This Management's Discussion and Analysis of Financial Condition and Results of
Operations is intended to assist in understanding and assessing the trends and
significant changes in our results of operations and financial condition as of
the dates and for the periods presented. Historical results may not indicate
future performance. Our forward-looking statements, which reflect our current
views about future events, are based on assumptions and are subject to known and
unknown risks and uncertainties that could cause actual results to differ
materially from those contemplated by these statements. Factors that may cause
differences between actual results and those contemplated by forward-looking
statements include, but are not limited to, those discussed in our Annual Report
on Form 10-K for the year ended December 31, 2011 and our subsequent reports on
Form 10-Q and Form 8-K filed with the Securities and Exchange Commission (the
"SEC"). As used in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, the words, "we," "our," and "us" refer to
Skilled Healthcare Group, Inc. and its wholly-owned subsidiaries. This
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with our condensed consolidated
financial statements and related notes included in this report.
Business Overview
We are a holding company with subsidiaries that operate skilled nursing
facilities, assisted living facilities, hospices, home health providers and a
rehabilitation therapy business. We have an administrative service company that
provides a full complement of administrative and consultative services that
allows our affiliated operators and third-party operators with
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whom we contract to better focus on delivery of healthcare services. We have one
such service agreement with an unrelated facility operator. These subsidiaries
focus on providing high-quality care to our patients. Our subsidiaries that
operate skilled nursing facilities have a strong commitment to treating patients
who require a high level of skilled nursing care and extensive rehabilitation
therapy, whom we refer to as high-acuity patients. As of June 30, 2012, we owned
or leased 74 skilled nursing facilities and 22 assisted living facilities,
together comprising 10,409 licensed beds. We also lease five skilled nursing
facilities in California to an unaffiliated third party operator. Our skilled
nursing and assisted living facilities, approximately 77.2% of which we own, are
located in California, Texas, Iowa, Kansas, Missouri, Nebraska, Nevada and New
Mexico, and are generally clustered in large urban or suburban markets. For the
six months ended June 30, 2012, we generated approximately 72.2% of our revenue
from our skilled nursing facilities, including our integrated rehabilitation
therapy services at these facilities. The remainder of our revenue is generated
from our assisted living services, rehabilitation therapy services provided to
third-party facilities, hospice care and home health services, and or lease of
five skilled nursing facilities to an unaffiliated third party operators.
Revisions to Prior Period Amounts
We recently identified errors related to certain claims under Medicare Part B
for blood glucose testing at certain of our affiliated companies. Although blood
glucose tests are routinely ordered by physicians to safely monitor vulnerable
patients' blood glucose levels, effective January 1, 2007, CMS redefined the
criteria for "medical necessity" before a Medicare claim for such a test is
payable. The new criteria specifies the nature of a physician order for the
blood glucose test, the frequency of a physician's review of the test results
and the frequency of a physician's utilization of the test results in the
patient's plan of care or treatments. The documentation and other requirements
for Medicare Part B billing of blood glucose testing that took effect in January
2007 significantly limited the number of blood glucose tests that are
reimbursable compared to those that were previously reimbursable. Our internal
policies changed at the time to be consistent with new Medicare regulations.
Subsequent to January 1, 2007, a number of our affiliated companies incorrectly
continued to bill Medicare under the rules that existed prior to January 1,
2007. The billing errors resulted in a cumulative overstatement of consolidated
revenue in the amount of $5.8 million for the period from January 1, 2007 to
December 31, 2011. The affiliated companies submitted approximately 30,000
claims related to blood glucose testing in the affected period that were not
reimbursable under the revised standard. The affected providers have refunded
all previously paid post 2006 Medicare Part B claims for blood glucose tests.
In accordance with Financial Accounting Standards Board ("FASB") Accounting
Standards Codification ("ASC") No. 250-10-S99 ("ASC 250-10-S99"), we evaluated
these refunds and, based on an analysis of quantitative and qualitative factors,
determined that they were not material to any of the prior reporting periods
affected and, therefore, amendment of previously filed reports with the
Securities and Exchange Commission was not required. However, if the adjustments
to correct the cumulative effect of the aforementioned refunds had been recorded
in the three and six months ended June 30, 2012, the impact would have been
material to those two periods. Therefore, as required by Staff Accounting
Bulletin ("SAB") 108, we have revised in this filing previously reported
financial information for the fiscal years ended December 31, 2011, 2010, 2009,
2008, and 2007, and for the quarterly periods in fiscal years 2011 and 2010.
Also, in accordance with SAB 108, we will include this revised financial
information when we file subsequent reports on Form 10-Q and Form 10-K or files
a registration statement under the Securities Act of 1933, as amended.
The prior period financial statements included in this filing have been revised
to reflect the correction of the aforementioned errors, see Note 2 - "Correction
of Previously Issued Consolidated Financial Statements," to our Condensed
Consolidated Financial Statements included in Item 1 for additional information
on these revisions. The condensed consolidated statement of operations for the
quarter ended March 31, 2012 has not been restated. Revenue for the quarter
ended March 31, 2012 was overstated by $0.3 million. This correction has been
recorded as an adjustment to revenue in the quarter ended June 30, 2012, as this
amount was not material to the operating results for the period then ended.
Despite the fact that our affected subsidiaries have refunded all of the
reimbursements they received in connection with the Medicare Part B claims for
all blood glucose tests after January 1, 2007, some refunded claims could
nonetheless potentially lead to allegations that any of the affected
subsidiaries are subject to sanctions under the Federal False Claims Act or the
Federal Civil Monetary Penalties Law. Such sanctions could lead to any
combination of a variety of criminal, civil and administrative penalties, which
could be material both individually and in the aggregate. We cannot determine
the likelihood that any penalties might be imposed related to this refund and
has not accrued for any such penalties. See "Revenue we receive from Medicare
and Medicaid is subject to potential retroactive reduction or repayment" in Part
II, Item 1A of this report for additional information.
Industry Trends
Medicare and Medicaid Reimbursement
Rising healthcare costs due to a variety of factors, including an aging
population and increasing life expectancies, has in
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recent years increased demand for post-acute healthcare services, such as
skilled nursing, assisted living, home health care, hospice care and
rehabilitation therapy. In an effort to mitigate the cost of providing
healthcare benefits, third party payors including Medicare, Medicaid, managed
care providers, insurance companies and others have increasingly encouraged the
treatment of patients in lower-cost care settings. As a result, in recent years
skilled nursing facilities, which typically have significantly lower cost
structures than acute care hospitals and certain other post-acute care settings,
have generally been serving larger populations of higher-acuity patients than in
the past. Despite this growth in demand, uncertainty over Medicare and Medicaid
reimbursement rates persists. Medicare and Medicaid reimbursement rates are
subject to change from time to time and, because revenue derived directly or
indirectly from Medicare and Medicaid reimbursement has historically comprised
the most significant portion of our consolidated revenue, a reduction in rates
could materially and adversely impact our revenue.
Medicare reimburses our skilled nursing facilities under a prospective payment
system ("PPS") for certain inpatient covered services. Under the PPS, facilities
are paid a predetermined amount per patient, per day, based on the anticipated
costs of treating patients. The amount to be paid is determined by classifying
each patient into a resource utilization group ("RUG") category that is based
upon each patient's acuity level. In October 2010, the number of RUG categories
was expanded from 53 to 66 as part of the implementation of the RUGs IV system
and the introduction of a revised and substantially expanded patient assessment
tool called the minimum data set (MDS) version 3.0.
On July 29, 2011, the Centers for Medicare & Medicaid Services ("CMS") issued a
final rule providing for, among other things, a net 11.1% reduction in PPS
payments to skilled nursing facilities for CMS's fiscal year 2012 (which began
October 1, 2011) as compared to PPS payments in CMS's fiscal year 2011 (which
ended September 30, 2011). The 11.1% reduction was on a net basis, after the
application of a 2.7% market basket increase, and reduced by a 1.0% multi-factor
productivity adjustment required by the Patient Protection and Affordable Care
Act of 2010 ("PPACA"). The final CMS rule also adjusted the method by which
group therapy is counted for reimbursement purposes, and changed the timing in
which patients who are receiving therapy must be reassessed for purposes of
determining their RUG category.
On July 27, 2012, CMS issued a final rule providing for, among other things, a
net 1.8% increase in PPS payments to skilled nursing facilities for CMS's fiscal
year 2013 (which begins October 1, 2012) as compared to PPS payments in CMS's
fiscal year 2012 (which ends September 30, 2012). The 1.8% increase was on a net
basis, after the application of a 2.5% market basket increase, and reduced by a
0.7% multi-factor productivity adjustment required by PPACA.
