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LHC GROUP, INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations.
Edgar Glimpses
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$63.1 million to$2.283 billion for the year endingDecember 31, 2022 from$2.220 billion for the year endingDecember 31, 2021 , largely due to acquired growth and offset by the impact from the COVID-19 pandemic. During 2022, we acquired 13 agencies, such that, as ofDecember 31, 2022 , we operated 920 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, 2022 , we operated 527 home health service locations, of which 320 are wholly-owned by us, 203 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, 61 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, 2022 , we operated 128 community-based services locations, of which 119 are wholly-owned and nine are majority-owned through an equity joint venture. We provide facility-based services principally through our LTACHs. As ofDecember 31, 2022 , we operated 11 LTACHs with 12 locations, of which all but two are located within host hospitals. We also operate two skilled nursing facilities, two rural health clinics, one physician practice, one family health center, and 81 physical therapy clinics. Of these 99 facility-based services locations as ofDecember 31, 2022 , 88 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) 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 seven HCI wholly-owned locations. 39
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Development Activities
The following table provides a summary of our acquisitions, divestitures and internal development activities fromJanuary 1, 2021 throughDecember 31, 2022 . This table does not include two skilled nursing facilities, family health center, rural health clinics, 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, 2021 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 Developed - - - - 0 Acquired 12 - 1 - - Divested/Merged (42) (11) (9) - (7) Total at December 31, 2022 527 159 128 12 7 Recent Developments
Coronavirus and Coronavirus Aid, Relief, and Economic Security Act
In response to COVID-19, the
2020
months ended
•Accelerated and Advance Payments Program (CAAP): During the twelve monthsDecember 31, 2022 , CMS recouped$106.5 million and as ofDecember 31, 2022 , the contract liabilities - deferred revenue was satisfied. •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 continued 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 had a 1% sequestration adjustment and Medicare patient claims with dates of service beginningJuly 1, 2022 have a 2% sequestration adjustment. During the twelve months endedDecember 31, 2022 and 2021, we recognized$10.0 million and$26.8 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. OnJanuary 11, 2023 , theU.S. Department of Health and Human Services extended the PHE untilApril 11, 2023 . During the twelve months endedDecember 31, 2022 and 2021, respectively, we recognized$20.3 million and$25.7 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 was due in 50% increments, with the first due byDecember 31, 2021 and the second 50% due byDecember 31, 2022 . During the twelve months endedDecember 31, 2022 , we paid the remaining$26.8 million of these deferred payments. During the twelve months endedDecember 31, 2022 , we did experience higher costs related to higher contract labor utilization due to an increase in our clinicians being on quarantine from COVID-19 exposure or potential exposure. There is no guarantee that we won't experience similar impacts in the future or experience 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. 40 --------------------------------------------------------------------------------
OnOctober 31, 2022 , CMS released the final rule for fiscal year 2023. The final rule states the Medicare base payments will increase by 0.7%. The increase reflects the effects of the 4.0% home health payment update, a 3.5% decrease from the effects of the prospective permanent behavioral assumption adjustment of -3.925% that is being phased-in, and 0.2% increase from the effects of an update to the fixed-dollar ratio used in determining outlier payments. The impact of the -3.925% permanent behavioral assumption adjustment is -3.5%, as the permanent adjustment is only made to the 30-day payment rate and not the Low Utilization Payment Adjustment per visit payment rates. CMS also finalized a permanent 5% cap on negative wage index changes regardless of the underlying reason for the decrease. Hospice
On
payment rates and the wage index. The final rule states the following:
•A payment increase of 3.8%, which applies a 4.1% market basket update and 0.3
percentage point reduction for productivity.
•Hospice agencies that fail to meet quality reporting requirements will receive
a two percentage point reduction to the annual market basket update.
•An increase of the aggregate cap value of
for fiscal year 2022.
•A permanent cap on negative wage index changes greater than a 5% decrease from
the prior year, regardless of the underlying reason for the decrease.
