Item 1. Business
Company Overview
Unless the context otherwise requires, “we,” “us,” “our,” “Envision” and the “Company” refer to the business of Envision Healthcare Corporation and its subsidiaries. References herein to “AmSurg” refer to AmSurg Corp. and references herein to “EHH” refer to Envision Healthcare Holdings, Inc., in each case prior to the completion of the Merger (as defined below).
We are a nationwide provider of healthcare services, offering a highly differentiated array of clinical solutions, including physician-led services and ambulatory services. We empower physicians in aligning with health systems, payors and communities forming high-performing clinical networks. We strive to be the trusted strategic partner for providers, health systems, communities and payors in the common pursuit of the highest quality of care for the patients we serve.
On December 1, 2016, AmSurg and EHH completed the merger and the strategic combination (the Merger) of their respective businesses. While the Merger was a merger of equals of AmSurg and EHH, AmSurg was the accounting acquirer in the Merger; therefore, the historical consolidated financial statements of AmSurg for periods prior to the Merger are considered to be the historical financial statements of the Company. The Company’s consolidated financial statements for 2016 included in this report reflect AmSurg’s consolidated operations for the period from January 1, 2016 to November 30, 2016, and the Company’s consolidated operations for the period from December 1, 2016 to December 31, 2016. On December 2, 2016, shares of the common stock of the Company began trading on the New York Stock Exchange under the ticker symbol “EVHC.”
The Merger combined two leaders to create a premier healthcare services provider organization offering clinical solutions on a national scale, enabling the Company to create value for health systems, payors, providers and patients. AmSurg has more than 25 years of operating history in the ambulatory surgery business and more than 50 years of operating history in the physician services business, primarily in anesthesia services. EHH has more than 40 years of operating history in the physician services business, primarily in emergency services. We market our services on a stand-alone, multi-service or integrated basis combining two or more services. We believe our physician-centric culture and integrated care model benefits providers and patients by improving the quality of care and reducing the total cost of care.
On February 28, 2017, we announced that we would explore strategic alternatives for our medical transportation business, American Medical Response (AMR). On August 7, 2017, we entered into a definitive agreement to divest AMR to an entity controlled by funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (KKR) for approximately $2.4 billion in cash. As a result, the medical transportation business is no longer a separate reportable segment. The transaction is subject to regulatory approval and customary closing conditions, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act. We received a second request from the FTC asking for further information related to the transaction, and the buyer has agreed to certain divestiture remedies to address concerns raised by the FTC. We expect that the transaction will be completed during the first quarter of 2018.
We have aligned our financial results into two reportable segments: physician services and ambulatory services. The physician services segment includes the Company’s hospital-based and non-hospital-based physician services businesses. The ambulatory services segment includes the Company’s ambulatory surgery business, which acquires, develops, owns and operates ambulatory surgery centers (ASCs) and surgical hospitals in partnership with physicians and health systems. For the year ended
December 31, 2017
, approximately
84%
and
16%
of our revenues were generated by our physician services segment and ambulatory services segment, respectively. For additional information about our reportable segments, please see "Note
21
- Segment Reporting" to our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data in this report.
Recent Developments
On October 31, 2017, we announced that our Board of Directors (our Board), in consultation with management and financial and legal advisors, had unanimously initiated a full review of a broad range of strategic alternatives to enhance stockholder value. The Board has not set a timetable for completion of its review. There can be no assurance that this review will result in a transaction or other alternatives of any kind, or if such strategic alternative does occur, that it will successfully enhance stockholder value.
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Item 1. Business - (continued)
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Competitive Strengths
National physician-led healthcare services company offering a broad array of services.
The Merger combined two leading, complementary healthcare services companies to form one of the nation’s largest provider organizations, well-positioned to help shape the future of healthcare delivery. Currently, we manage a broad array of clinical network solutions, including physician-led services and ambulatory services. We believe our scale and breadth of services in a fragmented marketplace allows us to be the most trusted and highest quality strategic partner for health systems, healthcare providers, payors, patients and communities in the common pursuit of the highest quality of care for the patients we serve. Additionally, our portfolio of service offerings creates value by delivering integrated physician-centric care to systems, payors and patients, and positions us favorably for growth and long-term leadership as the dynamic healthcare landscape continues to evolve.
Opportunities for accelerated growth.
We operate in the physician services and ambulatory services markets, two large and growing segments that are supported by favorable demographic shifts. We have a track record of delivering strong growth through a combination of organic growth, new contract additions and selective acquisitions. Organic growth has historically been supported by consistent underlying market volume trends, stable pricing and a diversified payor mix. Historically, market volumes have been driven primarily by the non-discretionary nature of our services, aging demographics and primary care physician shortages that drive patients to emergency rooms. We believe that our networks of high-quality providers position us to take advantage of these trends, even during periods of slower inpatient utilization growth for certain of our healthcare system customers.
We have successfully executed on new contract growth by providing a set of differentiated services and delivering integrated, efficient, high-quality care, which has helped us expand our relationships with our existing customers and compete effectively in the bidding process for new contracts. We intend to continue to expand our existing customer relationships and capitalize on greenfield opportunities as we seek to increase our new contract growth, which represents the majority of the anticipated revenue synergies of the Merger. Additionally, we believe we will have opportunities to expand our services to the health systems we currently serve. We also have a strong track record of executing on and integrating select acquisition opportunities. We expect that the fragmented nature of the segments in which we operate, in particular the physician services segment, in addition to the strength of our operating platform, will aid in increasing our near- and long-term acquisition pipelines.
Strong financial profile with attractive cash flow and deleveraging profile
. We have historically achieved revenue growth and attractive margins while maintaining a strong balance sheet. We have a diversified business mix across our segments, geographies and clients, as well as significant cash flow, which we expect to deploy opportunistically for acquisitions, thereby driving growth while also reducing leverage ratios.
Focus on clinical excellence.
We are focused on achieving the best clinical outcomes for our patients through the application of rigorous recruiting and credentialing standards, the promotion of a physician-led leadership culture and the monitoring of our clinical quality measures. Through extensive clinical and leadership development programs, we train our healthcare professionals to continually enhance their skills and deliver innovative and patient-focused experiences and outcomes. Our healthcare professionals are supported through our specialty-specific networks, which are led by our physician senior leadership. We provide internally developed continuing medical education accredited courses to our healthcare professionals, including instructor-led and on-line education sessions. We have developed and implemented quality measurement systems that track multiple key indicators, which assist our professionals in systematically monitoring, examining and analyzing outcomes and processes. These quality measurement systems are supplemented by our active peer review infrastructure designed to ensure the development and implementation of actionable items that will improve patient outcomes. Our ability to deliver high levels of customer service and patient care is a direct result of this focus, which helps us to differentiate our services, and to attract and retain providers.
Ability to attract and retain high-quality providers.
Through our recruiting databases and processes, we are able to identify and target high-quality providers to match the needs of our customers. We believe that our national presence and operating infrastructure enable us to provide attractive opportunities for our providers to enhance their skills through extensive clinical and leadership development programs. We believe that our differentiated recruiting, training and development programs strengthen our customer and provider relationships, enhance our strong contract and clinician retention rates and allow us to efficiently recruit providers to support our robust new contract pipeline across each of our service lines.
Business Strategy
Capitalize on organic growth opportunities.
Our scale, scope and long operating history, combined with our value-enhancing initiatives, provide us with competitive advantages to continue to grow our business. We believe that our integrated service offerings, differentiated and data-driven clinical quality processes, scalable technology and sophisticated risk management programs improve the
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Item 1. Business - (continued)
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quality and efficiency of care, creating value for health systems, payors and patients. We also believe our physician-led, patient-focused culture and approach to clinical solutions will allow us to continue to successfully recruit and retain clinical professionals.
Grow complementary and integrated service lines.
Our continued focus on expanding our existing relationships and integrated service offerings has helped health systems, communities and payors realize economic benefits and clinical value for patients. We plan to expand and integrate the delivery of our differentiated suite of services across our existing customer base. We believe that our ability to expand our existing relationships will be enhanced by our strong reputation, our national footprint, and strong relationships with our health system customers.
Supplement organic growth with strategic acquisitions.
The segments in which we compete are highly fragmented, presenting significant opportunities for organic growth and additional acquisitions. We have a successful track record of completing and integrating select acquisitions. This has enhanced our presence in existing markets, facilitated our entry into new geographies and expanded the scope of our services. We will continue to follow a disciplined strategy in exploring future acquisitions by analyzing the strategic rationale, financial impact and organic growth profile of each potential opportunity. From time to time, we perform strategic reviews of our business lines, and may pursue strategic initiatives in the future, including divestitures, acquisitions, spin-offs, split-offs, strategic partnerships or joint ventures.
Enhance operational efficiencies and productivity.
We believe there are significant opportunities to continue to build upon our success in improving our productivity and profitability. We continue to focus on initiatives to improve productivity, including more efficient scheduling, continued use of mid-level providers, enhancing our leadership training programs, improving and realigning compensation programs and providing certain shared services across our businesses. We believe that our processes related to managed care contracting, billing, coding, collection and compliance have driven a strong track record of efficient revenue cycle management. We have made significant investments in infrastructure, including management information systems that we believe will continue to enable us to improve clinical results and key client metrics while reducing the cost of providing patient care. We have dedicated teams with business and clinical expertise that are responsible for implementing best practices. Furthermore, in all segments, we will continue to utilize risk mitigation programs for loss prevention and early intervention, including continued use of clinical “fail-safes” and other technology. We believe that our significant investments in scalable technology systems will facilitate additional cost reductions and efficiencies.
Physician Services Segment
We are a leading national provider of multispecialty physician services to our health system clients, including hospitals, ASCs and other healthcare facilities. As of
December 31, 2017
, we had physician services contracts, primarily in the areas of emergency department and hospitalist services, anesthesiology services, radiology/tele-radiology services and children's services, covering more than
1,800
clinical departments in healthcare facilities in
45
states and the District of Columbia, and over
25,200
employed or affiliated physicians and other healthcare professionals. The market for physician services is fragmented in each of our specialties, and is serviced by national, regional and local providers. For the year ended
December 31, 2017
, Arizona, California, Florida, New Jersey and Texas accounted for approximately
62%
of our physician services segment net revenue.
We, or our affiliated entities, recruit and hire or contract with physicians and other healthcare professionals, who then provide services to patients in the facilities with which we contract. We bill and collect from each patient or the patient’s insurance provider for the medical services performed. We also have agreements with independent physician groups and hospitals to provide management services such as billing and collection, recruiting, risk management and certain other administrative services.
The following table presents the physician services revenue mix from our primary specialties for the years ended December 31,
2017
and
2016
. Revenue mix for the year ended December 31, 2016 is presented on a pro forma combined basis, assuming the Merger was completed on January 1, 2016.
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Revenue Mix
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2017
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2016
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Emergency department and hospitalist services
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54
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%
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55
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%
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Anesthesiology services
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28
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27
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Radiology services
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8
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5
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Children's services
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2
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2
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Office based, surgery and other
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8
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11
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Total
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100
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%
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100
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%
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Item 1. Business - (continued)
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Emergency Department (ED) and Hospitalist Services
We are a leading national provider of emergency medicine services to hospitals, freestanding emergency care facilities, and urgent care facilities in the United States. Emergency departments are an essential access point for medical services and are a primary source of patient admissions to hospitals and other facilities. Consequently, hospitals require efficient and effectively operated emergency departments, often turning to third-party providers with greater experience and resources. We believe that ED utilization trends and cost pressures facing hospitals have resulted in an increased focus by facilities on improving the operating efficiency of their EDs.
We provide inpatient physician services, or hospitalist medicine services, for hospital patients who have no primary care physician or have an attending physician who requests that our hospitalist manage the patient. We help reduce the average length of stay for patients. Inpatient service physicians are also an integral part of the post-discharge coordination of patient care by directing how care outside the hospital setting should be established and coordinated by improving the care coordination through effective working relationships with the ED. We believe that effective hospitalist programs result in better patient outcomes and lower costs. We frequently provide hospitalist services to our customers in combination with other physician services. During
2017
, our ED and hospitalist medicine providers handled more than
19.3 million
emergency room visits.
Anesthesiology Services
We are a leading national provider of anesthesia services in the United States. Our anesthesia care teams provide anesthesiology services to hospitals, ASCs and other healthcare facilities. These teams are typically comprised of board-certified physicians and allied health professionals. Our anesthesiologists are a key part of the effective management and productivity of hospital surgery departments, ASCs and other healthcare facilities. During
2017
, our anesthesia professionals handled more than
2.9 million
anesthetic cases.
Radiology/Tele-radiology Services
We are a leading national provider of radiology services, including diagnostic, interventional and tele-radiology services, to hospitals, imaging centers and physician group practices in the United States. Many of our radiologists provide their services at healthcare facilities where they interpret all modalities of radiology images. They can consult directly with attending physicians, providing prompt, accurate interpretations, which promotes the professional development of our radiologists as they interact constantly with the physicians at our clients’ facilities. During
2017
, our radiology professionals interpreted over
9.9 million
studies.
Children’s Services
We are a leading national provider of children’s services in the United States. Through our children's services teams, which include on-site medical directors, physicians and nurse practitioners, we provide neonatal management services at our healthcare facility partners' neonatal intensive care units (NICUs). We continue to expand our provision of children’s services in pediatric hospitalist, pediatric intensivist and pediatric emergency medicine subspecialties. During
2017
, our children’s services professionals supported approximately
300,000
patient days.
Other Services
Surgery Services.
We offer management, oversight and surgeon staffing for trauma surgery services. This service gives hospitals the opportunity to raise their trauma designation by providing expanded coverage for and management of surgery services.
Post-Acute Care Services.
We provide direct patient care and care coordination by clinicians outside the acute care setting through physician-led post-acute care services, including transitional care teams and tele-monitoring and tele-medicine. We serve patients who require comprehensive care across various settings, many of whom suffer from advanced illnesses and chronic diseases. We believe that providers of care management solutions outside the hospital can offer an attractive value proposition.
Office-Based Services.
We operate groups of office-based medical practices that primarily focus on women’s health and provide services in the areas of gynecology and obstetrics. We maintain and operate our office-based practices in communities where the practices support and integrate with our facilities-based specialties, providing additional value to our healthcare facility clients through coordination of care. We provide management services to affiliated office-based practices and typically manage all aspects of the practice other than the provision of medical services, except in jurisdictions where we are permitted to also provide clinical management services.
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Item 1. Business - (continued)
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Support Services
We provide a full range of hospital-based physician staffing and related management services for each of our physician services specialties, which include:
Contract Management.
We utilize an integrated approach to contract management that involves physicians, non-clinical business experts and operational and quality assurance specialists. An on-site medical director responsible for the day-to-day oversight of the relationship, including clinical quality, works closely with the facility’s management in developing strategic initiatives and objectives. A quality manager develops site-specific quality improvement programs, and a practice improvement staff focuses on chart documentation, operational improvement and physician utilization patterns.
Staffing.
We provide healthcare facilities with a full range of staffing services to ensure that each contract is staffed with the appropriate mix of qualified physicians and other medical professionals. Our dedicated clinical teams include qualified physicians and other healthcare professionals responsible for the delivery of high-quality, cost-effective care. These teams also rely on managerial personnel, many of whom have clinical experience, who oversee the administration and operations of the clinical area.
Recruiting.
Many healthcare facilities lack the dedicated resources and expertise necessary to identify and attract specialized physicians. Our marketing and recruiting staff utilizes our proprietary recruiting support systems and databases to increase the success and efficiency of our recruiters and our physician retention rates.
Scheduling.
Our scheduling departments schedule, or assist our medical directors in scheduling, physicians and other healthcare professionals in accordance with the coverage model at each facility. We provide 24-hour service to ensure that unscheduled situations such as physician illness and personal emergencies do not result in a disruption of coverage.
Operational Improvement Assessments.
On behalf of our hospital customers, we implement process improvement programs that are directed toward enhancement of operating and triage systems, and improvement of critical operational metrics, including turnaround times, “left without being treated,” and throughput times. These programs are delivered to the clinical and non-clinical members of the hospital ED as well as other areas of a healthcare facility where services are being provided.
Practice Support Services.
In some situations, facilities and physician groups that are not contracted or affiliated with us are interested in receiving stand-alone management services such as billing and collection, scheduling, recruitment and risk management, and at times we unbundle our services to meet these needs. We provide these services to independent physician groups and healthcare facilities under practice support agreements that generally have a term of one to three years.
Physician Services Segment Overview
The growing complexity of the healthcare delivery system has led many healthcare facilities to increasingly engage third-party providers to provide medical coverage and administrative functions to improve productivity, increase the overall quality of care and reduce administrative costs. We believe the primary clinical areas we serve, which include emergency and hospitalist medicine, anesthesiology, radiology and children’s services, are specialties that are extremely important lines of service for the overall provision of care. The market for services in our specialties tends to be highly fragmented and is predominantly served by smaller group practices.
We believe our physician services segment is well-positioned to benefit from certain trends including the following:
Shift towards national providers of physician services.
Hospitals, ASCs and other healthcare facilities are increasingly utilizing national providers of healthcare professionals as a means of achieving targeted physician coverage levels, including by addressing difficulties in hiring and retaining physicians and increasing operational efficiency to improve patient flow, reduce wait times, coordinate care, shorten lengths of stay and reduce readmission rates, all of which lead to lower costs and promote improved patient care. Historically, hospitals, ASCs and other healthcare facilities have relied on local practice groups to provide physician services, but an increasing number have been turning to national physician groups to meet their increasingly complex needs. We are a direct beneficiary of this continuing shift from smaller local groups to larger national provider organizations. We believe we are well positioned to serve as a trusted partner to health systems in their transformation to integrated healthcare delivery networks.
Consolidation of healthcare providers.
Historically, healthcare has predominantly been provided through smaller, fragmented local provider groups. However, due to changes in reimbursement, increasing regulatory compliance requirements and growing client demands for quality measurement and cost efficiencies, hospitals, ASCs and other healthcare facilities, in some instances, are increasingly consolidating with one another, provider groups are consolidating into larger groups and individual physicians are
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Item 1. Business - (continued)
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seeking larger partners. A significant portion of our growth has come from consolidation with regional provider groups, other acquisitions of smaller physician group practices and new contract wins, all of which have in part been driven by these consolidation trends.
Opportunities created by healthcare reform.
The healthcare sector is periodically subject to regulatory, legislative and other political reform initiatives, at the federal and state level, that significantly impact government healthcare programs, reimbursement models, and health insurance coverage. Recent reform initiatives include efforts to shift governmental reimbursement models away from fee for service methodologies toward value-based approaches. In particular, under the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA), physicians will receive payment incentives or reductions based on their performance with respect to clinical quality, efficiency, clinical improvement activities and meaningful use of electronic health records. We believe our continuing focus on clinical excellence and monitoring the clinical quality of our services positions us favorably to benefit from the shift toward value-based reimbursement models. Other initiatives have increased access to health insurance, including the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (Health Reform Law), and other healthcare reform measures. The Health Reform Law has also increased the obligation of healthcare providers to provide coordinated care and held providers accountable for showing measurable patient outcomes. As a healthcare provider with a national footprint, under the Health Reform Law, as currently in effect, we believe we are in a favorable position to serve the expected growth in patient populations and to meet our clients’ needs for increased coordination and outcomes measurement. However, the Health Reform Law has been modified by congressional action since its enactment, including the repeal of the mandate requiring substantially all U.S. citizens to obtain qualifying health insurance coverage, and may in the future be repealed or further modified as leaders in both the executive and legislative branches of government have stated their intention to do so. See "Government Regulation-
Health Reform Law
" later in this report.
