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LHC GROUP, INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contains forward-looking statements about future revenues, operating results, plans and expectations. Forward-looking statements are based on a number of assumptions and estimates that are inherently subject to significant risks and uncertainties and our results could differ materially from the results anticipated by our forward-looking statements as a result of many known or unknown factors, including, but not limited to, those factors discussed in Part I, Item 1A. Risk Factors. Also, please read the "Cautionary Statement Regarding Forward-Looking Statements" set forth at the beginning of this Annual Report on Form 10-K. In addition, read the following discussion in conjunction with Part 1 of this Annual Report on Form 10-K as well as our Consolidated Financial Statements and the related Notes contained elsewhere in this Annual Report on Form 10-K.
Overview
We provide post-acute health care services primarily to Medicare beneficiaries throughoutthe United States , through our home health agencies, hospice agencies, home and community-based, long-term acute care hospitals, and HCI. Our net service revenue increased$156.4 million to$2.220 billion for the year endingDecember 31, 2021 from$2.063 billion for the year endingDecember 31, 2020 , largely due to acquired growth and offset by the impact from the COVID-19 pandemic. During 2021, we acquired 90 agencies, such that, as ofDecember 31, 2021 , we operated 970 locations in 37 states within the continentalUnited States and theDistrict of Columbia .
Segments
Our services are classified into five segments: (1) home health, (2) hospice, (3) home and community-based, (4) facility-based services, offered primarily through our LTACHs, and (5) HCI. Through our home health services segment we offer a wide range of services, including skilled nursing, medically-oriented social services, and physical, occupational and speech therapy. As ofDecember 31, 2021 , we operated 557 home health service locations, of which 344 are wholly-owned by us, 209 are majority-owned or controlled by us through equity joint ventures, two are controlled by us through license lease arrangements, and the remaining two are only managed by us.
Through our hospice services segment, we offer a wide range of services,
including pain and symptom management, emotional and spiritual support,
inpatient and respite care, homemaker services, and counseling. As of
wholly-owned by us, 62 are majority-owned by us through equity joint ventures
and two, are controlled by us through license lease arrangements.
Through our home and community-based, our services are performed by paraprofessional personnel, and include assistance to elderly, chronically ill, and disabled patients with activities of daily living. As ofDecember 31, 2021 , we operated 136 community-based services locations, of which 121 are wholly-owned and 15 are majority-owned through an equity joint venture. We provide facility-based services principally through our LTACHs. As ofDecember 31, 2021 , we operated 11 LTACHs with 12 locations, of which all but two are located within host hospitals. We also operate two skilled nursing facilities, a rural health clinic, one physician practice, one family health center, and 75 physical therapy clinics. Of these 93 facility-based services locations as ofDecember 31, 2021 , 82 are wholly-owned by us and 11 are controlled by us through equity joint ventures. Our HCI segment reports on our developmental activities outside its other business segments. The HCI segment includes (a)Imperium Health Management, LLC , an ACO enablement and management company, (b)Long Term Solutions, Inc. , an in-home assessment company serving the long-term care insurance industry, and (c) certain assets operated by Advanced Care House Calls, which provides primary medical care for patients with chronic and acute illnesses who have difficulty traveling to a doctor's office. These activities are intended ultimately, whether directly or indirectly, to benefit our patients and/or payors through the enhanced provision of services in our other segments. The activities all share a common goal of improving patient experiences and quality outcomes, while lowering costs. They include, but are not limited to, items such as: technology, information, population health management, risk-sharing, care-coordination and transitions, clinical advancements, enhanced patient engagement and informed clinical decision and technology enabled in-home clinical assessments. We have 14 HCI locations, with 13 being wholly-owned and one controlled by us through an equity joint venture. 40 -------------------------------------------------------------------------------- The percentage of net service revenue contributed from each reporting segment for the each of the periods endedDecember 31, 2021 , 2020 and 2019 was as follows: Type of Segment 2021 2020 2019 Home Health 69.9 % 71.0 % 72.3 % Hospice 14.0 11.8 10.9 Home and Community-Based 8.5 9.4 10.0 Facility-Based 6.0 6.2 5.4 Healthcare Innovations 1.6 1.6 1.4 100.0 % 100.0 % 100.0 % Development Activities The following table provides a summary of our acquisitions, divestitures and internal development activities fromJanuary 1, 2020 throughDecember 31, 2021 . This table does not include two skilled nursing facilities, family health center, rural health clinic, physician practice, and physical therapy clinics through our facility-based services segment. Home Health Hospice Home and Community Long-Term Acute Care Agencies Agencies -Based Agencies Hospitals HCI Total at January 1, 2020 553 110 107 13 10 Developed 1 6 16 - 2 Acquired 13 6 4 - - Divested/Merged (30) (2) (3) (1) - Total at December 31, 2020 537 120 124 12 12 Developed - 1 13 - 2 Acquired 27 49 1 - - Divested/Merged (7) - (2) - - Total at December 31, 2021 557 170 136 12 14 Recent Developments
Coronavirus and Coronavirus Aid, Relief, and Economic Security Act
The COVID-19 outbreak has adversely impacted economic activity and conditions worldwide, including work forces, liquidity, capital markets, consumer behavior, supply chains, and macroeconomic conditions. After the declaration of a national emergency inthe United States onMarch 13, 2020 , in compliance with stay-at-home and physical distancing orders and other restrictions on movement and economic activity intended to reduce the spread of COVID-19, we continue to alter numerous clinical, operational, and business processes. We continue to take precautions to protect the safety and well-being of our employees by purchasing and delivering additional supplies of personal protection equipment to our clinicians across the country. In response to the COVID-19 outbreak, we promptly convened a cross-functional COVID-19 task force comprised of our company's leaders that continually communicates with our clinicians and other employees concerning best practices and Company changes in policies and procedures. We continually review and adjust to changes to adapt to the current environment associated with COVID-19. We remain fully functional and continue to provide our patients with critical services during the pandemic. In addition, we currently plan to continue to execute on our strategic business plans.