In July 2012, CMS issued its final rule for hospice services its the 2013 fiscal
year. The rule includes a market basket increase of 2.6% less 0.3% reduction in
the market basket as a result of the ACA and a 0.7% reduction due to
productivity adjustment. After adjusting for the wage index in our hospice
agencies, we estimate that the net impact on our hospice service operations will
be a decrease of 0.7% in our reimbursement rates effective October 1, 2012.
Should future changes in PPS include further reduced rates or increased
standards for reaching certain reimbursement levels (including as a result of
automatic cuts tied to federal deficit cut efforts or otherwise), our Medicare
revenues derived from our skilled nursing facilities (including rehabilitation
therapy services provided at our skilled nursing facilities) could be reduced,
with a corresponding adverse impact on our financial condition and results of
operation. Our rehabilitation therapy, hospice and home health care businesses
are also to a large degree directly or indirectly dependent on (and therefore
affected by changes in) Medicare and Medicaid reimbursement rates. For example,
our rehabilitation therapy business may have difficulty increasing or
maintaining the rates it has negotiated with third party nursing facilities in
light of the reduced PPS reimbursement rates that took effect on October 1, 2011
as discussed above or future reductions in reimbursement rates.
We also derive a substantial portion of our consolidated revenue from Medicaid
reimbursement, primarily through our skilled nursing business. Medicaid programs
are administered by the applicable states and financed by both state and federal
funds. Medicaid spending nationally has increased substantially in recent years,
becoming an increasingly significant component of state budgets. This, combined
with slower state revenue growth and other state budget demands, has led both
the federal government and many states, including California and other states in
which we operate, to institute measures aimed at controlling the growth of
Medicaid spending (and in some instances reducing it).
Historically, adjustments to reimbursement under Medicare and Medicaid have had
a significant effect on our revenue and results of operations. Recently enacted,
pending and proposed legislation and administrative rulemaking at the federal
and state levels could have similar effects on our business. Efforts to impose
reduced reimbursement rates, greater discounts and more stringent cost controls
by government and other payors are expected to continue for the foreseeable
future and could adversely affect our business, financial condition and results
of operations. Additionally, any delay or default by the federal or state
governments in making Medicare and/or Medicaid reimbursement payments could
materially and adversely affect our business, financial condition and results of
operations.
Federal Health Care Reform
In addition to the matters described above affecting Medicare and Medicaid
participating providers, PPACA enacted several reforms with respect to skilled
nursing facilities, home health agencies and hospices, including payment
measures to
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realize significant savings of federal and state funds by deterring and
prosecuting fraud and abuse in both the Medicare and Medicaid programs. While
many of the provisions of PPACA will not take effect for several years or are
subject to further refinement through the promulgation of regulations, some key
provisions of PPACA are presently effective.
• Enhanced CMPs and Escrow Provisions. PPACA includes expanded civil
monetary penalty ("CMP") and related provisions applicable to all
Medicare and Medicaid providers. CMS rules adopted to
implement
applicable provisions of PPACA also provide that assessed CMPs may
be collected and placed in whole or in part into an escrow pending
final disposition of the applicable administrative and
judicial
appeals processes. To the extent our businesses are assessed large
CMPs that are collected and placed into an escrow account pending
lengthy appeals, such actions could adversely affect our results of
operations.
• Nursing Home Transparency Requirements. In addition to expanded CMP
provisions, PPACA imposes new transparency requirements for
Medicare-participating nursing facilities. In addition to previously
required disclosures regarding a facility's owners, management and
secured creditors, PPACA expanded the required disclosures to
include information regarding the facility's organizational
structure, additional information on officers, directors, trustees
and "managing employees" of the facility (including their names,
titles, and start dates of services), and information regarding
certain parties affiliated with the facility. The transparency
provisions could result in the potential for greater government
scrutiny and oversight of the ownership and investmentstructure for
skilled nursing facilities, as well as more extensive
disclosure of
entities and individuals that comprise part of skilled nursing
facilities' ownership and management structure.
• Face-to-Face Encounter Requirements. PPACA imposes new patient
face-to-face encounter requirements on home health agencies and
hospices to establish a patient's ongoing eligibility for Medicare
home health services or hospice services, as applicable. A
certifying physician or other designated health careprofessional
must conduct the face-to-face encounters within specified
timeframes, and failure of the face-to-face encounter to occur and
be properly documented during the applicable timeframes could render
the patient's care ineligible for reimbursement under Medicare.
• Suspension of Payments During Pending Fraud Investigations. PPACA
provides the federal government with expanded authority to suspend
Medicare and Medicaid payment if a provider is investigated for
allegations or issues of fraud. This suspension authority creates a
new mechanism for the federal government to suspend both Medicare
and Medicaid payments for allegations of fraud, independent of
whether a state exercises its authority to suspend Medicaid payments
pending a fraud investigation. To the extent the suspension of
payments provision is applied to one of our businesses for
allegations of fraud, such a suspension could adversely affect our
results of operations.
• Overpayment Reporting and Repayment; Expanded False Claims Act
Liability. PPACA enacted several important changes that expand
potential liability under the federal False Claims Act.Overpayments
related to services provided to both Medicare and Medicaid
beneficiaries must be reported and returned to the applicable payor
within specified deadlines, or else they are considered
obligations
of the provider for purposes of the federal False Claims Act. This
new provision substantially tightens the repayment and
reporting
requirements generally associated with operations of health care
providers to avoid False Claims Act exposure.
• Home and Community Based Services. PPACA provides thatstates can
provide home and community-based attendant services and supports
through the Community First Choice State plan option. States
choosing to provide home and community based services under this
option must make them available to assist with activities of daily
living, instrumental activities of daily living and health related
tasks under a plan of care agreed upon by the individual and his/her
representative. For states that elect to make coverage of home and
community-based services available through the Community First
Choice State plan option, the percentage of the state's Medicaid
expenses paid by the federal government will increase by 6
percentage points. PPACA also includes additional measures related
to the expansion of community and home based services andauthorizes
states to expand coverage of community and home-based services to
individuals who would not otherwise be eligible for them. The
expansion of home-and-community based services could reduce the
demand for the facility based services that we provide.
• Health Care-Acquired Conditions. PPACA provides that theSecretary
of Health and Human Services must prohibit payments to states for
any amounts expended for providing medical assistance for certain
medical conditions acquired during the patient's receipt of health
care services. CMS adopted a final rule to implement this
provision
of PPACA in the third quarter of 2011. The rule prohibits states
from making payments to providers under the Medicaid program for
conditions that are deemed to be reasonably preventable. It uses
Medicare's list of preventable conditions in inpatienthospital
settings as the base (adjusted for the differences in the Medicare
and Medicaid populations) and provides states the flexibility to
identify additional preventable conditions and settings for which
Medicaid payment will be denied.
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• Value-Based Purchasing. PPACA requires the Secretary of Health and
Human Services to develop a plan to implement a value-based
purchasing ("VBP") program for payments under the Medicare program
for skilled nursing facilities and to submit a report
containing the
plan to Congress. The intent of the provision is to potentially
reconfigure how Medicare pays for health care services, moving the
program towards rewarding better value, outcomes, and
innovations,
instead of volume. According to the plan submitted to Congress in
June 2012, the funding for the VBP program could come from payment
withholds from poor-performing skilled nursing facilities or by
holding back a portion of the base payment rate or the annual update
for all skilled nursing facilities. If a VBP program is ultimately
implemented, it is uncertain what effect it would have upon skilled
nursing facilities, but its funding or other provisions could
negatively affect skilled nursing facilities.
• Anti-Kickback Statute Amendments. PPACA amended the
Anti-Kickback
Statute so that (i) a claim that includes items or services
violating the Anti-Kickback Statute also would constitute a false or
fraudulent claim under the federal False Claims Act and (ii) the
intent required to violate the Anti-Kickback Statute islowered such
that a person need not have actual knowledge or specific intent to
violate the Anti-Kickback Statute in order for a violation to be
deemed to have occurred. These modifications of theAnti-Kickback
Statute could expose us to greater risk of inadvertent
violations of
the statute and to related liability under the federal False Claims
Act.
The provisions of PPACA discussed above are examples of recently-enacted federal
health reform provisions that we believe may have a material impact on the
long-term care profession generally and on our business. However, the foregoing
discussion is not intended to constitute, nor does it constitute, an exhaustive
review and discussion of PPACA. It is possible that other provisions of PPACA
may be interpreted, clarified, or applied to our businesses in a way that could
have a material adverse impact on our business, financial condition and results
of operations. Similar federal and/or state legislation that may be adopted in
the future could have similar effects.
Revenue
Revenue by Service Offering
We operate our business in three reportable operating segments: (i) long-term
care services, which includes the operation skilled nursing and assisted living
facilities and is the most significant portion of our business; (ii) our
rehabilitation therapy services business; and (iii) our hospice and home health
businesses. Our reporting segments are business units that offer different
services, and that are managed separately due to the nature of services
provided.
