The following discussion of our financial condition and results of operations
should be read in conjunction with the condensed consolidated financial
statements and the notes thereto included elsewhere in this Quarterly Report on
Form 10-Q and our consolidated financial statements for the year ended
December 31, 2011 and the notes thereto included in our Annual Report on Form
10-K previously filed with the Securities and Exchange Commission. As used
herein, unless otherwise specified or the context otherwise requires, references
to the "Company", "we", "our" and "us" refer to the business and operations of
Rotech Healthcare Inc. and its subsidiaries.
Introduction
Background
We are one of the largest providers of home medical equipment and related
products and services in the United States, with a comprehensive offering of
respiratory therapy and durable home medical equipment and related services. We
provide home medical equipment and related products and services principally to
older patients with breathing disorders, such as chronic obstructive pulmonary
diseases (COPD), which include chronic bronchitis, emphysema, obstructive sleep
apnea and other cardiopulmonary disorders. We provide equipment and services in
49 states through approximately 420 operating locations located primarily in
non-urban markets.
Our revenues are principally derived from respiratory equipment rental and
related services, which accounted for 86.8% and 87.5% of net revenues for the
three months ended June 30, 2012 and 2011, respectively, and 86.7% and 87.4% of
net revenues for the six months ended June 30, 2012 and 2011. Revenues from
respiratory equipment rental and related services include rental of oxygen
concentrators, liquid oxygen systems, portable oxygen systems, ventilator
therapy systems, nebulizer equipment and sleep disorder breathing therapy
systems, and the sale of nebulizer medications. We also generate revenues
through the rental and sale of durable medical equipment, which accounted for
10.7% and 10.6% of net revenues for the three months ended June 30, 2012 and
2011, respectively, 10.9% and 10.6% of net revenues for the six months ended
June 30, 2012 and 2011. Revenues from rental and sale of durable medical
equipment include hospital beds, wheelchairs, walkers, patient aids and
ancillary supplies. We derive our revenues principally from reimbursement by
third-party payors, including Medicare, Medicaid, the Veterans Administration
(VA) and private insurers.
Executive Summary
We face significant financial and Medicare reimbursement related challenges that
continue to negatively affect our financial position. We anticipate that we will
continue to face such challenges in the near and long-term future. Most of these
difficulties result from our highly leveraged capital structure, while others
are the result of significant Medicare reimbursement reductions applicable to
our industry.
In light of these challenges, our operational focus is on reducing our cost
structure while maintaining internal growth and improving our overall collection
rates. Specifically, we are focused on:
• Simplifying the operational processes performed in our branch locations
following the successful implementation of our new order intake system
(implemented in late 2011).
• Expanding quality assurance functions to ensure that orders are entered
accurately and timely and all required billing paperwork is obtained in
an expeditious manner.
We also believe that our national geographic coverage, patient care reputation
and strong managed care relationships position us well for accelerated patient
growth as managed care plans continue to focus on network consolidation.
Although we have slowed the pace of our asset and equipment purchase
transactions during the first six months of 2012, we do expect to continue
seeking opportunities to gain market share through selective asset and equipment
purchases from competitors exiting the home medical equipment market. In
particular:
• During the first six months of 2012, we purchased $2.5 million of new
and used rental equipment, inventory and certain identifiable
intangible assets from competitors exiting the home medical equipment
market. Some of the equipment purchased in these transactions is
currently on rent and located in patients' homes. We believe that we
will be successful in continuing to identify additional asset and
equipment purchase opportunities and that we will be able to successfully transition a high percentage of the associated patients
onto service with our Company. During the six months ended June 30,
2012, we have recognized approximately $14.8 million of revenues
associated with patients transitioned onto service with our Company
through asset and equipment purchases.
• During the first six months of 2011, we purchased $9.0 million of new
and used rental equipment and inventory
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from competitors exiting the home medical equipment market. Some of the
equipment purchases in these transactions is currently on rent and located in
patients' homes. During the six months ended June 30, 2011, we have recognized
approximately $11.7 million of revenues associated with patients transitioned
onto service with our Company through equipment purchases.
We expect that we will continue to evaluate and explore strategic alternatives
and opportunities as they may arise, including potential acquisitions, business
combination transactions, strategic partnerships or similar transactions. In
addition, either in connection with or independent of such a transaction, we
expect that we may engage in financing activities through public or private
offerings of equity, debt or convertible securities, including common stock,
preferred stock, warrants, convertible notes or other instruments. We may
repurchase our common stock from time to time in open market purchases or in
privately negotiated transactions subject to the limitations provided in our
respective debt agreements. The timing and actual number of shares repurchased
is at the discretion of management of the Company and will depend on a variety
of factors, including stock price, corporate and regulatory requirements, market
conditions, the relative attractiveness of other capital deployment
opportunities and other corporate priorities.
On June 28, 2011, we submitted our application for relisting of our common stock
on the NASDAQ Global Market. The application review by NASDAQ's Listing
Qualifications department for compliance with all NASDAQ Stock Market standards
is substantially complete. However, we do not currently meet the $4.00 per share
minimum bid price required for initial listing on the NASDAQ Global Market.
While we intend to satisfy all of NASDAQ's requirements for relisting, there can
be no assurance that our application will be approved, or of when or if our
common shares will be listed on the NASDAQ Stock Market or another stock
exchange. Our common stock will continue to trade on the OTC Bulletin Board
under our current symbol, ROHI, during the NASDAQ listing process.
Reimbursement by Third-Party Payors
We derive substantially all of our revenues from reimbursement by third-party
payors, including Medicare, Medicaid, the VA and private insurers. Revenue
derived from Medicare, Medicaid and other federally funded programs represented
54.8% and 56.9% of our patient service revenue for the three months ended
June 30, 2012 and 2011, respectively, 55.5% and 57.0% or our patient service
revenue for the six months ended June 30, 2012 and 2011, respectively. Our
business has been, and may continue to be, significantly impacted by changes
mandated by Medicare legislation.
Under existing Medicare laws and regulations, the sale and rental of our
products generally are reimbursed by the Medicare program according to
prescribed fee schedule amounts calculated using statutorily-prescribed
formulas. Significant legislation affecting home medical equipment (HME)
reimbursement has been signed into law, including the Patient Protection and
Affordable Care Act, as amended by the Health Care and Education Affordability
Reconciliation Act (collectively, the "PPACA"), Medicare Improvement for
Patients and Providers Act of 2008 (MIPPA), Medicare, Medicaid and State
Children's Health Insurance Program Extension Act of 2007 ("SCHIP Extension
Act"), the Deficit Reduction Act of 2005 (DRA) and the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003 (MMA), contain provisions that
negatively impact reimbursement for the primary HME products that we provide.
The PPACA, MIPPA, the SCHIP Extension Act, DRA and MMA provisions (each of which
is discussed in more detail below), when fully implemented, could have a
material adverse effect on our financial condition, revenues, profit margins,
profitability, operating cash flows and results of operations.
• The PPACA includes, among other things, annual, non-deductible fees on
any entity that manufacturers or imports certain prescription drugs and
biologics, beginning in 2011; a deductible excise tax on any entity
that manufactures or imports medical devices offered for sale in the
United States, with limited exceptions, beginning in 2013; new face-to-face encounter requirements for HME and home health services;
and a requirement that by 2016, the competitive bidding process must be
nationalized or prices in non-competitive bidding areas must be
adjusted to match competitive bidding prices.
