $6 million in the same period
in 2011. Income from continuing operations aggregated $34 million for the six
months ended June 30, 2012 compared to $16 million for the same period in 2011.
Severance costs, lease cancellation charges and other miscellaneous costs
related to the closing of a regional office and three LTAC hospitals, the
cancellation of a sub-acute unit project, employment-related lawsuits, employee
retention costs incurred in connection with the decision to allow leases to
expire for 54 nursing and rehabilitation centers leased from Ventas, and
transaction costs impacted the consolidated pretax operating results by $10
million ($6 million net of income taxes) in the second quarter of 2012 and $15
million ($9 million net of income taxes) for the six months ended June 30, 2012.
Transaction, severance and financing costs primarily related to the RehabCare
Merger negatively impacted the consolidated pretax operating results by $47
million ($30 million net of income taxes) in the second quarter of 2011 and $53
million ($34 million net of income taxes) for the six months ended June 30,
2011.
Results of Operations-Discontinued Operations
Discontinued operations was breakeven in the second quarter of 2012 compared to
income of $0.6 million in the same period in 2011. Income from discontinued
operations aggregated $0.1 million for the six months ended June 30, 2012
compared to $0.4 million for the same period in 2011.
Liquidity
Operating cash flows
Cash flows provided by operations (including discontinued operations) aggregated
$50 million for the six months ended June 30, 2012 compared to $51 million for
the same period in 2011. Operating cash flows were negatively impacted by lower
accounts receivable collections for the six months ended June 30, 2012 compared
to the same period in 2011, primarily as a result of Medicaid payments deferred
by states until July and fiscal intermediary processing delays related to the
2011 CMS Rules. Operating cash flows for the six months ended June 30, 2012 were
negatively impacted by $5 million ($3 million net of income taxes) of severance,
lease cancellation and transaction payments. Operating cash flows for the six
months ended June 30, 2011 were negatively impacted by $88 million ($69 million
net of income taxes) of severance, transaction and financing payments, primarily
related to the RehabCare Merger. Operating cash flows for the six months ended
June 30, 2012 included a net federal income tax payment of $5 million and
operating cash flows for the six months ended June 30, 2011 included a net
federal income tax refund of $15 million.
The Company utilizes its ABL Facility to meet working capital needs and finance
its acquisition and development activities. As a result, the Company typically
carries minimal amounts of cash on its consolidated balance sheet. Based upon
the Company's expected operating cash flows and the availability of borrowings
under the Company's ABL Facility ($237 million at June 30, 2012), management
believes that the Company has the necessary financial resources to satisfy its
expected short-term and long-term liquidity needs.
New credit facilities and notes
In connection with the RehabCare Merger, the Company entered into the New Credit
Facilities and the Notes. The Company used proceeds from the New Credit
Facilities and the Notes to pay the Merger Consideration, repay all amounts
outstanding under the Company's and RehabCare's previous credit facilities and
to pay transaction
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
New credit facilities and notes (Continued)
costs. The amounts outstanding under the Company's and RehabCare's former credit
facilities that were repaid at the RehabCare Merger closing were $390 million
and $345 million, respectively. The New Credit Facilities have incremental
facility capacity in an aggregate amount between the two facilities of $200
million, subject to meeting certain conditions, including a specified senior
secured leverage ratio with respect to the Term Loan Facility. In connection
with these new credit arrangements, the Company paid $46 million of lender fees
related to debt issuance that were capitalized as deferred financing costs and
paid $13 million of other financing costs that were charged to interest expense
during 2011.
All obligations under the New Credit Facilities are fully and unconditionally
guaranteed, subject to certain customary release provisions, by substantially
all of the Company's existing and future direct and indirect domestic 100% owned
subsidiaries, as well as certain non-100% owned domestic subsidiaries as the
Company may determine from time to time in its sole discretion. The Notes are
guaranteed by substantially all of the Company's domestic 100% owned
subsidiaries.
The agreements governing the New Credit Facilities and the indenture governing
the Notes include a number of restrictive covenants that, among other things and
subject to certain exceptions and baskets, impose operating and financial
restrictions on the Company and certain of its subsidiaries. In addition, the
Company is required to comply with a minimum fixed charge coverage ratio and a
maximum total leverage ratio under the New Credit Facilities. These financing
agreements governing the New Credit Facilities and the indenture governing the
Notes also contain customary affirmative covenants and events of default. The
Company was in compliance with the terms of the New Credit Facilities and the
indenture governing the Notes at June 30, 2012.