In our long-term care services segment, we derive the majority of our revenue by
providing skilled nursing care and integrated rehabilitation therapy services to
residents in our affiliated skilled nursing facilities. The remainder of our
long-term care segment revenue is generated by our assisted living facilities,
by our administration of an unaffiliated third party skilled nursing facility,
and from our leasing of five skilled nursing facilities to an unaffiliated third
party operator. In our therapy services segment, we derive revenue by providing
rehabilitation therapy services to third-party facilities. In our hospice and
home health services segment, we provide hospice and home health services.
The following table shows the revenue and percentage of our total revenue
generated by each of these segments for the periods presented (dollars in
thousands):
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Three Months Ended June 30,
2012 2011
Revenue Revenue Revenue Revenue Increase/(Decrease)
Dollars Percentage Dollars Percentage Dollars Percentage
Long-term care
services:
Skilled nursing
facilities $ 156,267 71.9 % $ 164,899 76.6 % $ (8,632 ) (5.2 )%
Assisted living
facilities 6,895 3.2 6,737 3.1 158 2.3
Administration of
third party
facility 125 0.1 291 0.1 (166 ) (57.0 )
Facility lease
revenue 768 0.3 746 0.4 22 2.9
Total long-term
care services 164,055 75.5 172,673 80.2 (8,618 ) (5.0 )
Therapy services:
Third-party
rehabilitation
therapy services 26,385 12.1 23,703 11.0 2,682 11.3
Total therapy
services 26,385 12.1 23,703 11.0 2,682 11.3
Hospice & home
health services:
Hospice 20,576 9.5 15,832 7.4 4,744 30.0
Home Health 6,359 2.9 3,035 1.4 3,324 109.5
Total hospice &
home health
services 26,935 12.4 18,867 8.8 8,068 42.8
Total $ 217,375 100.0 % $ 215,243 100.0 % $ 2,132 1.0 %
Six Months Ended June 30,
2012 2011
Revenue Revenue Revenue Revenue Increase/(Decrease)
Dollars Percentage Dollars Percentage Dollars Percentage
Long-term care
services:
Skilled nursing
facilities $ 315,251 72.2 % $ 339,945 77.7 % $ (24,694 ) (7.3 )%
Assisted living
facilities 13,809 3.2 13,461 3.1 348 2.6
Administration of
third party
facility 565 0.1 546 0.1 19 3.5
Facility lease
revenue 1,522 0.3 746 0.2 776 104.0
Total long-term
care services 331,147 75.8 354,698 81.1 (23,551 ) (6.6 )
Therapy services:
Third-party
rehabilitation
therapy services 52,501 12.1 45,893 10.5 6,608 14.4
Total therapy
services 52,501 12.1 45,893 10.5 6,608 14.4
Hospice & home
health services:
Hospice 40,330 9.2 30,159 6.9 10,171 33.7
Home Health 12,810 2.9 6,773 1.5 6,037 89.1
Total hospice &
home health
services 53,140 12.1 36,932 8.4 16,208 43.9
Total $ 436,788 100.0 % $ 437,523 100.0 % $ (735 ) (0.2 )%
Sources of Revenue
The following table sets forth revenue consolidated by state in dollars and as a
percentage of total revenue for the periods presented (dollars in thousands):
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Three Months Ended June 30,
2012 2011
Percentage of Percentage of
Revenue Dollars Revenue Revenue Dollars Revenue
California $ 88,694 40.8 % $ 87,759 40.8 %
Texas 44,134 20.3 46,293 21.5
New Mexico 24,299 11.2 22,682 10.5
Nevada 16,209 7.5 14,706 6.8
Kansas 15,690 7.2 16,434 7.6
Missouri 14,286 6.6 15,583 7.2
Montana 3,996 1.8 3,189 1.5
Arizona 3,044 1.4 2,594 1.2
Iowa 2,739 1.3 2,683 1.3
Idaho 2,474 1.1 2,250 1.0
Nebraska 1,083 0.5 804 0.5
Other 727 0.3 266 0.1
Total $ 217,375 100.0 % $ 215,243 100.0 %
Six Months Ended June 30,
2012 2011
Percentage of Percentage of
Revenue Dollars Revenue Revenue Dollars Revenue
California $ 176,922 40.5 % $ 182,696 41.8 %
Texas 89,794 20.6 92,402 21.1
New Mexico 48,900 11.2 44,853 10.3
Nevada 31,557 7.2 29,425 6.7
Kansas 31,393 7.2 34,246 7.8
Missouri 29,406 6.7 30,902 7.1
Montana 7,637 1.8 6,064 1.4
Arizona 7,042 1.6 5,487 1.3
Iowa 5,666 1.3 5,654 1.3
Idaho 4,897 1.1 4,441 1.0
Nebraska 1,942 0.4 804 0.2
Other 1,632 0.4 549 0.1
Total $ 436,788 100.0 % $ 437,523 100.0 %
Long-Term Care Services Segment
Skilled Nursing Facilities. Within our skilled nursing facilities, we generate
our revenue from Medicare, Medicaid, managed care providers, insurers, private
pay and other sources. We believe that our skilled mix, which we define as the
number of Medicare and non-Medicaid managed care patient days at our skilled
nursing facilities divided by the total number of patient days at our skilled
nursing facilities for any given period, is an important indicator of our
success in attracting high-acuity patients because it represents the percentage
of our patients who are reimbursed by Medicare and managed care payors, for whom
we receive higher reimbursement rates. Most of our skilled nursing facilities
include our Express RecoveryTM program. This program uses a dedicated unit
within a skilled nursing facility to deliver a comprehensive rehabilitation and
recovery regimen in accommodations specifically designed to serve high-acuity
patients.
Assisted Living Facilities. Within our assisted living facilities, which are
mostly in Kansas, we generate our revenue primarily from private pay sources,
with a small portion earned from Medicaid or other state-specific programs.
Leased Facility Revenue. We lease five skilled nursing facilities in California
to an unaffiliated third party operator. For additional information on the lease
arrangement, see Note 6 - "Property and Equipment."
Therapy Services Segment
As of June 30, 2012, we provided rehabilitation therapy services to a total of
182 healthcare facilities, including 64 of our
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facilities, as compared to 176 facilities, including 64 of our facilities, as of
June 30, 2011. In addition, we have contracts to manage the rehabilitation
therapy services for our 10 healthcare facilities in New Mexico. The net
increase of 6 facilities serviced was comprised of 28 new facilities serviced,
net of 22 cancellations. Rehabilitation therapy revenue derived from servicing
our own facilities is included in our revenue from skilled nursing facilities.
Our rehabilitation therapy business receives payment for services from the
third-party facilities that it serves based on negotiated patient per diem rates
or a negotiated fee schedule based on the type of service rendered. As of June
30, 2012, we provided rehabilitation therapy services to facilities in
California, Nevada, New Mexico, Texas, Missouri, Nebraska, Iowa, and Indiana.
Hospice and Home Health Services Segment
Hospice. As of June 30, 2012, we provided hospice care in Arizona, California,
Idaho, Montana, Nevada and New Mexico. We derive substantially all of the
revenue from our hospice business from Medicare and managed care reimbursement.
Federal law imposes a Medicare payment cap on hospice service programs. We
monitor the impact of the Medicare cap on our hospice business by attempting to
address our average length-of-stay on an agency-by-agency basis. A key component
of this strategy is to analyze each hospice agency's mix of patients and
referral sources to achieve a desirable mix of the types of patients and
referral sources that we serve in each of our agencies.
Home Health. We provided home health care in Arizona, California, Idaho,
Montana, Nevada and New Mexico as of June 30, 2012. We derive the majority of
the revenue from our home health business from Medicare. Net service revenue is
recorded under the Medicare payment program based on a 60-day episodic payment
rate that is subject to downward adjustment based on certain variables.