In response to COVID-19, the
2020
months ended
•Provider Relief Fund: During the twelve months endedDecember 31, 2020 , we received$93.3 million from theProvider Relief Fund . We recognized no funds for the twelve months endedDecember 31, 2020 in our consolidated statements of income. We returned all funds to the government during the twelve months endedDecember 31, 2021 . 41 -------------------------------------------------------------------------------- •Accelerated and Advance Payments Program (CAAP): CAAP extended financial hardship relief to Medicare providers impacted by the COVID-19 pandemic in order to provide necessary funds when there is a disruption in claims submission and/or claims processing. During the twelve months endedDecember 31, 2020 , we received$318 million of accelerated and advance payments. The recoupment of CAAP will occur under a tiered approach. Beginning at one year from the date the payment was issued and continuing for 11 months, Medicare payments owed to providers will be recouped at a rate of 25%. If any amount of CAAP funds that we received from CMS remain unpaid after the initial 11 month period, CMS will recoup 50% of Medicare payments otherwise owed to us during the following six months. Interest will be assessed on any amount of the CAAP funds that we received from CMS that remain unpaid following those recoupment periods. CMS will issue a repayment letter to the Company for any such outstanding amounts, which must be paid in full within 30 days from the date of the letter. We intend to repay the full amount outstanding before any interest accrues. During the twelve monthsDecember 31, 2021 ,$211.5 million was recouped by CMS and$106.5 million of contract liabilities - deferred revenue remains on our consolidated balance sheets as ofDecember 31, 2021 . •Suspension of the 2% sequestration payment adjustment: CMS suspended the 2% sequestration payment adjustment for patient claims with dates of services or end of period dates fromMay 1 through December 31, 2020 . The Consolidated Appropriations Act, 2021, signed into law onDecember 27, 2020 , extended the suspension of the 2% sequestration payment adjustment toMarch 31, 2021 . OnApril 14, 2021 ,Congress passed legislation to continue the suspension of the 2% sequestration payment adjustments on Medicare patient claims with dates of service throughDecember 31, 2021 . OnDecember 10, 2021 , the Protecting Medicare and American Farmers from Sequester Cuts Act legislation passed, which will continue the suspension of the sequestration payment adjustments for Medicare patient claims with dates of service throughMarch 31, 2022 . Medicare patient claims with dates of service betweenApril 1 through June 30, 2022 will have a 1% sequestration adjustment and Medicare patient claims with dates of service beginningJuly 1, 2022 will have a 2% sequestration adjustment. During the twelve months endedDecember 31, 2021 and 2020, we recognized$26.8 million and$18.1 million , respectively, of net service revenue due to the suspension of the 2% sequestration payment adjustment. •Waiver of the application of site-neutral payment: Under Section 1886(m)(6)(A)(i) of the Act, the claims processing systems will be updated to pay all LTACH cases admitted during the COVID-19 PHE period at the LTACH PPS standard federal rate, effective for claims with an admission date occurring on or afterJanuary 27, 2020 through the end of the PHE period. The PHE has been extended toApril 15, 2022 . During the twelve months endedDecember 31, 2021 and 2020, respectively, we recognized$25.7 million and$19.2 million of net service revenue due to the suspension of site-neutral payments. •Delaying payment of the employer portion of social security tax: The Company deferred payments of the employer portion of social security tax for 2020, which will be due in 50% increments, with the first due byDecember 31, 2021 and the second 50% due byDecember 31, 2022 . As ofDecember 31, 2020 , we deferred$51.9 million of social security tax payments. During the twelve months endedDecember 31, 2021 , we paid$26.8 million of these deferred payments. During the twelve months endedDecember 31, 2021 , our utilization of contract labor increased due an increase in our clinicians being on quarantine from COVID-19 exposure or potential exposure. This resulted in an increase in overall costs. There is no guarantee that we won't experience such service disruption in the future or a decrease in demand for our services as a result of COVID-19. The rapid development and fluidity of this situation makes it difficult to predict the ultimate impact of COVID-19 on our business and operations. Nevertheless, COVID-19 presents a material uncertainty which could materially impact our business and results of operations in the future.
OnNovember 2, 2021 , CMS released the final rule for the calendar year 2022 to update base payment rates by 3.2%, which is based on a payment update of 2.6%, a 0.7% increase due to the reduction of the fixed-dollar loss ratio for outliers, and a 0.1% reduction due to the rural add-on percentages mandated by the Bipartisan Budget Act of 2018. The base 30 day payment rate is increased from$1,901.12 to$2,031.64 . The final rule expanded the Home Health Value-Based Purchasing ("HHVBP") model nationally, with the first performance year beginningJanuary 1, 2023 . Starting in 2025, fee-for-service payments to home health agencies will be adjusted based on the quality of care provided to beneficiaries during the calendar year 2023 performance year.