Increased competition for specialty physicians.
With a growing and aging population in the United States, demands for specialty physician services are increasingly outpacing the supply of qualified practitioners. We believe there will be a shortage of physicians in each of our specialties occurring in the next ten years. This growing shortage has led to increasing challenges in recruiting and retaining specialty physicians among hospitals, ASCs and other healthcare facilities, which we believe we can service in part by utilizing other allied healthcare professionals, such as certified registered nurse anesthetists, advanced registered nurse practitioners and physician assistants. Given our expertise in recruiting healthcare professionals in our specialty fields and the attractiveness of our business model to such specialists, we believe we are well-positioned to continue to recruit and retain healthcare professionals and meet the increasing demand for their services in the years to come.
Physician Services Strategy
We intend to grow the revenue and profitability of our physician services segment by:
Delivering distinctive service to our existing client base to drive strong same-contract growth.
The foundation of our physician services business lies in how we service our existing base of health system customers. To ensure that we maintain and further strengthen these client relationships, we pursue the following key strategies:
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expand our national physician services capabilities through management expertise, enhancements in our internal physician recruiting, credentialing and onboarding organizations, further development of our provider quality metrics capabilities and investment in reimbursement technologies;
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provide our health system clients with a compelling and diverse suite of clinical solutions to deliver on our customers' mandate for increased clinical quality, patient satisfaction and coordination of care;
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work with our clients to develop increased efficiencies through the application of best practice information regarding physician staffing and procedural turnaround;
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further advance our relationships with national managed care companies to facilitate favorable contract terms and more efficient revenue cycle management;
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collaborate with hospitals, ASCs and other healthcare facilities to improve their operations by leveraging the clinical leadership of our physicians at clients’ facilities; and
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recruit and retain high quality physicians and healthcare professionals by providing clinical resources, comprehensive administrative practice support, competitive compensation and career opportunities.
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Organically expanding through new contract wins.
The fragmentation of physician services providers creates significant opportunities for organic growth, as we believe that we can provide better solutions for hospitals, ASCs and other healthcare facilities than those offered by smaller provider groups. Our differentiated capabilities and market presence have enabled us to win contracts with both new and existing clients and we expect to continue to capitalize on these trends. Within our existing client base, there is a significant opportunity to win new contracts by expanding our relationships with existing health system partners by adding additional specialties
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Item 1. Business - (continued)
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at their facilities. We have significantly invested in expanding the breadth and focus of our physician services segment business development functions. We believe our expanded efforts and dedicated internal resources will position us well to continue to win new contracts.
Executing acquisitions to augment our organic growth.
As physician services providers continue to consolidate, we believe we will have the opportunity to augment the organic growth of our physician services segment through opportunistic acquisitions of regional and local providers. We will selectively target strategic “platform” practices for future growth in new geographies and “in-market” practices in geographies where we have an established presence. In the last five years, the Company, including its predecessors, has successfully acquired and integrated more than 50 physician group practices
for a combined acquisition price of approximately $3.1 billion.
Enhancing profitability by achieving further operating efficiencies.
We believe we can improve the operating efficiency of our physician services business as we grow. Our infrastructure is designed to achieve economies of scale by enhancing profitability with revenue growth without compromising the quality of operations or clinical care. We believe our processes related to managed care contracting, billing, coding, collection and compliance have driven a track record of effective and efficient revenue cycle management. We continue to make investments in infrastructure, including management information systems that we believe will enable us to improve clinical quality and key client metrics while reducing the cost of providing patient care.
Physician Services Revenues
Our physician services segment revenue is derived principally from the provision of physician services to patients of the healthcare facilities we serve and primarily consists of fee for service revenue from third-party payors. We also receive contract revenue, which represents income earned from the Company's hospital customers to supplement payments from third-party payors. We record revenue at the time services are provided, net of a contractual allowance and provision for uncollectibles. Revenue less the contractual allowance represents the net revenue expected to be collected from third-party payors including managed care, commercial and governmental payors such as Medicare and Medicaid and patients insured by these payors.
We also recognize revenue for services provided during a particular period but not yet billed. Expected collections are estimated based on fees and negotiated payment rates in the case of third-party payors, the specific benefits provided for under each patient’s healthcare plan, mandated payment rates under the Medicare and Medicaid programs, and historical cash collections. Our provision for uncollectibles includes the estimate of uncollectible balances due from uninsured patients, uncollectible co-pay and deductible balances due from insured patients and special charges, if any, for uncollectible balances due from managed care, commercial and governmental payors. We record net revenue from uninsured patients at its estimated realizable value, which includes a provision for uncollectible balances, based on historical cash collections, net of recoveries.
We provide the majority of billing for our employed and affiliated physicians through our internal billing function. We also selectively utilize third-party revenue cycle management providers to perform billing. Additionally, we have invested in several applications that provide the foundation for the day-to-day operations of our physician services business, including facilities-based billing and office-based billing.
Retroactive adjustments, recoupments or refund demands may change amounts realized from third-party payors. Retroactive adjustments to amounts previously reimbursed can and do occur on a regular basis as a result of reviews and audits. Additional factors that could complicate our physician services billing include:
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disputes between payors as to which party is responsible for payment;
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the difficulty of adherence to specific compliance requirements, diagnosis coding and various other procedures mandated by the government; and
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failure to obtain proper physician credentialing and documentation in order to bill governmental payors.
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Contracts.
We have contracts with (i) hospital and ASC customers to provide professional staffing and related management services, (ii) healthcare facilities and independent physician groups to provide management services and (iii) affiliated physician groups and medical professionals to provide management services and various benefits. As provider of multispecialty physician services with a national footprint, we also contract with large health systems.
We deliver services to our hospital customers and their patients through two principal types of contractual arrangements. We most frequently contract directly with the hospital to provide physician staffing and management services. In some instances, a physician-owned professional corporation (PC) contracts with the hospital to provide physician staffing and management services, and the PC, in turn, contracts with us for management and administrative services, including billing, scheduling support, accounting and other
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Item 1. Business - (continued)
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services. The PC pays our management fee from the fees it collects from patients, third-party payors and, in some cases, the hospital customer. Our physicians and other healthcare professionals who provide services under these hospital contracts do so pursuant to independent contractor or employment agreements with us, or pursuant to arrangements with the professional corporation that has a management agreement with us.
Generally, agreements with hospitals are awarded on a competitive basis with an initial term of three years subject to automatic one-year renewals, and allow for termination by either party upon specified notice. Pursuant to our agreements with hospital customers:
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we bill patients and third-party payors directly for physician fees,
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we bill patients and third-party payors directly for physician fees, with the hospital paying us an additional pre-arranged fee for our services, or
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we bill the hospitals directly for the physicians fees.
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We bill patients and third-party payors for physician-related services, which is often referred to as the “professional component.” Separately, hospitals and other allied health providers bill the same patients and third-party payors for services they provide, including medical equipment and diagnostic testing. In all cases, the hospitals are responsible for billing and collecting for non-physician related services as well as for providing the capital for medical equipment and supplies associated with the services we provide.
We contract with healthcare professionals as either independent contractors or employees to provide services to our customers. The healthcare professionals generally are paid an hourly rate for each hour of coverage, a variable rate based upon productivity or other objective criteria or a combination of both a fixed hourly rate and a variable rate component. We typically arrange for professional liability and workers compensation coverage for our healthcare professionals.
Contracts with healthcare professionals typically have one-year terms with automatic renewal clauses for additional one-year terms. The contracts can be terminated with cause for various reasons and usually contain provisions allowing for termination without cause by either party upon 90 days’ notice. Agreements with physicians generally contain a non-compete or non-solicitation provision.
The following table summarizes our approximate payor mix as a percentage of net revenue and our approximate payor mix based on patient encounters for the periods indicated, assuming the Merger was completed on January 1, 2016.
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Percentage of Net Revenue
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Percentage of Total Volume
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Year Ended December 31,
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Year Ended December 31,
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2017
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2016
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2015
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2017
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2016
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2015
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Medicare
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20
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%
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20
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%
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13
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%
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33
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%
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32
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%
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36
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%
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Medicaid
|
8
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8
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5
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23
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25
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22
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Commercial and managed care
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55
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54
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71
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31
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30
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33
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|
Self-pay
|
2
|
|
|
1
|
|
|
1
|
|
|
13
|
|
|
13
|
|
|
9
|
|
|
Net fee for service revenue
|
85
|
%
|
|
83
|
%
|
|
90
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
Contract and other revenue
|
15
|
|
|
17
|
|
|
10
|
|
|
|
|
|
|
|
|
Net revenue for physician services
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
Competition
The physician services segment is highly fragmented, and we consider our primary competitors to be local physician group practices. On a regional and national basis, we compete with companies such as Mednax Inc., Team Health, US Acute Care Solutions, U.S Anesthesia Partners, Fresenius, Schumacher Clinical Partners and California Emergency Physicians.
Physician Services Locations
As of December 31,
2017
, we had contracts covering more than
1,800
clinical departments at healthcare facilities in
45
states and the District of Columbia. For the year ended
December 31, 2017
, Arizona, California, Florida, New Jersey and Texas accounted for approximately
62%
of our physician services segment net revenue. We generally negotiate and enter into separate contracts with facilities to which we deliver physician services. However, many facilities are affiliated with one another or owned by the same entity. As a result, while no single facility represents more than
10%
of our physician services segment revenue, there are several significant client relationships with groups of affiliated facilities that result in a concentration of revenue. During
2017
, facilities affiliated with
|
|
|
|
|
|
Item 1. Business - (continued)
|
|
HCA Holdings, Inc. comprised approximately
20%
of our consolidated net revenue and approximately
24%
of our physician services segment net revenue.
Ambulatory Services Segment
We are one of the largest owners and operators of ambulatory surgical centers (ASCs or surgery centers) in the United States based upon total number of facilities. We acquire, develop and operate ASCs in partnership with physicians and health systems. We generally own a majority interest, primarily 51%, in the facilities we operate. We also own minority interests in certain surgery centers in partnerships with leading health systems and physicians and intend to continue to pursue such partnerships. At
December 31, 2017
, we operated
264
ASCs in
35
states and the District of Columbia with approximately
2,000
physician partners and 1,000 affiliated physicians who utilize our surgery centers.
ASCs primarily provide elective, high volume, lower-risk surgical procedures across multiple specialties, including, among others, gastroenterology, ophthalmology, and orthopaedics. Our ASCs are designed with a cost structure that creates significant savings for patients and payors when compared to surgical services performed in hospital outpatient departments (HOPDs). We acquire, develop and operate ASCs through the formation of strategic partnerships with physicians to better serve the communities in the markets we serve. Since physicians are critical to the delivery of healthcare, we have developed our operating model to encourage physicians to affiliate with us. We believe we attract physicians because we design our facilities and adopt staffing, scheduling and clinical systems and protocols with the goal of increasing physician efficiency. We believe that our focus on physician satisfaction combined with providing safe, high-quality healthcare in a friendly and convenient environment for patients will continue to make our ASCs an attractive alternative to HOPDs for physicians, patients and payors. We believe our facilities, when compared to HOPDs, (i) enhance the quality of care for our patients, (ii) provide significant administrative, clinical and efficiency benefits to physicians, and (iii) offer a lower cost alternative for patients and payors.
The types of procedures performed at each surgery center depend on the specialty of the practicing physicians who use the surgery center. The procedures most commonly performed at our surgery centers are:
|
|
|
|
•
|
gastroenterology - colonoscopy and other endoscopy procedures;
|
|
|
|
|
•
|
ophthalmology - cataracts and retinal laser surgery; and
|
|
|
|
|
•
|
orthopaedic -
knee and shoulder arthroscopy and carpal tunnel repair.
|
The following table presents the number of our surgery centers by specialty and ambulatory services net revenue mix for the years ended
December 31, 2017
,
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Specialty Count
|
|
Net Revenue Mix
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
|
Gastroenterology
|
|
162
|
|
|
155
|
|
|
151
|
|
|
51
|
%
|
|
51
|
%
|
|
52
|
%
|
|
Multispecialty
|
|
55
|
|
|
57
|
|
|
58
|
|
|
29
|
|
|
30
|
|
|
29
|
|
|
Ophthalmology
|
|
37
|
|
|
38
|
|
|
39
|
|
|
15
|
|
|
14
|
|
|
14
|
|
|
Orthopaedic
|
|
10
|
|
|
10
|
|
|
9
|
|
|
5
|
|
|
5
|
|
|
5
|
|
|
Total
|
|
264
|
|
|
260
|
|
|
257
|
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
Item 1. Business - (continued)
|
|
The following table presents certain information with respect to our ambulatory services segment for the years ended
December 31, 2017
,
2016
and
2015
. An ASC is deemed to be under development when a limited liability company (LLC) or limited partnership (LP) has been formed with the physician partners to develop the ASC.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Procedures performed during the period at consolidated centers
|
1,715,595
|
|
|
1,721,399
|
|
|
1,729,262
|
|
|
Centers in operation, end of period (consolidated)
|
234
|
|
|
238
|
|
|
236
|
|
|
Centers in operation, end of period (unconsolidated)
|
30
|
|
|
22
|
|
|
21
|
|
|
Average number of continuing centers in operation (consolidated)
|
237
|
|
|
237
|
|
|
238
|
|
|
New centers added, during period
|
10
|
|
|
8
|
|
|
11
|
|
|
Centers merged into existing centers, during period
|
—
|
|
|
1
|
|
|
—
|
|
|
Centers disposed, during period
|
6
|
|
|
4
|
|
|
—
|
|
|
Surgical hospitals in operation, end of period (unconsolidated)
|
1
|
|
|
1
|
|
|
1
|
|
|
Centers under letter of intent, end of period
|
2
|
|
|
3
|
|
|
5
|
|
|
Average revenue per consolidated center (in thousands)
|
$
|
5,392
|
|
|
$
|
5,352
|
|
|
$
|
5,168
|
|
|
Same center revenues increase, day adjusted (consolidated)
|
1.8
|
%
|
|
4.3
|
%
|
|
6.0
|
%
|
Ambulatory Services Segment Overview
For many years, government programs, private insurance companies, managed care organizations and self-insured employers have implemented cost containment measures intended to limit the growth of healthcare expenditures. These cost-containment measures, together with technological advances, have contributed to the significant shift in the delivery of healthcare services away from traditional inpatient hospital settings to more cost-effective alternate sites, including ASCs. ASCs have been widely viewed as a successful way to increase efficiency by improving the quality of, and access to, healthcare and increasing patient satisfaction, while simultaneously reducing costs. According to data issued by the Centers for Medicare and Medicaid Services (CMS) in 2017, there were approximately 5,500 Medicare-certified ASCs. We believe that approximately 66% of those ASCs performed procedures in a single specialty and approximately 34% performed procedures in more than one specialty (multispecialty). Among the single specialty ASCs, we believe over 2,400 are in our preferred specialties of gastroenterology, ophthalmology, orthopaedic, ear, nose and throat (ENT) and urology, while the remainder are in specialties such as plastic surgery, podiatry and pain management. Of our preferred specialties, we believe approximately 67% of single specialty ASCs and 27% of multispecialty ASCs are independently owned.
We believe the following factors have contributed to the increased migration of procedures to outpatient surgical facilities:
Cost‑effective alternative.
Ambulatory surgery is generally less expensive than hospital-based surgery for a number of reasons, including lower facility development costs, more efficient staffing and space utilization, and a specialized operating environment focused on cost containment. Accordingly, charges to patients and payors by ASCs are generally less than hospital charges.
Physician and patient preference.
We believe many physicians prefer ASCs because these facilities enhance physicians’ productivity by providing them with greater scheduling flexibility, more consistent nurse staffing and faster turnaround time between cases, allowing them to perform more surgeries in a defined period of time. In contrast, HOPDs generally serve a broader group of physicians, including those involved with emergency procedures, which can result in postponed or delayed surgeries for non-emergency procedures. Many patients prefer ASCs as a result of more convenient locations, shorter waiting times and more convenient scheduling and registration than HOPDs.
Ambulatory Services Strategy
We are a leader in the acquisition, development and operation of ASCs. The key components of our strategy are to:
|
|
|
|
•
|
attract and retain physicians that are leaders in their specialty and community;
|
|
|
|
|
•
|
increase same-center revenues and profitability at our existing surgery centers;
|
|
|
|
|
•
|
expand our national network of ASCs by selectively acquiring both single-specialty ASCs and multispecialty ASCs, and developing new ASCs in partnership with physicians and health systems; and
|
|
|
|
|
•
|
pursue the acquisition of companies that own and operate multiple ASCs.
|
Attract and retain physicians that are leaders in their specialty and community.
We typically structure partnerships with physicians in a 51% / 49% ownership relationship, whereby we are the majority member and provide management and administrative services to
|
|
|
|
|
|
Item 1. Business - (continued)
|
|
our partners. We believe our focus on physician satisfaction, combined with providing safe, high-quality healthcare in a patient friendly and convenient environment helps us attract and retain physician partners.
Increase same-center revenue growth.
We grow revenues in our existing surgery centers primarily through increasing procedure volume by (i) increasing the number of physicians performing procedures at our ASCs, (ii) marketing our ASCs to referring physicians, payors and patients, and (iii) achieving efficiencies in center operations. For the year ended
December 31, 2017
, we achieved same-center revenue growth of
1.8%
.
Growth in the number of physicians performing procedures.
The most effective way to increase procedure volume and revenues at our ASCs is to increase the number of physicians who use our ASCs through:
|
|
|
|
•
|
the physicians affiliated with the ASCs recruiting new physicians to their practices;
|
|
|
|
|
•
|
identifying additional physicians to join the partnerships that own the ASCs; and
|
|
|
|
|
•
|
recruiting non-partner physicians in the same or other specialties to use the ASCs.
|
Marketing our ASCs to referring physicians, payors and patients.
We market our ASCs to referring physicians and payors by emphasizing the quality, high patient satisfaction and lower cost at our ASCs, including through programs designed to educate employers and patients as to the health and cost benefits of our services. We have a dedicated business development team that is responsible for negotiating contracts on behalf of our ASCs with third-party payors and negotiating reimbursement rates pursuant to existing contracts.
Achieving efficiencies in center operations.
We have dedicated teams with business and clinical expertise that are responsible for implementing best practices within our ASCs. The implementation of these best practices allows the ASCs to improve operating efficiencies through:
|
|
|
|
•
|
physician scheduling enhancements;
|
|
|
|
|
•
|
improved patient flow; and
|
|
|
|
|
•
|
improved operating room turnover.
|
We enhance the profitability of our ASCs through benefits we receive from economies of scale such as group purchasing, staffing and clinical efficiencies and cost containment initiatives. We also track center performance relative to certain benchmarks in order to maximize center-level revenues and profitability. The information we gather and collect from our ASCs and
ambulatory services segment
operations team members allows us to develop best practices and identify those ASCs that could most benefit from improved operating efficiency techniques and cost containment measures.
Expand our national network of ASCs.
While we have historically been an active acquirer of ASCs, the market remains fragmented, providing many opportunities for additional acquisitions. We target ownership in single-specialty ASCs that perform gastrointestinal endoscopy, ophthalmology and orthopaedic procedures, as well as multispecialty ASCs that are equipped and staffed to perform surgical procedures in more than one specialty. As of
December 31, 2017
, approximately
66%
of our
ambulatory services segment
revenues were from single-specialty ASCs that perform gastroenterology or ophthalmology procedures. These specialties have a higher concentration of older patients than other specialties, such as orthopaedics or ENT. We will also pursue the acquisition of companies that own and operate multiple ASCs when those opportunities arise.