Regulatory and Other Governmental Actions Affecting Revenue
We derive a substantial portion of our revenue from government Medicare and
Medicaid programs. In addition, our rehabilitation therapy services, for which
we receive payment from private payors, is significantly dependent on Medicare
and Medicaid funding, as those private payors are primarily funded or reimbursed
by these programs. The following table summarizes the amount of revenue that we
received from each of our payor classes by segment in the periods presented
(dollars in thousands):
Three Months Ended June 30,
2012 2011
Hospice & Home
Long-Term Therapy Hospice & Home Revenue Long-Term Therapy Health Revenue
Care Services Services Health Services Total Revenue Percentage Care Services Services Services Total
Revenue Percentage
Medicare
Part A $ 45,476 $ - $ 23,299 $ 68,775 31.6 % $ 58,617 $ - $ 17,809 $ 76,426 35.5 %
Medicare
Part B 4,806 - - 4,806 2.2 5,605 - - 5,605 2.6
Medicaid 64,159 - 639 64,798 29.8 61,215 - 275 61,490 28.6
Subtotal
Medicare
and
Medicaid 114,441 - 23,938 138,379 63.6 125,437 - 18,084 143,521 66.7
Managed
Care
Part A 23,302 - 1,153 24,455 11.3 20,489 - 108 20,597 9.6
Managed
Care
Part B 542 - - 542 0.2 443 - - 443 0.2
Private
pay and
other 25,770 26,385 1,844 53,999 24.9 26,304 23,703 675 50,682 23.5
Total $ 164,055 $ 26,385 $ 26,935 $ 217,375 100.0 % $ 172,673 $ 23,703 $ 18,867 $ 215,243 100.0 %
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Six Months Ended June 30,
2012 2011
Hospice & Home
Long-Term Therapy Hospice & Home Revenue Long-Term Therapy Health Revenue
Care Services Services Health Services Total Revenue Percentage Care Services Services Services TotalRevenue Percentage
Medicare
Part A $ 94,663 $ - $ 46,541 $ 141,204 32.3 % $ 126,560 $ - $ 34,710 $ 161,270 36.8 %
Medicare
Part B 9,076 - - 9,076 2.1 8,299 - - 8,299 1.9
Medicaid 129,003 - 1,058 130,061 29.8 125,037 - 484 125,521 28.7
Subtotal
Medicare
and
Medicaid 232,742 - 47,599 280,341 64.2 259,896 - 35,194 295,090 67.4
Managed
Care
Part A 46,216 - 2,258 48,474 11.1 42,491 - 299 42,790 9.8
Managed
Care
Part B 1,001 - - 1,001 0.2 826 - - 826 0.2
Private
pay and
other 51,188 52,501 3,283 106,972 24.5 51,485 45,893 1,439 98,817 22.6
Total $ 331,147 $ 52,501 $ 53,140 $ 436,788 100.0 % $ 354,698 $ 45,893 $ 36,932 $ 437,523 100.0 %
Medicare. Medicare is a federal health insurance program for people age 65 or
older, people under age 65 with certain disabilities, and people of all ages
with End-Stage Renal Disease. Part A of the Medicare program includes hospital
insurance that helps to cover hospital inpatient care and skilled nursing
facility inpatient care under certain circumstances (e.g., up to 100 days of
inpatient skilled nursing coverage following a 3-day qualifying hospital stay,
and no custodial or long-term care). It also helps cover hospice care and some
home health care. Skilled nursing facilities are paid under Medicare Part A on
the basis of a prospective payment system, or PPS. The PPS payment rates are
adjusted for case mix and geographic variation in wages and cover all costs of
furnishing covered skilled nursing facilities services (routine, ancillary, and
capital-related costs). The amount to be paid is determined by classifying each
patient into a resource utilization group, or RUG, category, which is based upon
the patient's acuity level. CMS generally evaluates and adjusts payment rates on
an annual basis.
Medicaid. Medicaid is a state-administered medical assistance program for the
indigent, operated by the individual states with the financial participation of
the federal government. Each state has relatively broad discretion in
establishing its Medicaid reimbursement formulas and coverage of service, which
must be approved by the federal government in accordance with federal
guidelines. All states in which we operate cover long-term care services for
individuals who are Medicaid eligible and qualify for institutional care.
Providers must accept the Medicaid reimbursement level as payment in full for
services rendered. Medicaid programs generally make payments directly to
providers, except in cases where the state has implemented a Medicaid managed
care program, under which providers receive Medicaid payments from managed care
organizations (MCOs) that have subcontracted with the Medicaid program. All
states in which we currently do business have all, or a portion of, their
Medicaid population enrolled in a Medicaid MCO. PPACA provides for increased
financial participation by the federal government in a state's Medicaid program
if the state chooses to expand its Medicaid program as contemplated by PPACA.
However, states are not required to expand their Medicaid programs and it is
uncertain as to which states, including states in which we operate, will choose
to expand their programs.
Managed Care. Our managed care patients consist of individuals who are insured
by a third-party entity, typically called a senior Health Maintenance
Organization, or senior HMO plan, or are Medicare beneficiaries who assign their
Medicare benefits to a senior HMO plan.
Private Pay and Other. Private pay and other sources consist primarily of
individuals or parties who directly pay for their services or are beneficiaries
of the Department of Veterans Affairs.
Critical Accounting Estimates
Discussion of our critical accounting policies and estimates is included under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies and Estimates" in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2011, which we filed with the
SEC on February 13, 2012.
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Results of Operations
The following table summarizes some of our key performance indicators, along
with other statistics, for each of the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
Occupancy statistics (skilled nursing
facilities):
Available beds in service at end of
period 8,805 8,819 8,805 8,819
Available patient days 801,743 802,649 1,603,269 1,627,402
Actual patient days 665,486 662,220 1,333,679 1,353,028
Occupancy percentage 83.0 % 82.5 % 83.2 % 83.1 %
Average daily number of patients 7,313 7,277 7,328 7,475
Hospice average daily census 1,402 1,085 1,389 1,039
Home health episodic-based admissions 2,099 874 4,084 1,855
Home health episodic-based
recertifications 360 151 693 298
Revenue per patient day (skilled
nursing facilities prior to
intercompany eliminations)
LTC only Medicare (Part A) $ 513 $ 572 $ 509 $ 572
Medicare blended rate (Part A & B) 567 627 571 625
Managed care (Part A) 385 383 384 387
Managed care blended rate (Part A &
B) 394 391 392 395
Medicaid 157 154 157 154
Private and other 173 175 181 178
Weighted-average for all $ 237 $ 251 $ 239 $ 252
Patient days by payor (skilled nursing
facilities):
Medicare 88,690 102,444 181,724 215,727
Managed care 60,464 53,467 120,486 109,684
Skilled Mix 149,154 155,911 302,210 325,411
Private pay and other 107,242 109,050 211,442 215,104
Medicaid 409,090 397,259 820,027 812,513
Total 665,486 662,220 1,333,679 1,353,028
Patient days as a percentage of total
patient days (skilled nursing
facilities):
Medicare 13.3 % 15.5 % 13.6 % 15.9 %
Managed care 9.1 8.0 9.0 8.2
Skilled Mix 22.4 23.5 22.6 24.1
Private pay and other 16.1 16.5 15.9 15.8
Medicaid 61.5 60.0 61.5 60.1
Total 100 % 100 % 100 % 100 %
Revenue for total company:
Medicare 33.8 % 38.1 % 34.4 % 38.7 %
Managed care, private pay, and other 36.4 33.3 35.8 32.6
Quality mix 70.2 71.4 70.2 71.3
Medicaid 29.8 28.6 29.8 28.7
Total 100 % 100 % 100 % 100 %
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The following table sets forth details of our revenue, expenses, and net income
and other items as a percentage of total revenue for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Expenses:
Cost of services (exclusive of rent cost of
revenue and depreciation and amortization
shown below) 82.9 79.6 83.2 79.2
Rent cost of revenue 2.1 2.1 2.1 2.1
General and administrative 3.0 3.4 2.8 3.2
Depreciation and amortization 3.0 3.0 3.0 2.9
91.0 88.1 91.1 87.4
Other income (expenses):
Interest expense (4.8 ) (4.5 ) (4.6 ) (4.5 )
Interest income 0.1 0.1 0.1 0.1
Other income (expense) - - - (0.1 )
Equity in earnings of joint venture 0.2 0.3 0.2 0.3
Debt retirement costs (1.8 ) - (0.9 ) -
Total other income (expenses), net (6.3 ) (4.1 ) (5.2 ) (4.2 )
Income from continuing operations before
provision for income taxes 2.7 7.8 3.7 8.4
Provision for income taxes 1.1 3.0 1.5 3.3
Net income 1.6 % 4.8 % 2.2 % 5.1 %
Adjusted EBITDA(1) 12.3 % 15.6 % 12.1 % 16.0 %
Adjusted EBITDAR(2) 14.4 % 17.8 % 14.2 % 18.1 %
Three Months Ended June 30, Six Months Ended June 30,
2012 2011 2012 2011
Reconciliation from net income to EBITDA,
EBITDAR, Adjusted EBITDA and Adjusted
EBITDAR (in thousands):
Net income $ 3,497 $ 10,384 $ 9,834 $ 22,045
Interest expense, net of interest income 10,389 9,454 19,809 19,225
Provision for income taxes 2,355 6,467 6,391 14,476
Depreciation and amortization expense 6,591 6,432 12,866 12,577
EBITDA(1) 22,832 32,737 48,900 68,323
Rent cost of revenue 4,539 4,547 9,095 9,117
EBITDAR(2) 27,371 37,284 57,995 77,440
EBITDA(1) 22,832 32,737 48,900 68,323
Debt retirement costs 3,958 - 3,958 -
Disposals of property and equipment - 3 - 293
Expenses related to the exploration of
strategic alternatives - 474 - 716
Exit costs related to the Northern
California divestiture - 435 - 820
Adjusted EBITDA(1) 26,790 33,649 52,858 70,152
Rent cost of revenue 4,539 4,547 9,095 9,117
Adjusted EBITDAR(2) $ 31,329 $ 38,196 $ 61,953 $ 79,269
(1) We define EBITDA as net income (loss) before depreciation, amortization
and interest expense (net of interest income) and the provision for income
taxes. Adjusted EBITDA is EBITDA adjusted for non-core business items,
which for the periods presented in this report includes gains or losses on
debt retirement costs, the disposal of property and equipment, expenses
related to the exploration of strategic alternatives, and exit costs
related to the disposition of certain of our operations in Northern
California (each to the extent applicable in the appropriate period.)