ABL Facility
The ABL Facility has a five-year tenor and is secured by a first priority lien
on eligible accounts receivable, cash, deposit accounts, and certain other
assets and property and proceeds from the foregoing (the "First Priority ABL
Collateral"). The ABL Facility has a second priority lien on substantially all
of the Company's other assets and properties. As of June 30, 2012, the Company
had $404 million outstanding under the ABL Facility. In addition, approximately
$9 million of letters of credit were issued under the ABL Facility.
Borrowings under the ABL Facility bear interest at a rate per annum equal to the
applicable margin plus, at the Company's option, either (1) LIBOR determined by
reference to the costs of funds for eurodollar deposits for the interest period
relevant to such borrowing adjusted for certain additional costs, or (2) a base
rate determined by reference to the highest of (a) the prime rate of JPMorgan
Chase Bank, N.A., (b) the federal funds effective rate plus one-half of 1.00%
and (c) LIBOR as described in subclause (1) plus 1.00%. At June 30, 2012, the
applicable margin for borrowings under the ABL Facility was 2.75% with respect
to LIBOR borrowings and 1.75% with respect to base rate borrowings. The
applicable margin is subject to adjustment each fiscal quarter, based upon
average historical excess availability during the preceding quarter.
Term Loan Facility
The Term Loan Facility has a tenor of seven years and is secured by a first
priority lien on substantially all of the Company's assets and properties other
than the First Priority ABL Collateral and a second priority lien on the First
Priority ABL Collateral. The Term Loan Facility net proceeds at the RehabCare
Merger totaled $693 million, net of a $7 million original issue discount that
will be amortized over the tenor of the Term Loan Facility.
Borrowings under the Term Loan Facility bear interest at a rate per annum equal
to an applicable margin plus, at the Company's option, either (1) LIBOR
determined by reference to the costs of funds for eurodollar deposits for the
interest period relevant to such borrowing adjusted for certain additional
costs, or (2) a base rate determined by
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
New credit facilities and notes (Continued)
Term Loan Facility (Continued)
reference to the highest of (a) the prime rate of JPMorgan Chase Bank, N.A.,
(b) the federal funds effective rate plus one-half of 1.00% and (c) LIBOR
described in subclause (1) plus 1.00%. LIBOR is subject to an interest rate
floor of 1.50%. The applicable margin for borrowings under the Term Loan
Facility is 3.75% with respect to LIBOR borrowings and 2.75% with respect to
base rate borrowings.
In December 2011, the Company entered into two interest rate swap agreements to
hedge its floating interest rate on an aggregate of $225 million of outstanding
Term Loan Facility debt. The interest rate swaps have an effective date of
January 9, 2012, and expire on January 11, 2016. The Company is required to make
payments based upon a fixed interest rate of 1.8925% calculated on the notional
amount of $225 million. In exchange, the Company will receive interest on $225
million at a variable interest rate that is based upon the three-month LIBOR,
subject to a minimum rate of 1.5%. The Company determined the interest rate
swaps continue to be effective cash flow hedges at June 30, 2012. The fair value
of the interest rate swaps recorded in other accrued liabilities was $2 million
and $1 million at June 30, 2012 and December 31, 2011, respectively.
Notes
In connection with the RehabCare Merger, the Company completed a private
placement of the Notes. The Notes bear interest at an annual rate equal to 8.25%
and are senior unsecured obligations of the Company and the subsidiary
guarantors, ranking pari passu with all of their respective existing and future
senior unsubordinated indebtedness. The indenture contains certain restrictive
covenants that will, among other things, limit the Company and certain of its
subsidiaries' ability to incur, assume or guarantee additional indebtedness; pay
dividends; make distributions or redeem or repurchase stock; restrict dividends,
loans or asset transfers from the Company's subsidiaries; sell or otherwise
dispose of assets; and enter into transactions with affiliates. These covenants
are subject to a number of limitations and exceptions. The indenture also
contains customary events of default.
Pursuant to a registration rights agreement, the Company filed with the SEC a
registration statement related to an offer to exchange the Notes for an issue of
SEC-registered notes with substantially identical terms. The exchange offer
commenced on October 13, 2011 and was completed on November 10, 2011.
Other financing activities
As a result of deterioration in professional liability and workers compensation
underwriting results of the Company's limited purpose insurance subsidiary in
2011, the Company made a capital contribution of $9 million during the six
months ended June 30, 2012 to its limited purpose insurance subsidiary.