The following are the final fiscal year 2023 base payment rates for various levels of care, which began onOctober 1, 2022 and will end onSeptember 30, 2023 and fiscal year 2022 base payment rates for various levels of care, which began onOctober 1, 2021 and endedSeptember 30, 2022 (payment rates for hospice providers not complying with the hospice quality reporting requirements will be 2% lower than the values referenced below): Fiscal Year 2023 Fiscal Year 2022 Description Rate per patient day Rate per patient
day
Routine Home Care days 1-60 $ 211.34 $ 203.4 Routine Home Care days 61+ $ 167.00 $ 160.74 Continuous Home Care $ 1,522.04 $ 1,462.52 Full Rate = 24 hours of care$60.94 = hourly rate for 2022$63.42 = hourly rate for 2023 Inpatient Respite Care $ 492.10 $ 473.75 General Inpatient Care $ 1,110.76 $ 1,068.28 Facility-Based Services OnAugust 1, 2022 , CMS issued the final rule for the fiscal year 2023 Long-Term Care Hospital Prospective Payment System ("LTCH PPS"). LTCH PPS payments will increase 2.3% due primarily to the annual standard federal rate update (the productivity-adjusted market basket increase) of 3.8% and a decrease in high cost outlier payments.
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
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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 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not 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 endedDecember 31, 2021 filed onFebruary 24, 2022 .
Consolidated Results of Operations
The following table sets forth, for the period indicated, our consolidated
results (amounts in thousands):
Year Ended December 31,
2022 2021
Consolidated Services Data:
Net service revenue $
2,282,771
Cost of service revenue (excluding depreciation and amortization) 1,399,158
1,336,609 Gross margin 883,613 883,013 General and administrative expenses 764,239 696,435 Impairment of intangibles and other 10,854 937 Operating income 108,520 185,641 Interest expense (31,311) (4,338) Income tax expense 16,961 37,687 Income attributable to noncontrolling interests 20,377 27,888 Net income available to LHC Group, Inc.'s common stockholders $
39,871
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, 2022 2021 Consolidated Services Data: Cost of service revenue (excluding depreciation and amortization) 61.3 % 60.2 % Gross margin 38.7 39.8 General and administrative expenses 33.5 31.4 Impairment of intangibles and other 0.5 - Operating income 4.8 8.4 Interest expense (1.4) (0.2) Income tax expense 29.9 24.6 Income attributable to noncontrolling interests 0.9 1.3 Net income attributable to LHC Group, Inc.'s common stockholders 1.7 5.2 42
-------------------------------------------------------------------------------- Consolidated net service revenue was comprised of the following for the periods endingDecember 31 : Segment 2022 2021 Home Health 67.1 % 69.9 % Hospice 17.9 14.0 Home and Community-Based 7.9 8.5 Facility-Based 5.6 6.0 Healthcare Innovations 1.5 1.6 100.0 % 100.0 % 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):
2022 2021
Salaries, wages, and benefits$ 813,516 53.1 %$ 819,041 52.8 % Transportation 39,507 2.6 37,416 2.4 Supplies and services 40,979 2.7 45,228 2.9 Total$ 894,002 58.4 %$ 901,685 58.1 % Hospice Salaries, wages, and benefits$ 198,656 48.8 %$ 142,070 45.6 % Transportation 12,730 3.1 9,204 3.0 Supplies and services 58,791 14.4 43,621 14.0 Total$ 270,177 66.3 %$ 194,895 62.6 % Home and Community-Based Salaries, wages, and benefits$ 127,572 70.6 %$ 134,852 71.1 % Transportation 1,718 1.0 1,681 0.9 Supplies and services 852 0.5 1,319 0.7 Total$ 130,142 72.1 %$ 137,852 72.7 % Facility-Based Salaries, wages, and benefits$ 73,133 57.2 %$ 66,067 50.0 % Transportation 250 0.2 68 0.1 Supplies and services 19,953 15.6 23,135 17.5 Total$ 93,336 73.0 %$ 89,270 67.6 % Healthcare Innovations Salaries, wages, and benefits$ 11,270 31.9 %$ 12,620 35.8 % Transportation 193 0.5 220 0.6 Supplies and services 38 0.1 67 0.2 Total$ 11,501 32.5 %$ 12,907 36.6 % Consolidated Salaries, wages, and benefits$ 1,224,147 53.6 %$ 1,174,650 52.9 % Transportation 54,398 2.4 48,589 2.2 Supplies and services 120,613 5.3 113,370 5.1 Total$ 1,399,158 61.3 %$ 1,336,609 60.2 % Consolidated cost of service revenue for the year endedDecember 31, 2022 was$1.40 billion compared to$1.34 billion for the same period in 2021, an increase of approximately$62.5 million , or 4.7%. During 2022, cost of service revenue in our home health, hospice, and facility-based segments were impacted by the continued labor market challenges. These 43 -------------------------------------------------------------------------------- challenges are, but not limited to, consistent utilization of nursing contract labor at a higher cost-per-visit rate, payments of sign-on and retention bonuses, increased clinician wages, and labor costs associated with acquisitions purchased during the latter half of 2021.