Hospice
OnJuly 29, 2021 , CMS released the final rule for fiscal year 2022 to update payment rates and the wage index. The final hospice payment update is a 2.0% increase to the payment rates. The final rule will apply a 2.7% market basket update and a 42 --------------------------------------------------------------------------------
0.7 percentage point cut for productivity. In addition, the final rule increases
the aggregate cap value of
The following are the final fiscal year 2022 base payment rates for various levels of care, which began onOctober 1, 2021 and will end onSeptember 30, 2022 and fiscal year 2021 base payment rates for various levels of care, which began onOctober 1, 2020 and endedSeptember 30, 2021 (payment rates for hospice providers not complying with the hospice quality reporting requirements will be 2% lower than the values referenced below): Fiscal Year 2022 Fiscal Year 2021 Description Rate per patient day Rate per patient
day
Routine Home Care days 1-60 $ 203.40 $ 199.25 Routine Home Care days 61+ $ 160.74 $ 157.49 Continuous Home Care $ 1,462.52 $ 1,432.41 Full Rate = 24 hours of care$59.68 = hourly rate for 2021$60.94 = hourly rate for 2022 Inpatient Respite Care $ 473.75 $ 461.09 General Inpatient Care $ 1,068.28 $ 1,045.66 Facility-Based Services OnAugust 2, 2021 , CMS issued a final rule for the fiscal year 2022 Long-Term Care Hospital Prospective Payment System ("LTACH-PPS"), which described that LTACH-PPS payments for fiscal year 2022 will increase by 1.1%. LTACH-PPS payments for fiscal year 2022 for discharges paid using the standard LTACH payment rate will increase by 0.9% due primarily to the annual standard Federal rate update for fiscal year 2022 of 1.9% and 0.8% decrease in high cost outlier payments. LTACH-PPS payments for fiscal year 2022 for discharges paid using the site neutral payment rate will increase by 3%.
Medicare Accountable Care Organizations
The Affordable Care Act established ACOs as a tool to improve quality and lower
costs through increased care coordination in the Medicare fee-for-service
("FFS") program, also known as "Original Medicare." The Medicare FFS program
covers approximately 70% of the Medicare recipients or approximately 36 million
eligible Medicare beneficiaries. ACOs are typically formed as legal entities by
groups of doctors and other healthcare providers who endeavor to work together
to provide high quality services and care for their patients through three-year
contracts with CMS. Provider and beneficiary participation in an ACO is purely
voluntary and Medicare beneficiaries retain their current ability to seek
treatment from any provider they wish. Beneficiaries are assigned to ACOs using
an "attribution" model based on a plurality of services provided by the primary
care physician. Beneficiaries retain the right to use any doctor or hospital who
accepts Medicare, at any time.
CMS established the MSSP to facilitate coordination and cooperation among
providers to improve the quality of care for Medicare FFS beneficiaries and to
reduce costs. Eligible providers, hospitals, and suppliers may participate in
the MSSP by creating, participating in or contracting with an ACO. The MSSP is
designed to improve beneficiary outcomes and increase value of care by (1)
promoting accountability for the care of Medicare FFS beneficiaries, (2)
requiring coordinated care for all services provided under Medicare FFS, and (3)
encouraging investment in infrastructure and redesigned care processes. The MSSP
will reward ACOs that provide healthcare services at a cost for the ACO's
patients during a relevant measurement year that is below the ACO's benchmark
costs established by CMS, while also meeting performance standards on quality of
care. Under the final MSSP rules, Medicare is to reimburse individual providers
and suppliers for specific items and services as Medicare currently does under
the FFS payment methodologies. MSSP rules require CMS to develop a benchmark for
savings to be achieved by each ACO, if the ACO is to receive shared savings or
for ACOs that have elected to accept responsibility for losses. An ACO that
meets the program's quality performance standards will be eligible to receive a
share of the savings to the extent its assigned beneficiary medical expenditures
are below its own medical expenditure benchmark provided by CMS. The Company's
HCI services provides specialized management services to ACOs, and in return,
the Company shares in any MSSP payments received by the ACO.
Operational Data
This section of this Annual Report on Form 10-K generally discusses 2021 and
2020 items and year-to-year comparisons between 2021 and 2020. Discussions of
2019 items and year-to-year comparisons between 2020 and 2019 that are not
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included in this Annual Report on Form 10-K can be found in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II, Item 7 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2020 filed on February 26, 2021 .