Conversely, as a result of improved professional liability underwriting results
of the Company's limited purpose insurance subsidiary in 2010, the Company
received a distribution of $3 million during the six months ended June 30, 2011
from its limited purpose insurance subsidiary. These transactions were completed
in accordance with applicable regulations. Neither the contribution nor the
distribution had any impact on earnings.
Capital Resources
Capital expenditures and acquisitions
Excluding the RehabCare Merger and acquisitions, routine capital expenditures
(expenditures necessary to maintain existing facilities that generally do not
increase capacity or add services) totaled $51 million for the six months ended
June 30, 2012 compared to $59 million for the same period in 2011. Hospital
development capital expenditures (primarily replacement facility construction)
totaled $21 million for the six months ended June 30, 2012 compared to
$14 million for the same period in 2011. Nursing and rehabilitation center
development capital
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Capital Resources (Continued)
Capital expenditures and acquisitions (Continued)
expenditures (primarily the addition of transitional care services for higher
acuity patients) totaled $2 million for the six months ended June 30, 2012
compared to $11 million for the same period in 2011. Excluding acquisitions, the
Company anticipates that routine capital spending for 2012 should approximate
$125 million to $135 million, hospital development capital spending should
approximate $30 million to $35 million and nursing and rehabilitation center
development capital spending should approximate $10 million. Management expects
that substantially all of these expenditures will be financed through internal
sources. Management believes that its capital expenditure program is adequate to
improve and equip existing facilities. At June 30, 2012, the estimated cost to
complete and equip construction in progress approximated $25 million.
The RehabCare Merger purchase price totaled $963 million and was comprised of
$662 million in cash and $301 million of Kindred common stock.
Excluding the RehabCare Merger, the Company financed acquisitions with either
operating cash flows or its ABL Facility. These expenditures totaled $68 million
for the six months ended June 30, 2012 compared to $18 million for the same
period in 2011.
Renewal of Ventas facilities
On April 27, 2012, the Company provided Ventas with notices to renew the Renewal
Facilities for an additional five years. The current lease term for the Renewal
Facilities is scheduled to expire in April 2013.
Under its master lease agreements with Ventas, the Company had 73 nursing and
rehabilitation centers and 16 LTAC hospitals within ten separate renewal bundles
subject to lease renewals. Each renewal bundle contains both nursing and
rehabilitation centers and LTAC hospitals. The master lease agreements require
that the Company renew all or none of the facilities within a renewal bundle.
The Company has renewed three renewal bundles containing the Renewal Facilities.
The Renewal Facilities contain 2,178 licensed nursing and rehabilitation center
beds and 616 licensed hospital beds and generated revenues of approximately $434
million for the year ended December 31, 2011. The current annual rent for the
Renewal Facilities approximates $46 million.
The Company did not renew seven renewal bundles containing 54 nursing and
rehabilitation centers and ten LTAC hospitals. These facilities contain 6,140
licensed nursing and rehabilitation center beds and 1,066 licensed hospital beds
and generated revenues of approximately $790 million for the year ended
December 31, 2011. The current annual rent for these facilities approximates $77
million.
On May 24, 2012, the Company entered into a new master lease agreement with
Ventas for the ten LTAC hospitals that the Company had previously announced it
did not intend to renew. The new master lease agreement will be effective on
May 1, 2013 and will have a term of ten years with three five-year renewal
options. The annual rent for the new lease will be $28 million and is subject to
annual increases based on the increase in the consumer price index (subject to
an annual 4% cap). The current annual rent for these ten LTAC hospitals
approximates $22 million. These ten LTAC hospitals contain 1,066 licensed
hospital beds and generated revenues of approximately $276 million for the year
ended December 31, 2011. The terms of the new master lease agreement are
substantially similar to the terms of the other master lease agreements between
Kindred and Ventas.
On May 24, 2012, the Company and Ventas also entered into a separate agreement
to provide Ventas with more flexibility to accelerate the transfer of the 54
nursing and rehabilitation centers currently leased by the Company that are
scheduled to expire on April 30, 2013. The Company will continue to operate
these nursing and rehabilitation centers and include them in its results from
continuing operations through the expiration of the lease term in April 2013.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Other Information
Effects of inflation and changing prices
The Company derives a substantial portion of its revenues from the Medicare and
Medicaid programs. Congress and certain state legislatures have enacted or may
enact additional significant cost containment measures limiting the Company's
ability to recover its cost increases through increased pricing of its
healthcare services. Medicare revenues in LTAC hospitals and nursing centers are
subject to fixed payments under the Medicare prospective payment systems.