• MIPPA retroactively delayed the implementation of competitive bidding
for eighteen months and decreased the 2009 fee schedule payment amounts
by 9.5% for product categories included in competitive bidding.
• The SCHIP Extension Act, which went into effect April 1, 2008, reduced
Medicare reimbursement amounts for covered Medicare Part B drugs,
including inhalation drugs that we provide.
• The DRA capped the Medicare rental period for oxygen equipment at 36
months of continuous use, after which time title of the equipment would
transfer to the beneficiary. For purposes of this cap, the DRA provided
for a new 36-month rental period that began January 1, 2006 for all
oxygen equipment. With the passage of MIPPA, transfer of title of
oxygen equipment at the end of the 36-month rental cap was repealed,
although the rental cap remained in place.
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? The MMA significantly reduced reimbursement for inhalation drug
therapies beginning in 2005, reduced payment amounts for five
categories of HME, including oxygen, beginning in 2005, froze payment
amounts for other covered HME items through 2007, established a competitive bidding program for HME and implemented quality standards
and accreditation requirements for HME suppliers.
We cannot predict the impact that any federal legislation enacted in the future
will have on our financial condition, revenues, profit margins, profitability,
operating cash flows and results of operations.
Further, changes in the law or new interpretations of existing laws could have a
dramatic effect on permissible activities, the relative costs associated with
doing business and the amount of reimbursement by government and other
third-party payors. Reimbursement we receive from Medicare and other government
programs is subject to federal and state statutory and regulatory requirements,
administrative rulings, interpretations of policy, implementation of
reimbursement procedures, renewal of VA contracts, retroactive payment
adjustments and governmental funding restrictions. Our levels of revenue and
profitability, like those of other health care companies, are affected by the
continuing efforts of government payors to contain or reduce the costs of health
care, including competitive bidding initiatives, measures that impose quality
standards as a prerequisite to payment, policies reducing certain HME payment
rates and restricting coverage and payment for inhalation drugs, and refinements
to payments for oxygen and oxygen equipment.
(1) Competitive Bidding Program for HME. On April 2, 2007, the Centers for
Medicare & Medicaid Services (CMS), the agency responsible for administering the
Medicare program, issued its final rule implementing a competitive bidding
program for certain HME products under Medicare Part B. This nationwide
competitive bidding program is designed to replace the existing fee schedule
payment methodology. Under the competitive bidding program, suppliers compete
for the right to provide items to beneficiaries in a defined geographic region.
CMS selects contract suppliers that agree to receive as payment the "single
payment amount" calculated by CMS after bids are submitted. Round 1 of the
competitive bidding program began on July 1, 2008 in ten high-population
competitive bidding areas (CBAs). As a winning bidder in nine of the ten
competitive bidding areas, we signed contracts with CMS to become a contracted
supplier for the Round 1 contract period of July 1, 2008 through June 30, 2011.
The competitive bidding program was scheduled to expand to 70 additional CBAs
for a total of 80 CBAs in 2009 and additional areas thereafter.
However, on July 15, 2008, the United States Congress, following an override of
a Presidential veto, enacted MIPPA. MIPPA retroactively delayed the
implementation of competitive bidding for eighteen months, and terminated all
existing contracts previously awarded. MIPPA included a 9.5% nationwide
reduction in reimbursement effective January 1, 2009 for the product categories
included in competitive bidding, as a budget-neutrality offset for the eighteen
month delay.
On January 16, 2009, CMS published an interim final rule with comment period
(IFC) addressing the MIPPA provisions that affect Round 1 of the competitive
bidding program. This IFC announced the delay of Round 1 of the program from
2007 to 2009. The round one competition, also known as the Round 1 rebid,
occurred in the same CBAs as the 2007 Round 1 bidding, excluding Puerto Rico.
The product categories for 2009 were the same as those selected for the 2007
round one bidding, with the exception of negative pressure wound therapy and
Group 3 complex rehabilitative wheelchairs. The IFC also announced the delay of
Round 2 of the program from 2009 to 2011, the national mail order program until
after 2010 and competition in additional areas, other than mail order, until
after 2011. Suppliers are required to meet all applicable eligibility,
financial, quality and accreditation standards. The MIPPA changes that were
addressed in this IFC did not alter the fundamental requirements of the final
regulation for the competitive bidding program published on April 10, 2007.
On July 2, 2010, CMS announced the single payment amount for each of the
respective Round 1 rebid CBAs and product categories and began offering
contracts to certain bidders in the CBAs. We were awarded and accepted 17
contracts. The contracts became effective on January 1, 2011 and have a term of
three years. In addition, on July 1 and September 9, 2011, we completed two
acquisitions in two of the Round 1 rebid CBAs. As part of these acquisitions, we
assumed six additional competitive bid contracts, for a total of 23, as follows:
• 7 CBAs for oxygen supplies and equipment;
• 6 CBAs for enteral nutrients, equipment and supplies;
• 5 CBAs for continuous positive airway pressure, respiratory assist
devices and related supplies and accessories;
• 2 CBA for walkers;
• 1 CBA for hospital beds and related supplies; and
• 2 CBAs for standard power wheelchairs, scooters and related accessories.
The average reduction from current Medicare payment rates in this round of
competitive bidding across the CBAs is 32%. Suppliers that were not contracted
by CMS may continue to provide certain capped rental and oxygen equipment for
those beneficiaries that were patients at the time the program began and are
known as "grandfathered suppliers". In the CBAs and product categories where we
are not a contracted supplier, we continue to service our Medicare patients as
grandfathered
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suppliers under applicable guidelines. Based upon CMS release information, it
appears that approximately 70% of existing providers across the Round 1 Rebid
CBAs were not awarded competitive bidding contracts and are therefore not able
to provide competitive bid products to new Medicare patients during the term of
these contracts in the respective CBAs. We have experienced significant volume
increases within the CBAs where we were awarded contracts, which we attribute in
part to an increase in market share, and we believe that the revenue associated
with these volume increases will more than offset the impact of the associated
reductions in reimbursement rates over time. The application of the new
competitive bid rates in the Round 1 rebid reduced our net revenue by
approximately $1.3 million per quarter. To continue to participate in
competitive bidding for the Round 1 Rebid CBAs, suppliers must recompete. On
April 17, 2012, CMS announced plans to recompete the awarded supplier contracts,
with the exception of mail-order diabetic supplies. The bidding for this round
is scheduled to begin in Fall 2012.
CMS is currently undertaking Round 2 of competitive bidding in 91 additional
markets, with contracts expected to be effective in July 2013. Our Medicare
revenues from the product categories in the 91 additional markets to be included
in Round 2 of competitive bidding were approximately $54.0 million in 2011. The
PPACA legislation requires CMS to expand competitive bidding further to
additional geographic markets (certain markets may be excluded at the discretion
of CMS) or to use competitive bid pricing information to adjust the payment
amounts otherwise in effect for areas that are not competitive bidding areas by
January 1, 2016.