The following table sets forth, for the period indicated, each of our segment's
data regarding census, admissions, billable hours and patient days:
Three Months Three Months Three Months Three Months
Ended March 31, Ended June 30, Ended September 30, Ended December 31,
2021 2021 2021 2021
Home Health :
Average census 83,938 85,554 84,258 86,228
Average Medicare census 45,237 45,134 43,675 43,325
Admissions 107,922 109,082 108,492 111,141
Medicare admissions 54,413 54,990 52,527 51,983
Hospice:
Average census 4,457 4,454 5,697 7,024
Average Medicare census 4,163 4,173 5,334 6,516
Admissions 5,577 4,967 6,466 7,516
Medicare admissions 4,910 4,475 5,752 6,615
Patient days 401,119 405,339 524,099 646,231
Home and Community-Based:
Billable hours 1,901,281 1,878,138 1,817,711 1,779,057
LTACHs:
Patient days 21,160 20,199 22,722 22,443
Three Months Three Months Three Months Three Months
Ended March 31, Ended June 30, Ended September 30, Ended December 31,
2020 2020 2020 2020
Home Health:
Average census 76,978 77,530 82,254 83,686
Average Medicare census 46,093 44,811 47,120 47,219
Admissions 108,182 93,482 104,304 104,440
Medicare admissions 59,880 50,545 55,907 54,968
Hospice:
Average census 4,290 4,329 4,393 4,320
Average Medicare census 3,996 4,022 4,091 4,032
Admissions 5,060 4,869 5,077 5,454
Medicare admissions 4,528 4,269 4,569 4,809
Patient days 390,369 398,283 404,214 397,456
Home and Community-Based:
Billable hours 1,985,600 1,921,900 1,942,706 1,884,411
LTACHs:
Patient days 20,161 23,658 24,275 21,836
Consolidated Results of Operations
The following table sets forth, for the period indicated, our consolidated
results (amounts in thousands):
Year Ended December 31,
2021 2020
Consolidated Services Data:
Net service revenue $
2,219,622
Cost of service revenue (excluding depreciation and amortization) 1,336,609
1,250,403
44
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Gross margin 883,013 812,801
General and administrative expenses 696,435 632,847
Impairment of intangibles and other 937 1,849
Operating income 185,641 178,105
Interest expense (4,338) (4,129)
Income tax expense 37,687 36,043
Income attributable to noncontrolling interests 27,888 26,337
Net income available to
The following table sets forth our consolidated results as a percentage of net service revenue, except income tax expense, which is presented as a percentage of income attributable toLHC Group, Inc's common stockholders: Year Ended December 31, 2021 2020 Consolidated Services Data: Cost of service revenue (excluding depreciation and amortization) 60.2 % 60.6 % Gross margin 39.8 39.4 General and administrative expenses 31.4 30.7 Impairment of intangibles and other 0.1 0.1 Operating income 8.4 8.6 Interest expense (0.2) (0.2) Income tax expense 24.6 24.4 Income attributable to noncontrolling interests 1.3 1.3 Net income attributable to LHC Group, Inc.'s common stockholders 5.2 5.4 Consolidated net service revenue for the year endedDecember 31, 2021 was$2.22 billion compared to$2.06 billion for the same period in 2020, an increase of$156.4 million , or 7.6%. Consolidated net service revenue was comprised of the following for the periods endingDecember 31 : Segment 2021 2020 Home Health 69.9 % 71.0 % Hospice 14.0 11.8 Home and Community-Based 8.5 9.4 Facility-Based 6.0 6.2 Healthcare Innovations 1.6 1.6 100.0 % 100.0 % The following table sets forth each of our segment's revenue growth or loss, along with key applicable statistical data, for the twelve months endedDecember 31, 2021 and the related change from the same period in 2020 (amounts in thousands, except statistical data, and revenue excludes implicit price concessions): Organic (1) Organic Growth Acquired (2) Total Total Growth (Loss)% (Loss) % Home Health Revenue$ 1,558,387 6.0 %$ 18,980 $ 1,577,367 6.5 % Revenue Medicare$ 958,064 (1.3)$ 14,300 $ 972,364 (0.7) New admissions 429,959 5.5 6,678 436,637 6.4 New Medicare admissions 211,480 (3.7) 2,433 213,913 (3.3) Average census 84,160 5.8 835 84,995 6.1 Average Medicare census 43,809 (4.6) 533 44,342 (4.2) 45
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Home health episodes 333,750 (2.4) 5,315 339,065 (3.2) Hospice Revenue$ 252,877 1.9$ 64,902 $ 317,779 28.6 Revenue Medicare$ 234,161 2.5$ 59,775 $ 293,936 29.3 New admissions 20,483 0.5 4,043 24,526 20.6 New Medicare admissions 18,295 0.8 3,457 21,752 20.0 Average census 4,301 (1.1) 1,107 5,408 24.5 Average Medicare census 4,033 (0.5) 1,014 5,047 24.7 Patient days 1,570,958 (1.4) 405,830 1,976,788
24.3
Home and Community-Based
Revenue$ 190,087 (5.0)$ 1,015 $ 191,102 (5.8) Billable hours 7,326,316 (3.8) 49,871 7,376,187 (4.6) Facility-Based LTACHs Revenue$ 125,342 3.2$ 1,758 $ 127,100 2.9 Patient days 83,292 (6.6) 3,232 86,524 (4.7) Other facility-based Revenue$ 8,126 (10.4) $ -$ 8,126 (10.4) Healthcare Innovations Revenue$ 35,940 5.3 $ -$ 35,940 5.3 Consolidated Revenue$ 2,170,759 4.3 %$ 86,655 $ 2,257,414 7.6 % (1) Organic - combination of same store, a location that has been in service with us for greater than 12 months, and de novo, an internally developed location that has been in service for 12 months or less. (2) Acquired - purchased locations that have been in service with us 12 months or less. Organic growth is primarily generated by population growth in areas covered by mature agencies and by increased market share in acquired and developing agencies. Historically, acquired agencies have the highest growth in admissions and average census in the first 24 months after acquisition, and have the highest contribution to organic growth, measured as a percentage of growth, in the second full year of operation after the acquisition.