Medicaid reimbursement rates in many states in which the Company operates
nursing and rehabilitation centers also are based upon fixed payment systems.
Generally, these rates are adjusted annually for inflation. However, these
adjustments may not reflect the actual increase in the costs of providing
healthcare services.
Various healthcare reform provisions became law upon the enactment of the ACA.
The reforms contained in the ACA are affecting certain of the Company's
businesses and the Company expects that it will impact all of them in some
manner. Several of the reforms are very significant and could ultimately change
the nature of the Company's services, the methods of payment for the Company's
services and the underlying regulatory environment. The reforms include possible
modifications to the conditions of qualification for payment, bundling payments
to cover both acute and post-acute care and the imposition of enrollment
limitations on new providers. In addition, a primary goal of healthcare reform
is to reduce costs, which includes reductions in the reimbursement paid to the
Company and other healthcare providers. Moreover, healthcare reform could
negatively impact insurance companies, other third party payors, the Company's
customers, as well as other healthcare providers, which may in turn negatively
impact the Company's business. As such, these healthcare reforms or other
similar healthcare reforms could have a material adverse effect on the Company's
business, financial position, results of operations and liquidity. There is also
the possibility that implementation of the provisions expanding health insurance
coverage or the entire ACA will be delayed, revised or eliminated as a result of
efforts to repeal or amend the law. The U.S. Supreme Court recently upheld the
constitutionality of the ACA. Future court proceedings, the 2012 presidential
election and pending efforts in the U.S. Congress to repeal, amend or retract
funding for various aspects of the ACA create additional uncertainty about the
ultimate impact of the ACA on the Company and the healthcare industry. Due to
the substantial regulatory changes that will need to be implemented by CMS and
others, and the numerous processes required to implement these reforms, the
Company cannot predict which healthcare initiatives will be implemented at the
federal or state level, the timing of any such reforms, or the effect such
reforms or any other future legislation or regulation will have on the Company's
business, financial position, results of operations and liquidity.
The ACA enacted a series of reductions to the annual market basket payment
updates for LTAC hospitals. Congress also mandated that the annual market basket
payment update for a variety of providers, including LTAC hospitals, nursing
centers, IRFs, hospice providers and home health providers, be reduced for a
"productivity adjustment" determined by CMS. These productivity adjustments may
vary and will be determined annually by CMS. The productivity adjustments for
LTAC hospitals, IRFs and nursing centers were implemented on October 1, 2011.
The productivity adjustments for hospice providers and home health providers are
to be implemented on October 1, 2012 and October 1, 2014, respectively.
The Budget Control Act of 2011, enacted on August 2, 2011, increased the United
States debt ceiling in connection with deficit reductions over the next ten
years. In accordance with the Budget Control Act of 2011, $1.2 trillion in
domestic and defense spending reductions will automatically begin February 1,
2013, split evenly between domestic and defense spending. Payments to Medicare
providers are subject to these automatic spending reductions, subject to a 2%
cap. At this time, the Company believes this will result in an automatic 2%
reduction on each claim submitted to Medicare beginning February 1, 2013.
Reductions to Medicare and Medicaid reimbursement resulting from the Budget
Control Act of 2011 could have a material adverse effect on the Company's
business, financial position, results of operations and liquidity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Other Information (Continued)
Effects of inflation and changing prices (Continued)
The Long-Term Acute Care Prospective Payment System ("LTAC PPS") maintains LTAC
hospitals as a distinct provider type, separate from short-term acute care
hospitals. Only providers certified as LTAC hospitals may be paid under this
system. To maintain certification under LTAC PPS, the average length of stay of
fee for service Medicare patients must be at least 25 days.