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(2) We define EBITDAR as net income (loss) before depreciation, amortization,
interest expense (net of interest income), the provision for income taxes
and rent cost of revenue. Adjusted EBITDAR is EBITDAR adjusted for the
non-core business items listed above for the definition of Adjusted EBITDA
(each to the extent applicable in the appropriate period.)
We believe that the presentation of EBITDA, EBITDAR, Adjusted EBITDA and
Adjusted EBITDAR provides useful information regarding our operational
performance because they enhance the overall understanding of the financial
performance and prospects for the future of our core business activities.
Specifically, we believe that a report of EBITDA, EBITDAR, Adjusted EBITDA and
Adjusted EBITDAR provides consistency in our financial reporting and provides a
basis for the comparison of results of core business operations between our
current, past and future periods. EBITDA, EBITDAR, Adjusted EBITDA and Adjusted
EBITDAR are primary indicators management uses for planning and forecasting in
future periods, including trending and analyzing the core operating performance
of our business from period-to-period without the effect of accounting
principles generally accepted in the United States of America ("U.S. GAAP"),
expenses, revenues and gains (losses) that we believe are unrelated to the
day-to-day performance of our business. We also use EBITDA, EBITDAR, Adjusted
EBITDA and Adjusted EBITDAR to benchmark the performance of our business against
expected results, analyzing year-over-year trends as described below and to
compare our operating performance to that of our competitors.
Management, including operating company based management, uses EBITDA, EBITDAR,
Adjusted EBITDA and Adjusted EBITDAR to assess the performance of our core
business operations, to prepare operating budgets and to measure our performance
against those budgets on a consolidated and segment level. Segment management
uses these metrics to measure performance on a business-by-business level. We
typically use Adjusted EBITDA and Adjusted EBITDAR for these purposes on a
consolidated basis as the adjustments to EBITDA and EBITDAR are not generally
allocable to any individual business unit and we typically use EBITDA and
EBITDAR to compare the operating performance of each skilled nursing facility,
assisted living facility, or other business unit as well as to assess the
performance of our operating segments. EBITDA, EBITDAR, Adjusted EBITDA and
Adjusted EBITDAR are useful in this regard because they do not include such
costs as interest expense (net of interest income), income taxes, depreciation
and amortization expense, rent cost of revenue (in the case of EBITDAR and
Adjusted EBITDAR) and special charges, which may vary from business unit to
business unit and period-to-period depending upon various factors, including the
method used to finance the business, the amount of debt that we have determined
to incur, whether a facility is owned or leased, the date of acquisition of a
facility or business, the original purchase price of a facility or business unit
or the tax law of the state in which a business unit operates. We believe these
types of charges are dependent on factors unrelated to the underlying business
unit performance. As a result, we believe that the use of EBITDA, EBITDAR,
Adjusted EBITDA and Adjusted EBITDAR provides a meaningful and consistent
comparison of our underlying businesses and facilities between periods by
eliminating certain items required by U.S. GAAP which have little or no
significance to their day-to-day operations.
Finally, we use Adjusted EBITDA to determine compliance with our debt covenants
and assess our ability to borrow additional funds and to finance or expand
operations. Our senior secured credit facility uses a measure substantially
similar to Adjusted EBITDA as the basis for determining compliance with our
financial covenants, specifically our minimum interest coverage ratio and our
maximum total leverage ratio, and for determining the interest rate of our first
lien term loan. For example, the senior secured credit facility includes
adjustments to EBITDA for (i) gain or losses on sale of assets, (ii) the
write-off of deferred financing costs of extinguished debt, (iii) pro forma
adjustments for acquisitions to show a full year of EBITDA and interest expense,
(iv) sponsorship fees paid to Onex which totals $0.5 million annually, (v)
non-cash stock compensation and (vi) impairment of long-lived assets. Our
noncompliance with these financial covenants could lead to acceleration of
amounts due under our senior secured credit facility.
Despite the importance of these measures in analyzing our underlying business,
maintaining our financial requirements, designing incentive compensation and for
our goal setting both on an aggregate and individual business level basis,
EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR are non-GAAP financial
measures that have no standardized meaning defined by U.S. GAAP. Therefore, our
EBITDA, EBITDAR, Adjusted EBITDA and Adjusted EBITDAR measures have limitations
as analytical tools, and they should not be considered in isolation, or as a
substitute for analysis of our results as reported under U.S. GAAP. Some of
these limitations are:
• they do not reflect our cash expenditures, or future requirements, for
capital expenditures or contractual commitments;
• they do not reflect changes in, or cash requirements for, our working
capital needs;
• they do not reflect the interest expense, or the cash requirements
necessary to service interest or principal payments, on our debt;
• they do not reflect any income tax payments we may be required to make;
• although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the
future, and EBITDA and Adjusted EBITDA do not reflect any cash
requirements for such replacements;
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• they are not adjusted for all non-cash income or expense items that are
reflected in our consolidated statements of cash flows;
• they do not reflect the impact on earnings of charges resulting from
certain matters we consider not to be indicative of our ongoing
operations; and
• other companies in our industry may calculate these measures differently
than we do, which may limit their usefulness as comparative measures.
We compensate for these limitations by using EBITDA, EBITDAR, Adjusted EBITDA
and Adjusted EBITDAR only to supplement net income on a basis prepared in
conformance with U.S. GAAP in order to provide a more complete understanding of
the factors and trends affecting our business. Furthermore, the non-GAAP
financial measures that we present may be different from the presentation of
similar measures by other companies, so the comparability of the measures among
companies may be limited. We strongly encourage investors to consider net income
determined under U.S. GAAP as compared to EBITDA, EBITDAR, Adjusted EBITDA and
Adjusted EBITDAR, and to perform their own analysis, as appropriate.
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
Revenue. Revenue increased by $2.2 million, or 1.0%, to $217.4 million in the
three months ended June 30, 2012 from $215.2 million in the three months ended
June 30, 2011.
Long term care services
Three Months Ended June 30,
2012 2011 Increase/(Decrease)
Revenue Revenue Revenue Revenue
Dollars Percentage Dollars Percentage Dollars Percentage
(dollars in millions)
Skilled nursing
facilities $ 156.3 71.9 % $ 164.9 76.6 % $ (8.6 ) (5.2 )%
Assisted living
facilities 6.9 3.2 6.7 3.1 0.2 2.3
Administration of third
party facility 0.1 0.1 0.3 0.1 (0.2 ) (57.0 )
Leased facility revenue 0.7 0.3 0.7 0.4 - 2.9
Total long-term care
services $ 164.0 75.5 % $ 172.6 80.2 % $ (8.6 ) (5.0 )%
Skilled nursing facilities revenue decreased $8.6 million in the first quarter
of 2012 as compared to the first quarter of 2011, with the decrease coming from
skilled nursing facilities operated for all of the three months ended June 30,
2012 and 2011. The decrease resulted primarily from a $9.3 million decrease in
revenue due to a lower weighted average per patient day ("PPD") Medicare
reimbursement rate, offset by a $0.7 million increase in revenue due to higher
occupancy rates. We experienced an increase in our average daily census ("ADC")
and average length of stay ("ALOS") in our same store skilled nursing facilities
in the second quarter of 2012 as compared to the second quarter of 2011. The
decrease in PPD rates was primarily a result of the Medicare rate cut discussed
below as well as a shift from Medicare days to Managed Medicare days as more
seniors elect Medicare Advantage. Medicare Advantage plans are operated by
private companies, to which Medicare pays a fixed monthly amount per enrollee to
provide the enrollees healthcare services that would otherwise be reimbursed
through Medicare's standard PPS system. A decrease in our skilled mix also
contributed to the decline in PPD rates. Our average daily Part A Medicare rate
decreased 10.3% to $513 in the three months ended June 30, 2012 from $572 in the
three months ended June 30, 2011, primarily due to the decrease of our skilled
nursing Medicare rates by 11.1%, effective October 1, 2011, which will continue
to negatively impact skilled nursing revenues in future periods. Our average
daily Medicaid rate increased 2.0% to $157 per day in the three months ended
June 30, 2012 from $154 per day in the three months ended June 30, 2011,
primarily due to increased Medicaid rates in California, Kansas, Missouri and
Nevada. These increases in Medicaid rates were substantially offset by increases
in the provider taxes in those states. We expect moderate weighted average
Medicaid rate increases in the second half for 2012. The increase of $0.2
million at our assisted living facilities in the second quarter of 2012 as
compared to the second quarter of 2011 was due primarily to the July 2011
acquisition of Vintage Park at San Martin in Las Vegas, Nevada. Our revenue
related to the administration of a third party facility decreased $0.2 million
in the second quarter of 2012 as compared to the second quarter of 2011.