We also plan to continue expanding our network of ASCs through partnerships with hospitals and hospital systems. As a result of recent healthcare trends, many hospitals and hospital systems are seeking to enter or improve their operations within the ASC market in order to offer a complete continuum of care as well as to establish better relationships with physicians who have a need to operate in both in-patient and out-patient environments. As a result of our deep experience in ASC operations, we believe the relationships we have established with hospitals and hospital-owned entities bring both quality and efficiency to such relationships.
We typically look to acquire ASCs that meet the following criteria:
|
|
|
|
•
|
Diversified physician group:
ASCs that have eight to ten (or more) physicians. In order to manage succession planning, we look to acquire ASCs where physicians vary in age in order to limit the risk of several physicians exiting the practice in a short period of time.
|
|
|
|
|
•
|
Market leader:
ASCs that are market leaders for the procedures performed in that facility.
|
|
|
|
|
•
|
Contracts with payors:
ASCs that contract with all or most of the major commercial payors in their market.
|
|
|
|
|
•
|
History of growth:
ASCs with a track record of consistent case and revenue growth.
|
|
|
|
|
|
|
Item 1. Business - (continued)
|
|
The development staff of our
ambulatory services segment
identifies existing ASCs that are potential acquisition candidates and physicians who are potential partners for new center development and conducts a review of all aspects of the surgery center's operations.
In presenting to physicians the advantages of developing a new ASC in partnership with us, our development staff emphasizes the proximity of a surgery center to a physician’s office, the simplified administrative procedures, the ability to schedule consecutive cases without preemption by inpatient or emergency procedures, the rapid turnaround time between cases, the high technical competency of the center’s clinical staff and the state-of-the-art surgical equipment. We also focus on our expertise in developing and operating ASCs, including contracting with vendors and third-party payors. In a development project, we provide services, such as financial feasibility pro forma analysis, site selection, financing for construction, equipment and build out and architectural oversight. Capital contributed by the physicians and our company plus debt financing provides the funds necessary to construct and equip a new surgery center and initial working capital.
As part of each surgery center acquisition or development transaction, we generally form an LLC or LP, which are referred to herein as “partnerships,” where certain states require such a model and enter into an operating agreement or a LP agreement with our physician partners. We generally own 51% of the partnerships. Under these agreements, we receive a percentage of the net income and cash distributions of the entity equal to our percentage ownership interest in the entity and have the right to the same percentage of the proceeds upon a sale or liquidation of the entity. In the LP structure, as the sole general partner, one of our affiliates is generally liable for the debts of the LP. However, the physician partners are generally required to guarantee their pro rata share of any indebtedness or lease agreements to which the limited partnership is a party in proportion to their ownership interest in the LP.
Except in limited instances, we manage each partnership and oversee the business office, contracting, marketing, financial reporting, accreditation, clinical, regulatory and administrative operations of the surgery center. The physician partners provide the center with a medical director and performance improvement chairman and may provide certain other specified services such as billing and collections, transcription and accounts payable processing. In addition, the partnership may lease the services of certain non-physician personnel from entities affiliated with the physician partners, who will provide services at the center. Certain significant aspects of the partnership's governance are overseen by an operating board, which is typically comprised of equal representation by us and our physician partners. We work closely with our physician partners to increase the likelihood of a successful partnership.
Under many of our agreements with physician partners of our surgery centers, we are obligated to purchase the interests of the physicians at an amount as specified in the limited partnership and operating agreements in the event that their continued ownership of interests in the limited partnerships and limited liability companies becomes prohibited. The determination of such a prohibition generally is required to be made by our counsel in concurrence with counsel of the physician partners or, if they cannot concur, by a nationally recognized law firm with expertise in healthcare law jointly selected by us and the physician partners. The interest we are required to purchase will not exceed the minimum interest required as a result of the change in the law or regulation causing such prohibition.
Ambulatory Services Revenues
Revenues from our ASCs are derived from facility fees charged for surgical procedures performed and, at certain of our surgery centers (primarily ASCs that perform gastrointestinal endoscopy procedures), charges for anesthesia services provided by medical professionals employed or contracted by our ASCs. These fees vary depending on the procedure, but usually include all charges for operating room usage, special equipment usage, supplies, recovery room usage, nursing staff and medications. Facility fees do not include professional fees charged by the physicians who perform the surgical procedures. Revenues are recorded at the time of the patient encounter and billings for such procedures are made on or about that same date. At the majority of our surgery centers, it is our policy to collect patient co-payments and deductibles at the time the surgery is performed. Our revenues are recorded net of estimated contractual adjustments from third-party medical service payors.
ASCs depend upon third-party reimbursement programs, including governmental and private insurance programs, to pay for substantially all of the services rendered to patients. During
2017
, we derived approximately
27%
of our ambulatory services segment revenue from governmental healthcare programs, primarily Medicare and managed Medicare programs, and the remainder from a wide mix of commercial payors and patient co-pays and deductibles. The Medicare program currently pays ASCs in accordance with a predetermined fee schedule. Our surgery centers are not required to file cost reports and, accordingly, we have no unsettled amounts from governmental third-party payors.
In addition to payment from governmental programs, ASCs derive a significant portion of their revenues from private health insurance plans. These plans include both standard indemnity insurance programs as well as managed care programs, such as preferred provider organizations and HMOs. The strengthening and consolidation of managed care systems nationally has resulted in increased
|
|
|
|
|
|
Item 1. Business - (continued)
|
|
competition among providers of surgery center services that contract with these systems. Further, most of the plans offered through the health insurance exchanges created by the Health Reform Law provide for narrow networks that restrict the number of participating providers or tiered networks that impose significantly higher cost sharing obligations on patients who obtain services from providers in a disfavored tier. Exclusion from participation in a managed care network or assignment to a disfavored tier could result in material reductions in patient volume and revenues of our ambulatory services segment. Some of our competitors may have greater financial resources and market penetration than we do. We believe that all payors, both governmental and private and certain other industry participants, such as large employer groups and their affiliates, will continue their efforts over the next several years to reduce healthcare costs and that these efforts will generally result in a less stable market for healthcare services. While no assurances can be given concerning the ultimate success of our efforts to contract with healthcare payors, we believe that our position as a lower-cost alternative for certain surgical procedures should enable our surgery centers to compete effectively in the evolving healthcare marketplace.
Competition
We consider our primary competitors to be regional and national ASC providers, including hospitals and health systems, such as United Surgical Partners, Inc., Surgical Care Affiliates and Surgery Partners. We also compete with national, regional and local hospital systems for the development of new surgery centers.
Accreditation
We believe that undergoing and maintaining voluntary accreditation signifies our commitment to quality. Managed care organizations in certain markets will only contract with a facility that is accredited by either the Accreditation Association for Ambulatory Health Care (AAAHC) or The Joint Commission. Substantially all of our ASCs are accredited by AAAHC or The Joint Commission and have received three-year certifications.
Ambulatory Services Locations
At
December 31, 2017
, we operated
264
ASCs in
35
states and the District of Columbia. The size of our typical single-specialty ASC is approximately 6,000 to 10,000 square feet. The size of our typical multispecialty ASC is approximately 10,000 to 14,000 square feet. Each center typically has two to three operating or procedure rooms with areas for reception, preparation, recovery and administration and is specifically tailored to meet the needs of its physician partners.
|
|
|
|
|
|
Item 1. Business - (continued)
|
|
Medical Transportation
On August 7, 2017, we entered into a definitive agreement to divest our medical transportation business, AMR, to an entity controlled by funds affiliated with Kohlberg Kravis Roberts & Co. As a result, our medical transportation business has been classified as discontinued operations and is no longer a separate reportable segment. We expect to complete the divestiture of AMR during the first quarter of 2018. AMR is the largest ambulance provider in the nation and a leading provider of other medical transportation services in the United States. Ambulance services encompass both “911” emergency response and non-emergency transport services, including critical care transfers, wheelchair transports and other inter-facility transports. Emergency response services include the dispatch of ambulances equipped with life support equipment and staffed with paramedics and/or emergency medical technicians (EMTs) to provide immediate medical care to injured or ill patients. Non-emergency services utilize paramedics, EMTs and/or nurses to transport patients between healthcare facilities or between facilities and patient residences.
AMR provides substantially all of its medical transportation services under its American Medical Response (AMR) brand name. AMR operates under other names when required to do so by local statute or contractual agreement. AMR's broad geographic footprint enables it to contract on a national and regional basis with insurance companies, healthcare facilities and government agencies.
A significant portion of AMR's medical transportation business net revenue was generated from emergency “911” ambulance services. These services include treating and stabilizing patients, transporting the patient to a hospital or other healthcare facility and providing attendant medical care en route. Non-emergency ambulance services revenues included critical care transfers, wheelchair transports and other inter-facility transports, with the remaining balance of net revenue was generated from managed transportation services, fixed-wing air ambulance services and the provision of training, dispatch and other services to communities and public safety agencies including services provided to the Federal Emergency Management Agency (FEMA). AMR has a national contract with FEMA to provide ambulance and para-transit services, as well as rotary and fixed-wing air ambulance transportation services to supplement federal and military responses to disasters, acts of terrorism and other public health emergencies in the full 48 contiguous states.
Medical Transportation Overview
AMR provides a full range of emergency and non-emergency ambulance transport and related services, which include:
“911” Response Services
AMR provides emergency response services primarily under long-term exclusive contracts with communities and hospitals. AMR's contracts typically stipulate that it must respond to “911” calls in the designated area within a specified response time. AMR utilizes two types of ambulance units: Advanced Life Support (ALS) units and Basic Life Support (BLS) units. ALS units, which are staffed by two paramedics or one paramedic and an EMT, are equipped with high-acuity life support equipment such as cardiac monitors, defibrillators and oxygen delivery systems, and carry pharmaceutical and medical supplies. BLS units are generally staffed by two EMTs and are outfitted with medical supplies and equipment necessary to administer first aid and basic medical treatment. The decision to dispatch an ALS or BLS unit is determined by contractual requirements, as well as by the nature of the patient’s medical situation. Exclusive “911” contracts with communities and government agencies typically specify maximum fees a provider may charge and set forth minimum requirements, such as response times, staffing levels, types of vehicles and equipment, quality assurance and insurance coverage. The rates that a provider is permitted to charge for services under a contract for “911” emergency ambulance services and the amount of the subsidy, if any, the provider receives from a community or government agency depend in large part on the nature of the services it provides, the payor mix and the performance requirements.
Non-Emergency Medical Transportation Services
We provide transportation to patients requiring ambulance or wheelchair transport with varying degrees of medical care needs between healthcare facilities or between healthcare facilities and their homes. Unlike emergency response services, which typically are provided by communities or private providers under exclusive or semi-exclusive contracts, non-emergency transportation usually involves multiple contract providers at a given facility, with one or more of the competitors designated as the “preferred” provider. Non-emergency transport business generally is awarded by a healthcare facility, such as a hospital or nursing home, or a healthcare payor, such as a health maintenance organization (HMO), managed care organization or insurance company. Usage tends to be controlled by the facility discharge planners, nurses and physicians who are responsible for requesting transport services. Non-emergency services are provided primarily by private ambulance companies. Non-emergency medical transportation services include: (i) inter-facility critical care transport, (ii) wheelchair and stretcher-car transports and (iii) other inter-facility transports.
|
|
|
|
|
|
Item 1. Business - (continued)
|
|
Other Services
In addition to “911” emergency and non-emergency ambulance services, AMR provides the following managed transportation services, dispatch services, event medical services, paramedic training, fixed-wing air ambulance services, community paramedic, on-site and offshore EMS, and industrial and community fire protection services.
Medical Transportation Revenues
AMR receive payment from the following sources:
|
|
|
|
•
|
federal and state governments, primarily under the Medicare and Medicaid programs;
|
|
|
|
|
•
|
HMOs and private insurers;
|
|
|
|
|
•
|
fees for stand-by and event driven coverage, including from its national contract with FEMA; and
|
Emergency transport.
Contracts with communities to provide emergency transport services are typically exclusive, with terms of three to five years in length and generally are obtained through a competitive bidding process. In some instances where AMR is the existing provider, communities elect to renegotiate existing contracts rather than initiate new bidding processes. “911” contracts often contain options for earned extensions or evergreen provisions. AMR's “911” emergency response arrangements typically specify maximum fees AMR may charge and set forth minimum requirements, such as response times, staffing levels, types of vehicles and equipment, quality assurance and insurance coverage. Communities and government agencies may also require us to provide a performance bond or other assurances of financial responsibility. The rates AMR is permitted to charge for services under a contract for emergency ambulance services and the amount of the subsidy, if any, received from a community or government agency depend in large part on the nature of the services AMR provides, payor mix and performance requirements.
Non-emergency transport.
AMR has arrangements to provide non-emergency ambulance services with hospitals, nursing homes and other healthcare facilities that require a stable and reliable source of medical transportation for their patients. These contracts typically designate AMR as the preferred ambulance service provider of non-emergency ambulance services to those facilities and permits AMR to charge a base fee, mileage reimbursement and additional fees for the use of particular medical equipment and supplies. AMR has historically provided a portion of its non-emergency transports to facilities and organizations in competitive markets without specific contracts.
Non-emergency transports often are provided to managed care or insurance plan members who are stabilized at the closest available hospital and are then moved to facilities within their health plan’s network. We believe the increased prevalence of managed care benefits larger ambulance service providers, which can service a higher percentage of a managed care provider’s members. This allows the managed care provider to reduce its number of vendors, thus reducing administrative costs and allowing it to negotiate more favorable rates with healthcare facilities. AMR's scale and broad geographic footprint enable contracting on a national and regional basis with managed care and insurance companies. We believe that communities, government agencies, healthcare facilities, managed care companies and insurers consider the quality of care, historical response time performance and total cost to be among the most important factors in awarding and renewing contracts.
Competition
Competition in the ambulance transport market is based primarily on:
|
|
|
|
•
|
the ability to improve customer service, such as on-time performance and efficient call intake;
|
|
|
|
|
•
|
the ability to provide comprehensive clinical care;
|
|
|
|
|
•
|
the ability to recruit, train and motivate employees, particularly ambulance crews who have direct contact with patients and healthcare personnel; and
|
|
|
|
|
•
|
pricing, billing and reimbursement expertise.
|
AMR's predominant competitors are local fire departments and other local government providers. Larger private provider competitors include Falck, a Danish corporation with a significant U.S. presence, Acadian Ambulance Service in Louisiana and Paramedics Plus. Small, locally-owned operators principally serve the inter-facility transport market.
|
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Item 1. Business - (continued)
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Medical Personnel
Paramedics and EMTs must be state-certified and locally credentialed to transport patients and perform emergency care services. Certification as an EMT typically requires completion of a program designated by the U.S. Department of Transportation, such as those offered at AMR's training institute, NCTI. In addition, specialized courses may be completed to target specific patient populations, such as pediatrics, geriatrics, trauma and burns. In most communities, the local physician medical director, often in conjunction with a physician advisory board, develops medical protocols to be followed by paramedics and EMTs in a service area. In addition, real-time instructions are conveyed on a case-by-case basis through direct communications between the ambulance crew and hospital emergency physicians. This consultation allows for more comprehensive evaluation and treatment of difficult cases. Like physicians, both paramedics and EMTs must complete continuing education programs and, in some cases, state supervised refresher training and/or examinations to maintain their certifications.
Medical Transportation Locations
During 2017, AMR provided services in 41 states and the District of Columbia. Its broad geographic footprint enables AMR to contract on a national and regional basis with insurance companies, healthcare facilities and government agencies.
Government Regulation
Our operations and relationships with healthcare providers such as hospitals, ASCs and other healthcare facilities and healthcare professionals are subject to extensive regulation by numerous federal and state government entities as well as local government agencies. Specifically, but without limitation, we are subject to the following types of laws and regulations.
Health Reform.
In recent years, the U.S. Congress and certain state governments have enacted a number of measures designed to effect major change across healthcare services. Most prominent among these efforts, the Health Reform Law contains a number of provisions designed to reduce Medicare program spending, including an annual productivity adjustment that reduces payment updates to ASCs and various initiatives that may reduce payments for physician services. The Health Reform Law also expanded coverage of previously uninsured individuals through a combination of public program expansion and private sector health insurance reforms. We believe the Health Reform Law has generally resulted in increased volume at facilities at which we provide physician services and at our surgery centers. Certain provisions of the Health Reform Law, including those promoting Accountable Care Organizations (ACOs) and other coordinated care models, may make it more difficult to compete for patients, negatively impacting our surgery centers, physician practices and health facilities we partner with. Additionally, within our physician services segment, we derive a significant portion of our revenue from payments made by government healthcare programs, including Medicare and Medicaid. CMS has implemented, or is implementing, a number of programs and requirements intended to transform Medicare from a passive volume-based payment system to an active purchaser of quality goods and services. These efforts directly impact hospitals, among other providers and may also affect the level of utilization of and payments received for our physician services.
Leaders in both the executive and legislative branches of government have stated their intention to repeal, replace, or significantly modify the Health Reform Law, its implementation or its interpretation. In 2017, Congress eliminated the financial penalty associated with the individual mandate, effective January 2019. In addition, the President signed an executive order directing federal agencies to take actions to minimize the “economic and regulatory burdens” of the Health Reform Law. The impact of efforts to repeal, replace or modify the Health Reform Law, or other efforts to reform healthcare delivery or financial systems, may materially adversely impact our business. Because of the many variables involved, including uncertainties surrounding any future legislative or administrative action to repeal, replace or significantly modify the Health Reform Law, we are unable to predict the net effect of the Health Reform Law.
Licensure and certification.
In order to receive Medicare reimbursement, we must meet applicable conditions for coverage set forth by the Department of Health and Human Services (HHS) for the facility and service type and also comply with state and local laws and regulations, all of which are subject to change from time to time. Each of our existing surgery centers are certified as Medicare providers or suppliers. Our ASC services are subject to periodic Medicare certification surveys. Additional licensure, certification, or accreditation requirements may apply. For example, state licensing of ASCs is required to operate of each of our surgery centers and to participate in federally-funded programs, such as Medicare and Medicaid. Our facilities are also subject to federal, state and local laws addressing issues such as occupational safety, employment, medical leave, insurance regulations, civil rights and discrimination and medical waste and other environmental issues.
Our affiliated physicians participate in Medicare. In addition, every state imposes licensing requirements on individual physicians, and many states impose licensing requirements on facilities and services operated and owned by physicians. Certain non-physician practitioners, including physician assistants and nurse practitioners (sometimes referred to as “midlevel practitioners”), may also
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Item 1. Business - (continued)
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enroll in Medicare and are required to be licensed. Further, our other healthcare professionals may also be subject to other licensure, certification, or accreditation requirements. There can be no assurance that our physicians and non-physician practitioners will continue to qualify for participation, to the extent applicable, or meet licensure standards.
In some states, a certificate of need (CON) process controls the development of certain facilities and services, such as ASCs. CON statutes and regulations generally provide that, prior to the expansion of existing surgery centers, the construction of new healthcare facilities, the acquisition of major items of equipment or the introduction of certain new services, approval must be obtained from the designated state health planning agency. Approval is conditioned on the designated state health planning agency’s determination that a need exists for expanded or additional facilities or services. Our ASC development strategy focuses on states that do not require a CON. Acquisitions of existing surgery centers usually do not require CON approval.
Billing and reimbursement compliance.
Billing and reimbursement rules are complex, change frequently and may vary depending on the source of payment. For example, Medicare and other payors generally only cover services determined to be medically necessary. Providers must carefully bill for and document services provided to ensure accurate coding, including use of the correct ICD-10 code and comply with supervision requirements when billing for services provided by midlevel practitioners.