Cost of Service Revenue
The following table summarizes cost of service revenue (amounts in thousands,
except percentages, which are percentages of the segment's respective net
service revenue):
2021 2020
Salaries, wages, and benefits$ 819,041 52.8 %$ 756,483 51.7 % Transportation 37,416 2.4 36,874 2.5 Supplies and services 45,228 2.9 55,306 3.8 Total$ 901,685 58.1 %$ 848,663 58.0 % Hospice Salaries, wages, and benefits$ 142,070 45.6 %$ 107,539 44.1 % Transportation 9,204 3.0 7,572 3.1 Supplies and services 43,621 14.0 35,564 14.6 Total$ 194,895 62.6 %$ 150,675 61.8 % Home and Community-Based
Salaries, wages, and benefits
46 --------------------------------------------------------------------------------
Transportation 1,681 0.9 1,830 0.9 Supplies and services 1,319 0.7 3,398 1.7 Total$ 137,852 72.7 %$ 150,378 77.2 % Facility-Based
Salaries, wages, and benefits
48.5 % Transportation 68 0.1 113 0.1 Supplies and services 23,135 17.5 23,354 18.2 Total$ 89,270 67.6 %$ 85,827 66.8 % Healthcare Innovations
Salaries, wages, and benefits
44.1 % Transportation 220 0.6 264 0.8 Supplies and services 67 0.2 297 0.9 Total$ 12,907 36.6 %$ 14,860 45.8 % Consolidated Salaries, wages, and benefits$ 1,174,650 52.9 %$ 1,085,831 52.6 % Transportation 48,589 2.2 46,653 2.3 Supplies and services 113,370 5.1 117,919 5.7 Total$ 1,336,609 60.2 %$ 1,250,403 60.6 % Consolidated cost of service revenue for the year endedDecember 31, 2021 was$1.34 billion compared to$1.25 billion for the same period in 2020, an increase of approximately$86.2 million , or 6.9%. During 2021, cost of service revenue was impacted by:
•an increase in our home health segment of nursing contract labor due to the
high number of clinicians in quarantine for COVID-19.
•our acquisition activity in 2021 in the hospice segment increased net service
revenue and total costs.
•a decrease in billable hours in our home and community-based segment due to
lower patient volumes, which decreased net service revenue and total costs.
•an overall decrease in supplies as we incurred substantial costs in 2020 to acquire needed personal protective equipment to protect our clinicians during the start of the global pandemic. We continue to purchase additional personal protective equipment; however, we are observing an overall decline in utilization and an overall price per unit decline for these supplies.
General and Administrative Expenses
The following table summarizes general and administrative expenses (amounts in
thousands, except percentages, which are percentages of the segment's respective
net service revenue):
2021 2020
Home Health
General and administrative $ 489,092 31.5 % $ 452,232 30.9 %
Depreciation and amortization 12,040 0.8 12,336 0.8
Total $ 501,132 32.3 % $ 464,568 31.7 %
Hospice
General and administrative $ 86,781 27.9 % $ 64,369 26.4 %
Depreciation and amortization 2,912 0.9 2,085 0.9
Total $ 89,693 28.8 % $ 66,454 27.3 %
Home and Community-Based
General and administrative $ 45,062 23.8 % $ 43,789 22.5 %
Depreciation 1,662 0.9 1,654 0.9
Total $ 46,724 24.7 % $ 45,443 23.4 %
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Facility-Based
General and administrative
Depreciation and amortization 3,329 2.5 3,971 3.1 Total$ 45,304 34.3 %$ 43,435 33.8 % Healthcare Innovations General and administrative$ 12,608 35.8 %$ 11,744 36.2 % Depreciation 974 2.8 1,203 3.7 Total$ 13,582 38.6 %$ 12,947 39.9 % Consolidated General and administrative$ 675,518 30.4 %$ 611,598 29.6 % Depreciation 20,917 0.9 21,249 1.0 Total$ 696,435 31.4 %$ 632,847 30.7 % Consolidated general and administrative expenses for the year endedDecember 31, 2021 were$696.4 million compared to$632.8 million for the same period in 2020, an increase of approximately$63.6 million , or 10.0%. Our general and administrative expenses increased due to continued investments in our technology infrastructure and increased costs related to the completion of certain acquisitions during the latter part of 2020 and the twelve months ended 2021.
Income Tax Expense
Consolidated income tax expense for the year endedDecember 31, 2021 was$37.7 million compared to$36.0 million for the same period in 2020. The increase in income tax expense was primarily attributable to the increase in our results of operations in 2021 as compared to 2020.
Liquidity and Capital Resources
Our cash balance atDecember 31, 2021 was$9.8 million , compared to$286.6 million atDecember 31, 2020 . The$276.8 million decrease in our cash position was due to$211.5 million recoupment of CAAP,$93.3 million payment to the government for theProvider Relief Fund ,$26.8 million payment of deferred payroll taxes related to the CARES Act and offset with additional proceeds from our line of credit. AtDecember 31, 2021 , we had$217.8 million of available liquidity from cash and our revolving credit facility, net of$106.5 million liabilities associated with the CAAP, as compared toDecember 31, 2020 of$529.9 million of available liquidity from cash and our revolving credit facility, net of$411.2 million liabilities associated with theCAAP and Provider Relief Fund . AtDecember 31, 2021 , we have additional capacity in our revolving credit facility of$300.0 million per our accordion expansion. Based on our current plan of operations, including acquisitions, we believe this amount, when combined with expected cash flows from operations, will be sufficient to fund our growth strategy and to meet our anticipated operating expenses, capital expenditures, and debt service obligations for at least the next 12 months.