Therapy services
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Three Months Ended June 30,
2012 2011 Increase/(Decrease)
Revenue Revenue Revenue Revenue
Dollars Percentage Dollars Percentage Dollars Percentage
(dollars in millions)
Rehabilitation therapy
services $ 42.2 19.2 % $ 39.7 18.4 % $ 2.5 6.3 %
Intersegment elimination of
services related to affiliated
entities (15.8 ) (7.3 ) (16.0 ) (7.4 ) 0.2 (1.3 )
Third party therapy
services $ 26.4 11.9 % $ 23.7 11.0 % $ 2.7 11.3 %
Of the $2.7 million increase in third party therapy services revenue, $0.7
million was related to the net addition of new third party contracts added since
the second quarter of 2011. The remaining balance of the increase resulted
primarily from an increase in Medicare Part B growth at third party facilities
serviced for all of the three months ended June 30, 2012 and 2011.
Hospice & Home Health services
Three Months Ended June 30,
2012 2011 Increase/(Decrease)
Revenue Revenue Revenue Revenue
Dollars Percentage Dollars Percentage Dollars Percentage
(dollars in millions)
Hospice $ 20.6 9.5 % $ 15.8 7.4 % $ 4.7 30.0 %
Home Health 6.3 2.9 3.0 1.4 3.4 109.5
Total hospice & home health
services $ 26.9 12.4 % $ 18.8 8.7 % $ 8.1 42.8 %
Hospice and home health services revenue increased $8.1 million in the second
quarter of 2012 as compared to the second quarter of 2011. Hospice revenue
increased by $4.7 million, with $1.8 million of the increase coming from hospice
businesses operated for all of the three months ended June 30, 2012 and 2011. An
increase in average daily census accounted for $1.5 million of the increase,
with the remaining $0.3 million increase resulting from a higher weighted
average PPD rate. Additionally, there was an increase of $2.9 million due to the
acquisition of Cornerstone Hospice ("Cornerstone") in October 2011. For the
quarters ended June 30, 2012 and 2011, we recorded hospice Medicare cap expenses
of $0.3 million and $0.1 million, respectively, as adjustments to revenue. The
increase of $3.4 million at our home health business in the second quarter of
2012 as compared to the second quarter of 2011 was primarily due to the
acquisition of Altura Homecare & Rehab in July 2011 ("Altura").
Cost of Services Expenses. Cost of services expenses increased $9.0 million, or
5.2%, to $180.2 million, or 82.9% of revenue, in the three months ended June 30,
2012, from $171.2 million, or 79.5% of revenue, in the three months ended
June 30, 2011. The increase in cost of services expense as a percentage of
revenue is primarily attributable to the impact of the Medicare rate cut
previously discussed.
Long term care services
Three Months Ended June 30,
2012 2011
Cost of Service Cost of Service
Dollars Dollars
(prior to (prior to
intersegment Percentage of intersegment Percentage of Increase/(Decrease)
eliminations) Revenue eliminations) Revenue Dollars Percentage
(dollars in millions)
Skilled nursing
facilities $ 126.9 81.2 % $ 126.8 76.9 % $ 0.1 0.1 %
Assisted living
facilities 4.7 68.8 4.8 70.5 (0.1 ) (0.1 )
Regional
operations
support 5.0 n/a 6.5 n/a (1.5 ) (22.6 )
Total long-term
care services $ 136.6 83.3 % $ 138.1 80.0 % $ (1.5 ) (1.0 )%
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Cost of services expenses at our skilled nursing facilities increased $0.1
million in the second quarter of 2012 as compared to the second quarter of 2011.
The $0.1 million increase was related to operating costs at facilities acquired
or developed prior to January 1, 2011 and resulted from an increase in patient
days offset by a 0.4% decrease in operating costs, which dropped to $190.50 PPD
in the three months ended June 30, 2012 from $191.34 PPD for the three months
ended June 30, 2011. These additional operating costs resulted from a $0.9
million increase in labor costs, which represented an increase of $0.74, or
0.7%, on a PPD basis offset by a decrease of $0.8 million in insurance, bad
debt, and other operating expenses. Cost of services expenses at our assisted
living facilities decreased $0.1 million in the three months ended June 30, 2012
compared to the three months ended June 30, 2011. Cost of services expenses for
our regional operations support decreased $1.5 million in the three months ended
June 30, 2012 compared to the three months ended June 30, 2011 primarily due to
a decrease in severance expense, headcount reduction, and a decrease in
purchased services.
Therapy services
Three Months Ended June 30,
2012 ` 2011
Cost of Service Cost of Service
Revenue Dollars Revenue Dollars
(prior to (prior to (prior to (prior to
intersegment intersegment Percentage of intersegment intersegment Percentage of Increase/(Decrease)
eliminations) eliminations) Revenue eliminations) eliminations) Revenue
Dollars Percentage
(dollars in millions)
Rehabilitation
therapy services $ 42.2 $ 38.5 91.2 % $ 39.7 $ 34.5 86.9 % $ 4.0 11.5 %
Total
therapy services $ 42.2 $ 38.5 91.2 % $ 39.7 $ 34.5 86.9 % $ 4.0 11.5 %
Rehabilitation therapy costs of services as a percentage of revenue increased in
the three months ended June 30, 2012, as compared to the same period in 2011,
primarily due to regulatory changes to group therapy discussed below, which has
resulted in a requirement for more treatment time by licensed therapists. CMS
rulemaking effective for its fiscal year 2012 (which began October 1, 2011)
effectively creates a disincentive for providing group therapy treatments in
contrast to its policies that promoted such efficiencies in prior fiscal years.
CMS also made changes effective October 1, 2011 that require additional therapy
time to provide more frequent assessments of the patients we treat. These two
factors have negatively impacted the margins of the therapy business. Though
these factors have increased our operating costs we have seen improvements in
our rehabilitation therapy costs as a percentage of revenue as the result of
increased productivity efficiencies gained through using technology to reduce
the time therapists must spend on administrative tasks.
Hospice and home health services
Three Months Ended June 30,
2012 2011
Cost of Service Percentage of Cost of Service Percentage of Increase/(Decrease)
Dollars Revenue Dollars Revenue Dollars Percentage
(dollars in millions)
Hospice $ 15.8 76.6 % $ 11.9 74.9 % $ 3.9 33.0 %
Home Health 5.7 89.5 3.3 109.2 2.4 71.7
Total hospice & home
health services $ 21.5 79.7 % $ 15.2 80.4 % $ 6.3 41.5 %
Cost of services expenses related to our hospice business increased $3.9 million
in the second quarter of 2012 as compared to the second quarter of 2011. The
change was primarily due to an increase of $2.2 million due to the acquisition
of Cornerstone and $1.7 million of additional expenses at our existing hospice
business. The $1.7 million increase resulted from an increase in operating costs
of $5.01 PPD, or 4.2%, to $125.06 PPD in the three months ended June 30, 2012
from $120.05 for the three months ended June 30, 2011. These additional
operating costs resulted from a $1.0 million increase in labor costs, which
represented an increase of $2.46, or 3.0%, on a PPD basis. Additionally, the
increase in operating costs resulted from a $0.9 million increase in supplies,
purchased services, and other operating expenses. Cost of services related to
our home health
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business increased $2.4 million in the second quarter of 2012 as compared to the
second quarter of 2011 primarily due to the acquisition of Altura in July 2011.
Rent cost of revenue. Rent cost of revenue remained consistent at $4.5 million
in the three months ended June 30, 2012 and June 30, 2011.
General and Administrative Services Expenses. Our general and administrative
services expenses decreased $0.8 million, or 11.2%, to $6.4 million, or 3.0% of
revenue, in the three months ended June 30, 2012 from $7.2 million, or 3.4% of
revenue, in the three months ended June 30, 2011. The decrease is primarily a
result of a decrease in purchased services. In the second quarter of 2011 we
incurred costs relating to exploring strategic alternatives.
