INTEGRATED HEALTHCARE HOLDINGS INC – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
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FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks discussed under the caption "Risk Factors" in our Annual Report on Form 10-K filed on
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. Except as may be required by applicable law, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
As used in this report, the terms "we," "us," "our," "the Company," "
Unless otherwise indicated, all amounts included in this Item 2 are expressed in thousands (except percentages and per share amounts).
OVERVIEW
On
SIGNIFICANT CHALLENGES
COMPANY - Our Acquisition involved significant cash expenditures, debt incurrence and integration expenses that has seriously strained our consolidated financial condition. If we are required to issue equity securities to raise additional capital or for any other reasons, existing stockholders will likely be substantially diluted, which could affect the market price of our stock. In
INDUSTRY - Our Hospitals receive a substantial portion of their revenues from
Changes to
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Our business is subject to extensive federal, state and, in some cases, local regulation with respect to, among other things, participation in the
We are subject to periodic audits by the
The healthcare industry is highly competitive. We compete with a variety of other organizations in providing medical services, many of which have greater financial and other resources and may be more established in their respective communities than we are. Competing companies may offer newer or different centers or services than we do and may thereby attract patients or customers who are presently our patients or customers or are otherwise receiving our services.
An increasing trend in malpractice litigation claims, rising costs of malpractice litigation, losses associated with these malpractice lawsuits and a constriction of insurers have caused many insurance carriers to raise the cost of insurance premiums or refuse to write insurance policies for hospital facilities. Also, a tightening of the reinsurance market has affected property, vehicle, and excess liability insurance carriers.
We receive all of our inpatient services revenue from operations in
LIQUIDITY AND CAPITAL RESOURCES
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and settlement of obligations in the normal course of business. As of
Key items for the three months ended
1. Net patient service revenues (patient service revenues, net of contractual allowances and discounts, less provision for doubtful accounts) for the three months endedJune 30, 2013 and 2012 were$223.2 million and$80.8 million , respectively, representing an increase of$142.4 million , or 176.2%. The Hospitals serve a disproportionate number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments fromMedicaid , Medicaid DSH, andOrange County, CA (CalOptima). Governmental net revenues increased$141.7 million for the three months endedJune 30, 2013 compared to the three months endedJune 30, 2012 . The increase was primarily related to Hospital Quality Assurance Fee ("QAF") revenues received from theState of California . For the three months endedJune 30, 2013 , we recorded$142.2 million in QAF revenues compared to$0 during the three months endedJune 30, 2012 (see "HOSPITAL QUALITY ASSURANCE FEES").
Inpatient admissions decreased by 7.8% to 4.7 for the three months ended
Uninsured patients, as a percentage of gross charges (retail charges), were 7.6% for the three months ended
22 2. Operating expenses: Management is working aggressively to reduce costs without reduction in service levels. These efforts have in large part been offset by inflationary pressures. Operating expenses for the three months endedJune 30, 2013 were$123.4 million , representing an increase of$40.4 million , or 48.7%, compared to the three months endedJune 30, 2012 . The increase is primarily related to QAF expenses of$33.5 million incurred during the three months endedJune 30, 2013 compared to$0 incurred during the three months endedJune 30, 2012 .
DEBT - As of
- A$47.277 million Term Loan issued under the$80.0 million Restated Credit Agreement by and among us,Silver Point Finance, LLC and its affiliate,SPCP Group, LLC (together withSilver Point Finance, LLC , "Silver Point"), andPCHI and Ganesha Realty, LLC , as Credit Parties, bearing an interest rate of LIBOR plus 10%, with the LIBOR floor set at 2% (12% atJune 30, 2013 ). If any event of default occurs and continues, the lender can increase the interest rate by 5% per year. As ofJune 30, 2013 , we were in compliance with all financial covenants. The stated maturity date for this Restated Credit Agreement isApril 13, 2016 . - A$35.0 million Revolving Credit Agreement by and among us andMidCap Funding IV, LLC , as assigned to it fromMidCap Financial, LLC , as agent and a lender, bearing an interest rate of 4.25% plus LIBOR, with a 2.5% floor, per year (6.75% atJune 30, 2013 ) and an unused commitment fee of 0.5% per year ($10.8 million outstanding balance atJune 30, 2013 ). For purposes of calculating interest, all payments we make on the Revolving Credit Agreement are subject to a five business day clearance period. As ofJune 30, 2013 , we were in compliance with all financial covenants. The stated maturity date for this Revolving Credit Agreement isMarch 25, 2016 . AtJune 30, 2013 , we had$24.2 million in additional availability under this facility.