Other changes impacting competitive bidding and current payment policies for
certain items of durable medical equipment, prosthetics, orthotics and supplies
were finalized by CMS on November 2, 2010, including:
• Implementation of certain statutory provisions under MIPPA and the
PPACA, including: (1) the subdivision of metropolitan statistical areas
(MSAs) with populations over 8,000,000 into smaller CBAs, as required
under MIPPA; (2) the addition of 21 MSAs to the 70 MSAs already
designated as included in Round 2, for a total of 91 MSAs, as required
under the PPACA; and (3) the implementation of payment policies adopted
under the PPACA for power wheelchairs, which eliminated the lump sum
purchase option for standard power wheelchairs furnished on or after
January 1, 2011, and adjusted the amount of the capped rental payments
for power wheelchairs. Effective January 1, 2011, rental payments under
the adjusted fee schedule are 15% (instead of 10%) of the purchase
price for the first three months and 6% (instead of 7.5%) for the
remaining rental months not to exceed 13 months; and
• The establishment of an appeals process for competitive bidding
contract suppliers that are notified that they are in breach of
contract.
CMS in the 2010 rule also solicited comments on whether to reduce the maximum
number of payments a contract supplier would receive beyond the 13-month (for
capped rental) and 36-month (for oxygen and oxygen equipment) caps when a
beneficiary who is receiving the equipment from a non-contract supplier elects
to switch to the contract supplier. To date CMS has not made any changes.
In addition, most recently, CMS announced that beginning on September 1, 2012,
the agency will initiate a new Prior Authorization for Power Mobility Devices
(PMDs) Demonstration, which will require Medicare HME suppliers of certain PMDs,
such as power wheelchairs, to receive prior approval from a DME MAC before
submitting claims for payment. The demonstration impacts PMDs for beneficiaries
residing in California, Florida, Illinois, Michigan, New York, North Carolina,
and Texas and is scheduled to last 3 years. The failure to receive prior
approval will result in a 25% payment reduction in areas not covered by
competitive bidding. We do not anticipate that the demonstration will have a
material impact on our operations.
(2) Certain Clinical Conditions, Accreditation Requirements and Quality
Standards. The MMA required establishment and implementation of new clinical
conditions of coverage for HME products and quality standards for HME suppliers.
Some clinical conditions have been implemented, such as the requirement for a
face-to-face visit by treating physicians for beneficiaries seeking power
mobility devices. CMS published its quality standards and criteria for
accrediting organizations for HME suppliers in 2006 and revised some of these
standards in October 2008. As an entity that bills Medicare and receives payment
from the program, we are subject to these standards. We have revised our
policies and procedures to ensure compliance in all material respects with the
quality standards. These standards, which are applied by independent
accreditation organizations, include business-related standards, such as
financial and human resources management requirements, which would be applicable
to all HME suppliers, and product-specific quality standards, which focus on
product specialization and service standards. The product specific standards
address several of our products, including oxygen and oxygen equipment, CPAP and
power and manual wheelchairs and other mobility equipment.
Currently, all of our operating locations are accredited by the Joint Commission
(formerly referred to as the Joint Commission on Accreditation of Healthcare
Organizations). The Joint Commission is a CMS recognized accrediting
organization. Round 1 re-bid competitive bid suppliers were required to be
accredited by September 30, 2009.
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Additional clinical conditions for coverage were imposed under PPACA,
authorizing CMS to require a physician or other licensed professional to conduct
a face-to-face encounter with the beneficiary before writing a prescription for
certain HME. On July 30, 2012, CMS proposed to implement this requirement
through a rule that would impact, among others, items that cost more than $1,000
and items that in the view of CMS are particularly susceptible to fraud, waste
and abuse. CMS identified oxygen and oxygen equipment, positive airway pressure
devices, and respiratory assist devices as requiring such a face-to-face
requirement, which would implicate our products if finalized.
Supplier standards for Medicare HME companies, effective March 3, 2009 require
HME suppliers to meet certain surety bond requirements. For each National
Provider Identifier (NPI) number subject to Medicare billing privileges,
suppliers must obtain a surety bond in the amount of $50,000. Each of our 420
operating locations is required to have its own NPI number. There may be an
upward adjustment for suppliers that have had adverse legal actions imposed on
them in the past. HME suppliers already enrolled in Medicare were required to
obtain a surety bond by October 2, 2009, and newly enrolled suppliers or those
changing ownership were subject to the provisions of the new rule on May 4,
2009. We maintain surety bonds covering all of our NPI numbers at each of our
operating locations.
(3) Reduction in Payments for HME and Inhalation Drugs. The MMA changes also
included a reduction in reimbursement rates beginning in January 2005 for oxygen
equipment and certain other HME items (including wheelchairs, nebulizers,
hospital beds and air mattresses) based on the percentage difference between the
amount of payment otherwise determined for 2002 and the 2002 median
reimbursement amount under the Federal Employee Health Benefits Program (FEHBP)
as determined by the Office of the Inspector General of the Department of Health
and Human Services (OIG). The FEHBP adjusted payments remained "frozen" through
2008. With limited exceptions, items that were not included in competitive
bidding received a 5% update for 2009. As discussed above, for 2009, MIPPA
included a 9.5% nationwide reduction in reimbursement for the product categories
included in competitive bidding, as a budget neutrality offset for the eighteen
month delay.
The MMA also revised the payment methodology for certain drugs, including
inhalation drugs dispensed through nebulizers. Historically, prescription drug
coverage under Medicare has been limited to drugs furnished incident to a
physician's services and certain self-administered drugs, including inhalation
drug therapies. Prior to MMA, Medicare reimbursement for covered drugs,
including the inhalation drugs that we provide, was limited to 95 percent of the
published average wholesale price (AWP) for the drug. MMA established new
payment limits and procedures for drugs reimbursed under Medicare Part B.
Beginning in 2005, inhalation drugs furnished to Medicare beneficiaries are
reimbursed at 106 percent of the volume-weighted average selling price (ASP) of
the drug, as determined from data provided each quarter by drug manufacturers
under a specific formula described in MMA. Implementation of the ASP-based
reimbursement formula resulted in a significant reduction in payment rates for
inhalation drugs. Given the overall reduction in payment for inhalation drugs
dispensed through nebulizers, CMS established a dispensing fee for inhalation
drugs shipped to a beneficiary beginning in 2005. The current dispensing fee is
$57 for the first 30-day period in which a Medicare beneficiary uses inhalation
drugs and $33 for each subsequent 30-day period. The dispensing fee for a 90-day
supply of inhalation drugs is $66. The dispensing fee has remained unchanged
since 2006. Future changes from quarterly updates to ASP pricing, as well as any
future dispensing fee reductions or eliminations, if they occur, could have a
material adverse effect on our financial condition, revenues, profit margins,
profitability, operating cash flows and results of operations.
Furthermore, because the ASP amounts vary from quarter to quarter, changes in
market forces influence the Medicare payment rate. In late 2006, the US Food and
Drug Administration approved a first-time generic formulation for DuoNeb. The
introduction of this generic product into the market has contributed to the
reduction of the ASP for DuoNeb from $1.079 in the fourth quarter of 2007 to
$0.218 in the third quarter 2012. The impact of this reduction to our profit
margins, profitability, operating cash flows and results of operations was
partially mitigated through the dispensing of generic DuoNeb and changes in
nebulizer product mix.
(4) Reduction in Payments for Oxygen and Oxygen Equipment. The DRA which was
signed into law on February 8, 2006, made certain changes to the way Medicare
Part B pays for certain of our HME products, including oxygen and oxygen
equipment. For oxygen equipment, prior to the DRA, Medicare made monthly rental
payments indefinitely, provided medical need continued. The DRA capped the
Medicare rental period for oxygen equipment at 36 months of continuous use,
after which time ownership of the equipment would transfer to the beneficiary.