Depreciation and Amortization. Depreciation and amortization increased by $0.2
million, or 2.5%, to $6.6 million, or 3.0% of revenue, in the three months ended
June 30, 2012 from $6.4 million, or 3.0% of revenue, in the three months ended
June 30, 2011. This increase is primarily a result of the change in fair value
related to the contingent consideration due to the Hospice/Home Health
acquisition in 2010, Altura acquisition in July 2011, and the Cornerstone
acquisition in October 2011. Additionally, there was an increase in depreciation
expense from more assets being placed into service during 2011 and 2012, offset
by a decrease of intangible amortization.
Interest Expense. Interest expense increased by $0.8 million, or 8.4%, to $10.5
million, or 4.8% of revenue, in the three months ended June 30, 2012 from $9.7
million, or 4.5% of revenue, in the three months ended June 30, 2011. The
increase in our interest expense was primarily due to an increase in the average
debt outstanding for the three months ended June 30, 2012 to $518.8 million from
$500.2 million for the three months ended June 30, 2011. The increase in average
debt outstanding was a result of having the senior subordinated notes
outstanding for 30 days after we completed the $100.0 million expansion of our
term debt as we were required to provide a 30 day redemption notice for the
senior subordinated notes. This also resulted in increasing the average rate by
1.5% for the period as the senior subordinated notes had a higher interest rate
than our credit facility.
Interest Income. Interest income decreased $0.1 million, to $0.1 million, or
0.1% of revenue in the three months ended June 30, 2012 from $0.2 million, or
0.1% of revenue for the three months ended June 30, 2011.
Equity in Earnings of Joint Venture. Equity earnings of our pharmacy joint
venture remained consistent at $0.5 million in the three months ended June 30,
2012 and June 30, 2011.
Debt Retirement Costs. Debt retirement costs of $4.0 million for the three
months ended June 30, 2012 was due to the expensing of fees paid in connection
with the refinancing and existing deferred financing fees of $3.8 million and
original issue discount of $0.2 million both associated with the redemption of
the 2014 Notes in May 2012 and the $100 million expansion of our term debt.
Income before provision for income taxes. Income before provision for incomes
taxes decreased by $11.0 million to $5.9 million in the three months ended
June 30, 2012 from $16.9 million in the three months ended June 30, 2011. The
$11.0 million decrease was related primarily to an increased cost of services of
$9.0 million, an increase in debt retirement costs of $4.0 million, and an
increase in interest expense of $0.8 million offset by a decrease in general and
administrative expense of $0.8 million and an increase in revenue of $2.1
million, all discussed above.
Provision for Income Taxes. We recorded a tax expense of $2.4 million, or 40.2%
of pre-tax earnings, for the three months ended June 30, 2012, as compared to a
tax expense of $6.5 million, or 38.4% of pre-tax earnings, for the three months
ended June 30, 2011. The decrease in tax expense was primarily a result of the
decrease in pre-tax earnings for the three months ended June 30, 2012, as
compared to the three months ended June 30, 2011 which influenced the tax rate
for the three months ended June 30, 2012.
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
Revenue. Revenue decreased by $0.7 million, or 0.2%, to $436.8 million in the
six months ended June 30, 2012 from $437.5 million in the six months ended
June 30, 2011.
Long term care services
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Six Months Ended June 30,
2012 2011 Increase/(Decrease)
Revenue Revenue Revenue Revenue
Dollars Percentage Dollars Percentage Dollars Percentage
(dollars in millions)
Skilled nursing
facilities $ 315.2 72.2 % $ 339.9 77.7 % $ (24.7 ) (7.3 )%
Assisted living
facilities 13.8 3.2 13.5 3.1 0.3 2.6
Administration of third
party facility 0.6 0.1 0.5 0.1 0.1 3.5
Leased facility revenue 1.5 0.3 0.7 0.2 0.8 104.0
Total long-term care
services $ 331.1 75.8 % $ 354.6 81.1 % $ (23.5 ) (6.6 )%
Skilled nursing facilities revenue decreased $24.7 million in the first six
months of 2012 as compared to the first six months of 2011. Revenue decreased
$17.7 million for skilled nursing facilities operated for all of the six months
ended June 30, 2012 and 2011, primarily as a result of a $19.5 million decrease
to a lower weighted average PPD rate, offset by a $1.8 million increase due to
higher occupancy rates. We experienced an increase in our ADC and ALOS in our
same store skilled nursing facilities in the first six months of 2012 as
compared to the first six months of 2011. The decrease in PPD rates was the
result of the Medicare rate cut discussed below, a decrease in our skilled mix,
and a shift from Medicare days to Managed Medicare days as more seniors elect
Medicare Advantage. Additionally, there was an increase of $0.8 million in
revenue from our commencement of operations at the Rehabilitation Center of
Omaha in April 2011 offset by a decrease of $7.8 million in revenue from the
transfer of operations of five skilled nursing facilities in northern California
to an unaffiliated third party operator in April 2011. Our average daily Part A
Medicare rate decreased 11.0% to $509 in the six months ended June 30, 2012 from
$572 in the six months ended June 30, 2011, primarily due to the decrease of our
skilled nursing Medicare rates by 11.1%, effective October 1, 2011, which will
continue to negatively impact skilled nursing revenues in future periods. Our
average daily Medicaid rate increased 2.0% to $157 per day in the six months
ended June 30, 2012 from $154 per day in the six months ended June 30, 2011,
primarily due to increased Medicaid rates in California, Kansas, Missouri, and
Nevada. These increases in Medicaid rates were substantially offset by increases
in the provider taxes in those states. As discussed above, we expect moderate
weighted average Medicaid rate increases in the second half for 2012. The
increase of $0.3 million at our assisted living facilities in the first six
months of 2012 as compared to the six months of 2011 was due to the July 2011
acquisition of Vintage Park at San Martin in Las Vegas, Nevada.
Therapy services
Six Months Ended June 30,
2012 2011 Increase/(Decrease)
Revenue Revenue Revenue Revenue
Dollars Percentage Dollars Percentage Dollars Percentage
(dollars in millions)
Rehabilitation therapy
services $ 84.3 19.2 % $ 79.1 17.7 % $ 5.2 7.1 %
Intersegment elimination of
services related to affiliated
entities (31.8 ) (7.3 ) (33.2 ) (7.7 ) 1.4 (6.4 )
Third party therapy
services $ 52.5 12.1 % $ 45.9 10.5 % $ 6.6 14.4 %
Of the $6.6 million increase, $0.9 million was related to therapy services
provided at the five Northern California facilities at which operations were
transferred to an independent third party operator in April 2011 and $2.8
million was related to the net addition of new third party contracts added since
the second quarter of 2011. The remaining balance of the increase resulted
primarily from an increase in Medicare Part B growth at third party facilities
operated for all of the six months ended June 30, 2012 and 2011.
Hospice & Home Health services
Six Months Ended June 30,
2012 2011 Increase/(Decrease)
Revenue Revenue Revenue Revenue
Dollars Percentage Dollars Percentage Dollars Percentage
(dollars in millions)
Hospice $ 40.3 9.2 % $ 30.2 6.9 % $ 10.2 33.7 %
Home Health 12.8 2.9 6.8 1.5 6.0 89.1
Total hospice & home health
services $ 53.1 12.1 % $ 37.0 8.4 % $ 16.2 43.9 %
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Hospice and home health services revenue increased $16.2 million in the first
six months of 2012 as compared to the first six months of 2011. Revenue
increased $4.2 million for hospice business operated for all of the six months
ended June 30, 2012 and 2011, as a result of a $4.4 million increase due to an
increase in average daily census, offset by a $0.2 million decrease due to a
lower weighted average PPD rate. Additionally, there was an increase of $6.0
million due to the acquisition of Cornerstone. For the first six months ended
June 30, 2012 and 2011, we recorded hospice Medicare cap expenses of $0.8
million and $0.1 million, respectively, as adjustments to revenue. Revenue
increased $6.0 million at our home health businesses in the six months ended
June 30, 2012 as compared to the same period in 2011. Of the $6.0 million
increase, $1.6 million was from home health agencies operated for all of both
periods, with a $2.6 million increase from an increase in episodes, offset by a
$1.0 million decrease in rate per episode. The decrease in rate per episode was
due to a patient mix increase of commercial insurance payor versus Medicare
payor. The remaining balance of the increase in home health revenue was due to
acquisitions.
Cost of Services Expenses. Cost of services expenses increased $16.6 million, or
4.8%, to $363.3 million, or 83.2% of revenue, in the six months ended June 30,
2012, from $346.7 million, or 79.2% of revenue, in the six months ended June 30,
2011. The increase in cost of services expense as a percentage of revenue is
primarily attributable to the impact of the Medicare rate cut previously
discussed.