On August 1, 2012, CMS issued the 2012 CMS Rule. Included in the 2012 CMS Rule
is (1) a market basket increase to the standard federal payment rate of 2.6%;
(2) offsets to the standard federal payment rate mandated by the ACA of:
(a) 0.7% to account for the effect of a productivity adjustment, and (b) 0.1% as
required by statute; (3) a wage level budget neutrality factor of 0.999265
applied to the adjusted standard federal payment rate; (4) adjustments to area
wage indexes; and (5) a decrease in the high cost outlier threshold per
discharge to $15,408. Effective December 29, 2012, the 2012 CMS Rule also would
(1) begin a three-year phase-in of a 3.75% budget neutrality adjustment which
would reduce LTAC hospital rates by 1.3% in 2013; and (2) restore a payment
reduction that would limit payments for very short-stay outliers that would
reduce the Company's LTAC hospital payments by approximately 0.5%. The 2012 CMS
Rule also (1) provides for a one-year extension of the existing moratorium on
the "25 Percent Rule" (described below) pending the results of an ongoing
research initiative to re-define the role of LTAC hospitals in the Medicare
program, and (2) allows for the expiration of the current moratorium on the
development or expansion of LTAC hospitals on December 29, 2012.
In aggregate, based upon its review of the 2012 CMS Rule, the Company expects
that LTAC Medicare payment rates will decline slightly in 2013 compared to
current rates. The 2012 CMS Rule does not include the impact of a 2%
sequestration payment reduction mandated by Congress that is expected to begin
in February 2013.
CMS is currently evaluating various certification criteria for designating a
hospital as a LTAC hospital. If such certification criteria were developed and
enacted into legislation, the Company's hospitals may not be able to maintain
their status as LTAC hospitals or may need to adjust their operations.
The SCHIP Extension Act became law on December 29, 2007. This legislation
provides for, among other things:
(1) a mandated study by the Secretary of Health and Human Services on the
establishment of LTAC hospital certification criteria;
(2) enhanced medical necessity review of LTAC hospital cases;
(3) a three-year moratorium on the establishment of a LTAC hospital or
satellite facility, subject to exceptions for facilities under
development;
(4) a three-year moratorium on an increase in the number of licensed beds at a
LTAC hospital or satellite facility, subject to exceptions for states
where there is only one other LTAC hospital and upon request following the
closure or decrease in the number of licensed beds at a LTAC hospital
within the state;
(5) a three-year moratorium on the application of a one-time budget neutrality
adjustment to payment rates to LTAC hospitals under LTAC PPS;
(6) a three-year moratorium on very short-stay outlier payment reductions to
LTAC hospitals initially implemented on May 1, 2007;
(7) a three-year moratorium on the application of the policy known as the "25
Percent Rule" to freestanding LTAC hospitals;
(8) a three-year period during which LTAC hospitals that are co-located with
another hospital may admit up to 50% of their patients from their
co-located hospital and still be paid according to LTAC PPS;
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Other Information (Continued)
Effects of inflation and changing prices (Continued)
(9) a three-year period during which LTAC hospitals that are co-located with
an urban single hospital or a hospital that generates more than 25% of the
Medicare discharges in a metropolitan statistical area ("MSA Dominant
hospital") may admit up to 75% of their patients from such urban single
hospital or MSA Dominant hospital and still be paid according to LTAC PPS;
and
(10) the elimination of the July 1, 2007 market basket increase in the
standard federal payment rate of 0.71%, effective for discharges
occurring on or after April 1, 2008.
The ACA revised certain provisions of the SCHIP Extension Act. The moratoriums
on the establishment of new LTAC hospitals or satellites and bed increases at
LTAC hospitals or satellites, the application of a one-time budget neutrality
adjustment to rates, the payment reductions due to the very short-stay outlier
provisions and application of the "25 Percent Rule" to freestanding hospitals
were extended from three years to five years. In addition, the periods during
which LTAC hospitals may admit up to 50% of their patients from co-located
hospitals and during which LTAC hospitals may admit up to 75% of their patients
from a MSA Dominant hospital were extended from three years to five years as
well. The 2012 CMS Rule extended by one additional year the moratorium on the
application of the "25 Percent Rule" to freestanding hospitals and added one
additional year during which LTAC hospitals may admit up to 50% of their
patients from co-located hospitals and during which LTAC hospitals may admit up
to 75% of their patients from a MSA Dominant hospital.
CMS has regulations governing payments to LTAC hospitals that are co-located
with another hospital (a "HIH"). The rules generally limit Medicare payments to
the HIH if the Medicare admissions to the HIH from its co-located hospital
exceed 25% of the total Medicare discharges for the HIH's cost reporting period,
the "25 Percent Rule." There are limited exceptions for admissions from rural,
urban single and MSA Dominant hospitals. Admissions that exceed this "25 Percent
Rule" are paid using the short-term acute care inpatient payment system
("IPPS"). Patients transferred after they have reached the short-term acute care
outlier payment status are not counted toward the admission threshold. Patients
admitted prior to meeting the admission threshold, as well as Medicare patients
admitted from a non co-located hospital, are eligible for the full payment under
LTAC PPS. If the HIH's admissions from the co-located hospital exceed the limit
in a cost reporting period, Medicare will pay the lesser of (1) the amount
payable under LTAC PPS or (2) the amount payable under IPPS. At June 30, 2012,
the Company operated 27 HIHs with 1,026 licensed beds.