When our services are covered by multiple payors, financial responsibility is to be allocated among the payors in a process known as coordination of benefits (COB). The rules governing COB are complex, particularly when one of the payors is Medicare or another government program. Under these rules, in some cases, the government payor can be billed as a “secondary payor” only after recourse to a primary payor (e.g., a liability insurer) has been exhausted. If multiple payors reimburse us an amount which, in the aggregate, exceeds the amount to which we are entitled, we are obligated to process a refund.
In the event any of our billing and collection practices violate applicable laws, regulations, and other guidance, we could be subject to penalties, refund demands and recoupments. When the federal government covers items or services, federal fraud and abuse laws also apply. Further, to the extent that the complexity associated with billing for our services causes delays in our cash collections, we assume the financial risk of increased carrying costs associated with the aging of our accounts receivable as well as increased potential for bad debts which could have a material adverse effect on our revenue, provision for uncompensated care and cash flow.
Fraud and Abuse Provisions
Federal Anti-Kickback Statute.
The federal Anti-Kickback Statute prohibits healthcare providers and others from knowingly and willfully soliciting, receiving, offering or paying, directly or indirectly, any remuneration (including any kickback, bribe or rebate) in return for, or to induce, referrals or orders for services or items covered by a federal healthcare program. The federal Anti-Kickback Statute is very broad in scope, and many of its provisions have not been uniformly or definitively interpreted by case law or regulations. Courts have found a violation of the federal Anti-Kickback Statute if just one purpose of the remuneration is to generate referrals, even if there are other lawful purposes. Furthermore, knowledge of the law or intent to violate the law is not required to establish a violation of the federal Anti-Kickback Statute.
Violations may result in criminal penalties or fines of up to $100,000, imprisonment for up to five years, and substantial civil penalties for each violation, plus three times the amount claimed. Civil monetary penalties, including those for violations of the federal Anti-Kickback Statute and those imposed under the FCA, are adjusted annually based on updates to the Consumer Price Index and were recently increased under the Bipartisan Budget Act of 2018. In addition, violations may result in exclusion from participation in the Medicare and Medicaid programs. Exclusion from these programs would result in significant reduction in revenues and would have a material adverse effect on our business. The Health Reform Law provides that submission of a claim for services or items generated in violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim and may be subject to additional penalties under the federal False Claims Act (FCA).
Congress and HHS have published safe harbors that outline categories of activities that are deemed protected from prosecution under the federal Anti-Kickback Statute. Failure to meet the requirements of a safe harbor does not necessarily render the conduct or business arrangement illegal under the federal Anti-Kickback Statute. However, such conduct and business arrangements may lead to increased scrutiny by governmental enforcement authorities. The limited partnerships and limited liability companies that own our surgery centers do not meet all of the criteria of a safe harbor. However, we believe that our surgery centers and the related limited partnerships and limited liability companies are in compliance with the current requirements of applicable federal and state law because, among other factors:
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the limited partnerships and limited liability companies exist to effect legitimate business purposes, including the provision of high quality, cost-effective and efficient services to the patients served;
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Item 1. Business - (continued)
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the limited partnerships and limited liability companies function as an extension of the practices of physicians who are affiliated with the surgery centers and the surgical procedures are performed personally by these physicians without referring the patients outside of their practice;
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our physician partners have a substantial investment at risk in the limited partnerships and limited liability companies;
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terms of the investment do not take into account the volume of the physician partners’ past or anticipated future services provided to patients of the surgery centers;
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the physician partners are not required or encouraged as a condition of the investment to treat Medicare or Medicaid patients at the surgery centers or to influence others to refer such patients to the surgery centers for treatment;
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the limited partnerships, the limited liability companies, our subsidiaries and our affiliates do not loan any funds to or guarantee any debt on behalf of the physician partners with respect to their investment; and
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distributions by the limited partnerships and limited liability companies are allocated uniformly in proportion to ownership interests.
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The safe harbor regulations also set forth a safe harbor for personal services and management contracts. Certain of our limited partnerships and limited liability companies have entered into ancillary services agreements with our physician partners’ group practices, pursuant to which the practice may provide the center with billing and collections, transcription, payables processing, payroll and other ancillary services. The consideration payable by a limited partnership or limited liability company for certain of these services may be based on the volume of services provided by the practice, which is measured by the limited partnership’s or limited liability company’s revenues. Although these relationships do not meet all of the criteria of the personal services and management contracts safe harbor, we believe that the ancillary services agreements are in compliance with the current requirements of applicable federal and state law because, among other factors, we believe the fees payable to the physician practices are equal to the fair market value of the services provided.
The HHS Office of Inspector General (OIG) is authorized to issue advisory opinions regarding the interpretation and applicability of the federal Anti-Kickback Statute, including whether an activity constitutes grounds for the imposition of civil or criminal sanctions. Although advisory opinions are not binding on any entity other than the parties who submitted the requests, advisory opinions provide some guidance as to how the OIG would analyze a particular arrangement. The OIG has issued advisory opinions in which it concluded that proposed arrangements between anesthesia groups and facilities, including, physician-owned ASCs could result in prohibited remuneration under the federal Anti-Kickback Statute. Certain of our limited partnerships and limited liability companies have entered into certain arrangements for professional services, including arrangements for anesthesia services. We believe our arrangements for anesthesia services can be differentiated from those described in the negative OIG advisory opinions and are in compliance with the requirements of the federal Anti-Kickback Statute.
In connection with our physician services business, we have a variety of financial relationships with physicians, hospitals, ASCs, and other healthcare services, including joint venture arrangements. These financial relationships do not meet all of the criteria of the personal services and management contracts safe harbor, but we believe that the arrangements are in compliance with the current requirements of applicable federal and state law because, among other factors, we believe the fees payable under the arrangements are consistent with fair market value of the services provided.
Prohibition on certain self-referrals and physician ownership of healthcare facilities.
The federal physician self-referral law, commonly referred to as the Stark Law, prohibits a physician from making a referral for a designated health service to an entity if the physician or a member of the physician’s immediate family has a financial relationship with the entity, unless an exception applies. Sanctions for violating the Stark Law include denial of payment, refunding amounts received for services provided pursuant to prohibited referrals, substantial civil money penalties per prohibited service provided and a separate penalty for a circumvention scheme. These penalties are adjusted annually based on updates to the Consumer Price Index. In addition, violations may result in exclusion from participation in the Medicare and Medicaid programs. Exclusion of our surgery centers or physician groups from these programs could result in significant loss of revenues and could have a material adverse effect on us. Further, failure to refund amounts received as a result of a prohibited referral on a timely basis may constitute a false or fraudulent claim and may result in civil penalties and additional penalties under the FCA. The Stark Law applies to referrals involving the following services under the definition of “designated health services”: clinical laboratory services; physical therapy services; occupational therapy services; radiology and imaging services; radiation therapy services and supplies; durable medical equipment and supplies; parenteral and enteral nutrients, equipment and supplies; prosthetics, orthotics and prosthetic devices and supplies; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. CMS has issued final regulations interpreting the Stark Law that help clarify the requirements of the exceptions to the Stark Law, but it is difficult to determine how the government will interpret many of these exceptions for enforcement purposes.
A number of provisions of the Stark Law implementing regulations limit how the Stark Law affects ASCs. Under these regulations, services that would otherwise constitute a designated health service, but that are paid by Medicare as a part of the surgery center
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Item 1. Business - (continued)
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payment rate, are not a designated health service for purposes of the Stark Law. The so-called ASC exemption to the Stark Law also applies to any radiology and imaging procedures that are integral to a covered ASC surgical procedure and that are performed immediately before, during, or immediately following the surgical procedure (that is, on the same day). Similarly, CMS has excluded from the Stark Law definition of “outpatient prescription drugs” any drugs that are integral to an ASC procedure and are “covered as ancillary services” under the revised ASC payment system. The Stark Law continues to prohibit a physician-owned ASC from furnishing outpatient prescription drugs for use in a patient’s home. In addition, there is a Stark Law exception covering implants, prosthetics, implanted prosthetic devices and implanted durable medical equipment provided in a surgery center setting under certain circumstances. Because of these exemptions, we believe the Stark Law does not prohibit physician ownership or investment interests in our surgery centers to which they refer patients.
With respect to our physician services business, we contract with hospitals and other providers of designated health services. Our physician practices also provide services, such as imaging and laboratory services, that constitute designated health services. Thus, we are required to structure our financial relationships involving providers of designated health services in a manner that complies with a Stark Law exception. There are a number of exceptions that may apply to our physician services business, including the exceptions for bona fide employment relationships, indirect compensation arrangements and in-office ancillary services. We attempt to structure our relationships to meet an exception to the Stark Law when required, but the regulations implementing the exceptions are detailed and complex, and we cannot guarantee that every relationship complies fully with the Stark Law.
Several states in which we operate have self-referral statutes similar to the Stark Law. Often these state laws are broad in scope and apply regardless of the source of payment for care. Little precedent exists for the interpretation or enforcement of these state laws. We believe that physician ownership of surgery centers is not prohibited by any of these state self-referral statutes. We can give no assurances that further judicial or agency interpretations of existing federal or state laws or further legislative restrictions on physician ownership or investment in, or financial relationships with, healthcare entities will not be issued that could have a material adverse effect on us.
The Federal False Claims Act and similar federal and state laws.
We are subject to state and federal laws that govern the submission of claims for reimbursement. One of the most prominent of these laws is the federal FCA, which prohibits an individual or entity from knowingly and willfully presenting a claim (or causing a claim to be presented) that is false or fraudulent for payment from the government, including the Medicare and Medicaid programs and the health insurance exchanges created under the Health Reform Law, if those payments include any federal funds. The standard for “knowing and willful” often includes conduct that amounts to a reckless disregard for whether accurate information is presented by claims processors. There are many potential bases for liability under the FCA, including knowingly and improperly avoiding repayment of an overpayment received from the government and the knowing failure to report and return an overpayment within 60 days of identifying the overpayment. The government may use the FCA to prosecute Medicare and other government program fraud in areas such as coding errors, billing for services not provided and submitting false cost reports. Violations of other statutes, such as the federal Anti-Kickback Statute, can serve as a basis for liability under the FCA.
The FCA may be enforced by the federal government directly, or by a qui tam plaintiff (or whistleblower) on the government’s behalf. When a private plaintiff brings a qui tam action under the FCA, the defendant often will not be made aware of the lawsuit until the government commences its own investigation or makes a determination whether it will intervene. When a defendant is determined by a court of law to be liable under the FCA, the defendant may be required to pay three times the amount of the alleged false claim, plus substantial mandatory civil penalties for each separate false claim. These penalties are adjusted annually based on updates to the Consumer Price Index. A private plaintiff who brings a qui tam lawsuit may receive a share of any settlement or judgment.
Every entity that receives at least $5.0 million annually in Medicaid payments must have written policies for all employees, contractors or agents, providing detailed information about false claims, false statements and whistleblower protections under certain federal laws, including the federal FCA, and similar state laws. A number of states, including states in which we operate, have adopted their own false claims provisions as well as their own qui tam provisions whereby a private party may file a civil lawsuit in state court. States that enact false claims laws that are comparable to the federal FCA are entitled to an increased share of FCA recoveries.
We believe that we have procedures in place to ensure the accurate completion of claims forms and requests for payment. However, the laws and regulations defining proper Medicare or Medicaid billing are complex and have not been subjected to extensive judicial or agency interpretation. Billing errors can occur despite our best efforts to prevent or correct them, and we cannot assure you that the government will regard such errors as inadvertent and not in violation of the FCA or related statutes.
Other fraud and abuse laws
. In addition to the laws described above, various other laws and regulations prohibit fraud and abuse in the health care industry and provide for significant penalties. For example, the knowing and willful defrauding of, or attempt to defraud, a healthcare benefit program, including both governmental and private healthcare programs and plans, may result in criminal
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Item 1. Business - (continued)
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penalties. Further, the payment of inducements to Medicare and Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner may result in civil penalties. Federal enforcement officials have numerous enforcement mechanisms to combat fraud and abuse, including an incentive program under which individuals can receive up to $1,000 for providing information on Medicare fraud and abuse that leads to the recovery of at least $100 of Medicare funds. In addition, federal enforcement officials have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed healthcare fraud. Evolving interpretations or enforcement of current, or the adoption of new, federal or state laws or regulations could affect many of our arrangements. Law enforcement authorities, including the OIG, are increasing their scrutiny of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as a mechanism to exchange remuneration for patient care referrals or opportunities. Investigators have demonstrated a willingness to look behind the formalities of a business transaction to determine the underlying purposes of payments between healthcare providers and potential referral sources.
Healthcare investigations.
Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, as well as their executives and managers. These investigations relate to a wide variety of topics, including referral relationships and billing practices. The Health Reform Law includes additional federal funding of $350 million over 10 years to fight healthcare fraud, waste and abuse, which includes $10 million for federal fiscal year (FFY) 2018. From time to time, the OIG and the Department of Justice have established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Some of our activities could become the subject of governmental investigations or inquiries. For example, we have significant Medicare billings and we have joint venture arrangements involving physician investors. In addition, our executives and managers, many of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, could be included in governmental investigations or named as defendants in private litigation. We are not aware of any current governmental investigations involving any of our facilities, our executives or our managers. A future adverse investigation of us, our executives or our managers, even if it does not result in a determination of a liability, could result in significant expense to us, as well as adverse publicity.
Privacy and security requirements.
There are currently numerous legislative and regulatory initiatives at the state and federal levels addressing the privacy and security of patient health and other identifying information. The privacy and security regulations promulgated pursuant to HIPAA extensively regulate the use and disclosure of individually identifiable protected health information and require “covered entities,” including healthcare providers, to implement administrative, physical and technical safeguards to protect the security of such information. Violations of the regulations may result in criminal penalties and substantial civil penalties. These penalties are adjusted annually based on updates to the Consumer Price Index. HHS enforces HIPAA and is required to perform compliance audits. State attorneys general are also authorized to bring civil actions seeking either injunction or damages in response to violations of HIPAA privacy and security regulations that threaten the privacy of state residents. A covered entity may be subject to penalties as a result of a business associate (an entity that handles individually identifiable health information on behalf of a covered entity) violating HIPAA if the business associate is found to be an agent of the covered entity. Business associates are also directly subject to certain provisions of the HIPAA security and privacy regulations and may be penalized for violations of the regulations. Covered entities must report breaches of unsecured protected health information to affected individuals without unreasonable delay, but not to exceed 60 days following discovery of the breach by the covered entity or its agents. Notification must also be made to HHS and, in certain situations involving large breaches, to the media. There is a presumption that all non-permitted uses or disclosures of unsecured protected health information are breaches unless the covered entity or business associate establishes that there is a low probability the information has been compromised.
In addition to HIPAA, there are numerous other laws and legislative and regulatory initiatives at the federal and state levels addressing privacy and security concerns. We remain subject to any federal or state laws and regulations that encompass privacy concerns or the reporting of security breaches that are more restrictive than the regulations issued under HIPAA. These laws and regulations vary and could impose additional penalties. For example, they may require us to notify affected individuals in the event of a data breach involving certain individually identifiable health or financial information. In some cases, the Federal Trade Commission uses its consumer protection authority to initiate enforcement actions in response to data breaches.
EMTALA.
Because we perform services at hospitals and other types of healthcare facilities, we and our affiliated physicians may be subject to laws which are applicable to those entities. For example, our operations are impacted by the Emergency Medical Treatment and Active Labor Act of 1986 (EMTALA), which prohibits “patient dumping” by requiring hospitals and hospital EDs and others to assess and stabilize any patient presenting to the hospital’s ED or urgent care center requesting care for an emergency medical condition, regardless of the patient’s ability to pay. Many states in which we operate have similar state law provisions concerning patient dumping. Violations of EMTALA can result in exclusion of the offending physician from the Medicare and Medicaid programs and civil monetary penalties. These penalties increased are adjusted annually based on changes to the Consumer Price Index.
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Item 1. Business - (continued)
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Fee-splitting; Corporate practice of medicine.
We employ or contract with physicians or physician‑owned PCs to deliver physician services to our customers and their patients. We frequently enter into management services contracts with these physicians and PCs pursuant to which we provide billing, scheduling and a wide range of other services, and they pay us for those services out of the fees they collect from patients and third-party payors. These activities are subject to various state laws that prohibit the practice of medicine by lay entities or persons, the “corporate practice of medicine,” and are intended to prevent unlicensed persons from interfering with or influencing the physician’s professional judgment. In addition, various state laws also generally prohibit the sharing of professional services income with nonprofessional or business interests. Activities other than those directly related to the delivery of healthcare, such as scheduling, contracting, setting rates and the hiring and management of non-clinical personnel, may implicate the restrictions on the corporate practice of medicine or fee-splitting. In such states, we maintain long-term management contracts with affiliated physician groups, which employ or contract with physicians to provide physician services. In most instances within our surgery center business, the physicians and physician group practices whose members perform procedures at our surgery centers are not affiliated with us, other than through the physicians’ ownership in the entity that owns the surgery centers and through any service agreements we have with the physicians. We believe that we are in material compliance with applicable state laws relating to the corporate practice of medicine and fee-splitting. However, regulatory authorities or other parties, including our affiliated physicians, may assert that, despite these arrangements, we are engaged in the corporate practice of medicine or that our contractual arrangements with affiliated physician groups constitute unlawful fee-splitting. In this event, we could be subject to adverse judicial or administrative interpretations, to civil or criminal penalties, our contracts could be found legally invalid and unenforceable or we could be required to restructure our contractual arrangements with our affiliated physician groups.
Fair Debt Collection Practices Act.
Some of our operations may be subject to compliance with certain provisions of the Fair Debt Collection Practices Act and comparable statutes in many states. Under the Fair Debt Collection Practices Act, a third-party collection company is restricted in the methods it uses to contact consumer debtors and elicit payments with respect to placed accounts. Requirements under state collection agency statutes vary, with most requiring compliance similar to that required under the Fair Debt Collection Practices Act. We believe we are in substantial compliance with the Fair Debt Collection Practices Act and comparable state statutes where applicable.
Antitrust laws.
The federal government and most states have enacted antitrust laws that prohibit certain types of conduct deemed to be anti-competitive. These laws prohibit price fixing, market allocation, bid-rigging, concerted refusal to deal, market monopolization, price discrimination, tying arrangements, acquisitions of competitors and other practices that have, or may have, an adverse effect on competition. Violations of federal or state antitrust laws can result in various sanctions, including criminal and civil penalties. Antitrust enforcement in the healthcare sector is currently a priority of the Federal Trade Commission and the Department of Justice. We believe we are in compliance with such federal and state laws, but courts or regulatory authorities may reach a determination in the future that could adversely affect our operations.
Environmental matters.
We are subject to federal, state and local laws and regulations relating to hazardous materials, pollution and the protection of the environment. Such regulations include those governing emissions to air, discharges to water, storage, treatment and disposal of wastes, including medical waste, remediation of contaminated sites, and protection of worker health and safety. These laws and regulations frequently change and have become increasingly stringent over time. Non-compliance with these laws and regulations may result in significant fines or penalties or limitations on our operations or claims for remediation costs, as well as alleged personal injury or property damages. We believe our current operations are in substantial compliance with all applicable environmental, health and safety requirements and that we maintain all material permits required to operate our business.