Our outstanding debt consists of the following:
June 30, March 31, 2013 2013 Current: Revolving line of credit$ 10,761 $ 30,000 Discount (433 ) (473 )$ 10,328 $ 29,527 Noncurrent: Term loan$ 47,277 $ 47,277 Discount (1,594 ) (1,747 )$ 45,683 $ 45,530
WARRANTS - On
In addition, on
On
We entered into a Warrant Repurchase Agreement with
Immediately following the warrant repurchase, we issued a new common stock warrant (the "New Warrant") to
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Also simultaneous with the transactions described above, we extended the expiration date from
We assessed the amended credit agreement entered into in
The Omnibus Warrants, the Release Warrant, and the New Warrant are collectively referred to as the "IHHI Warrants." As of
The gain (loss) related to the change in fair value of the Company's outstanding warrants for the three months ended
HOSPITAL QUALITY ASSURANCE FEES - In
In
In
Through
We cannot provide any assurances or estimates in connection with CMS's final managed care approval of the 2013 QAF (for the period from
ELECTRONIC HEALTH RECORDS INCENTIVE PROGRAM - Provisions of the American Recovery and Reinvestment Act of 2009 provide incentive payments for the adoption and meaningful use of certified electronic health record (EHR) technology. The Medicare EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) that are meaningful users of certified EHRs. The Medicaid EHR incentive program provides incentive payments to eligible hospitals (and certain other providers) for efforts to adopt, implement, upgrade, or meaningful use of certified EHR technology.
CMS has established the final rule which requires eligible providers in their first year of participation in the
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LONG TERM LEASE COMMITMENT WITH VARIABLE INTEREST ENTITY - On
COMMITMENTS AND CONTINGENCIES - The
The
There are additional requirements that must be complied with by 2030. The costs of meeting these requirements have not yet been determined. Compliance with seismic ordinances will be costly and could have a material adverse effect on our cash flow. In addition, remediation could possibly result in certain environmental liabilities, such as asbestos abatement.
On
Under the agreements, McKesson will provide us with a variety of services, including new software implementation and education/training services for our personnel, software maintenance services and professional services related to movement and migration of data from legacy systems. McKesson will also furnish to us and maintain new hardware to accommodate the upgraded software and systems. The new hardware will include computers and servers, among other things, and will include installation, testing, and ongoing maintenance. We have entered into the arrangement to enhance our clinical information systems and upgrade our billing and revenue management information systems.
The agreements will initially run for a period of five years, and the recurring services may be renewed by us for successive periods. The agreements do not provide that they may be terminated by us prior to the initial expiration date. The agreements provide for one-time fees and recurring fees which aggregate a total of
Net cash used in investing activities during the three months ended
Net cash used in financing activities for the three months ended
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RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following table sets forth, for the three months ended
Three months ended June 30, 2013 2012 Revenues 100.0 % 100.0 % Operating expenses: Salaries and benefits 25.0 % 64.9 % Supplies 6.2 % 17.2 % Other operating expenses 22.9 % 18.4 % Depreciation and amortization 1.0 % 1.2 % 55.1 % 101.7 % Operating income (loss) 44.9 % (1.7 )% Other expense: Interest expense, net (1.2 )% (3.0 )% Income (loss) on warrants (3.0 )% 0.9 % (4.2 )% (2.1 )% Income (loss) before income tax provision 40.7 % (3.8 )% Income tax provision 20.3 % 0.1 % Net income (loss) 20.4 % (3.9 )% Net income attributable to noncontrolling interests (0.1 )% (0.4 )% Net income (loss) attributable toIntegrated Healthcare Holdings, Inc. 20.3 % (4.3 )%
THREE MONTHS ENDED
NET PATIENT SERVICE REVENUES - Net patient service revenues (patient service revenues, net of contractual allowances and discounts, less provision for doubtful accounts) for the three months ended
Admissions for the three months ended
Substantially all patient service revenues come from external customers. The largest payers are
The Hospitals serve a disproportionate number of indigent patients and receive governmental revenues and subsidies in support of care for these patients. Governmental revenues include payments from
Other operating revenues of
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OPERATING EXPENSES - Operating expenses for the three months ended
Salaries and benefits increased
Supplies for the three months ended
Other operating expenses during the three months ended