On May 1, 2007, CMS issued regulatory changes regarding Medicare reimbursement
for LTAC hospitals (the "2007 Final Rule"). In the 2007 Final Rule, the "25
Percent Rule" was expanded to all LTAC hospitals, regardless of whether they are
co-located with another hospital. Under the 2007 Final Rule, all LTAC hospitals
were to be paid LTAC PPS rates for admissions from a single referral source up
to 25% of aggregate Medicare admissions. Patients reaching high cost outlier
status in the short-term hospital were not to be counted when computing the 25%
limit. Admissions beyond the 25% threshold were to be paid at a lower amount
based upon IPPS. However, as set forth above, the SCHIP Extension Act initially
placed a three-year moratorium on the expansion of the "25 Percent Rule" to
freestanding hospitals. That moratorium was extended to five years by the ACA.
This moratorium was further extended for one additional year under the 2012 CMS
Rule. In addition, the SCHIP Extension Act initially provided for a three-year
period during which (1) LTAC hospitals may admit up to 50% of their patients
from their co-located hospitals and still be paid according to LTAC PPS; and
(2) LTAC hospitals that are co-located with an urban single hospital or a MSA
Dominant hospital may admit up to 75% of their patients from such urban single
or MSA Dominant hospital and still be paid according to LTAC PPS. Those periods
also were extended to five years under the ACA and one additional year under the
2012 CMS Rule.
On July 30, 2010, CMS issued final regulations regarding Medicare reimbursement
for LTAC hospitals for the fiscal year beginning October 1, 2010. Included in
those final regulations is (1) a market basket increase to the standard federal
payment rate of 2.5%; (2) an offset of 2.5% applied to the standard federal
payment rate to account for the effect of documentation and coding changes;
(3) an offset of 0.5% applied to the standard federal payment
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Other Information (Continued)
Effects of inflation and changing prices (Continued)
rate as mandated by the ACA; (4) adjustments to area wage indexes; and (5) an
increase in the high cost outlier threshold per discharge to $18,785. CMS
indicated that all of these changes will result in a 0.5% increase to average
Medicare payments to LTAC hospitals.
On August 1, 2011, CMS issued final regulations regarding Medicare reimbursement
for LTAC hospitals for the fiscal year beginning October 1, 2011. Included in
the final regulations is (1) a market basket increase to the standard federal
payment rate of 2.9%; (2) offsets to the standard federal payment rate mandated
by the ACA of: (a) 1.0% to account for the effect of a productivity adjustment,
and (b) 0.1% as required by statute; (3) a wage level budget neutrality factor
of 0.99775 applied to the adjusted standard federal payment rate;
(4) adjustments to area wage indexes; and (5) a decrease in the high cost
outlier threshold per discharge to $17,931. CMS has projected the impact of
these changes will result in a 2.5% increase to average Medicare payments to
LTAC hospitals. Management believes that the impact of these changes to LTAC PPS
would result in an approximate 0.7% increase in payments to the Company's LTAC
hospitals.
On August 2, 2011, the Long-Term Care Hospital Improvement Act of 2011 was
introduced into the United States Senate (the "LTAC Legislation") and is
currently pending review by the United States Senate Finance Committee. If
enacted, the LTAC Legislation would implement new patient and facility criteria
for LTAC hospitals and alleviate the negative impact of various scheduled
Medicare reimbursement adjustments. The LTAC Legislation provides for patient
criteria to ensure that LTAC hospital patients are physician screened prior to
admission and throughout their stay for the appropriateness of their stay in a
LTAC hospital. In addition, facility criteria would establish common
requirements for the programmatic, personnel and clinical operations of a LTAC
hospital. The LTAC Legislation further provides that at least 70% of patients
must be medically complex in order for a hospital to maintain its Medicare
certification as a LTAC hospital. The LTAC Legislation also would repeal the "25
Percent Rule" for all LTAC hospitals, the scheduled very short-stay outlier
payment reductions and the one-time budget neutrality adjustment requirement.