Certain environmental laws and regulations impose strict, and under certain circumstances joint and several, liability for investigation and remediation of the release of regulated substances into the environment. Such liability can be imposed on current or former owners or operators of contaminated sites, or on persons who dispose or arrange for disposal of wastes at a contaminated site. Releases have occurred at a few of the facilities we lease as a result of historical practices of the owners or former operators. Based on available information, we do not believe that any known compliance obligations, releases or investigations under environmental laws or regulations will have a material adverse effect on our business, financial position and results of operations. However, there can be no guarantee that these releases or newly discovered information, more stringent enforcement of or changes in environmental requirements, or our inability to enforce available indemnification agreements will not result in significant costs.
Employees
As of
December 31, 2017
, we and our affiliated entities employed or contracted with approximately
69,300
persons, approximately
46,200
of whom were full-time employees or contractors and
23,100
of whom were part-time employees or contractors. We employ or contract with approximately
16,800
employees performing various clinical support and corporate functions. We lease the services of approximately
800
full-time employees and
400
part-time employees from entities affiliated with the physician partners in our ASCs.
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Item 1. Business - (continued)
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Support Infrastructure and Technology
To support our clinical staff and client facilities, we maintain an infrastructure that provides clinical, administrative and business support services to physicians, other healthcare professionals and administrative staff. These support services include but are not limited to:
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non-clinical operation management;
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physician and allied care recruiting;
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revenue cycle management;
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compliance, education and oversight;
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managed care contracting with third-party payors;
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information technology;
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quality improvement; and
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These support services are critical to the success of our business. Personnel located at our corporate headquarters primarily provide these services, but we also have regional offices where we have substantial operations. These services allow us to leverage our operational excellence and existing infrastructure to provide services to our clients, employees and physicians. Our infrastructure has enabled us to integrate newly developed or acquired businesses while achieving significant economies of scale.
We have invested in and developed management information systems that support our current operations and that management believes will support our projected growth. We purchase hardware and software that has been customized for us, as well as develop our own technology in both our clinical and administrative areas, which we believe may provide a competitive advantage over local, regional and emerging national providers. There are several applications currently in use and under development that provide the foundation for our day-to-day operations, including:
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Billing services -
Billing systems that perform facilities-based revenue cycle management for each of the specialties in which we provide physician services, as well as for many of our ASCs.
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Enterprise management -
Enterprise-wide reporting systems that are used for all essential accounting and finance functions, which include both integrated human resource and payroll functions.
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Recruitment and business development -
A third-party database used by our business development departments and our physician recruitment subsidiary. This application is primarily used to develop a database of medical professionals that can be targeted in the recruitment process and also to manage other aspects of the recruitment and hiring process.
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Web-based applications -
Our web-based comprehensive neonatal clinical electronic health record system, which is used in each of the facilities where we provide NICU and newborn nursery services to gather all pertinent clinical data from our patients to determine outcomes. Our web-based portal providing physician partners with access to financial information, financial and quality benchmarking reports along with best practices from the ambulatory services segment community of surgery centers and peer, physician-to-physician, insights on latest technologies and therapies.
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Intellectual Property
We have registered the trademarks for certain of our businesses, including Envision Physician Services and AmSurg. We have also registered the trademarks for certain logos used in the marketing of our businesses, including Envision Healthcare, Envision Physician Services and AmSurg. Generally, registered trademarks have perpetual life, provided that they are renewed on a timely basis and continue to be used properly as trademarks. We have also developed proprietary software that we protect through copyrights or contractual provisions and confidentiality procedures and agreements, including our EmComp, EmBillz and MEDS applications. Other than the intellectual property described above, we do not believe our business is dependent to a material degree on patents, copyrights, trademarks or trade secrets. Other than licenses to commercially available software, we do not believe that any of our licenses to third-party intellectual property are material to our business taken as a whole.
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Item 1. Business - (continued)
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Insurance
Given the nature of the services we provide, we are subject to professional and general liability claims and related lawsuits in the ordinary course of business. We maintain insurance with third-party insurers generally on a claims-made basis, subject to self-insured retentions, exclusions and other restrictions. A substantial portion of our professional and general liability loss risks are being provided by a third-party insurer that is fully reinsured by our wholly owned captive insurance company. In addition, our wholly owned captive provide coverage for a substantial portion of our employee workers' compensation claims. The assets, liabilities and results of operations of our wholly owned captive insurance company subsidiary are included in our consolidated financial statements.
The liabilities for self-insurance include estimates of the ultimate costs related to both reported claims on an individual and aggregate basis and unreported claims. We also obtain professional liability insurance on a claims-made basis from third-party insurers for certain of our owned practices and certain of our employed and affiliated physicians.
Our reserves for our professional and general liability claims within the self-insured retention are based upon periodic actuarial calculations. Our reserves for losses and related expenses represent estimates involving actuarial and statistical projections, at a given point in time, of our expectation of the ultimate resolution plus administration costs of the losses that we have incurred. Our reserves are based on historical claims, demographic factors, industry trends, severity and exposure factors and other actuarial assumptions calculated by an independent actuarial firm. The independent actuarial firm performs studies of projected ultimate losses on an annual basis and we utilize these actuarial estimates to determine appropriate reserves. Liabilities for claims incurred but not reported are not discounted. The estimation of these liabilities is inherently complex and subjective, as these claims are typically resolved over an extended period of time, often as long as ten years or more. We periodically re-evaluate our accruals for our professional and general liabilities, and our actual results may vary significantly from our estimates if future claims differ from expected trends. The key assumptions used in our actuarial valuations are subject to constant adjustment as a result of changes in our actual loss history and the movement of projected emergence patterns as claims develop.
Corporate Compliance Program and Corporate Integrity Obligations
We have developed a corporate compliance program in an effort to monitor compliance with federal and state laws and regulations applicable to healthcare entities, to ensure that we maintain high standards of conduct in the operation of our business and to implement policies and procedures so that employees act in compliance with all applicable laws, regulations and our policies. Our program also attempts to monitor compliance with our Corporate Compliance Plan, which details our standards for: (i) business ethics, (ii) compliance with applicable federal, state and local laws, and (iii) business conduct. We have a Compliance Department whose focus is to prevent, detect and mitigate regulatory risks and remediate issues if identified. We attempt to accomplish this mission through:
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providing guidance, education and proper controls based on the regulatory risks associated with our business model and strategic plan,
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conducting internal audits and reviews to identify any improper practices that may be occurring,
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resolving regulatory matters, and
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enhancing the ethical culture and leadership of the organization.
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The OIG has issued a series of Compliance Program Guidance documents in which the OIG has set out the elements of an effective compliance program. We believe our compliance program has been structured appropriately in light of this guidance. The primary compliance program components recommended by the OIG, all of which we have attempted to implement, include:
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formal policies and written procedures,
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designation of a Compliance Officer,
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education and training programs,
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internal monitoring and reviews,
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responding appropriately to detected misconduct,
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open lines of communication, and
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discipline and accountability.
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Our Board reviews the effectiveness of our corporate compliance program on an annual basis. The Compliance and Quality Committee of our Board also meets regularly to provide oversight of our Compliance Program. Our corporate compliance program is based on the overall goal of promoting a culture that encourages employees to conduct activities with integrity, dignity and care for those we serve, and in compliance with all applicable laws and policies. Notwithstanding the foregoing, we audit compliance with our Compliance Program on a sample basis. Although such an approach reflects a reasonable and accepted approach in the industry, we cannot assure you that our program will detect and rectify all compliance issues in all markets and for all time periods.
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Item 1. Business - (continued)
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As do other healthcare companies which operate effective compliance programs, from time to time we identify practices that may have resulted in Medicare or Medicaid overpayments or other regulatory issues. For example, we have previously identified situations in which we may have inadvertently utilized incorrect billing codes for some of the services we have billed to government programs such as Medicare or Medicaid, or billed for services which may not meet medical necessity guidelines. In such cases, if appropriate, it is our practice to disclose the issue to the affected government programs and to refund any resulting overpayments and, if appropriate, penalties. The government usually accepts such disclosures and repayments without taking further enforcement action, and we generally expect that to be the case with respect to our past and future disclosures and repayments. However, it is possible that such disclosures or repayments will result in allegations by the government that we have violated the False Claims Act or other laws, leading to investigations and possibly civil or criminal enforcement actions. We are required to refund any overpayments within 60 days of discovery. Failure to refund overpayments on a timely basis could result in civil monetary penalties or provide a basis for a false claims act allegation.
Corporate Integrity Agreements
When the U.S. Government settles a case involving allegations of billing or contracting misconduct with a healthcare provider, it typically requires the provider to enter into a Corporate Integrity Agreement (“CIA”) with the OIG for a set period of years. As a condition of settlement of a government investigation against our Rural/Metro Corporation subsidiary, our medical transportation operations were previously subject to a CIA requiring that we maintain a corporate compliance program. Rural/Metro was released from its obligations under the CIA in January 2018. On December 19, 2017, in connection with the resolution of the DOJ's investigation into physician services provided by the Company’s EmCare subsidiary at hospitals affiliated with Health Management Associates, Inc., the Company entered into a CIA with respect to its physician services business. The CIA provides that we will maintain, over a five-year term, a corporate compliance program with oversight of our emergency department and hospitalist medicine physician service lines that includes oversight, reporting, policy, screening and monitoring obligations, certain of which have been previously implemented through our existing compliance program, as described above.
Among the expanded requirements to be implemented pursuant to the physician services CIA are the following: (i) additional contracting procedures to comply with the federal Anti-Kickback Statute, (ii) independent review of emergency and hospitalist medicine facility contracting, (iii) notification to the OIG of government investigations or legal proceedings, and (iv) reporting of overpayments and other "reportable events" (as defined in the CIA). We will satisfy our obligations under the CIA through our ongoing compliance program, which is overseen by our Board and was developed to monitor compliance on a comprehensive basis across all service lines at the direction of our Chief Compliance Officer.
If we fail or if we are accused of failing to comply with the terms of our existing CIAs, we may be subject to additional litigation or other government actions, including being excluded from participating in the Medicare program and other federal healthcare programs. If we enter into any settlement of healthcare regulatory claims with the U.S. Government in the future, we may be required to enter into additional CIAs.
See Item 1A, “Risk Factors-Risks Related to Healthcare Regulation” for additional information related to regulatory matters.
Seasonality
Historically, the impact of seasonal effects on our revenues and operating results has been dampened due to growth from acquisitions as well as our geographic diversification. Without giving effect to these growth and diversification factors and with the exception of emergency medicine and children's services, our net revenue would fluctuate based on the number of business days in each calendar quarter, because the majority of medical services provided by our anesthesiology, office-based practices and ambulatory surgery centers consist of scheduled procedures and office visits that occur during business hours. Our net revenue would also be impacted by unpredictable weather events such as snowstorms or hurricanes that reduce the number of days of operations as well as the number of patients. The timing, severity and geographical impact of influenza and other recurring viruses has also impacted revenues derived from our ED service line. Revenue in the fourth quarter was also be impacted by an increased utilization of services as patients try to utilize their healthcare benefits before they expire at year-end. In addition, we incur a significantly higher payroll tax expense during the first and second quarters due to a significant number of our employees exceeding the level of taxable wages for social security contributions during the second half of the year.
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Item 1. Business - (continued)
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Available Information
We file reports with the Securities and Exchange Commission (SEC) including annual reports on Form 10-K, quarterly reports on Form 10-Q and other reports from time to time. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F. Street, N.E., Room 1580, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer and the SEC maintains an Internet site at http://www.sec.gov that contains the reports, proxy and information statements and other information filed electronically. Our website address is: http://www.evhc.net. We make available free of charge through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference unless such information is otherwise specifically referenced elsewhere in this annual report on Form 10-K.
Executive Officers of the Registrant
The following table sets forth certain information regarding the persons serving as our executive officers.
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Name
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Age
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Experience
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Christopher A. Holden
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53
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President and Chief Executive Officer and Director of the Company. Prior to the Merger, Mr. Holden served from October 2007 through November 2016 as President and Chief Executive Officer and a director of AmSurg. Prior to October 2007, Mr. Holden served for over ten years in various capacities, including Division President, with Columbia/HCA Healthcare Corporation, now known as HCA, and Triad Hospitals, Inc.
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Karey L. Witty
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53
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Executive Vice President & Chief Operating Officer since October 2017. Previously, Mr. Witty served as Chief Executive Officer of Corizon Health, Inc., a leading provider of correctional healthcare services in the United States, from October 2015 through September 2017. Mr. Witty served as Chief Financial Officer of naviHealth from January 2014 until October 2015, and as Chief Financial Officer of HealthSpring from 2009 until 2012.
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Randel G. Owen
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58
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Executive Vice President and President - Ambulatory Services Group. Prior to the Merger, Mr. Owen served as Chief Financial Officer and Executive Vice President of EHH from May 2011 through November 2016 and as Chief Operating Officer of EHH from September 2012 through November 2016. Prior to May 2011, Mr. Owen served for over ten years as Executive Vice President and Chief Financial Officer of predecessor and affiliated entities of EHH.
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Kevin D. Eastridge
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52
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Executive Vice President and Chief Financial Officer since October 2017 and Senior Vice President and Chief Accounting Officer from December 2016 until October 2, 2017. Prior to the Merger, Mr. Eastridge served as Senior Vice President of Finance of AmSurg from July 2008 through November 2016 and as Chief Accounting Officer from July 2004 through November 2016. Mr. Eastridge served in various capacities with AmSurg from March 1997 through July 2004, including Vice President of Finance and Controller.
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Patrick B. Solomon
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48
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Senior Vice President and Chief Strategy Officer. Prior to the Merger, Mr. Solomon served as Senior Vice President and Chief Strategy Officer of AmSurg from 2015 through November 2016. Mr. Solomon joined Sheridan, which AmSurg acquired in July 2014, in 2003, and served as Executive Vice President and Chief Development Officer of Sheridan from 2012 to 2015 and as Executive Vice President of Operations from 2003 to 2012.
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Craig A. Wilson
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49
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Senior Vice President, General Counsel and Secretary. Prior to the Merger, Mr. Wilson served as Senior Vice President, General Counsel and Secretary of EHH from May 2011 through November 2016. Mr. Wilson has served in various capacities with EHH and its predecessors and affiliates since March 2000.
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Kenneth E. Zongor
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42
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Senior Vice President and Chief Accounting Officer since October 2017. Mr. Zongor has served as Chief Accounting Officer since October 2017. Previously, Mr. Zongor served as Senior Vice President of Financial Reporting, a post he held from July 2017 to October 2017. Prior to that, Mr. Zongor served as Vice President of Financial Reporting of AmSurg from September 2010 until December 2016 and in the same position with the Company from December 2016 until July 2017.
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The following factors affect our business and the segments in which we operate. The risks and uncertainties described below are not the only ones facing our company. Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also have an adverse effect on us. If any of the matters discussed in the following risk factors were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected.
Risks Related to Our Business
We may fail to realize the anticipated benefits of the Merger.
The success of the Merger will depend on, among other things, our ability to combine the legacy AmSurg and EHH businesses in a manner that facilitates continuing growth opportunities and realizes anticipated synergies, revenue and earnings growth projections. We expect to benefit from continuing operational synergies resulting from the consolidation of capabilities and elimination of redundancies, as well as greater efficiencies from increased scale and integration. Management also expects that we will enjoy other benefits, including expanded service offerings, cross-selling opportunities, and increased geographic reach of the combined businesses.
However, our management must successfully combine the legacy businesses of AmSurg and EHH in a manner that permits these cost savings, synergies and other benefits to be realized. While we were on target to achieve our previously announced cost synergy targets as of December 31, 2017, actual synergies may be lower than we currently expect, or may take longer to achieve than currently anticipated. In addition, we must achieve the anticipated savings, synergies and benefits without adversely affecting current revenues, earnings and investments in future growth. An inability to realize the full extent of the anticipated benefits of the Merger, as well as any delays encountered in the integration process, could have an adverse effect upon our revenues, earnings, level of expenses and operating results, which may adversely affect the value of our common stock.
From time to time, we may conduct a strategic review of our business lines, and may pursue strategic initiatives in the future. Strategic initiatives could include divestitures, acquisitions, spin-offs, split-offs, strategic partnerships or joint ventures. Any strategic initiatives could involve implementation challenges, execution risks or other risks, or significantly change our business profile or strategies. Any such strategic initiatives could have an adverse impact on our revenues, earnings, cash flows and operating results, which may adversely affect the value of our common and preferred stock.
Combining the businesses of AmSurg and EHH may be more difficult, costly or time-consuming than expected, which may adversely affect our results and negatively affect the value of our common stock.
Our management may face significant challenges in successfully integrating the AmSurg and EHH businesses, including in particular the physician services segment, integrating the organizations, procedures, policies and operations, addressing differences in the business cultures and retaining key personnel. The integration may be complex and time consuming, and could require substantial resources and effort by management and others. The ongoing integration process may also disrupt our business or cause inconsistencies in standards, controls, procedures and policies that adversely affect our relationships with employees, business partners, customers and others with whom we have business or other dealings, or limit our ability to achieve the anticipated benefits of the Merger. In addition, any difficulties in integrating the businesses could harm our reputation. If we are unable to successfully combine the businesses of AmSurg and EHH in an efficient, effective and timely manner, the anticipated benefits and cost savings of the Merger may not be realized fully, or at all, or may take longer to realize than expected, and the value of our common stock may be affected adversely.
Changes to payment rates or methods of third-party payors, including government healthcare programs, changes to the laws and regulations that regulate payments for medical services, the failure of payment rates to increase as our costs increase, or changes to our payor mix, could adversely affect our operating margins and revenues.
We provide physician services and ambulatory services primarily through fee for service payor arrangements. Under these arrangements, we collect fees directly or through our affiliated physicians or through the entities at which physician services are provided. We assume financial risks related to changes in third-party reimbursement rates and changes in payor mix. In some cases, our revenue decreases if our volume or reimbursement decreases, but our expenses, including physician compensation, may not decrease proportionately. Further, we collect a smaller portion of our fees for services rendered to uninsured patients than for services rendered to insured patients. Our credit risk related to services provided to uninsured individuals is exacerbated with respect to ED physician services, because of legal requirements that hospitals screen and stabilize or transfer all ED patients seeking care for an emergency medical condition regardless of a patient’s ability to pay.
We depend primarily on private and governmental third-party sources of payment for the services provided to patients. The amount we receive for our services may be adversely affected by market and cost factors as well as other factors over which we have no control, including changes to the Medicare and Medicaid payment systems. Health reform efforts at the federal and state levels may increase the likelihood of significant changes affecting government healthcare programs and private insurance coverage. There is significant uncertainty regarding the future of the Health Reform Law, in particular, as the presidential administration and certain members of Congress have expressed their intent to repeal or make significant changes to the law, its interpretation or its implementation.
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Item 1A. Risk Factors - (continued)
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Government healthcare programs are subject to, among other things, statutory and regulatory changes, administrative rulings, interpretations and determinations concerning patient eligibility requirements, funding levels and the method of calculating payments or reimbursements, all of which could materially increase or decrease payments we receive from these government programs. Any such change that limits reimbursement amounts or practices could also significantly affect hospitals, and consequently affect our physician services operations or require us to renegotiate contractual arrangements with our health system clients. Further, Medicare reimbursement rates are increasingly used by private payors as benchmarks to establish commercial reimbursement rates and any adjustment in Medicare reimbursement rates may impact our reimbursement rates from such private payors as well.
As the Medicare program transitions away from fee for service payment models and toward value-based payment methodologies, we may be required to make additional investments to receive maximum Medicare reimbursement. For example, the Medicare Physician Quality Reporting System provides additional Medicare compensation to physicians who implement and report certain quality measures. Further, MACRA requires the establishment of the Merit-Based Incentive Payment System under which, beginning in 2019, physicians will receive payment incentives or reductions based on their performance with respect to clinical quality, resource use, clinical improvement activities, and meaningful use of electronic health records. Other third party payors may also adopt value-based payment methodologies.