For purposes of this cap, the DRA provided for a new 36-month rental period that
began January 1, 2006 for all oxygen equipment. In addition to the changes in
the duration of the rental period for capped rental items and oxygen equipment,
the DRA permitted payments for servicing and maintenance of the products after
ownership transfers to the beneficiary.
On November 1, 2006, CMS released a final rule to implement the DRA changes,
which went into effect January 1, 2007. Under the rule, CMS clarified the DRA's
36-month rental cap on oxygen equipment. CMS also revised categories and payment
amounts for the oxygen equipment and contents during the rental period and for
oxygen contents after equipment ownership by the beneficiary as described below.
With the passage of MIPPA on July 15, 2008, transfer of title to oxygen
equipment at the end of the 36-month rental cap was repealed, although the
rental cap remained in place. Effective January 1, 2009, after the
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36th continuous month during which payment is made for the oxygen equipment, the
equipment is to continue to be furnished during any period of medical need for
the remainder of the reasonable useful lifetime of the equipment. The reasonable
useful lifetime for stationary or portable oxygen equipment begins when the
oxygen equipment is first delivered to the beneficiary and continues until the
point at which the stationary or portable oxygen equipment has been used by the
beneficiary on a continuous basis for five years (60 months) provided there are
no breaks in service due to medical necessity. Computation of the reasonable
useful lifetime is not based on the age of the equipment. During the capped
rental period from months 37 through 60 of continuous use, payment is made only
for oxygen and for certain reasonable and necessary maintenance and servicing
(for parts and labor not covered by the supplier's or manufacturer's warranty)
(as discussed in more detail below).
• Payment for Rental Period. The 2012 and 2011 rate for stationary oxygen
equipment is $176.06 and $173.31, respectively. The 2012 and 2011
monthly portable oxygen add-on amount is $29.43 and $28.74,
respectively. The 2012 monthly payment amount for oxygen-generating
portable oxygen equipment remains unchanged at $51.63 from 2011.
• Payment for Contents after 36-Month Rental Cap. Payment is based on the
type of equipment owned and whether it is oxygen-generating. CMS pays
separate monthly payments $77.45 each for stationary and portable
oxygen content. If the beneficiary uses both stationary and portable
equipment that is not oxygen-generating, the monthly payment amount for
oxygen contents is $154.90. For stationary or portable oxygen equipment
that is oxygen-generating, there will be no monthly payment for
contents.
• Payment for maintenance and service after 36-Month Rental Cap. CMS pays
for one in-home, maintenance and service visit for oxygen concentrators
and transfilling equipment every six months, beginning six months after
the end of the 36-month rental cap. This payment will be made if the
supplier visits the beneficiary's home, performs any necessary
maintenance and service, and inspects the equipment to ensure that it
will function safely for the next six months. CMS pays for such in-home maintenance and service visits every six months until medical necessity
ends or the beneficiary elects to obtain new equipment. Beginning July
1, 2010, the six-month maintenance and service payment rate is capped
at 10% of the cost of acquiring a stationary oxygen concentrator, which
resulted in a payment of $66 for calendar year 2010. For calendar year
2011 and subsequent years, the maintenance and servicing fee is
adjusted by the covered item update for DME, which resulted in a
payment of $65.93 for calendar year 2011, and $67.51 for calendar year
2012.
Finally, CMS clarified that though it retains title to the equipment, a supplier
is required to continue to furnish needed oxygen equipment and contents for
liquid or gaseous equipment after the 36-month rental cap until the end of the
equipment's reasonable useful lifetime. CMS determined the reasonable useful
lifetime for oxygen equipment to be five years provided there are no breaks in
service due to medical necessity, computed based on the date the equipment is
delivered to the beneficiary. On January 27, 2009, CMS posted further
instructions on the implementation of the 36-month rental cap, including
guidance on payment for oxygen contents after month 36 and the replacement of
oxygen equipment that has been in continuous use by the patient for the
equipment's reasonable useful lifetime (as defined above). In accordance with
the instructions, and consistent with the final rule published on October 30,
2008, suppliers may bill for oxygen contents on a monthly basis after the
36-month rental cap, and the supplier can deliver up to a maximum of three
months of oxygen contents at one time. Additionally, in accordance with these
instruction, and consistent with the final rule published on October 30, 2008,
we provide replacement equipment to our patients that exceed five years of
continuous use.
The ongoing financial impact of the 36-month rental cap will depend upon a
number of variables, including, (i) the number of Medicare oxygen customers
reaching 36 months of continuous service, (ii) the number of patients receiving
oxygen contents beyond the 36-month rental period and the coverage and billing
requirements established by CMS for suppliers to receive payment for such oxygen
contents, (iii) the mortality rates of patients on service beyond 36 months,
(iv) the incidence of patients with equipment deemed to be beyond its reasonable
useful life that may be eligible for new equipment and therefore a new rental
episode and the coverage and billing requirements established by CMS for
suppliers to receive payment for a new rental period, (v) any breaks in
continuous use due to medical necessity, and (vi) payment amounts established by
CMS to reimburse suppliers for maintenance of oxygen equipment. We cannot
predict the impact that any future rulemaking by CMS will have on our business.
If payment amounts for oxygen equipment and contents are further reduced in the
future, this could have a material adverse effect on our financial condition,
revenues, profit margins, profitability, operating cash flows and results of
operations.
CMS also has authority to make other adjustments to reimbursement for HME. With
the passage of the Balanced Budget Act of 1997, CMS may determine to increase or
reduce the reimbursement for HME, including oxygen, by up to 15% each year under
an inherent reasonableness procedure. The regulation implementing the inherent
reasonableness authority establishes a process for adjusting payments for
certain items and services covered by Medicare Part B when the existing payment
amount is determined to be grossly excessive or deficient. The regulation lists
factors that may be used by CMS and its Medicare contractors to determine
whether an existing reimbursement rate is grossly excessive or deficient and to
determine what a
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realistic and equitable payment amount is. Also, under the regulation, CMS and
its contractors will not consider a payment amount to be grossly excessive or
deficient and make an adjustment if they determine that an overall payment
adjustment of less than 15% is necessary to produce a realistic and equitable
payment amount. The implementation of the inherent reasonableness procedure
itself does not trigger payment adjustments for any items or services and to
date, no payment adjustments have occurred or been proposed under this inherent
reasonableness procedure.
Though the inherent reasonableness authority has not been exercised, in past
years, CMS historically has reduced the published Medicare reimbursement rates
for HME to an amount based on the payment amount for the least costly
alternative (LCA) treatment that meets the Medicare beneficiary's medical needs.
LCA determinations have been applied to particular products and services by CMS
and its contractors through the notice and comment process used in establishing
local coverage policies for HME. With respect to its LCA policies, on
October 16, 2008, a U.S. District Court in the District of Columbia held that
CMS did not have the authority to implement LCA determinations in setting
payment amounts for an inhalation drug. This decision was upheld by the U.S.
Court of Appeals and, as a result, CMS and its contractors withdrew their LCA
policy for the inhalation drug. In addition, CMS instructed its contractors that
they may no longer apply LCA policies to any HME. Effective February 4, 2011,
all coverage policies have been revised to eliminate their LCA provisions.