Liquidity
Our reported cash flows are affected by various external and internal factors,
including the following:
•Operating Results - Our net income has a significant effect on our operating cash flows. Any significant increase or decrease in our net income could have a material effect on our operating cash flows. •Timing of Acquisitions - We use a portion of our operating and/or financing cash flows for acquisitions. When the acquisitions occur at or near the end of a period, our cash outflows significantly increase. •Timing of Payroll - Some of our employees are paid bi-weekly on Fridays, while others are paid weekly on Fridays. Operating cash outflows increase in reporting periods that end on a Friday.
•Self-Insurance Plan Funding - We are self-funded for health insurance and
workers compensation insurance. Any significant changes in the amount of
insurance claims submitted could have a direct effect on our operating cash
flows.
48 -------------------------------------------------------------------------------- Cash used in investing activities primarily relates to acquisitions of home nursing, hospice agencies, and LTACHs, while cash used by financing activities primarily relates to borrowings or payments on outstanding debt agreements and payments to our noncontrolling interest partners.
The following table summarizes changes in cash flows (amounts in thousands):
Year Ended December 31,
2021 2020
Net cash provided by (used in):
Operating activities $ (100,332) $ 529,247
Investing activities (607,778) (82,500)
Financing activities 431,350 (191,850)
Change in cash $ (276,760) $ 254,897
Cash at beginning of period 286,569 31,672
Cash at end of period $ 9,809 $ 286,569
The CARES Act provided additional cash during the twelve months ended December
31, 2020 and increased our net cash provided by operating activities by $318
million of CAAP and $51.9 million payment deferral of our portion of social
security payroll tax. This was offset by use of increased prepaid medical
supplies due to the need of obtaining personal protective equipment to our
clinicians and increased costs of salaries, wages and benefits associated with
the increased staffing demands associated with our response to COVID-19.
In 2021, CMS recouped $211.5 million of CAAP and we returned $93.3 million of
Provider Relief Funds and $26.8 million of deferred payroll taxes back to the
government. In addition, we paid $569.6 million for acquisitions and $74.5
million for our share repurchase plan.
Credit Facility
OnMarch 30, 2018 , we entered into a Credit Agreement withJPMorgan Chase Bank, N.A ., which was effective onApril 2, 2018 . The Credit Agreement provided a senior, secured revolving line of credit commitment with a maximum principal borrowing limit of$500.0 million , which includes an additional$200.0 million accordion expansion feature, and a letter of credit sub-limit equal to$50.0 million . The expiration date of the Credit Agreement wasMarch 30, 2023 . OnAugust 3, 2021 , we entered into an Amended and Restated Senior Credit Facility (the "2021 Amended Credit Agreement"), which amends and restates in its entirety the Credit Agreement. The 2021 Amended Credit Agreement provided a senior, secured revolving line of credit commitment with a maximum principal borrowing limit of$800.0 million , which included an additional$500.0 million accordion expansion, and a letter of credit sub-limit equal to$75.0 million . OnDecember 31, 2021 , the aggregate commitment was increased to a maximum borrowing limit of$1.0 billion , with an additional$300.0 million accordion expansion. Our obligations under the 2021 Amended Credit Agreement are secured by substantially all of the assets of the Company and its wholly-owned subsidiaries, which assets include the Company's equity ownership of its wholly-owned subsidiaries and its equity ownership in joint venture entities. Our wholly-owned subsidiaries also guarantee the obligations of the Company under the 2021 Amended Credit Agreement. Revolving loans under the 2021 Amended Credit Agreement bear interest at, as selected by us, either a (i) the prevailing London Interbank Offered Rate ("LIBOR") (with interest periods of one, three, or six months at the Company's option) plus a spread of 1.25% to 2.00% based on our quarterly consolidated Leverage Ratio or (ii) the prevailing prime or base rate plus a spread of 0.25% to 1.00% based on our quarterly consolidated Leverage Ratio. Swing line loans bear interest at the Base Rate. We are limited to 15 Eurodollar borrowings outstanding at any time. We are required to pay a commitment fee for the unused commitments at rates ranging from 0.15% to 0.30% per annum depending upon our quarterly consolidated Leverage Ratio. The Base Rate atDecember 31, 2021 was 3.75% and the Eurodollar Rate was 1.63%. As ofDecember 31, 2021 , the effective interest rate on outstanding borrowings under the 2021 Amended Credit Agreement was 1.81%. OnMarch 5, 2021 , theICE Benchmark Administration , the administrator of LIBOR, announced its intention to cease the publication of LIBOR settings for 1-month, 3-month, 6-month, and 12-month LIBOR borrowings immediately onJune 30, 2023 .JPMorgan Chase Bank, N.A will transition our 2021 Amended Credit Agreement to an alternate rate to CME Term SOFR Reference Rate ("SOFR"), which is administered byCME Group Benchmark Administration Ltd ("CME"). Due to the differences observed between LIBOR rates and SOFR published rates,JPMorgan Chase Bank, N.A . will use a credit spread adjustment ("CSA") in order to minimize value transfer and leave the existing margin applicable to our 2021 49 -------------------------------------------------------------------------------- Amended Credit Agreement. The CSA used byJPMorgan Chase Bank, N.A . is based on the average of the differences between LIBOR and SOFR over a 12-month period and will be added to SOFR.