There are significant private and public sector pressures to restrain healthcare costs and to restrict reimbursement rates for medical services, and we believe that such pressures will continue. Many states are continuing to collect less revenue than they did in prior years, and as a result may face ongoing budget shortfalls and underfunded pension and other liabilities. Deteriorating financial conditions in the states in which we operate could lead to reduced or delayed funding for Medicaid programs, which may reduce or delay the reimbursement we receive for services provided. Major payors of healthcare, including federal and state governments and private insurers, have taken steps in recent years to monitor and control costs, eligibility for and use and delivery of healthcare services, and to revise payment methodologies. As part of their efforts to contain healthcare costs, purchasers increasingly are demanding discounted or global fee structures or the assumption by healthcare providers of all or a portion of the financial risk through shared risk, capitation and care management arrangements, often in exchange for exclusive or preferred participation in their benefit plans. Further, the ability of commercial payors to control healthcare costs may be enhanced by the increasing consolidation of insurance and managed care companies, which may reduce our ability to negotiate favorable contracts with such payors.
We expect efforts to impose greater discounts and more stringent cost controls by government and other payors to continue, thereby reducing the payments we receive for our services. The effect of cost containment trends will depend, in part, on our payor mix. We cannot assure you that we will be able to offset reduced operating margins through cost reductions, increased volume, the introduction of additional procedures or otherwise. In addition, we cannot assure you that future changes to reimbursement rates by government healthcare programs, cost containment measures by private third-party payors, including fixed fee schedules and capitated payment arrangements, or other factors affecting payments for healthcare services will not adversely affect our future revenues, operating margins, or profitability.
We are subject to decreases in our revenue and profit margin under our fee for service contracts and arrangements, where we bear the risk of changes in volume, payor mix and third-party reimbursement rates.
In our fee for service arrangements, which represent substantially all of our revenues, we, or our affiliated physicians, collect the fees for physician services. Under these arrangements, we assume financial risks related to changes in the mix of insured and uninsured patients and patients covered by government-sponsored healthcare programs, third-party reimbursement rates, and patient volume. A substantial decrease in patient volume, an increase in the number of uninsured or underinsured patients or an increase in the number of patients covered by government healthcare programs, as opposed to commercial plans that have higher reimbursement levels, could reduce our profitability and adversely impact future growth. In some cases, our revenue decreases if our volume or reimbursement decreases, but our expenses, including physician compensation, may not decrease proportionately.
We collect a smaller portion of our fees for services rendered to uninsured patients than for services rendered to insured patients. Our credit risk related to services provided to uninsured individuals in our ED specialty area is exacerbated because the law requires hospital EDs to treat all patients presenting to the ED seeking care for an emergency medical condition regardless of their ability to pay. We also believe uninsured patients are more likely to seek care at hospital EDs because they frequently do not have a primary care physician with whom to consult.
If we are unable to increase procedure volume at our existing surgery centers, the operating margins and profitability of our ambulatory services segment could be adversely affected.
Our growth strategy for our ambulatory services segment includes increasing our revenues and earnings primarily by increasing the number of procedures performed at our surgery centers. We seek to increase procedure volume at our surgery centers by increasing the number of physicians performing procedures at our surgery centers, obtaining new or more favorable managed care contracts, improving patient flow at our surgery centers, increasing the capacity at our surgery centers, promoting screening programs and increasing patient and physician awareness of our surgery
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Item 1A. Risk Factors - (continued)
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centers. Procedure volume at our surgery centers may be adversely impacted by economic conditions, high unemployment rates, natural disasters and physicians who no longer utilize our surgery centers and other factors that may cause patients to delay or cancel procedures. We can give you no assurances that we will be successful at increasing or maintaining procedure volumes, revenues and operating margins at our surgery centers.
Our revenue would be adversely affected if we lose existing contracts.
A significant portion of our growth historically has resulted from increases in the number of patient encounters and fees for services we provide under existing contracts, and the addition of new contracts. Substantially all of our net revenue in our physician services segment was generated under contracts, including exclusive contracts. Our contracts with hospitals for physician services generally have terms of one to three years. Most of our contracts, including contracts with several of our significant client relationships, are terminable by either of the parties upon notice of as little as 30 days. Any of our contracts may not be renewed or, if renewed, may contain terms that are not as favorable to us as our current contracts. We cannot assure you that we will be successful in retaining our existing contracts on comparable or better terms, if at all, or that any loss of contracts would not have a material adverse effect on our business, financial condition and results of operations. Furthermore, certain of our contracts will expire during each fiscal period, and we may be required to seek renewal of these contracts through a formal bidding process that often requires written responses to a RFP. We cannot assure you that we will be successful in retaining such contracts or that we will retain them on terms that are as favorable as present terms.
Our physician services segment has several significant client relationships that result in a concentration of revenue.
Although we negotiate and enter into separate contracts with facilities to which we deliver physician services, many facilities are affiliated with one another or owned and operated by the same entity. Although no single facility contract comprised more than
10%
of our consolidated net revenue, we have several significant client relationships with groups of affiliated facilities that result in a concentration of revenue. During 2017 facilities affiliated with HCA Holdings Inc. (HCA) comprised approximately
20%
of our consolidated net revenue. The loss or reduction of business from any of our significant client relationships could materially adversely affect the revenues and results of operations of our physician services segment.
We may not accurately assess the costs we will incur under new contracts.
Many of our contracts in our physician services segment involve a competitive bidding process. When we obtain new contracts, we must accurately assess the costs we will incur in providing services in order to realize adequate profit margins and otherwise meet our financial and strategic objectives. Increasing pressures from healthcare payors to restrict or reduce reimbursement rates at a time when the costs of providing medical services continue to increase make assessing the costs associated with the pricing of new contracts, as well as maintenance of existing contracts, more difficult. Entering into new contracts in a number of our service lines may also negatively impact cash flow as we absorb various expenses before we are able to bill and collect revenue associated with the new contracts. In addition, integrating new contracts, particularly those in new geographic locations, could prove more costly, and could require more management time, than we anticipate. Our failure to accurately predict costs or to negotiate an adequate profit margin could have a material adverse effect on our business, financial condition and results of operations.
We may not be able to successfully recruit and retain physicians and other healthcare professionals with the qualifications and attributes desired by us, our customers, and our surgery centers.
Our ability to recruit and retain qualified physicians and other healthcare professionals to staff contracts in our physician services business and to utilize our surgery centers in our ambulatory services business significantly affects our ability to provide quality care. We compete with other entities to recruit qualified physicians and other healthcare professionals. In many of the markets in which we operate, there are shortages of physicians in the targeted specialties of our physician services contracts and our surgery centers. Some of our competitors may have greater resources than we do, including financial, marketing, staff and capital resources, have or may develop new technologies or services that are attractive to physicians or patients, or have established relationships with physicians and payors.
In our physician services segment, our customer hospitals have increasingly demanded a greater degree of specialized skills, training and experience in the healthcare professionals providing services under their contracts with us. This decreases the number of healthcare professionals who may be qualified to staff our contracts. Moreover, because of the scope of the geographic and demographic diversity of the facilities with which we contract, we must recruit healthcare professionals, and particularly physicians, to staff a broad spectrum of specialty areas. We have had difficulty in the past recruiting physicians to staff contracts in some regions of the country and at some less economically advantaged hospitals. Our future success in retaining and winning new hospital contracts depends in part on our ability to recruit and retain physicians and other healthcare professionals to maintain and expand our operations.
In our ambulatory services segment, we also compete with other healthcare providers in recruiting physicians to utilize our surgery centers, for patients, and in contracting with managed care payors. In several of our markets, hospitals are directly recruiting physicians or groups of physicians as employees, including primary care physicians and physicians in the targeted specialties of our surgery centers, and restricting those physicians’ ability to refer patients to physicians and facilities not affiliated with the hospital. In
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Item 1A. Risk Factors - (continued)
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addition, physicians, hospitals, payors and other providers may form integrated delivery systems or utilize plan structures that restrict the physicians who may treat certain patients or the facilities at which patients may be treated. These restrictions may impact our surgery centers and the medical practices of our physician partners.
Our non-compete agreements and other restrictive covenants involving physicians and other clinical employees may not be enforceable.
We have contracts with physicians, other health professionals, and PCs in many states. Some of these contracts, as well as our contracts with hospitals, include provisions preventing these providers and professional corporations from competing with us both during and after the term of our relationship with them. The law governing non-compete agreements and other forms of restrictive covenants varies from state to state. Some states are reluctant to strictly enforce non-compete agreements and restrictive covenants applicable to physicians and other clinicians. There can be no assurance that our non-compete agreements related to physicians, other healthcare professionals, and professional corporations will not be successfully challenged as unenforceable in certain states. In such event, we would be unable to prevent these clinicians and PCs from competing with us, potentially resulting in the loss of some of our hospital contracts and other business.
If we fail to implement our business strategy, our financial performance and our growth could be materially and adversely affected.
Our future financial performance and success are dependent in large part upon our ability to implement our business strategy successfully. Our business strategy includes several initiatives, including capitalizing on organic growth opportunities, growing complementary and integrated services lines, supplementing organic growth with strategic initiatives, and enhancing operational efficiencies and productivity. We may not be able to implement our business strategy successfully or achieve the anticipated benefits of our business strategy. If we are unable to do so, our long-term growth, profitability, and ability to service our debt will be adversely affected. Even if we are able to implement some or all of the initiatives of our business strategy successfully, our operating results may not improve to the extent we anticipate, or at all. Implementation of our business strategy could also be affected by a number of factors beyond our control, such as changes in government regulation, increased competition, legal developments, general economic conditions or increased operating costs or expenses. In addition, to the extent we have misjudged the nature and extent of sector trends or our competition, we may have difficulty in achieving our strategic objectives.
Our margins may be negatively impacted by cross-selling to existing customers or selling bundled services to new customers.
One of our growth strategies involves the continuation and expansion of our efforts to sell complementary services across our businesses. There can be no assurance that we will be successful in our cross-selling efforts. As part of our cross-selling efforts, we may need to offer a bundled package of services that are at a lower price point to existing or new customers as compared to the price of individual services or otherwise offer services which may put downward price pressure on our services. Such price pressure may have a negative impact on our operating margins. In addition, if a complementary service offered as part of a bundled package underperforms as compared to the other services included in such package, we could face reputational harm which could negatively impact our relationships with our customers and ultimately our results of operations.
We may enter into partnerships with payors and other healthcare providers, including risk-based partnerships under the Health Reform Law as currently enacted. If this strategy is not successful, our financial performance could be adversely affected.
We have entered into strategic business partnerships with health systems and other large payors to take advantage of commercial opportunities in our facility-based physician services business. However, there can be no assurance that our efforts in these areas will continue to be successful. Moreover, joint venture and strategic partnership models may expose us to commercial risks that may be different from our other business models, including that the success of the joint venture or partnership may be only partially under our operational and legal control and the opportunity cost of not pursuing the specific venture independently or with other partners.
For example, our physician services segment has entered into joint venture agreements with HCA to provide physician services to various healthcare facilities. In these joint ventures, HCA has the option to acquire our stake in the venture on a predetermined financial formula, which, if exercised, would lead to the loss of our associated revenue and profits which may not be offset fully by the immediate proceeds of the sale of our stake. Additionally, under certain of our joint venture partnership arrangements, the hospital system partner has the right of first refusal should we desire to acquire an unrelated provider who derives 40% or more of their revenues from services provided to that hospital system or its affiliates. Furthermore, joint ventures may raise fraud and abuse issues. For example, the OIG has taken the position that certain contractual joint ventures between a party which makes referrals and a party which receives referrals for a specific type of service may violate the Anti-Kickback Statute if one purpose of the arrangement is to encourage referrals.
We have entered into, and in the future expect to enter into, risk-based partnerships and arrangements designed to encourage healthcare providers to assume financial accountability for outcomes and work together to better coordinate care for patients, both in the hospital and after discharge. Examples of such opportunities include CMS initiatives such as the CMS Bundled Payments for Care Improvement initiative, the Medicare Shared Savings Program and the Independence at Home Demonstration, as well as agreements entered into by our physician services business with health plans that include risk-based incentives tied to outcomes. We view entering
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Item 1A. Risk Factors - (continued)
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into targeted risk-based initiatives, including opportunities afforded by the Health Reform Law, as currently enacted, as an important part of our business strategy in order to develop our integrated service offerings across the patient continuum, continue the expansion of our physician services business, further develop our relationships with hospitals, hospital systems and other payors, and prepare for the possibility that Medicare may require us to participate in a capitated or value-based payment system for certain of our businesses in the future.
Advancing such initiatives can be time consuming and expensive, and there can be no assurance that our efforts in these areas will ultimately be successful. If we succeed in our efforts to enter into these risk-based partnerships but fail to deliver quality care at a cost consistent with our expectations, we may be subject to significant financial penalties depending on the program, and an unsuccessful implementation of such initiatives could materially and adversely affect our ability to enter into other risk-based partnerships and our business, financial condition or results of operations.
We could be subject to lawsuits which could harm the value of our business, including litigation for which we are not fully reserved.
From time-to-time we are involved in lawsuits, claims, audits and investigations, including those arising out of services provided, personal injury claims, professional liability claims, billing and marketing practices, employment disputes and contractual claims. Physicians, hospitals and other participants in healthcare delivery have become subject to an increasing number of lawsuits alleging medical malpractice and related legal theories such as negligent hiring, supervision and credentialing. Some of these lawsuits may involve large claim amounts and substantial defense costs.
Our physician services segment generally procures professional liability insurance coverage for its employed and affiliated medical professionals, and professional and corporate entities. A substantial portion of our professional liability loss risks are provided by third-party insurers, which is fully reinsured by our wholly owned captive insurance entity. In addition, our wholly owned captive provides stop loss coverage for our self-insured employee health benefits program related to our physician services segment. Under these insurance programs, we establish reserves, using actuarial estimates, for all losses covered under the policies. Liabilities for claims incurred but not reported are not discounted. Moreover, in the normal course of our business, we are involved in lawsuits, claims, audits and investigations, including those arising out of our billing and marketing practices, employment disputes, contractual claims and other business disputes for which we may have no insurance coverage, and which are not subject to actuarial estimates. The outcome of these matters could have a material effect on our results of operations in the period when we identify the matter, and the ultimate outcome could have a material adverse effect on our financial position, results of operations, or cash flows. Our liability to pay for our physician services segment's insurance program losses is partially collateralized by funds held through our wholly owned insurance captive, and letters of credit issued by our affiliates and, to the extent these losses exceed such collateral, or the limits of our insurance policies, we will be required to fund any remaining liabilities.
We may become subject to future lawsuits, claims, audits and investigations that could result in substantial costs and divert our attention and resources and adversely affect our business condition. In addition, since our current growth strategy includes acquisitions, among other things, we may become exposed to legal claims for the activities of an acquired business prior to the acquisition. These lawsuits, claims, audits or investigations, regardless of their merit or outcome, may also adversely affect our reputation and ability to expand our business.
We are subject to a variety of federal, state and local laws and regulatory regimes, including a variety of labor laws and regulations. Failure to comply with laws and regulations could subject us to, among other things, penalties and legal expenses which could have a materially adverse effect on our business
.
We are subject to various federal, state, and local laws and regulations including, but not limited to, the Employee Retirement Income Security Act of 1974 (ERISA) and regulations promulgated by the Internal Revenue Service (IRS), the U.S. Department of Labor and the Occupational Safety and Health Administration. We are also subject to a variety of federal and state employment and labor laws and regulations, including the Americans with Disabilities Act, the Federal Fair Labor Standards Act, the Worker Adjustment and Retraining Notification Act, and other regulations related to working conditions, wage‑hour pay, overtime pay, family leave, employee benefits, antidiscrimination, termination of employment, safety standards and other workplace regulations.
Failure to properly adhere to these and other applicable laws and regulations could result in investigations, the imposition of penalties or adverse legal judgments by public or private plaintiffs, and our business, financial condition and results of operations could be materially adversely affected. Similarly, our business, financial condition and results of operations could be materially adversely affected by the cost of complying with newly-implemented laws and regulations.
In addition, from time to time we have received, and expect to continue to receive, correspondence from former employees terminated by us who threaten to bring claims against us alleging that we have violated one or more labor and employment regulations. In certain instances former employees have brought claims against us and we expect that we will encounter similar actions against us in the
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Item 1A. Risk Factors - (continued)
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future. An adverse outcome in any such litigation could require us to pay contractual damages, compensatory damages, punitive damages, attorneys’ fees and costs.
The reserves we establish with respect to our losses covered under our insurance programs are subject to inherent uncertainties
.
In connection with our insurance programs, we establish reserves for losses and related expenses, which represent estimates involving actuarial and statistical projections, at a given point in time, of our expectations of the ultimate resolution and administration costs of losses we will incur in respect of our liability risks. The estimation of professional liabilities is inherently complex and subjective, as these claims are typically resolved over an extended period of time, often as long as ten years or more. Our reserves are based on historical claims, demographic factors, sector trends, severity and exposure factors and other actuarial assumptions calculated by an independent actuarial firm. The independent actuarial firm performs studies of projected ultimate losses on an annual basis and we utilize these actuarial estimates to determine appropriate reserves. Our reserves could be significantly affected if current and future occurrences differ from historical claim trends and expectations. While we monitor claims closely when we estimate reserves, the complexity of the claims and the wide range of potential outcomes may hamper timely adjustments to the assumptions we use in these estimates. Actual losses and related expenses may deviate, individually and in the aggregate, from the reserve estimates reflected in our consolidated financial statements. The long-term portion of insurance reserves was
$318.5 million
as of December 31, 2017. If we determine that our estimated reserves are inadequate, we will be required to increase reserves at the time of the determination, which would result in a reduction in our net income in the period in which the deficiency is determined.
We may make acquisitions which could divert the attention of management and may not be integrated successfully into our existing business.
A portion of our growth has resulted from, and is expected to continue to result from, the acquisition of physician groups, surgery centers, and other healthcare providers and businesses. We may continue to pursue acquisitions to increase our presence in existing markets, enter new geographic markets and expand the scope of services we provide. In 2017, our physician services and ambulatory services segments completed
16
acquisitions for total purchase consideration of approximately
$631.4 million
. We have evaluated, and expect to continue to evaluate, possible acquisitions on an ongoing basis, and such acquisition targets may be of significant size and may involve operations in multiple jurisdictions. We cannot assure you that we will identify suitable acquisition candidates, acquisitions will be completed on acceptable terms or at all, our due diligence process will uncover all potential liabilities or issues affecting our integration process, we will not incur break-up, termination or similar fees and expenses, or we will obtain all necessary or expected consents from third parties. We cannot assure you that we will be able to integrate successfully the operations of any acquired business into our existing business. In particular, we may experience challenges relating to the retention of physicians and other healthcare professionals of our acquired businesses or the integration of such healthcare professionals. Furthermore, acquisitions in new geographic markets and services may require us to comply with new and unfamiliar legal and regulatory requirements, which could impose substantial obligations on us and our management, cause us to expend additional time and resources becoming familiar with such requirements, and increase our exposure to penalties or fines for non-compliance with such requirements. The acquisition and integration of another business could divert management attention from other business activities. This diversion, together with other difficulties we may incur in integrating an acquired business, could have a material adverse effect on our business, financial condition and results of operations.