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):
2022 2021
Home Health
General and administrative $ 508,554 33.2 % $ 489,092 31.5 %
Depreciation and amortization 12,630 0.8 12,040 0.8
Total $ 521,184 34.0 % $ 501,132 32.3 %
Hospice
General and administrative $ 124,391 30.5 % $ 86,781 27.9 %
Depreciation and amortization 4,846 1.2 2,912 0.9
Total $ 129,237 31.7 % $ 89,693 28.8 %
Home and Community-Based
General and administrative $ 46,959 26.0 % $ 45,062 23.8 %
Depreciation 1,271 0.7 1,662 0.9
Total $ 48,230 26.7 % $ 46,724 24.7 %
Facility-Based
General and administrative $ 44,630 34.9 % $ 41,975 31.8 %
Depreciation and amortization 3,443 2.7 3,329 2.5
Total $ 48,073 37.6 % $ 45,304 34.3 %
Healthcare Innovations
General and administrative $ 16,562 46.9 % $ 12,608 35.8 %
Depreciation 953 2.7 974 2.8
Total $ 17,515 49.6 % $ 13,582 38.6 %
Consolidated
General and administrative $ 741,096 32.5 % $ 675,518 30.4 %
Depreciation 23,143 1.0 20,917 0.9
Total $ 764,239 33.5 % $ 696,435 31.4 %
Consolidated general and administrative expenses for the year ended December 31,
2022 were $764.2 million compared to $696.4 million for the same period in 2021,
an increase of approximately $67.8 million , or 9.7%. We incurred higher
administrative costs related to acquisitions purchased during the latter half of
2021 and costs associated with the continued work of the expected consummation
of the Merger.
Impairment of intangibles and other
Consolidated impairment of intangibles and other for the year endedDecember 31, 2022 was$10.9 million compared to$0.9 million for the same period in 2021. We closed 69 underperforming locations during 2022, of which we recorded the disposal of goodwill of$5.3 million and recorded the impairment of$5.6 million related to Certificates of Need/ Medicare licenses for these closed locations.
Interest Expense
Consolidated interest expense for the year endedDecember 31, 2022 was$31.3 million compared to$4.3 million for the same period in 2021. Our effective interest rate was 6.39% in 2022 as compared to 1.81% in 2021. We utilized our credit agreement during the latter half of 2021 and twelve months endedDecember 31, 2022 for the funding of acquisitions, the share repurchase plan, and recoupments of the CAAP. 44 --------------------------------------------------------------------------------
Income Tax Expense
Consolidated income tax expense for the year endedDecember 31, 2022 was$17.0 million compared to$37.7 million for the same period in 2021. The decrease in income tax expense was primarily attributable to the decrease in our results of operations in 2022 as compared to 2021.
Liquidity and Capital Resources
Our cash balance atDecember 31, 2022 was$17.9 million , compared to$9.8 million atDecember 31, 2021 . We have$260.8 million of available liquidity from cash and our revolving credit facility. AtDecember 31, 2022 , 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.
Cash used in investing activities primarily relates to acquisitions of home nursing and hospice agencies, 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,
2022 2021
Net cash provided by (used in):
Operating activities $ 49,974 $ (100,332)
Investing activities (58,360) (607,778)
Financing activities 16,488 431,350
Change in cash $ 8,102 $ (276,760)
Cash at beginning of period 9,809 286,569
Cash at end of period $ 17,911 $ 9,809
We experienced a decline in net income during the twelve months ended December
31, 2022 as compared to the twelve months ended December 31, 2021 . The decline
was related to decreased census, increased labor costs, and increased general
and administrative costs related to the Merger and acquisitions purchased during
the latter part of 2021. Our accounts payables and accrued expenses increased as
we implemented a new enterprise system and utilized payment management
strategies incorporated within the new system. During the twelve months ended
December 31, 2022 , CMS recouped $106.5 million of CAAP as compared to $211.5
million during the twelve months ended December 31, 2021 .