There can be no assurances that the LTAC Legislation will be enacted in its
current form or at all.
The Company cannot predict the ultimate long-term impact of LTAC PPS. This
payment system is subject to significant change. Slight variations in patient
acuity or length of stay could significantly change Medicare revenues generated
under LTAC PPS. In addition, the Company's hospitals may not be able to
appropriately adjust their operating costs to changes in patient acuity and
length of stay or to changes in reimbursement rates. In addition, there can be
no assurance that LTAC PPS will not have a material adverse effect on revenues
from commercial third party payors. Various factors, including a reduction in
average length of stay, have negatively impacted revenues from commercial third
party payors in recent years.
On July 29, 2011, CMS issued final regulations regarding Medicare reimbursement
for IRFs for the fiscal year beginning October 1, 2011. Included in these final
regulations are (1) a market basket increase to the standard payment conversion
factor of 2.9%; (2) offsets to the standard payment conversion factor mandated
by the ACA of: (a) 1.0% to account for the effect of a productivity adjustment,
and (b) 0.1% as required by statute; (3) a wage level budget neutrality factor
of 0.9988 applied to the standard payment conversion factor; (4) a case mix
group budget neutrality factor of 0.9988 applied to the standard payment
conversion factor; (5) adjustments to area wage indexes; and (6) a decrease in
the high cost outlier threshold per discharge to $10,660. CMS has projected the
impact of these changes will result in a 2.2% increase to average Medicare
payments to IRFs.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Other Information (Continued)
Effects of inflation and changing prices (Continued)
On July 25, 2012, CMS issued final regulations regarding Medicare reimbursement
for IRFs for the fiscal year beginning October 1, 2012. Included in these final
regulations are (1) a market basket increase to the standard payment conversion
factor of 2.7%; (2) offsets to the standard payment conversion factor mandated
by the ACA of: (a) 0.7% to account for the effect of a productivity adjustment,
and (b) 0.1% as required by statute; (3) adjustments to area wage indexes; and
(4) a decrease in the high cost outlier threshold per discharge to $10,466. CMS
has projected the impact of these changes will result in a 2.1% increase to
average Medicare payments to IRFs.
On July 16, 2010, CMS issued a notice that updates the payment rates for nursing
centers for the fiscal year beginning October 1, 2010. That notice provided for
an increase in rates of 1.7%, which is comprised of a market basket increase of
2.3% less a forecast error adjustment of 0.6%. In addition, for the fiscal year
beginning October 1, 2010, CMS increased the number of resource utilization
group ("RUG") categories for nursing centers from 53 to 66 (i.e., RUGs IV) and
amended the criteria, including the provision of therapy services, used to
classify patients into these categories. CMS indicated that these changes would
be enacted in a budget neutral manner. CMS began paying claims using the RUGs IV
system effective October 1, 2010. Based upon management's experience, these
final regulations resulted in increased payments to the Company for the federal
fiscal year ending September 30, 2011. The therapy time requirements to qualify
for rehabilitation RUG categories are unchanged under RUGs IV, however the
regulatory changes altered how minutes were allocated to calculate the RUGs
scores using the most recent clinical assessment tool of the minimum data set
("MDS 3.0"). Rather than count all therapy time that a nursing center patient
receives, rehabilitation providers must now allocate therapy minutes between the
patients being served during concurrent therapy sessions. In addition, the
number of patients that a therapist/assistant may treat concurrently is limited
to two patients. These changes have required the Company to employ more
therapists to provide additional individual therapy minutes.
CMS issued the 2011 CMS Rules on July 29, 2011, updating Medicare payment rates
for skilled nursing centers effective October 1, 2011. The 2011 CMS Rules impose
(1) a negative adjustment to RUGs IV therapy rates, and (2) a net market basket
increase of 1.7% consisting of (a) a 2.7% market basket inflation increase, less
(b) a 1.0% adjustment to account for the effect of a productivity
adjustment. CMS has projected the impact of these changes will result in an
11.1% decrease in payments to skilled nursing and rehabilitation centers. In
addition to these rate changes, the 2011 CMS Rules introduced additional changes
to RUG calculations along with adding additional patient assessments. Under the
2011 CMS Rules, group therapy is defined as therapy sessions with four patients
who are performing similar therapy activities. In addition, for purposes of
assigning patients to RUGs IV payment categories, the minutes of group therapy
are divided by four with 25% of the minutes being allocated to each patient. The
2011 CMS Rules also clarify the circumstances for reporting breaks in care of
three or more days of therapy and also implement a new change of therapy
assessment that is designed to allocate the patient to the RUG level that
represents the treatment provided in the last seven days. Both changes are
likely to produce alterations in the RUG scores billed for the patient along
with generating additional patient assessments. The Company's rehabilitation
division has hired additional therapists to facilitate the provision of
additional individual minutes to address patient needs. The Company believes
that the 2011 CMS Rules could reduce its annual revenues by approximately $100
million to $110 million in the Company's nursing center business and negatively
impact the Company's rehabilitation therapy business by approximately
$40 million to $50 million on an annual basis.