During the quarter ended March 31, 2012, management identified an error made in
certain programming logic within its billing system. As a result of this error,
we determined that we had been overpaid on certain specific Medicare claim types
since January 1, 2009. The amount of the overpayment totaled approximately $6.5
million. The programming logic that caused this error has been disabled in our
billing system and we are not aware of any other Medicare overpayment issues as
a result of this or any other programming error. We have substantially completed
the new programming logic to resume billing for the items impacted by the above
noted error. We have engaged an outside technical firm to conduct an independent
review of our new programming logic prior to implementation to confirm that the
programming logic is consistent with all associated Medicare regulations and
such review is ongoing. On May 7, 2012, we voluntarily refunded the above
described overpayment to the appropriate Durable Medical Equipment Medicare
Administrative Contractors (DME MACs) (see "Notes to Unaudited Condensed
Consolidated Financial Statements-(1) Basis of Presentation" included herein in
Item 1, "Financial Statements").
Results of Operations
The following table shows our results of operations for the three and six months
ended June 30, 2012 and 2011.
(unaudited)
Three months ended Six months ended
June 30, June 30,
2012 2011 2012 2011
Net revenues $ 116,544 $ 121,937 $ 233,501 $ 242,943
Costs and expenses:
Cost of net revenues 38,698 35,931 75,933 75,029
Selling, general and administrative 68,040 62,994 136,702 125,625
Provision for doubtful accounts 5,938 7,109 16,915 12,348
Depreciation and amortization 2,327 2,261 4,798 4,635
Total costs and expenses 115,003 108,295 234,348 217,637
Operating income 1,541 13,642 (847 ) 25,306
Other expense (income):
Interest expense, net 15,049 16,107 29,886 30,674
Other expense (income), net 90 (18 ) 90 (880 )
Loss on debt extinguishment - - - 1,216
Total other expense 15,139 16,089 29,976 31,010
Loss before income taxes (13,598 ) (2,447 ) (30,823 ) (5,704 )
Income tax expense (benefit) 15 23 47 (41 )
Net loss (13,613 ) (2,470 ) (30,870 ) (5,663 )
Accrued dividends on convertible
redeemable preferred stock 61 108 124 214
Net loss attributable to common
stockholders $ (13,674 ) $ (2,578 ) $ (30,994 ) $ (5,877 )
20
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The following table shows our results of operations as a percentage of our net
revenues for the three and six months ended June 30, 2012 and 2011.
(unaudited)
Three months ended Six months ended
June 30, June 30,
2012 2011 2012 2011
Net revenues 100.0 % 100.0 % 100.0 % 100.0 %
Costs and expenses:
Cost of net revenues 33.2 % 29.5 % 32.5 % 30.9 %
Selling, general and administrative 58.4 % 51.7 % 58.5 % 51.7 %
Provision for doubtful accounts 5.1 % 5.8 % 7.2 % 5.1 %
Depreciation and amortization 2.0 % 1.9 % 2.1 % 1.9 %
Total costs and expenses 98.7 % 88.9 % 100.3 % 89.6 %
Operating income 1.3 % 11.1 % (0.3 )% 10.4 %
Other expense (income):
Interest expense, net 12.9 % 13.2 % 12.8 % 12.6 %
Other expense (income), net 0.1 % - % - % (0.4 )%
Loss on debt extinguishment - % - % - % 0.5 %
Total other expenses 13.0 % 13.2 % 12.8 % 12.7 %
Loss before income taxes (11.7 )% (2.1 )% (13.1 )% (2.3 )%
Income tax expense (benefit) - % - % - % - %
Net loss (11.7 )% (2.1 )% (13.1 )% (2.3 )%
Accrued dividends on convertible
redeemable preferred stock 0.1 % 0.1 % 0.1 % 0.1 %
Net loss attributable to common
stockholders (11.8 )% (2.2 )% (13.2 )% (2.4 )%
Three months ended June 30, 2012 as compared to the three months ended June 30,
2011
Total net revenues for the three months ended June 30, 2012 were $116.5 million
as compared to $121.9 million for the comparable period in 2011. This net
decrease of $5.4 million from the comparable period in 2011 is primarily
attributable to:
• Decreased nebulizer medication volume and reimbursement totaling
approximately $2.0 million;
• Decreased net revenue from higher rates of contractual/revenue adjustments
compared to prior year totaling approximately $1.5 million;
• Patients moved to non-billable status primarily as a result of Medicare
claim denials from pre-payment and post-payment audits totaling
approximately $3.6 million;
• Decreased net revenue from Medicare oxygen patients reaching their 36
month rental cap totaling approximately $3.3 million; and
• Decreased net revenue from non-core product lines totaling approximately
$0.6 million.
These decreases were partially offset by:
• Organic growth of 6% in oxygen patients, 12% in CPAP rental patients and
5% in CPAP sales compared to prior year, totaling approximately $2.7
million in incremental revenue; and
• Growth in the net number of active patients on service with us through
equipment and asset purchase transactions totaling $2.9 million.
Cost of net revenues totaled $38.7 million for the three months ended June 30,
2012, an increase of $2.8 million, or 7.7%, from the comparable period in 2011.
Cost of net revenues for the three months ended June 30, 2012 and 2011 was
comprised of the following:
21
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Three months ended
June 30,
2012 2011
Cost of net revenues:
Product and supply costs $ 21,638 $ 21,342
Patient service equipment depreciation 14,797 12,425
Operating costs 2,263 2,164
$ 38,698 $ 35,931
The increase in product and supply costs is primarily attributable to increased
volume in CPAP supply sales net of volume-related decreases in product and
supply costs for nebulizer medications. The increase of $2.4 million in patient
service equipment depreciation is primarily attributable to the shortening of
our average composite useful life for CPAP equipment as a result of a higher
percentage of CPAP equipment renting to purchase. Operating costs primarily
consist of salary and benefit costs associated with our respiratory services and
pharmacy operations. These costs are reclassified from selling, general and
administrative expenses to cost of net revenues. Cost of net revenues as a
percentage of net revenues was 33.2% for the three months ended June 30, 2012 as
compared to 29.5% for the comparable period in 2011.
Selling, general and administrative expenses for the three months ended June 30,
2012 totaled $68.0 million, an increase of $5.0 million, or 8.0%, from the
comparable period in 2011. The increase in selling, general and administrative
expenses was primarily attributable to:
• $2.0 million retirement award due to Mr. Philip Carter, Chief Executive
Officer of the Company, under terms of his employment agreement;
• Incremental salary and benefit costs associated with asset purchases
completed since second quarter 2011 totaling approximately $0.9 million;
• Annual merit increase as compared to the same period in 2011 totaling
approximately $0.6 million; and
• Increased legal expenses of $1.0 million associated with review and
quantification of the aforementioned Medicare overpayment, as well as
legal costs associated with various strategic activities.
The provision for doubtful accounts for the three months ended June 30, 2012
totaled $5.9 million, a $1.2 million decrease from the comparable period in
2011. As a percentage of net revenues, the provision for doubtful accounts was
5.1% and 5.8% for the three months ended June 30, 2012 and 2011, respectively.
This decrease is attributable to the factors described below under the heading
"Liquidity and Capital Resources."
Depreciation and amortization for the three months ended June 30, 2012 totaled
$2.3 million, an increase of $0.1 million from the comparable period in 2011.
Depreciation and amortization as a percentage of net revenues increased to 2.0%
as compared to 1.9% for the comparable period in 2011.
Net interest expense for the three months ended June 30, 2012 totaled $15.0
million, a decrease of $1.1 million from the comparable period in 2011. This
decrease is primarily the result of the additional interest incurred during the
three months ended June 30, 2011 as a result of the 30 day notice period to
bondholders required for redemption of the Senior Subordinated Notes paid April
18, 2011.