At
amount of
million
Agreement. At
credit outstanding in the amount of
Under the terms of the 2021 Amended Credit Agreement, we are required to maintain certain financial ratios and comply with certain financial covenants. The 2021 Amended Credit Agreement permits us to make certain restricted payments, such as purchasing shares of its stock, within certain parameters, provided we maintain compliance with those financial ratios and covenants after giving effect to such restricted payments. We were in compliance with its debt covenants under the 2021 Amended Credit Agreement atDecember 31, 2021 .
Borrowings accrue interest under the Credit Agreement at either the Base Rate or
Eurodollar rate are subject to the applicable margins as set forth below:
Eurodollar Base Rate
Leverage Ratio Margin Margin Commitment Fee Rate
? 1.00:1.00 1.25 % 0.25 % 0.15 %
>1.00:1.00 ? 2.00:1.00 1.50 % 0.50 % 0.20 %
>2.00:1.00 ? 3.00:1.00 1.75 % 0.75 % 0.25 %
>3.00:1.00 2.00 % 1.00 % 0.30 %
Our 2021 Amended Credit Agreement contains customary affirmative, negative and
financial covenants, which are subject to customary carve-outs, thresholds, and
materiality qualifiers. These include bankruptcy and other insolvency events,
cross-defaults to other debt agreements, a change in control involving us or any
subsidiary guarantor and the failure to comply with certain covenants. The
Credit Facility allows us to make certain restricted payments within certain
parameters provided we maintain compliance with those financial ratios and
covenants after giving effect to such restricted payments or, in the case of
repurchasing shares of its stock, so long as such repurchases are within certain
specified baskets.
At
the Credit Agreement governing our credit facility.
Off-Balance Sheet Arrangements
We currently do not have any off-balance sheet arrangements with unconsolidated entities, financial partnerships or entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. In addition, we do not engage in trading activities involving non-exchange traded contracts. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in these relationships.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, which is incorporated herein by reference.
Critical Accounting Policies
The following discussion describes our critical accounting policy, which we
believe requires the most significant judgment and estimates used in the
preparation of our consolidated financial statements.
The preparation of financial statements in conformity withU.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported revenue and expenses during the reporting period. Changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances and we evaluate these estimates on an ongoing basis. 50 --------------------------------------------------------------------------------
Revenue Recognition
For a detailed discussion of revenue recognition, see Part I, Item 1.
Reimbursement in this Annual Report on Form 10-K which is incorporated here by
reference.
Net service revenue from contracts with customers is recognized in the period
the performance obligations are satisfied under our contracts by transferring
the requested services to our patients in amounts that reflect the consideration
to which is expected to be received in exchange for providing patient care,
which is the transaction price allocated to the services provided in accordance
with ASU 2014-09, Revenue from Contracts with Customers ("Topic 606") and ASU
2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the
Effective Date (collectively, "ASC 606").
Net service revenue is recognized as performance obligations are satisfied,
which can vary depending on the type of services provided. The performance
obligation is the delivery of patient care in accordance with the requested
services outlined in physicians' orders, which are based on specific goals for
each patient.
The performance obligations are associated with contracts in duration of less than one year; therefore, the optional exemption provided by ASC 606 was elected resulting in us not being required to disclose the aggregate amount of the transaction price allocated to the performance obligations that are unsatisfied or partially unsatisfied as of the end of the reporting period. Our unsatisfied or partially unsatisfied performance obligations are primarily completed when the patients are discharged and typically occur within days or weeks of the end of the period. We determine the transaction price based on gross charges for services provided, reduced by explicit price concessions and estimates of implicit price concessions. Explicit price concessions include contractual adjustments provided to patients and third-party payors. Implicit price concessions include discounts provided to self-pay, uninsured patients or other payors, adjustments resulting from regulatory reviews, audits, billing reviews and other matters. Subsequent changes to the estimate of the transaction price are recorded as adjustments to net service revenue in the period of change. Subsequent changes that are determined to be the result of an adverse change in the patient's ability to pay (i.e. change in credit risk) are recorded as a provision for doubtful accounts within general and administrative expenses. Explicit price concessions are recorded for the difference between our standard rates and the contracted rates to be realized from patients, third party payors and others for services provided. Implicit price concessions are recorded for self-pay, uninsured patients and other payors by major payor class based on historical collection experience and current economic conditions, representing the difference between amounts billed and amounts expected to be collected. We assess our ability to collect for the healthcare services provided at the time of patient admission based on the verification of the patient's insurance coverage under Medicare, Medicaid, and other commercial or managed care insurance programs. Amounts due from third-party payors, primarily commercial health insurers and government programs (Medicare and Medicaid), include variable consideration for retroactive revenue adjustments due to settlements of audits and reviews. We have determined estimates for price concessions related to regulatory reviews based on our historical experience and success rates in the claim appeals and adjudication process. Revenue is recorded at amounts estimated to be realizable for services provided.
The following table sets forth the percentage of net service revenue earned by
category of payor for the respective years ending
Payor 2021 2020 2019
Medicare 59.8 % 62.1 % 64.1 %
Medicaid 3.1 2.5 2.9
Other 37.1 35.4 33.0
100.0 % 100.0 % 100.0 %
Medicare
51
--------------------------------------------------------------------------------
The following describes the payment models in effect during the twelve
months-ended
temporary adjustments made by CMS in response to COVID-19 pandemic as described
elsewhere in this Annual Report on Form 10-K.