We acquired
ended
during the twelve months ended
In addition, we utilized our credit agreement for funding of the share
repurchase plan and recoupments of the CAAP during the twelve months ended
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Credit Facility
OnAugust 3, 2021 , we entered into an Amended and Restated Senior Credit Facility (the "2021 Amended Credit Agreement"), which 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, 2022 was 8.50% and the Eurodollar Rate was 6.44%. As ofDecember 31, 2022 , the effective interest rate on outstanding borrowings under the 2021 Amended Credit Agreement was 6.39%. 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 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. AtDecember 31, 2022 , we had$733.0 million drawn, letters of credit in the amount of$24.1 million outstanding under the credit facility, and$242.9 million remaining borrowing capacity available under the 2021 Amended Credit Agreement. AtDecember 31, 2021 , we had$661.2 million drawn and letters of credit in the amount of$24.3 million outstanding under the 2021 Amended Credit Agreement. 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, 2022 .
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.
46 --------------------------------------------------------------------------------
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 policies 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.
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.
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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 2022 2021 2020
Medicare 59.6 % 59.8 % 62.1 %
Medicaid 3.2 3.1 2.5
Other 37.2 37.1 35.4
100.0 % 100.0 % 100.0 %
Medicare
The following describes the payment models in effect during the twelve
months-ended December 31, 2022 . Such payment models have been subject to
temporary adjustments made by CMS in response to COVID-19 pandemic as described
elsewhere in this Annual Report on Form 10-K. The 2% sequestration reduction
adjustment was suspended for patient claims with dates of service that began May
1, 2020 through March 31, 2022 . Medicare patient claims with dates of service
between April 1 through June 30, 2022 had a 1% sequestration payment adjustment.
Medicare patient claims with dates of service beginning July 1, 2022 had the
full 2% sequestration adjustment.
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
48
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the aggregate base of hospice patients, indexed for inflation. The determination
for each cap is made annually based on the 12-month period ending on September
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
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, 2022 and 2021, the HCI segment recorded net service revenue of$15.6 million and$12.1 million , respectively, related to the 2021 and 2020 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.Goodwill Goodwill represents the excess of amounts paid for acquisitions over the fair value of net identifiable assets acquired less liabilities assumed. We assign assets acquired, including goodwill, and liabilities assumed to one or more reporting units as of the date of the acquisition. Our reporting units are home health, hospice, home and community-based, LTACHs, and HCI. The LTACHs are incorporated in the Company's facility-based operating segment. The other locations within the facility-based segment do not share in the economic benefits of the LTACH reporting unit, and as such, are excluded from the annual impairment testing.Goodwill and purchased intangible assets with indefinite useful lives are not amortized. ASC 350, "Intangibles -Goodwill and Other" ("ASC 350") requires that all indefinite-lived intangible assets, such as goodwill, be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that the asset is impaired. An entity may perform a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test. In assessing whether the asset is impaired, we asses all relevant events and circumstances for each of our reporting units. We perform our goodwill impairment testing on an annual basis as ofNovember 30 , and whenever events or changes in circumstances indicate that the carrying value of a reporting unit likely exceeds its fair value. This involves estimating the fair value of the reporting units using discounted cash flow models. For 2022, we performed our annual impairment review of goodwill atNovember 30 . We assessed and reviewed factors such as: labor cost; financial performance, such as cash flows and planned revenue; regulatory factors; market considerations, such as market-dependent multiples; and access of capital. For 2022, we performed a qualitative assessment of goodwill for each of our reporting units. When performing our qualitative assessment, we determined the existence of events and circumstances that would lead to a determination that is 49
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more likely than not that the fair value of the reporting units for hospice, home and community-based, and LTACHs could be less than its carrying amount. We were required to perform a quantitative assessment on these reporting units. Our quantitative assessment for the determination of impairment was made by comparing the carrying amount of the hospice, home and community-based, and LTACH reporting units with its fair value, calculated by a combination of market and discounted cash flow approaches. Minor changes to assumptions used in our approaches could have had a significant effect on our assessment of the fair value of our reporting units. Our home and community-based and LTACH reporting units fair value exceeded its respective carrying value by 5% and 1%, respectively. Both reporting units are at risk of failing step one of the impairment test in future quarters if financial performance continues to decrease and the cost of debt continues to increase.
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UNITED THERAPEUTICS CORP – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
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