Our success depends on our ability to manage growth effectively.
Even if we are successful in obtaining new business, organically or by acquisition, failure to manage our growth effectively could adversely affect our financial condition. We may experience extended periods of very rapid growth, and if we are not able to manage our growth effectively, our business and financial condition could materially suffer. Our growth may significantly strain our managerial, operational and financial resources and systems. To manage our growth effectively, we will have to continue to implement and improve our operational, financial and management controls, reporting systems and procedures. In addition, we must effectively expand, train and manage our employees. We will be unable to manage our businesses effectively if we are unable to alleviate the strain on resources caused by growth in a timely and successful manner.
The high level of competition in our lines of business could adversely affect our contract and revenue base for our physician services and ambulatory services segments
.
Physician Services
.
Physician staffing and related management services to hospitals and clinics are highly competitive. We compete with both national and regional enterprises such as Mednax Inc., Team Health, US Acute Care Solutions, U.S Anesthesia Partners, Fresenius, Schumacher Clinical Partners and California Emergency Physicians, some of which may have greater financial and other resources available to them, greater access to physicians or greater access to potential customers. Such competition could adversely affect our ability to obtain new facility contracts, retain existing contracts and increase or maintain profit margins. We also compete against local physician groups and self-operated facility-based physician services departments that also provide staffing and scheduling services. Many of these competitors provide healthcare services that are similar in scope to the services we provide. Moreover, in certain regions, some of our competitors have already established a significant network of physician groups and it may be more difficult for us to compete in such areas.
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Item 1A. Risk Factors - (continued)
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Ambulatory Surgery Centers
.
The ASC business is highly competitive. We compete with health systems and other surgery centers in recruiting physicians to utilize our surgery centers, for patients and for the opportunity to contract with payors. We compete with public and private companies in the development and acquisition of ASCs, including Surgery Partners, Surgical Care Affiliates, United Surgical Partners, Inc. and various health systems. Further, many physician groups independently develop ASCs without a corporate partner.
Our business depends on numerous complex information systems, and any failure to successfully maintain these systems or implement new systems could materially harm our operations
.
We depend on complex, integrated information systems and standardized procedures for operational and financial information and our billing operations. We may not have the necessary resources to enhance existing information systems or implement new systems where necessary to handle our volume and changing needs. Furthermore, we may experience unanticipated delays, complications and expenses in implementing, upgrading, integrating and operating our systems, which involve a variety of different processes. Any interruptions in operations during periods of implementation or upgrading could adversely affect our ability to properly allocate resources and process billing information in a timely manner, which could result in customer dissatisfaction and delayed cash flow. We also use the development and implementation of sophisticated and specialized technology to differentiate our services from our competitors and improve our profitability. The failure to successfully implement, maintain and protect operational, financial and billing information systems could have an adverse effect on our ability to report our required financial information in a timely and accurate manner, obtain new business, retain existing business and maintain or increase our profit margins.
Disruptions in our disaster recovery systems, management continuity planning or information systems could limit our ability to operate our business effectively, or adversely affect our financial condition and results of operations
.
Our information technology systems facilitate our ability to conduct our business. While we have disaster recovery systems and business continuity plans in place, any disruptions in our disaster recovery systems or the failure of these systems to operate as expected could, depending on the magnitude of the problem, adversely affect our operating results by limiting our capacity to effectively monitor and control our operations. Despite our implementation of a variety of security measures, our technology systems could be subject to physical or electronic break-ins, and similar disruptions from unauthorized tampering. In addition, in the event that a significant number of our management personnel were unavailable in the event of a disaster, our ability to effectively conduct business could be adversely affected.
Information security risks have generally increased in recent years because of new technologies and the increased incidence of cyber‑attacks resulting in the theft of protected health, business or financial information. Outside parties may also attempt to fraudulently induce our employees to release confidential or sensitive information or to make fraudulent payments, through illegal electronic tactics. A failure in or breach of our information systems as a result of cyber-attacks or other tactics could disrupt our business, result in the release or misuse of confidential or proprietary or financial information, damage our reputation, increase our administrative expenses, and expose us to additional risk of liability to federal or state governments or individuals. Although we believe that we have robust information security procedures and other safeguards in place, which are monitored and routinely tested internally and by external parties, as cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures or to investigate and remediate any information security vulnerabilities. Any of these disruptions or breaches of security could have a material adverse effect on our business, regulatory compliance, financial condition and results of operations.
A successful challenge by tax authorities to our treatment of certain healthcare professionals as independent contractors or the elimination of an existing safe harbor could materially increase our costs relating to these healthcare professionals.
As of
December 31, 2017
, we contracted with approximately 9,100 physicians and clinical personnel as independent contractors. Because we treat these providers as independent contractors rather than as employees, we do not (i) withhold federal or state income or other employment related taxes from the compensation that we pay to them, (ii) make federal or state unemployment tax or Federal Insurance Contributions Act payments with respect to them, (iii) provide workers compensation insurance with respect to them (except in states that require us to do so for independent contractors), or (iv) allow them to participate in benefits and retirement programs available to our employees. Our contracts with these healthcare professionals obligate them to pay these taxes and other costs. Whether these healthcare professionals are properly classified as independent contractors generally depends upon the facts and circumstances of our relationship with them. It is possible that the nature of our relationship with these healthcare professionals would support a challenge to our treatment of them as independent contractors. Under current federal tax law, however, if our treatment of these healthcare professionals is consistent with a long-standing practice of a significant segment of our industry and we meet certain other requirements, it is possible, but not certain, that our treatment would qualify under a “safe harbor” and, consequently, we would be protected from the imposition of taxes. However, if a challenge to our treatment of these healthcare professionals as independent contractors by federal or state taxing authorities were successful and these healthcare professionals were treated as employees instead of independent contractors, we could be liable for taxes, penalties and interest to the extent that these healthcare professionals did not fulfill their contractual obligations to pay those taxes. In addition, there are currently, and have been in the past, proposals made to
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Item 1A. Risk Factors - (continued)
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eliminate the safe harbor, and similar proposals could be made in the future. If such a challenge were successful or if the safe harbor were eliminated, there could be a material increase in our costs relating to these healthcare professionals and, therefore, there could be a material adverse effect on our business, financial condition and results of operations.
If we fail to successfully maintain an effective internal control over financial reporting, the integrity of our financial reporting could be compromised, which could result in a material adverse effect on our reported financial results.
We regularly acquire closely held entities that are not subject to the Sarbanes-Oxley Act of 2002, or the rules and regulations of the SEC, especially as it relates to internal control structure. As such, these closely held entities may not have previously implemented the internal controls required of a public company. The integration of acquired entities into our internal control over financial reporting has required and will continue to require significant time and resources from our management and other personnel and will increase our compliance costs. We are required to include our assessment of the effectiveness of the internal controls over financial reporting of entities we acquire in our overall assessment. We plan to complete the evaluation and integration of internal controls over financial reporting and report our assessment within the required time frame. Failure to maintain an effective internal control environment could have a material adverse effect on our ability to accurately report our financial results, the market’s perception of our business and our stock price.
Shortages of products, equipment and medical supplies and quality control issues with such products, equipment and medical supplies could disrupt our operations and adversely affect our operations and profitability.
Our operations, particularly the operations of our ambulatory surgery center business, depend significantly upon our and our clients’ ability to obtain sufficient products, drugs, equipment and medical supplies on a timely basis. If we or our clients are unable to obtain such necessary products, or if we or our clients fail to properly manage existing inventory levels, we may be unable to perform certain surgeries or provide certain medical services, which could adversely affect our operations. In addition, as a result of shortages, we could suffer, among other things, operational disruptions, disruptions in cash flows, increased costs and reductions in profitability. At times, supply shortages have occurred, and such shortages may be expected to recur from time to time.
Medical supplies and services may be subject to supplier product quality control incidents and recalls. In addition to contributing to materials shortages, product quality can affect patient care and safety. National suppliers have experienced material quality control incidents in the past, which may occur again in the future for reasons beyond our control and such incidents can negatively impact case volume, product costs and our reputation. In addition, we may have to incur costs to resolve quality control incidents related to medical supplies and services regardless of whether they were caused by us. Our inability to obtain the necessary amount and quality of products, equipment and medical supplies due to a quality control incident or recall could have a material adverse effect on our business, prospects, results of operations and financial condition.
We may write-off intangible assets, such as goodwill.
As a result of purchase accounting for our various acquisition transactions, our balance sheet at December 31, 2017 contained intangible assets designated as either goodwill or intangibles totaling approximately
$7.54 billion
in goodwill and approximately
$3.67 billion
in intangibles. Acquisitions that result in the recognition of additional intangible assets would cause an increase in these intangible assets. On an ongoing basis, we evaluate whether facts and circumstances indicate any impairment of the value of intangible assets. As circumstances change, we cannot assure you that the value of these intangible assets will be realized by us. If we determine that a significant impairment has occurred, we will be required to write-off the impaired portion of intangible assets, including goodwill, which could have a material adverse effect on our results of operations in the period in which the write-off occurs.
Our annual impairment test as of October 1,
2017
evaluated the allocated goodwill related to each of our reporting units -
$2.14 billion
for the ambulatory services reporting unit and
$5.97 billion
for the physician services reporting unit. As of the October 1,
2017
valuation, the fair value was substantially in excess of its carrying value for the ambulatory services reporting unit. For physician services reporting unit, the carrying value exceeded the fair value. Accordingly, under ASU No. 2017-04 we recorded a non-cash impairment charge of
$500.0 million
to reduce goodwill associated with the physician services reporting unit. Subsequent to the goodwill write-off the physician services segment’s carrying value was at fair value and the remaining goodwill associated with the physician services reporting unit was
$5.41 billion
. Any future adverse events or changes in our assumptions used in our analysis could require additional assessment since there is no excess of fair value over carrying value as of October 1.
Our ambulatory services segment may be adversely affected by changes to the medical practices of our physician partners or if we fail to maintain good relationships with the physician partners who use our surgery centers
.
Our ambulatory services segment depends on, among other things, the efforts and success of the physician partners who perform procedures at our surgery centers and the strength of our relationship with these physicians. The medical practices of our physician partners may be negatively impacted by general economic conditions, changes in payment rates or systems by payors (including Medicare), actions taken by referring physicians, other providers and payors, and other factors impacting their practices. Adverse economic conditions, including high unemployment rates, could cause patients of our physician partners and our ASCs to cancel or delay procedures. Our physician
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Item 1A. Risk Factors - (continued)
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partners that use our ASCs are not required to use our surgery centers and may perform procedures at other facilities. From time to time, we have had and may have future disputes with physicians in our surgery centers. The revenues and profitability of our ambulatory services segment may be adversely affected if a key physician or group of physicians stops using or reduces their use of our surgery centers as a result of changes in their physician practice, changes in payment rates or systems, or a disagreement with us. In addition, if the physicians who use our surgery centers do not provide quality medical care or follow required professional guidelines at our facilities or there is damage to the reputation of a physician or group of physicians who use our surgery centers, our business and reputation could be damaged.
Our ambulatory services segment may be negatively impacted by weather and other factors beyond our control.
The results of operations of our ambulatory services segment may be adversely impacted by adverse weather conditions, including hurricanes and widespread winter storms, or other factors beyond our control that cause disruption of patient scheduling, displacement of our patients, employees and physician partners, or force certain of our surgery centers to close temporarily. In certain geographic areas, we have a large concentration of surgery centers that may be simultaneously affected by adverse weather conditions or events. The future financial and operating results of our ambulatory services segment may be adversely affected by weather and other factors that disrupt the operation of our surgery centers.
We have a legal responsibility to the minority owners of the entities through which we own our surgery centers, which may conflict with our interests and prevent us from acting solely in our own best interests.
As the owner of majority interests in the limited partnerships and limited liability companies that own our surgery centers, we owe a fiduciary duty to the noncontrolling interest holders in these entities and may encounter conflicts between our interests and that of the minority holders. In these cases, our representatives on the governing board of each partnership or joint venture are obligated to exercise reasonable, good faith judgment to resolve the conflicts and may not be free to act solely in our own best interests. In our role as manager of the limited partnership or limited liability company, we generally exercise our discretion in managing the business of the surgery center. Disputes may arise between us and the physician partners regarding a particular business decision or the interpretation of the provisions of the limited partnership agreement or limited liability company operating agreement. The agreements provide for arbitration as a dispute resolution process in some circumstances. We cannot assure you that any dispute will be resolved or that any dispute resolution will be on terms satisfactory to us.
Failure to timely or accurately bill for services could have a negative impact on our net revenue, bad debt expense and cash flow.
Billing for healthcare services is an important but complex aspect of our business. In particular, the current practice of providing physician services in advance of payment or, in many cases, irrespective of the patient's ability to pay for such services, may have significant negative impact on our physician services segment's net revenue, bad debt expense and cash flow. We bill numerous and varied payors, such as self-pay patients, managed care payors and Medicare and Medicaid. These different payors typically have different billing requirements that must be satisfied prior to receiving payment for services rendered. Reimbursement is typically conditioned on our documenting medical necessity, the appropriate level of service and correctly applying diagnosis codes. Incorrect or incomplete documentation and billing information could result in non-payment for services rendered.
Additional factors that could complicate our ability to timely or accurately bill payors include:
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disputes between payors as to which party is responsible for payment;
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failure of information systems and processes to submit and collect claims in a timely manner;
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variation in coverage for similar services among various payors;
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our reliance on third-parties to provide billing services for certain of our service lines;
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the difficulty of adherence to specific compliance requirements, diagnosis coding and other procedures mandated by various payors; and
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in connection with billing for physician services, failure to obtain proper physician credentialing and documentation in order to bill various payors.
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To the extent that the complexity associated with billing for healthcare services we provide causes delays in our cash collections, we may experience increased carrying costs associated with the aging of our accounts receivable as well as increased potential for bad debt expense.
Unfavorable changes in regulatory, economic and other conditions could occur in the states where our operations are concentrated.
For the year ended
December 31, 2017
, Arizona, California, Florida, New Jersey and Texas accounted for approximately
62%
of our physician services segment net revenue. This concentration increases the risk that, should our physician services segment programs in these states be adversely affected by changes in law or regulatory, economic and other conditions, our physician services segment revenue and profitability could materially decline. Furthermore, a natural disaster or other catastrophic event in one of these states could affect us more significantly than other companies with less geographic concentration.
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Item 1A. Risk Factors - (continued)
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We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business, or to defend successfully against intellectual property infringement claims by third parties
. Our ability to compete effectively depends in part upon our intellectual property rights, including but not limited to our trademarks and copyrights, and our proprietary technology. Our use of contractual provisions, confidentiality procedures and agreements, and trademark, copyright, unfair competition, trade secret and other laws to protect our intellectual property rights and proprietary technology may not be adequate. Litigation may be necessary to enforce our intellectual property rights and protect our proprietary technology, or to defend against claims by third parties that the conduct of our businesses or our use of intellectual property infringes upon such third-party’s intellectual property rights. Any intellectual property litigation or claims brought against us, whether or not meritorious, could result in substantial costs and diversion of our resources, and there can be no assurances that favorable final outcomes will be obtained in all cases. The terms of any settlement or judgment may require us to pay substantial amounts to the other party or cease exercising our rights in such intellectual property, including ceasing the use of certain trademarks used by us to distinguish our services from those of others or ceasing the exercise of our rights in copyrightable works. In addition, we may have to seek a license to continue practices found to be in violation of a third‑party’s rights, which may not be available on reasonable terms, or at all. Our business, financial condition or results of operations could be adversely affected as a result.
Risks Related to Our Substantial Indebtedness
Our substantial indebtedness may adversely affect our financial health and prevent us from making payments on our indebtedness
.
We have substantial indebtedness. As of December 31,
2017
, we had total indebtedness, including capital leases, of approximately
$6.41 billion
, including
$1.10 billion
of our 5.625% Senior Unsecured Notes due 2022,
$750.0 million
of our 5.125% Senior Unsecured Notes due 2022,
$550.0 million
of our 6.25% Senior Unsecured Notes due 2024, and
$3.96 billion
of borrowings under the senior secured term loan facility (“Term Loan Facility”). In addition, as of December 31, 2017, after giving effect to approximately
$186.2 million
of letters of credit issued under the asset-based revolving credit facility (“ABL Facility”), we had capacity to borrow approximately
$663.8 million
under our $850.0 million ABL Facility, subject to availability requirements. As of December 31,
2017
, we also had approximately
$832.0 million
in operating lease commitments. We anticipate that net proceeds from the divestiture of our medical transportation business, which is expected to be $2.1 billion, will be used to reduce our indebtedness outstanding under our Term Loan Facility. Following the completion of the divestiture of AMR, we expect our maximum available under the ABL Facility will be approximately
$650.0 million
.
The degree to which we are leveraged may have important consequences for holders of our common stock. For example, it may:
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make it more difficult for us to make payments on our indebtedness;
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increase our vulnerability to general economic and sector conditions, including recessions and periods of significant inflation and financial market volatility;
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expose us to the risk of increased interest rates because any borrowings we make under the ABL Facility, and our borrowings under the Term Loan Facility under certain circumstances, will bear interest at variable rates;
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require us to use a substantial portion of our cash flow from operations to service our indebtedness, thereby reducing our ability to fund working capital, capital expenditures and other expenses;
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limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;
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place us at a competitive disadvantage compared to competitors that have less indebtedness; and
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limit our ability to borrow additional funds that may be needed to operate and expand our business.
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Despite our indebtedness levels, we, our subsidiaries and our affiliated professional corporations may be able to incur substantially more indebtedness, which may increase the risks created by our substantial indebtedness.
We, our subsidiaries and our affiliated professional corporations may be able to incur substantial additional indebtedness in the future. The terms of the indentures governing our outstanding senior unsecured notes and the credit agreements governing the ABL Facility and the Term Loan Facility permit us to incur additional indebtedness, and do not fully prohibit our subsidiaries and our affiliated professional corporations from incurring indebtedness. If we are in compliance with certain incurrence ratios set forth in the credit agreements governing the ABL Facility and the Term Loan Facility and the indentures governing our outstanding senior unsecured notes, we, and our subsidiaries, may be able to incur substantial additional indebtedness, which may increase the risks created by our current substantial indebtedness. Our affiliated professional corporations are not subject to the covenants governing any of our indebtedness.
We will require a significant amount of cash to service our indebtedness. The ability to generate cash or refinance our indebtedness as it becomes due depends on many factors, some of which are beyond our control.
We are a holding company, and as such we have no independent operations or material assets other than their ownership of equity interests in our subsidiaries and our subsidiaries’ contractual arrangements with physicians and professional corporations. We depend on our subsidiaries to distribute funds to us so we are able to pay our obligations and expenses, including satisfying our indebtedness. Our ability to make scheduled
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Item 1A. Risk Factors - (continued)
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payments on, or to refinance our obligations under, our indebtedness and to fund planned capital expenditures and other corporate expenses will depend on the ability of our subsidiaries to make distributions, dividends or advances, which in turn will depend on their future operating performance and on economic, financial, competitive, legislative, regulatory and other factors. Many of these factors are beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations, that currently anticipated cost savings and operating improvements will be realized or that future borrowings will be available to us in an amount sufficient to enable us to satisfy our obligations under our indebtedness or to fund our other needs. In order for us to satisfy our obligations under our indebtedness and fund our planned capital expenditures, we must continue to execute our business strategy. If we are unable to do so, we may need to reduce or delay our planned capital expenditures or refinance all or a portion of our indebtedness on or before maturity. Significant delays in our planned capital expenditures may materially and adversely affect our future revenue prospects. In addition, we cannot assure you that we will be able to refinance any of our indebtedness on commercially reasonable terms or at all.