Long term care services
Six Months Ended June 30,
2012 2011
Cost of Service Cost of Service
Dollars Dollars
(prior to (prior to
intersegment Percentage of intersegment Percentage of Increase/(Decrease)
eliminations) Revenue eliminations) Revenue Dollars Percentage
(dollars in millions)
Skilled nursing
facilities $ 256.0 81.2 % $ 261.1 76.8 % $ (5.1 ) (1.9 )%
Assisted living
facilities 9.9 71.4 9.6 71.0 0.4 3.7
Regional
operations
support 10.6 n/a 12.8 n/a (2.3 ) (17.7 )
Total long-term
care services $ 276.5 83.5 % $ 283.5 79.9 % $ (7.0 ) (2.5 )%
Cost of services expenses at our skilled nursing facilities decreased $5.1
million in the first six months of 2012 as compared to the first six months of
2011. This decrease was substantially due to a decrease of $7.1 million in
expenses resulting from the transfer of operations of five skilled nursing
facilities in northern California to an unaffiliated third party operator in
April 2011 offset by $0.7 million of additional expenses due to the acquisition
of a leasehold interest by the Rehabilitation Center of Omaha in April 2011 and
$1.3 million of additional expenses from operating costs increasing at
facilities acquired or developed prior to January 1, 2011. The $1.3 million
increase resulted from an increase in patient days at our facilities operated
for all of both periods offset by a decrease in operating costs of $0.11 PPD, or
0.1%, to $192.13 PPD in the six months ended June 30, 2012 from $192.24 PPD for
the six months ended June 30, 2011. These additional operating costs resulted
from a $3.0 million increase in labor costs, which represented an increase of
$1.67, or 1.5%, on a PPD basis offset by a decrease of $1.7 million in
insurance, bad debt, and other operating expenses. Cost of services expenses at
our assisted living facilities increased $0.4 million in the six months ended
June 30, 2012 compared to the six months ended June 30, 2011. The increase was
primarily due to the July 2011 acquisition of Vintage Park at San Martin in Las
Vegas, Nevada. Cost of services expenses for our regional operations support
decreased $2.3 million in the six months ended June 30, 2012 compared to the six
months ended June 30, 2011 primarily due to a decrease in severance expense, a
headcount reduction, and a decrease in purchased services.
Therapy services
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Six Months Ended June 30,
2012 ` 2011
Cost of Service Cost of Service
Revenue Dollars Revenue Dollars
(prior to (prior to (prior to (prior to
intersegment intersegment Percentage of intersegment intersegment Percentage of Increase/(Decrease)
eliminations) eliminations) Revenue eliminations) eliminations) Revenue Dollars Percentage
(dollars in millions)
Rehabilitation
therapy services $ 84.3 $ 77.5 91.9 % $ 79.1 $ 67.8 85.7 % $ 9.7 14.3 %
Total
therapy services $ 84.3 $ 77.5 91.9 % $ 79.1 $ 67.8 85.7 % $ 9.7 14.3 %
Rehabilitation therapy costs as a percentage of revenue increased in the six
months ended June 30, 2012, as compared to the same period in 2011, primarily
due to regulatory changes to group therapy, which has resulted in a requirement
for more treatment time by licensed therapists. CMS rulemaking effective for its
fiscal year 2012, which began October 1, 2011 effectively creates a financial
penalty for providing group therapy treatments in contrast to its policies that
promoted such efficiencies in prior fiscal years. CMS also made changes
effective October 1, 2011 that require additional therapy time to provide more
frequent assessments of the patients we treat. These two factors will continue
to negatively impact the margins of the therapy business in future periods.
Though these factors have increased our operating costs we have seen
improvements in our rehabilitation therapy costs as a percentage of revenue as
the result of increased productivity efficiencies gained through using
technology to reduce the time therapists must spend on administrative tasks.
Hospice and home health services
Six Months Ended June 30,
2012 2011
Cost of Service Percentage of Cost of Service Percentage of Increase/(Decrease)
Dollars Revenue Dollars Revenue Dollars Percentage
(dollars in millions)
Hospice $ 31.4 77.8 % $ 22.8 75.6 % $ 8.6 37.7 %
Home Health 11.1 87.1 6.7 98.4 4.4 67.4
Total hospice & home
health services $ 42.5 80.1 % $ 29.5 79.8 % $ 13.0 44.4 %
Cost of services expenses related to our hospice business increased $8.6 million
in the first six months of 2012 as compared to the first six months of 2011. The
change was primarily due to an increase of $4.4 million due to the acquisition
of Cornerstone and $4.2 million of additional expenses at our existing hospice
business. The $4.2 million increase resulted from an increase in operating costs
of $3.86 PPD, or 3.2%, to $125.13 PPD in the three months ended June 30, 2012
from $121.27 for the six months ended June 30, 2011. These additional operating
costs resulted from a $2.8 million increase in labor costs, which represented an
increase of $2.09, or 2.5%, on a PPD basis. Additionally, the increase in
operating costs resulted from a $1.4 million increase in supplies, purchased
services, and other operating expenses. Cost of services related to our home
health business increased $4.4 million in the first six months of 2012 as
compared to the first six months of 2011 primarily due to the acquisition of
Altura in July 2011.
Rent cost of revenue. Rent cost of revenue remained consistent at $9.1 million
in the six months ended June 30, 2012 and June 30, 2011.
General and Administrative Services Expenses. Our general and administrative
services expenses decreased $1.6 million, or 11.3%, to $12.5 million, or 2.8% of
revenue, in the six months ended June 30, 2012 from $14.1 million, or 3.2% of
revenue, in the six months ended June 30, 2011. The decrease is primarily a
result of a decrease in compensation expense and purchased services. Also, in
the first six months of 2011 we incurred costs relating to exploring strategic
alternatives.
Depreciation and Amortization. Depreciation and amortization increased by $0.3
million, or 2.3%, to $12.9 million, or 2.9% of revenue, in the six months ended
June 30, 2012 from $12.6 million, or 3.0% of revenue, in the six months ended
June 30, 2011. This increase is primarily a result of the change in fair value
related to the contingent consideration due to the
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Hospice/Home Health acquisition in 2010, Altura acquisition in July 2011, and
the Cornerstone acquisition in October 2011. Additionally, there was an increase
in depreciation expense from more assets being placed into service during 2011
and 2012, offset by a decrease of intangible amortization.
Interest Expense. Interest expense increased by $0.5 million, or 2.4%, to $20.1
million, or 4.6% of revenue, in the six months ended June 30, 2012 from $19.6
million or 4.5% of revenue, in the six months ended June 30, 2011. The increase
in interest expense was primarily due to senior subordinated notes being
outstanding for 30 days after we completed the $100.0 million expansion of our
term debt as we were required to provide a 30 day redemption notice for the
senior subordinated notes which resulted in increasing the average rate for the
period as the senior subordinated notes had a higher interest rate than our
credit facility. This increase was offset by the decrease in the average debt
outstanding for the six months ended June 30, 2012 to $501.2 million from $512.2
million for the six months ended June 30, 2011. The decrease in average debt
outstanding was the result of the use of operating cash flows to reduce debt.
Interest Income. Interest income remained consistent at $0.3 million for the six
months ended June 30, 2012 and 2011.
Equity in Earnings of Joint Venture. Equity earnings of our pharmacy joint
venture decreased $0.1 million, or 13.5%, to $1.0 million for the six months
ended June 30, 2012 from $1.1 million in the six months ended June 30, 2011.
Debt Retirement Costs. Debt retirement costs of $4.0 million for the six months
ended June 30, 2012 was due to the expensing of fees paid in connection with the
refinancing and existing deferred financing fees of $3.8 million and original
issue discount of $0.2 million associated with the redemption of the 2014 Notes
in May 2012 and the $100 million expansion of our term debt.
Income before provision for income taxes. Income before provision for incomes
taxes decreased by $20.3 million to $16.2 million in the six months ended
June 30, 2012 from $36.5 million in the six months ended June 30, 2011. The
$20.3 million decrease was related primarily to a decrease in revenue of $0.7
million, an increase of $16.6 million in cost of services, an increase in debt
retirement costs of $4.0 million and increased interest expense of $0.5 million
offset by a decrease in general and administrative services expenses of $1.6
million, all discussed above.
Provision for Income Taxes. We recorded a tax expense of $6.4 million, or 39.4%
of pre-tax earnings, for the six months ended June 30, 2012, as compared to a
tax expense of $14.5 million, or 39.6% of pre-tax earnings, for the six months
ended June 30, 2011. The decrease in tax expense was primarily a result of the
decrease in pre-tax earnings for the six months ended June 30, 2012, as compared
to the six months ended June 30, 2011.
Liquidity and Capital Resources
The following table presents selected data from our condensed consolidated
statements of cash flows (in thousands):