OPERATING INCOME (LOSS) - The operating income (loss) for the three months ended
OTHER INCOME (EXPENSE) - Interest expense for the three months ended
As of
NET INCOME (LOSS) - Net income (loss) for the three months ended
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
PATIENT SERVICE REVENUES - Patient service revenues are recognized in the period in which services are performed and are recorded based on established billing rates (gross charges) less contractual allowances and discounts, principally for patients covered by
Revenues under the traditional fee-for-service
The Hospitals receive supplemental payments from the
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Revenues under managed care plans, including
The Hospitals provide charity care to patients whose income level is below 300% of the Federal Poverty Level. Patients with income levels between 300% and 350% of the Federal Poverty Level qualify to pay a discounted rate under AB 774 based on various government program reimbursement levels. Patients without insurance are offered assistance in applying for
We are not aware of any material claims, disputes, or unsettled matters with any payers that would affect revenues that have not been adequately provided for in the accompanying unaudited condensed consolidated financial statements.
PROVISION FOR BAD DEBTS - We provide for accounts receivable that could become uncollectible by establishing an allowance to reduce the carrying value of such receivables to their estimated net realizable value. The Hospitals estimate this allowance based on the aging of their accounts receivable, historical collections experience for each type of payer and other relevant factors. There are various factors that can impact the collection trends, such as changes in the economy, which in turn have an impact on unemployment rates and the number of uninsured and underinsured patients, volume of patients through the emergency department, the increased burden of copayments to be made by patients with insurance and business practices related to collection efforts. These factors continuously change and can have an impact on collection trends and the estimation process.
Our policy is to attempt to collect amounts due from patients, including copayments and deductibles due from patients with insurance, at the time of service while complying with all federal and state laws and regulations, including, but not limited to, the Emergency Medical Treatment and Labor Act ("EMTALA"). Generally, as required by EMTALA, patients may not be denied emergency treatment due to inability to pay. Therefore, until the legally required medical screening examination is complete and stabilization of the patient has begun, services are performed prior to the verification of the patient's insurance, if any. In nonemergency circumstances or for elective procedures and services, it is the Hospitals' policy, when appropriate, to verify insurance prior to a patient being treated.
INCOME TAXES - Deferred income tax assets and liabilities are determined based on the differences between the book and tax basis of assets and liabilities and are measured using the currently enacted tax rates and laws using the asset and liability method. We assess the realization of deferred tax assets to determine whether an income tax valuation allowance is required. We have recorded a 100% valuation allowance on our net deferred tax since they did not meet the more-likely-than-not threshold.
There is a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return. It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
We and our subsidiaries file income tax returns in the U.S. federal jurisdiction and
INSURANCE - We accrue for estimated general and professional liability claims, to the extent not covered by insurance, when they are probable and reasonably estimable. We have purchased as primary coverage a claims-made form insurance policy for general and professional liability risks. Estimated losses within general and professional liability retentions from claims incurred and reported, along with incurred but not reported ("IBNR") claims, are accrued based upon projections and are discounted to their net present value using an interest rate of 5.0%. To the extent that subsequent claims information varies from estimates, the liability is adjusted in the period such information becomes available. As of
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We have purchased statutory coverage insurance to fund our obligations under our workers compensation program. We have a large deductible rating plan program. The workers compensation program is a prefunded program, subject to a
In addition, we have a self-insured health benefits plan for our employees. As a result, we have established and maintained an accrual for IBNR claims arising from self-insured health benefits provided to employees. Our IBNR accruals at
We have also purchased excess liability policies with aggregate limits of
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