Net loss for the three months ended June 30, 2012 was $13.6 million compared to
net loss of $2.5 million for the comparable period in 2011. This difference is
attributable to the changes in revenue, and costs and expenses described above.
Six months ended June 30, 2012 as compared to the six months ended ended
June 30, 2011
Total net revenues for the six months ended June 30, 2012 were $233.5 million as
compared to $242.9 million for the comparable period in 2011. This net decrease
of $9.4 million from the comparable period in 2011 is primarily attributable to:
• Decreased nebulizer medication volume and reimbursement totaling
approximately $6.0 million;
• Decreased net revenue from increased rates of contractual/revenue
adjustments compared to prior year totaling approximately $5.4 million ;
• Patients moved to non-billable status primarily as a result of Medicare
claim denials from pre-payment and post-payment audits totaling
approximately $7.5 million;
• Decreased net revenue from Medicare oxygen patients reaching their 36
month rental cap totaling approximately $5.8
22--------------------------------------------------------------------------------
million; and
• Decreased net revenue from non-core product lines totaling approximately
$1.2 million.
These decreases were partially offset by:
• Organic growth of 6% in oxygen, 12% in CPAP rental and 5% in CPAP sales
compared to prior year, totaling approximately $13.4 million in
incremental revenue; and
• Growth in the net number of active patients on service with us through
equipment and asset purchase transactions totaling $3.0 million.
Cost of net revenues totaled $75.9 million for the six months ended June 30,
2012, an increase of $0.9 million, or 1.2%, from the comparable period in 2011.
Cost of net revenues for the six months ended June 30, 2012 and 2011 was
comprised of the following:
Six months ended
June 30,
2012 2011
Cost of net revenues:
Product and supply costs $ 44,191 $ 45,570
Patient service equipment depreciation 27,357 25,140
Operating costs 4,385 4,319
$ 75,933 $ 75,029
The increase in product and supply costs is primarily attributable to increased
volume in CPAP supply sales net of volume-related decreases in product and
supply costs for nebulizer medications. The increase of $2.2 million in patient
service equipment depreciation is primarily attributable to the shortening of
our average composite useful life for CPAP equipment as a result of a higher
percentage of CPAP equipment renting to purchase. Operating costs primarily
consist of salary and benefit costs associated with our respiratory services and
pharmacy operations. The costs are reclassified from selling, general and
administrative expenses to cost of net revenues. Cost of net revenues as a
percentage of net revenues was 32.5% for the six months ended June 30, 2012 as
compared to 30.9% for the comparable period in 2011.
Selling, general and administrative expenses for the six months ended June 30,
2012 totaled $136.7 million, an increase of $11.1 million, or 8.8%, from the
comparable period in 2011. The increase in selling, general and administrative
expenses was primarily attributable to:
• $2.0 million retirement award due to Mr. Philip Carter, Chief Executive
Officer of the Company, under terms of his employment agreement;
• Incremental salary and benefit costs associated with asset purchases
completed since second quarter 2011 totaling approximately $2.3 million;
• Annual merit increase and one additional payroll day in the six months
ended June 30, 2012 as compared to the same period in 2011 net of
reductions in benefit costs totaling approximately $1.0 million;
• Increased telephone expense of approximately $1.0 million due primarily to
the excise tax refund (credit) recorded during the three months ended
March 31, 2011;
• Increased temporary labor costs and overtime totaling approximately $1.6
million primarily associated with addressing the operational backlogs
experienced during the implementation of our new order intake system that
led to the increase in earned but unbilled accounts receivable as of
December 31, 2011;
• Additional commissions expense associated with accelerated patient growth
in the six months ended June 30, 2012 as compared to the same period in
2011 totaling approximately $1.0 million;
• Increased legal expenses of $1.0 million primarily associated with review
and quantification of the aforementioned Medicare overpayment, as well as
legal costs associated with various strategic activities; and
• Increased vehicle fleet maintenance and fuel costs primarily as a result
of higher gas prices totaling approximately $0.9 million.
The provision for doubtful accounts for the six months ended June 30, 2012
totaled $16.9 million, a $4.6 million increase from the comparable period in
2011. As a percentage of net revenues, the provision for doubtful accounts was
7.2% and 5.1% for the six months ended ended June 30, 2012 and 2011,
respectively. This increase is attributable to the factors described below under
the heading "Liquidity and Capital Resources."
23
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Depreciation and amortization for the six months ended June 30, 2012 totaled
$4.8 million, an increase of $0.2 million from the comparable period in 2011.
This increase was mainly the result of purchased vehicles, including those
acquired in conjunction with certain equipment and asset purchase transactions.
Depreciation and amortization as a percentage of net revenues increased to 2.1%
as compared to 1.9% for the comparable period in 2011.
Net interest expense for the six months ended June 30, 2012 totaled $29.9
million, a decrease of $0.8 million from the comparable period in 2011. This
decrease is primarily the result of the additional interest incurred during the
six months ended June 30, 2011 as a result of the 30 day notice period to
bondholders required for redemption of the Senior Subordinated Notes paid April
18, 2011.
Net loss for the six months ended June 30, 2012 was $30.9 million compared to
net loss of $5.7 million for the comparable period in 2011. This difference is
attributable to the changes in revenue, and costs and expenses described above.
Non-GAAP Financial Measure
We present Adjusted EBITDA as a supplemental measure of our performance that is
not required by, or presented in accordance with, generally accepted accounting
principles (GAAP) in the United States of America. We define Adjusted EBITDA as
net earnings (loss) adjusted for (i) income tax (benefit) expense, (ii) interest
expense and (iii) depreciation and amortization, as further adjusted to
eliminate the impact of certain items, consistent with definitions provided
under our former Senior Facility, that we do not consider indicative of our
ongoing operating performance. These further adjustments are itemized below. You
are encouraged to evaluate these adjustments and the reasons we consider them
appropriate for supplemental analysis. We believe Adjusted EBITDA assists
investors and securities analysts in comparing our performance across reporting
periods on a consistent basis by excluding items, consistent with definitions
provided under our former Senior Facility, that we do not believe are indicative
of our core operating performance. However, there may be additional items which
are non-recurring as set forth above in Management's Discussion and Analysis of
Financial Condition and Results of Operations. We use Adjusted EBITDA to
evaluate the effectiveness of our business strategies. In evaluating Adjusted
EBITDA, you should be aware that in the future we may incur expenses that are
the same as or similar to some of the adjustments in this presentation. Our
presentation of Adjusted EBITDA should not be construed as an inference that our
future results will be unaffected by unusual or non-recurring items.
The following table is a reconciliation of Adjusted EBITDA to net loss (in
thousands):
Three months ended Six months ended
June 30, June 30,
2012 2011 2012 2011
Net loss $ (13,613 ) $ (2,470 ) $ (30,870 ) $ (5,663 )
Income tax expense (benefit) 15 23 47 (41 )
Interest expense 15,051 16,120 29,893 30,838
Depreciation and amortization,
including patient service equipment
depreciation 17,124 14,685 32,156 29,775
Non-cash equity-based compensation
expense 276 160 614 193
Operational restructuring and
transition related costs(1) 2,366 16 2,606 22
Settlement costs(2) 91 - 91 18
Loss on extinguishment of debt(3) - - - 1,216
Intake system implementation(4) 75 - 8,421 -
Oxygen content overbilling (5) 998 - 998 -
Legal fees(6) 368 - 368 -
$ 22,751 $ 28,534 $ 44,324 $ 56,358
(1) Includes $2.0 million retirement award due to Mr. Philip Carter, Chief
Executive Officer of the Company, under the terms of his employment
agreement, as well as other operational restructuring and transition related
costs generally consisting of severance and location closure costs, and
temporary, transitional employee costs associated with patient transition
following asset or equipment purchase transactions.