The indentures governing our senior notes and the credit agreements governing the ABL Facility and the Term Loan Facility restrict our ability to engage in certain business and financial transactions
.
Indentures.
The indentures governing our senior notes contain restrictive covenants that, among other things, limit our ability and the ability of our subsidiaries to:
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incur additional indebtedness or issue certain preferred shares;
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pay dividends on, redeem or repurchase stock or make other distributions in respect of the Company's capital stock;
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repurchase, prepay or redeem subordinated indebtedness;
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incur additional liens;
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transfer or sell assets;
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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
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enter into certain transactions with our affiliates; and
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designate any of our subsidiaries as unrestricted subsidiaries.
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Senior Secured Credit Facilities.
The credit agreements governing the ABL Facility and the Term Loan Facility (together, the “Senior Secured Credit Facilities”) contain a number of covenants that limit our ability and the ability of our restricted subsidiaries to:
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incur additional indebtedness or issue certain preferred shares;
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pay dividends on, redeem or repurchase stock or make other distributions in respect of the Company's capital stock;
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repurchase, prepay or redeem junior indebtedness;
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agree to payment restrictions affecting the ability of our restricted subsidiaries to pay dividends to us or make other intercompany transfers;
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incur additional liens;
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transfer or sell assets;
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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
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enter into certain transactions with affiliates;
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make negative pledges; and
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designate any of our subsidiaries as unrestricted subsidiaries.
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The credit agreement governing the ABL Facility also contains other covenants customary for asset‑based facilities of this nature. Our ability to borrow additional amounts under the credit agreement governing the ABL Facility depends upon satisfaction of these covenants. Events beyond our control can affect our ability to meet these covenants.
Our failure to comply with obligations under the indentures governing our senior notes and the credit agreements governing the Senior Secured Credit Facilities may result in an event of default under those indentures or those credit agreements. A default, if not cured or waived, may permit acceleration of our indebtedness. We cannot be certain that we will have funds available to remedy these defaults. If our indebtedness is accelerated, we cannot be certain that we will have sufficient funds available to pay the accelerated indebtedness or that we will have the ability to refinance the accelerated indebtedness on terms favorable to us or at all. The operating and financial restrictions and covenants described above may adversely affect our ability to finance future operations or capital needs or to engage in other business activities.
An increase in interest rates would increase the cost of servicing our debt and could reduce our profitability
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Our indebtedness under the ABL Facility bears interest at variable rates and, to the extent the rate for deposits in U.S. dollars in the London interbank
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Item 1A. Risk Factors - (continued)
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market (adjusted for maximum reserves) for the applicable interest period (LIBOR) exceeds 0.75%, our indebtedness under the Term Loan Facility bears interest at variable rates. As a result, increases in interest rates could increase the cost of servicing such debt and materially reduce our profitability and cash flows. As of December 31,
2017
, assuming all ABL Facility revolving loans were fully drawn and LIBOR exceeded 0.75%; each percentage point increase in interest rates would result in an approximately
$29.3 million
increase in annual interest expense on the Senior Secured Credit Facilities. The impact of such an increase would be more significant for us than it would be for some other companies because of our substantial debt.
Risks Relating to our Common Stock
Anti-takeover provisions in our second amended and restated certificate of incorporation and amended and restated by-laws could discourage, delay or prevent a change of control of our company and may affect the trading price of our common stock
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Our second amended and restated certificate of incorporation and second amended and restated by-laws include a number of provisions that may discourage, delay or prevent a change in our management or control over us that stockholders may consider favorable. For example, our second amended and restated certificate of incorporation and amended and restated by-laws collectively:
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authorize the issuance of “blank check” preferred stock that could be issued by our Board of Directors to thwart a takeover attempt;
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provide for the Company to be governed by Section 203 of the General Corporation Law of the State of Delaware (the “DGCL”), which affords the Company certain antitakeover protections;
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currently provide for a classified Board of Directors, which divides our Board of Directors into three classes, with members of each class serving staggered three-year terms, which prevents stockholders from electing an entirely new Board of Directors at an annual meeting;
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limit the ability of stockholders to remove directors;
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prohibit stockholders from calling special meetings of stockholders;
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prohibit stockholder action by written consent, thereby requiring all actions to be taken at a meeting of the stockholders; and
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establish advance notice requirements for nominations of candidates for election as directors or to bring other business before an annual meeting of our stockholders.
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These provisions may prevent our stockholders from receiving the benefit from any premium to the market price of our common stock offered by a bidder in a takeover context. Even in the absence of a takeover attempt, the existence of these provisions may adversely affect the prevailing market price of our common if the provisions are viewed as discouraging takeover attempts in the future.
Our second amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us
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Our second amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware is the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed to us or our stockholders by any of our directors, officers, employees or agents, (iii) any action asserting a claim against us arising under the DGCL or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. By becoming a stockholder in our company, you will be deemed to have notice of and have consented to the provisions of our second amended and restated certificate of incorporation related to choice of forum. The choice of forum provision in our second amended and restated certificate of incorporation may limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Risks Related to Healthcare Regulation
If we fail to comply with applicable laws and regulations, we could suffer penalties or be required to make significant changes to our operations.
The healthcare sector is heavily regulated, and we are required to comply with extensive and complex laws and regulations at the federal, state and local government levels relating to among other things:
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billing and coding for services, including documentation of care, appropriate treatment of overpayments and credit balances, and the submission of false statements or claims;
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relationships and arrangements with physicians, hospitals, vendors and other referral sources and referral recipients, including self-referral restrictions, prohibitions on kickbacks and other non-permitted forms of remuneration and prohibitions on the payment of inducements to Medicare and Medicaid beneficiaries in order to influence their selection of a provider;
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licensure, certification, enrollment in government programs and CON approval, including requirements affecting the operation, establishment and addition of services and facilities;
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the necessity, appropriateness, and adequacy of medical care, equipment, and personnel and conditions of coverage and payment for services;
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Item 1A. Risk Factors - (continued)
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quality of care and data reporting;
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ownership of surgery centers;
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operating policies and procedures;
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qualifications, training and supervision of medical and support personnel;
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fee-splitting and the corporate practice of medicine;
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screening, stabilization and transfer of individuals who have emergency medical conditions;
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workplace health and safety;
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debt collection practices;
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communications with patients and consumers;
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anti-competitive conduct;
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confidentiality, maintenance, data breach, identity theft and security issues associated with health-related and other personal information and medical records; and
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environmental protection.
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If we fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including fines, damages, recoupment of overpayments, loss of licenses needed to operate, loss of enrollment and approvals necessary to participate in Medicare, Medicaid and other government and third-party healthcare programs, and exclusion from participation in Medicare, Medicaid and other government healthcare programs. Investors, officers and managing employees associated with entities found to have committed healthcare fraud may also be excluded from participation in government healthcare programs. Enforcement officials have numerous mechanisms to combat fraud and abuse. For example, they may bring civil actions under the Civil Monetary Penalty Law, which has a lower burden of proof than criminal statutes. Civil monetary penalties are adjusted annually based on updates to the Consumer Price Index and were recently increased under the Bipartisan Budget Act of 2018. Further, failure to bill properly for services or return overpayments and violations of other statutes, such as the federal Anti-Kickback Statute or the federal Stark Law, may be the basis for actions under the FCA or similar state laws.
Many of these laws and regulations are complex, broad in scope and have few or narrowly structured exceptions and safe harbors. Further, these laws and regulations are subject to ongoing interpretation by regulatory agencies and courts. New interpretations of existing requirements, new laws or regulations or the enforcement of existing or new laws and regulations could subject our current practices to allegations of impropriety or illegality or require us to make changes in our operations, facilities, equipment, personnel, services, capital expenditure programs or operating expenses to comply with evolving requirements. Any enforcement action against us, even if we successfully defend against it, could cause us to incur significant legal expenses and divert our management’s attention from the operation of our business. To avoid sanctions and end expensive enforcement actions, we may be required to enter into settlement agreements with the government. Typically, such settlement agreements require substantial payments to the government in exchange for the government to release its claims and may also require us to enter into a corporate integrity agreement that imposes extensive ongoing compliance obligations.
We cannot assure you that current or future legislative initiatives, government regulation or judicial or regulatory interpretations thereof will not have a material adverse effect on us. We cannot assure you that a review of our business by judicial, regulatory or accreditation authorities will not subject us to fines or penalties, require us to expend significant amounts, reduce the demand for our services or otherwise adversely affect our operations.
Our relationships with referral sources and recipients, including healthcare providers, facilities and patients, are subject to the federal Anti-Kickback Statute and similar state laws.
The federal Anti-Kickback Statute prohibits healthcare providers and others from knowingly and willfully soliciting, receiving, offering or paying, directly or indirectly, any remuneration in return for, or to induce, referrals or orders for services or items covered by a federal healthcare program. Many of the states in which we operate also have adopted laws, similar to the federal Anti-Kickback Statute, that prohibit payments to physicians in exchange for referrals, some of which apply regardless of the source of payment for care. The federal Anti-Kickback Statute and similar state laws are broad in scope and many of their provisions have not been uniformly or definitively interpreted by case law or regulations. Courts have found a violation of the federal Anti-Kickback Statute if just one purpose of the remuneration is to generate referrals, even if there are other lawful purposes. Furthermore, knowledge of the law or intent to violate the law is not required to establish a violation of the federal Anti-Kickback Statute.
Congress and HHS have established narrow exceptions and safe harbor provisions that outline practices deemed protected from prosecution under the federal Anti-Kickback Statute. Many state laws restricting referrals do not contain exceptions or safe harbor provisions. While we endeavor to comply with applicable exceptions and safe harbors, certain of our current arrangements, including the ownership structures of our surgery centers, do not satisfy all of the requirements of a safe harbor. Failure to qualify for an exception or safe harbor does not mean the arrangement necessarily violates the federal Anti-Kickback Statute, but may subject the arrangement to greater scrutiny. Violations of the federal Anti-Kickback Statute and similar state laws may result in substantial civil or
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Item 1A. Risk Factors - (continued)
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criminal penalties, exclusion from participation in the Medicare and Medicaid programs and loss of licensure, which could have a material adverse effect on our business.
We are required to comply with laws governing the transmission, security and privacy of health information.
The HIPAA administrative simplification provisions require the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. In addition, as required by HIPAA, HHS has issued privacy and security regulations that extensively regulate the use and disclosure of protected health information or “PHI” and require covered entities, including healthcare providers and health plans, and vendors known as “business associates” to implement administrative, physical and technical safeguards to protect the security of PHI. Covered entities must report breaches of unsecured PHI without unreasonable delay to affected individuals, HHS and, in the case of larger breaches, the media. The privacy, security and breach notification regulations have imposed, and will continue to impose, significant compliance costs on our operations.
Violations of the HIPAA privacy and security regulations may result in criminal penalties and in substantial civil penalties. A covered entity may be subject to penalties as a result of a business associate violating HIPAA, if the business associate is found to be an agent of the covered entity. The Department is required to perform compliance audits, and state attorneys general may enforce the HIPAA privacy and security regulations in response to violations that threaten the privacy of state residents.
There are numerous other laws and legislative and regulatory initiatives at the federal and state levels addressing privacy and security concerns. These laws vary and may impose additional obligations or penalties. For example, various state laws and regulations may require us to notify affected individuals in the event of a data breach involving individually identifiable information (even if no health-related information is involved). In addition, the FTC uses its consumer protection authority to initiate enforcement actions in response to data breaches. To the extent we fail to comply with one or more federal and/or state privacy and security requirements or if we are found to be responsible for the non-compliance of our vendors, we could be subject to substantial fines or penalties, as well as third-party claims which could have a material adverse effect on our financial position, results of operations and cash flows.
We are unable to predict the impact of health reform initiatives, including the Health Reform Law.
Healthcare is subject to changing political, regulatory and other influences, which have resulted, and may continue to result, in reform initiatives that significantly impact healthcare providers. In particular, the Health Reform Law, as currently structured, expands coverage of uninsured individuals through the expansion of public programs and private sector health insurance reforms, and increases coverage of certain preventive services, including colonoscopies. We believe the Health Reform Law has resulted in an increased volume for certain procedures and in patients seeking care from us, but other provisions have reduced Medicare payments to ASCs and hospitals may indirectly impact payments received by our physician services business. In addition the Health Reform Law promotes efforts intended to transform Medicare from a passive volume-based payment system to an active purchaser of quality goods and services. ACOs, other coordinated care models and other efforts to promote value-based spending in Medicare and other programs may increase competition for patients and negatively impact our surgery centers and medical practices.
The President and certain members of Congress have indicated their intent to modify or repeal the Health Reform Law. In 2017, Congress eliminated the financial penalty associated with the individual mandate effective 2019, which may result in fewer individuals electing to purchase health insurance. Any government efforts related to health reform may have a material and adverse effect on our business, results of operations, cash flow, capital resources and liquidity. Moreover, the general uncertainty of health reform efforts, the Health Reform Law will be changed, and what and when alternative provisions if any, will be enacted may have a material and adverse impact our business, strategies, prospects, operating results or financial condition.
We have been and could become the subject of federal and state investigations and compliance reviews.
Health care companies are subject to a high level of scrutiny by various governmental agencies and their agents. Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, as well as their executives and managers. These investigations relate to a wide variety of topics, including referral and billing practices. Further, the federal FCA permits private parties to bring
qui tam
or “whistleblower” lawsuits against companies. Some states have adopted similar state whistleblower and false claims provisions.
From time to time, the OIG and the Department of Justice have established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse. Some of our activities could become the subject of governmental investigations or inquiries. Our significant Medicare billings and joint venture arrangements involving physician investors may increase our exposure. We have, in past years, been the subject of investigations regarding its contracting processes and billing practices, ultimately resulting in two settlement agreements and CIAs. Our emergency department and hospitalist medicine service lines are currently subject to a CIA, which was established in connection with our final settlement with the DOJ on December 19, 2017 to resolve an investigation into emergency and hospitalist medicine facility contracting. In addition, our executives and managers, some of whom have worked at
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Item 1A. Risk Factors - (continued)
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other healthcare companies that are or may become the subject of federal and state investigations and private litigation, could be included in governmental investigations or named as defendants in private litigation.
Governmental agencies and their agents conduct audits of health care providers, and private payers may conduct similar audits, investigations and monitoring activities. From time to time, we receive repayment demands from third-party payors based on allegations that our services were not medically necessary, were billed at an improper level, or otherwise violated applicable billing requirements. Our failure to comply with rules related to billing could result in, among other penalties, nonpayment for services rendered or refunds of amounts previously paid for such services. An investigation or audit of us, our executives or our managers could result in significant expense to us, adverse publicity, and divert management’s attention from our business, regardless of the outcome, and could result in significant penalties. Depending on nature of the conduct and whether the underlying conduct under investigation or audit could be considered systemic, the resolution of any review could have a material adverse effect on our financial position, results of operations and liquidity.
Treatment methodologies and governmental or commercial health insurance controls designed to reduce spending on healthcare procedures may reduce our revenue and profitability.
Controls imposed by Medicare and Medicaid, employer-sponsored healthcare plans and commercial health insurance payors designed to reduce the volume and costs of services provided to patients, in some instances referred to as “utilization review,” could adversely affect our facilities and medical practices. Although we are unable to predict the effect these changes will have on our operations, significant limits on the scope of services reimbursed and on reimbursement rates and fees may reduce our revenue and profitability. Additionally, trends in treatment protocols and commercial health insurance plan design, such as plans that shift increased costs and accountability for care to patients, could favor lower intensity and lower cost treatment methodologies, each of which could, in turn, have a material adverse effect on our business, prospects, results of operations and financial condition.
If we are unable to timely enroll our physician services segment providers in the Medicare and Medicaid programs, or if we do not fully comply with requirements to provide notice or reapply to various licensure or other certification authorities in connection with changes in our ownership structure or operations, our collections and revenues may be harmed.
We are required to enroll our physician services segment providers who are not otherwise already enrolled with Medicare and Medicaid in order to bill these programs for the physician services they provide. With respect to Medicare, providers can retrospectively bill Medicare for services provided 30 days prior to the effective date of the enrollment. In addition, the enrollment rules provide that the effective date of the enrollment will be the later of the date on which the enrollment application was filed and approved by the Medicare contractor, or the date on which the provider began providing services. If we are unable to properly enroll physicians and other applicable healthcare professionals within the 30 days after the provider begins providing services, we will be precluded from billing Medicare for any services which were provided to a Medicare beneficiary more than 30 days prior to the effective date of the enrollment. With respect to Medicaid, new enrollment rules and whether a state will allow providers to retrospectively bill Medicaid for services provided prior to submitting an enrollment application varies by state. Failure to timely enroll providers could reduce our physician services segment net revenue and have a material adverse effect on the business, financial condition or results of operations of our physician services segment.
The Health Reform Law, as currently structured, added additional enrollment requirements for Medicare and Medicaid, which have been further enhanced through implementing regulations and increased enforcement scrutiny. Every enrolled provider must revalidate its enrollment at regular intervals and must update the Medicare contractors and many state Medicaid programs with significant changes on a timely basis. If we fail to provide sufficient documentation as required to maintain our enrollment, Medicare and Medicaid could deny continued future enrollment or revoke our enrollment and billing privileges.
The requirements for enrollment, licensure, certification, and accreditation may include notification or approval in the event of a transfer or change of ownership or certain other changes. Other agencies or payors with which we have contracts may have similar requirements, and some of these processes may be complex. Failure to provide required notifications or obtain necessary approvals may result in the delay or inability to complete an acquisition or transfer, loss of licensure, lapses in reimbursement, or other penalties. While we make reasonable efforts to substantially comply with these requirements, we cannot assure you that the agencies that administer these programs or have awarded us contracts will not find that we have failed to comply in some material respects. A finding of non-compliance and any resulting payment delays, refund demands or other sanctions could have a material adverse effect on our business, financial condition or results of operations.
Laws and regulations impacting our arrangements with healthcare professionals and entities may cause us to restructure such arrangements, incur additional costs, lose contracts or suffer reductions under existing contracts.
A number of laws bear on our relationships with healthcare professionals and entities. For example, corporate practice of medicine laws generally prohibit the practice of medicine by lay entities or persons in order to prevent interference with independent medical judgment. These laws, which vary by state, may also prevent the sharing of professional services income with non-professional or business interests.
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Item 1A. Risk Factors - (continued)
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Some of our contracts with healthcare professionals and entities include provisions preventing these individuals and entities from competing with us both during and after the term of our contract with them. The laws governing non‑compete agreements and other forms of restrictive covenants vary from state to state. Some jurisdictions prohibit us from using non-compete covenants with our professional staff, while others are reluctant to strictly enforce non-compete agreements and restrictive covenants, especially when applied to healthcare providers. Additionally, certain facilities have the right to employ or engage our providers after the termination or expiration of our contract with those facilities, which limits our ability to enforce our non-compete provisions with regard to those providers.
There is a risk that authorities in some jurisdictions may take the position, or private litigants may allege, that our contractual relationships violate applicable laws. There can be no assurance that our non-compete agreements related to healthcare professionals and entities will not be successfully challenged as unenforceable in certain states. In such event, we would be unable to prevent the physicians or other parties to these agreements from competing with us, potentially resulting in the loss of some of our contracts or other business. Any adverse interpretations or changes could force us to restructure our relationships with physicians, other clinical employees, professional corporations or our hospital customers, or to restructure our operations. This could cause our operating costs to increase significantly. A restructuring could also result in a loss of contracts or a reduction in revenue under existing contracts.