We record revenue as services are provided under PDGM. For each 30-day period,
the patient is classified into one of 432 home health resource groups prior to
receiving services. Each 30-day period is placed into a subgroup falling under
the following categories: (i) timing being early or late, (ii) admission source
being community or institutional, (iii) one of 12 clinical groupings based on
the patient's principal diagnosis, (iv) functional impairment level of low,
medium, or high, and (v) a co-morbidity adjustment of none, low, or high based
on the patient's secondary diagnoses.
Each 30-day period payment from Medicare reflects base payment adjustments for
case-mix and geographic wage differences. In addition, payments may reflect one
of three retroactive adjustments to the total reimbursement: (a) an outlier
payment if the patient's care was unusually costly; (b) a low utilization
adjustment whereby the number of visits is dependent on the clinical grouping;
and/or (c) a partial payment if the patient transferred to another provider or
from another provider before completing the episode. The retroactive adjustments
outlined above are recognized in net service revenue when the event causing the
adjustment occurs and during the period in which the services are provided to
the patient. We review these adjustments to ensure that it is probable that a
significant reversal in the amount of cumulative revenue recognized will not
occur when the uncertainty associated with the retroactive adjustments is
subsequently resolved. Net service revenue and related patient accounts
receivable are recorded at amounts estimated to be realized from Medicare for
services rendered.
Hospice Services
We record revenue based upon the date of service at amounts equal to the
estimated payment rates. We receive one of four predetermined daily rates based
upon the level of care provided by us, which can be routine care, general
inpatient care, continuous home care and respite care. There are two separate
payment rates for routine care: payments for the first 60 days of care and care
beyond 60 days. In addition to the two routine rates, we may also receive a
service intensity add-on ("SIA"). The SIA is based on visits made in the last
seven days of life by a registered nurse or medical social worker for patients
in a routine level of care.
The performance obligation is the delivery of hospice services to the patient,
as determined by a physician, each day the patient is on hospice care.
Adjustments to Medicare revenue are made from regulatory reviews, audits,
billing reviews and other matters. We estimate the impact of these adjustments
based on our historical experience.
We are subject to variable consideration through an inpatient cap limit and an overall Medicare payment cap for each provider number. The inpatient cap relates to individual programs receiving more than 20% of their total Medicare reimbursement from inpatient care services, and the overall Medicare payment cap relates to individual programs receiving reimbursements in excess of a "cap amount", determined by Medicare to be payment equal to 12 months of hospice care for the aggregate base of hospice patients, indexed for inflation. The determination for each cap is made annually based on the 12-month period ending onSeptember 30 of each year. We monitor our limits on a provider-by-provider basis and record estimates of our liability for reimbursements in excess of the cap amount, if any, in the reporting period.
Facility-Based Services
Long-Term Acute Care Services
Gross revenue is recorded as services are provided under the LTACH prospective payment system. Each patient is assigned a long-term care diagnosis-related group. Payments are made at a predetermined fixed amount intended to reflect the average cost of treating a Medicare LTACH patient classified in that particular long-term care diagnosis-related group. For selected LTACH patients, the amount may be further adjusted based on length-of-stay and facility-specific costs, as well as in instances where a patient is discharged and subsequently re-admitted, among other factors. We calculate the adjustments based on historical averages of these types of adjustments for LTACH claims paid. Similar to other Medicare prospective payment systems, the rate is also adjusted for geographic wage differences. Net service revenue adjustments resulting from reviews and audits of Medicare cost report settlements are considered implicit price concessions for LTACHs and are measured at expected value.
Medicaid, managed care and other payors
52 -------------------------------------------------------------------------------- Other sources of net service revenue for all our segments fall into Medicaid, managed care or other payors of our services. Our Medicaid reimbursement is based on a predetermined fee schedule applied to each service provided. Therefore, revenue is recognized for Medicaid services as services are provided based on this fee schedule. Our managed care and other payors reimburse us based upon a predetermined fee schedule or an episodic basis, depending on the terms of the applicable contract. Accordingly, we recognize revenue from managed care and other payors as services are provided, such costs are incurred, and estimates of expected payments are known for each different payor, thus our revenue is recorded at the estimated transaction price.
Healthcare Innovations Services
The Company's HCI segment provides strategic health management services to ACOs that have been approved to participate in the MSSP. The HCI segment has service agreements with ACOs that provide for sharing of MSSP payments received by the ACO, if any. ACOs are legal entities that contract with CMS to provide services to the Medicare fee-for-service population for a specified annual period with the goal of providing better care for individuals, improving health for populations and lowering costs. ACOs share savings with CMS to the extent that the actual costs of serving assigned beneficiaries are below certain trended benchmarks of such beneficiaries and certain quality performance measures are achieved. The generation of shared savings is the performance obligation of each ACO, which only become certain upon the final issuance of unembargoed calculations by CMS, generally in the third quarter of each year. During the years endedDecember 31, 2021 and 2020, the HCI segment recorded net service revenue of$12.1 million and$9.6 million , respectively, related to the 2020 and 2019 ACO respective service periods, as certain ACO's served by the HCI segment received unembargoed calculations from CMS confirming the performance obligation had been met.
SELECT MEDICAL HOLDINGS CORP – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
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