24--------------------------------------------------------------------------------
(2) Settlement costs incurred outside our ordinary course of business which we
do not believe reflect the current and ongoing cash charges related to our
operating cost structure.
(3) We redeemed our 9.5% Senior Subordinated Notes due April 2012 on March 17, 2011, and recorded a $1.2 million loss on extinguishment of debt related to
unamortized debt issue costs.
(4) During the second half of 2011, we completed implementation of our new order
intake system. In conjunction with our electronic medical record system
implemented in 2009, we have redesigned our front-end order intake
processes. As a result, we have been able to automate and consolidate many
of our historically paper-based processes. However, during the six month
implementation process, we experienced extended delays in obtaining certain
required payor-specific documentation required to release claims. Such
delays were caused by unanticipated operational backlogs associated with our
conversion to the new order intake system. These operational backlogs caused
our earned but unbilled accounts receivable to increase to approximately
$30.5 million during the first quarter of 2012. We implemented numerous
operational initiatives designed to eliminate this backlog and as of April
30, 2012, we have reduced the total earned but unbilled receivables to $22.0
million. In the process of reducing our earned but unbilled receivables
during the first quarter of 2012, we incurred incremental labor expense
including overtime and temporary labor costs of approximately $0.5 million,
as well as write-offs of accounts receivable associated with insurance and
patient balances of approximately $7.8 million recorded during the three
months ended March 31, 2012. Management believes that these implementation
issues are substantially resolved and the associated increases in labor
costs, contractual/revenue adjustments impacting net revenue, and the
provision for doubtful accounts recorded during the three months ended March
31, 2012 are not indicative of our current operating performance and are not
expected to recur.
(5) Legal and consulting expenses related to review and quantification of the
Medicare overpayment described in "Notes to Unaudited Condensed Consolidated
Financial Statements-(1) Basis of Presentation" included herein in Item 1,
"Financial Statements".
(6) Legal fees associated with various non-recurring events and strategic
activities.
Adjusted EBITDA should not be considered as a measure of financial performance
under GAAP, and the items excluded from EBITDA are significant components in
understanding and assessing financial performance. Adjusted EBITDA has
limitations as an analytical tool. Some of these limitations are:
• Adjusted EBITDA does not reflect our cash expenditures, future
requirements for capital expenditures or contractual commitments;
• Adjusted EBITDA does not reflect changes in, or cash requirements for,
our working capital needs;
• Adjusted EBITDA does not reflect significant interest expense, or the
cash requirements necessary to service interest or principal payments
on our debts;
• although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized will often have to be replaced in the
future, and Adjusted EBITDA does not reflect any cash requirements for
such replacements;
• non-cash compensation is and will remain a key element of our overall
long-term incentive compensation package, although we exclude it as an
expense when evaluating our ongoing operating performance for a
particular period;
• Adjusted EBITDA does not reflect the impact of certain cash charges
resulting from matters we consider not to be indicative of our ongoing
operations; and
• other companies in our industry may calculate Adjusted EBITDA
differently than we do, limiting its usefulness as a comparative
measure.
Because of these limitations, Adjusted EBITDA should not be considered in
isolation or as a substitute for performance measures calculated in accordance
with GAAP. We compensate for these limitations by relying primarily on our GAAP
results and using Adjusted EBITDA only supplementally.
Liquidity and Capital Resources
Net cash provided by operating activities was $10.2 million for the six months
ended June 30, 2012, as compared to $12.9 million for the same period in 2011.
Our working capital requirements relate primarily to the working capital needed
for general corporate purposes. Cash flows and cash on hand were sufficient to
fund operations, capital expenditures and required repayments of debt during the
six months ended June 30, 2012. Based on current conditions, we believe that the
cash generated from our operations and cash balances will be sufficient to meet
our working capital, capital expenditure and other cash needs during the next
twelve months, including payment of interest amounts on our Senior Secured Notes
and Senior Second Lien Notes when due. In addition, we have $10.0 million
available under our revolving credit facility which expires March 17, 2014.
25
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Accounts receivable before allowance for doubtful accounts increased to $94.6
million at June 30, 2012 from $90.5 million at December 31, 2011. Allowances for
contractual adjustments and doubtful accounts as a percentage of accounts
receivable totaled 34.5% and 31.3% as of June 30, 2012 and December 31, 2011,
respectively. Days sales outstanding (DSO) in accounts receivable (calculated as
of each period end by dividing net accounts receivable by the 90-day rolling
average of net revenue) were 58.4 days at June 30, 2012, compared to 58.7 days
at December 31, 2011 and 58.9 days at June 30, 2011. There are several factors
that continue to impact our DSO:
• Significant increases in the number of claims subject to prepayment
review, primarily by the Durable Medical Equipment Medicare
Administrative Contractors (DME MACs) and Zone Program Integrity
Contractors (ZPICs);
• Increased authorization, reauthorization, qualification, requalification and ongoing compliance requirements that can result in
billing delays when patients fail to follow through with required
physician follow-up visits or fail to follow prescribed therapy
protocols;
• Increased patient co-payments and deductibles due from customers who
are finding it difficult to pay their out-of-pocket charges due to loss
of insurance coverage, increases in deductibles and co-payment amounts
or reductions in their investment or employment income; and
• More stringent patient collection standards. We have implemented more
stringent collection standards with respect to balances due from
patients including enhanced internal collection efforts and utilization
of a third-party collection resource. While these changes may result in
higher DSO, we believe that our efforts ultimately result in greater
collection of amounts due from patients.
As a result of the impact of the above factors, we increased our overall reserve
level for doubtful accounts during the quarter ended March 31, 2012. We continue
to work with our third-party vendor to reduce our overall levels of bad debt, as
well as internal initiatives to secure co-payment and deductibles amounts from
patients.
The following tables set forth the percentage breakdown of our accounts
receivable by payor and aging category as of June 30, 2012 and December 31,
2011:
June 30, 2012
Accounts receivable by payor and Managed Care Patient
aging category: Government and Other Responsibility Total
Aged 0-90 days 38 % 20 % 9 % 67 %
Aged 91-180 days 7 % 5 % 10 % 22 %
Aged 181-360 days 2 % 3 % 6 % 11 %
Aged over 360 days - % - % - % - %
Total 47 % 28 % 25 % 100 %
December 31, 2011
Accounts receivable by payor and Managed Care Patient
aging category: Government and Other Responsibility Total
Aged 0-90 days 37 % 20 % 8 % 65 %
Aged 91-180 days 7 % 5 % 7 % 19 %
Aged 181-360 days 5 % 3 % 7 % 15 %
Aged over 360 days - % - % 1 % 1 %
Total 49 % 28 % 23 % 100 %
Included in accounts receivable are earned but unbilled receivables of $21.4
million at June 30, 2012 and $28.1 million at December 31, 2011. These amounts
include $3.6 million at June 30, 2012 and December 31, 2011 of receivables for
which a prior authorization is required but has not yet been received. Delays,
ranging from a day to several weeks, between the date of service and billing can
occur due to delays in obtaining certain required payor-specific documentation
from internal and external sources. In addition to the aforementioned delays, we
are required to obtain revised documentation for patients transitioned onto
service with us through equipment purchases which results in increased initial
billing cycles for these patients. Earned but unbilled receivables are aged from
the date of service and are considered in our analysis of historical performance
and collectability.