In February 2012, Congress passed the Job Creation Act of 2012 which provides
for reductions in reimbursement of Medicare bad debts at the Company's nursing
and rehabilitation centers. The Job Creation Act of 2012 provides for a phase-in
of the reduction in the rate of reimbursement for bad debts of patients that are
dually eligible for Medicare and Medicaid. The rate of reimbursement will be
reduced from 100% to 88%, then 76% and then 65% for cost reporting periods
beginning on or after October 1, 2012, October 1, 2013, and October 1, 2014,
respectively. The rate of reimbursement for patients not dually eligible for
both Medicare and Medicaid will be reduced from 70% to 65%, effective with cost
reporting periods beginning on or after October 1, 2012. Approximately 90% of
the Company's Medicare bad debt reimbursements are associated with patients that
are dually eligible.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
Other Information (Continued)
Effects of inflation and changing prices (Continued)
On July 27, 2012, CMS issued final regulations updating Medicare payment rates
for skilled nursing and rehabilitation centers effective October 1, 2012. These
final regulations implement a net market basket increase of 1.8% consisting of
(1) a 2.5% market basket inflation increase, less (2) a 0.7% adjustment to
account for the effect of a productivity adjustment.
Medicare Part B provides reimbursement for certain physician services, limited
drug coverage and other outpatient services, such as therapy and other services,
outside of a Medicare Part A covered patient stay. Payment for these services is
determined according to the Medicare Physician Fee Schedule ("MPFS"). Annually
since 1997, the MPFS has been subject to a sustainable growth rate adjustment
("SGR"), intended to keep spending growth in line with allowable spending. Each
year since the SGR was enacted, this adjustment produced a scheduled negative
update to payment for physicians, therapists and other healthcare providers paid
under the MPFS. Annually, since 2002, Congress has stepped in with so-called
"doc fix" legislation to stop payment cuts to physicians. In February 2012,
Congress passed the Job Creation Act of 2012 which further suspended the payment
cut until December 31, 2012.
Since 2006, federal legislation has provided for an annual Medicare Part B
outpatient therapy cap. In succeeding years, CMS subsequently increased the
amount of the therapy cap. Legislation also was passed that required CMS to
implement a broad process for reviewing medically necessary therapy claims,
creating an exception to the cap. Legislation has annually extended the Medicare
Part B outpatient therapy cap exception process. The Job Creation Act of 2012
further extended the therapy cap exception process through December 31, 2012.
Patients in the Company's facilities whose stay is not reimbursed by Medicare
must seek reimbursement for their therapy under Medicare Part B and are subject
to the therapy cap.
Effective January 1, 2011, reimbursement rates for Medicare Part B therapy
services included in the MPFS were reduced for secondary procedures when
multiple therapy services are provided on the same day. CMS projected that the
rule would result in an approximate 7% rate reduction for Medicare Part B
therapy services in calendar year 2011. The Company estimated that this rule
reduced its Medicare revenues related to Part B therapy services by
approximately $7 million in 2011.
On July 24, 2012, CMS issued final regulations regarding Medicare payment rates
for hospice providers effective October 1, 2012. These final regulations
implement a net market basket increase of 1.6% consisting of: (1) a 2.6% market
basket inflation increase, less (2) offsets to the standard payment conversion
factor mandated by the ACA of: (a) a 0.7% adjustment to account for the effect
of a productivity adjustment, and (b) 0.3% as required by statute. CMS has
projected the impact of these changes will result in a 0.9% increase in payments
to hospice providers.
The Company believes that its operating margins will continue to be under
pressure as the growth in operating expenses, particularly professional
liability, labor and employee benefits costs, exceeds payment increases from
third party payors. In addition, as a result of competitive pressures, the
Company's ability to maintain operating margins through price increases to
private patients is limited.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