26
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Due to the nature of the industry and the reimbursement environment in which we
operate, certain estimates are required to record net revenues and accounts
receivable at their net realizable values. Inherent in these estimates is the
risk that they will have to be revised or updated as additional information
becomes available. Specifically, the complexity of many third-party billing
arrangements and the uncertainty of reimbursement amounts for certain services
from certain payors may result in adjustments to amounts originally recorded.
Such adjustments are typically identified and recorded at the point of cash
application, claim denial or account review.
Management performs analyses to evaluate the net realizable value of accounts
receivable. Specifically, management considers historical realization data,
accounts receivable aging trends, other operating trends and relevant business
conditions. Because of continuing changes in the health care industry and
third-party reimbursement, it is possible that management's estimates could
change, which could have an impact on our financial condition, revenues, profit
margins, profitability, operating cash flows and results of operations.
We derive a significant portion of our revenues from the Medicare and Medicaid
programs and from managed care health plans. Payments for services rendered to
patients covered by these programs may be less than billed charges. Revenue is
recognized at net realizable amounts estimated to be paid by customers and
third-party payors. Our billing system contains payor-specific price tables that
reflect the fee schedule amounts in effect or contractually agreed upon by
various government and commercial payors for each item of equipment or supply
provided to a customer. For Medicare and Medicaid revenues, as well as most
other managed care and private payors, final payment is subject to
administrative review and audit. Management makes estimated provisions for
adjustments, which may result from administrative review and audit, based upon
historical experience. Management closely monitors its historical collection
rates as well as changes in applicable laws, rules and regulations and contract
terms to help assure that provisions are made using the most accurate
information management believes to be available. However, due to the
complexities involved in these estimations, actual payments we receive could be
different from the amounts we estimate and record.
Collection of receivables from third-party payors and patients is our primary
source of cash and is critical to our operating performance. We manage billing
and collection of accounts receivable through our own billing and collection
centers. In addition, we utilize third-party collection resources to manage
collection of amounts due from patients. Our primary collection risks relate to
patient accounts for which the primary insurance payor has paid, but patient
responsibility amounts (generally deductibles and co-payments) remain
outstanding. We record bad debt expense based on a percentage of revenue using
historical Company-specific data. The percentage and amounts used to record bad
debt expense and the allowance for doubtful accounts are supported by various
methods including current and historical cash collections, bad debt write-offs,
and aging of accounts receivable. Accounts are written off against the allowance
when all collection efforts (including payor appeals processes) have been
exhausted. We routinely review accounts receivable balances in conjunction with
our historical contractual adjustment and bad debt rates and other economic
conditions which might ultimately affect the collectability of patient accounts
when we consider the adequacy of the amounts we record as provision for doubtful
accounts. Significant changes in payor mix, business office operations, economic
conditions or trends in federal and state governmental health care coverage
could affect our collection of accounts receivable, cash flows and results of
operations. Further, even if our billing procedures comply with all third-party
payor requirements, some of our payors may experience financial difficulties,
may delay payments or may otherwise not pay accounts receivable when due, which
would result in increased write-offs or provisions for doubtful accounts. If we
are unable to collect our accounts receivable on a timely basis, our revenues,
profitability and cash flow likely will significantly decline.
Because of continuing changes in the health care industry and third-party
reimbursement, it is possible that management's estimates could change, which
could have an impact on revenues, profit margins, profitability, operating cash
flows and results of operations. Our future liquidity may be materially
adversely impacted by health care reform.
Net cash used in investing activities was $24.1 million for the six months ended
June 30, 2012, as compared to $23.8 million for the same period in 2011. We
currently have no contractual commitments for capital expenditures over the next
twelve months other than to acquire equipment as needed to supply our patients.
Our business requires us to make significant capital expenditures relating to
the purchase and maintenance of the medical equipment used in our business. Cash
paid for capital expenditures totaled approximately $23.9 million for the six
months ended June 30, 2012 as compared to $24.5 million for the same period in
2011, including $0.4 million and $6.1 million paid for equipment purchases from
competitors exiting the home health care market, respectively. Some of the
equipment purchased in these transactions is currently on rent and located in a
patient's home. As such, we have the opportunity to transition such patients
onto service with our Company. We also paid $1.1 million and $3.2 million for
the six months ended June 30, 2012 and 2011, respectively, for asset purchases
from competitors. During the six months ended June 30, 2011 cash used in
investing activities included a $4.2 million reduction in our surety bond and
letter of credit collateral included in restricted cash.
Refer to the "Notes to Unaudited Condensed Consolidated Financial Statements-(9)
Debt" included herein in Item 1,
27--------------------------------------------------------------------------------
"Financial Statements," for a complete description of our outstanding
indebtedness.
We have outstanding letters of credit totaling $7.5 million as of June 30, 2012
and December 31, 2011. Our letters of credit were cash collateralized at 100% of
their face amount as of June 30, 2012 and December 31, 2011. The cash collateral
for these outstanding letters of credit is included in restricted cash in our
consolidated balance sheet as of June 30, 2012 and December 31, 2011.
Net cash used in financing activities was $4.6 million for the six months ended
June 30, 2012, as compared to $11.7 million for the same period in 2011. Cash
paid for the redemption of our Series A convertible redeemable preferred stock
totaled $2.8 million during the six months ended June 30, 2012. Cash used in
financing activities for the six months ended June 30, 2011 primarily related to
the $11.1 million net use of cash associated with the issuance of the Senior
Second Lien Notes and repayment of our outstanding Senior Subordinated Notes.
Off-balance Sheet Arrangements and Contractual Obligations
We do not have off-balance sheet arrangements (as that term is defined in
Item 303(a)(4)(ii) of Regulation S-K) that have or are reasonably likely to have
a current or future effect on our financial condition, revenues or expenses,
results of operations, liquidity, capital expenditures or capital resources.
Critical Accounting Policies
Refer to Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as presented in our Annual Report on Form 10-K for
the year ended December 31, 2011 regarding our critical accounting policies.
Forward-Looking Statements
This report contains certain statements that constitute forward-looking
statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and the provisions of section 21E of
the Securities Exchange Act of 1934, as amended
(the Exchange Act) and section 27A of the Securities Act of 1933, as amended.
These forward-looking statements include all
statements regarding the intent, belief or current expectations regarding the
matters discussed in this report and all statements
which are not statements of historical fact. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "estimates,"
"projects," "may," "will," "could," "should," "would," variations of such words
and similar expressions are intended to identify
such forward-looking statements. These forward-looking statements involve known
and unknown risks, uncertainties,
contingencies and other factors that could cause results, performance or
achievements to differ materially from those stated in
this report. For more information about the nature of forward-looking statements
and risks that could affect our future results
and the disclosure provided in this Quarterly Report, please see "Certain
Significant Risks and Uncertainties and Significant Events" in Note 8 of the
Condensed Consolidated Financial Statements in Part I, Item 1 and Exhibit 99.1,
Forward-Looking
Statements, which is incorporated herein by reference.
