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| AMED > SEC Filings for AMED > Form 10-K on 17-Feb-2009 | All Recent SEC Filings |
17-Feb-2009
Annual Report
You should read the following discussion and analysis in conjunction with our audited financial statements included in Part IV, Item 15, "Exhibits and Financial Statement Schedules" and Part I, Item 1, "Business" of this Annual Report on Form 10-K. The following analysis contains forward-looking statements about our future revenues, operating results and expectations. See "Cautionary Statement Regarding Forward-Looking Stagements" for a discussion of the risks, assumptions and uncertainties affecting these statements as well as Part I, Item 1A, "Risk Factors."
Overview
We are a leading provider of high-quality, low-cost home health services to the chronic, co-morbid, aging American population. Our services include home health and hospice services and approximately 87%, 89%, and 93% of our revenue was derived from Medicare for 2008, 2007 and 2006, respectively. During 2008, we had $1.2 billion in net service revenue, exceeding the billion dollar level for the first time and recorded earnings per diluted share of $3.22 per share. Additionally, we completed our largest acquisition with our purchase of TLC Health Care Services, Inc. ("TLC") which had 92 home health and 11 hospice agencies in 22 states. The following details our owned and operated Medicare-certified agencies, which are located in 37 states within the United States, the District of Columbia and Puerto Rico. The agencies closed were consolidated with agencies servicing the same areas.
Owned and Operated Agencies Managed Agencies
Home health Hospice Home health Hospice
At December 31, 2006 261 14 - -
Acquisitions 38 11 4 2
Start-ups 32 4 - -
Closed (6 ) - - -
At December 31, 2007 325 29 4 2
Acquisitions 131 14 - -
Start-ups 35 5 - -
Closed (11 ) - - -
At December 31, 2008 480 48 4 2
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Recent Developments
During 2008, the following events occurred that will impact the rates we are paid during 2009 by Medicare for both our home health and hospice services.
Payment
During 2008, the case-mix adjustment policy established a reduction in the market basket index of 2.75% for each of the years 2008 through 2010 and a decrease of 2.71% for 2011. Then, on October 30, 2008, the Centers for Medicare & Medicaid Services ("CMS") gave a home health market basket index update of 2.9%. As a result of these two rate changes, the 2009 base episode rate will be $2,272 compared to $2,270 in 2008 and $2,339 in 2007.
On August 8, 2008, CMS changed the Medicare hospice wage index for fiscal year 2009 and gave a 3.6% market basket increase to Medicare hospice rates for fiscal year 2009. CMS also issued a phase out of the Medicare hospice budget neutrality adjustment over three years and clarified wage index issues pertaining to the definition of rural and urban areas and multi-campus hospital facilities.
We do not expect these changes to have a material impact on our consolidated financial statements.
Results of Operations
Our operating results are not comparable for the years presented, primarily as a result of our acquisition and start-up agencies.
When we refer to "base business", we mean home health and hospice agencies that we have operated for at least the last twelve months; when we refer to "acquisitions", we mean home health and hospice agencies that we acquired within the last twelve months; and when we refer to "start-ups", we mean any home health or hospice agency opened by us in the last twelve months. Once an agency has been in operation for a twelve month period, the results for that particular agency are included as part of our base business from that date forward. When we refer to episodic-based revenue, admissions, recertifications or completed episodes, we mean revenue, admissions, recertifications or completed episodes of care for those payors that pay on an episodic-basis, which includes Medicare and other insurance carriers including Medicare Advantage programs.
Year Ended December 31, 2008 Compared to the Year Ended December 31, 2007
Net Service Revenue
We are dependent on Medicare for a significant portion of our revenue.
Approximately 87% and 89% of our net service revenue was derived from Medicare
for 2008 and 2007, respectively. The following table summarizes our net service
revenue growth (amounts in millions):
For the Year Ended December 31, 2008 For the Year Ended
Base/Start-ups (2) Acquisitions Total December 31, 2007
Home health revenue:
Medicare revenue $ 728.3 $ 241.2 $ 969.5 $ 580.3
Non-Medicare, episodic-based
revenue 66.7 16.0 82.7 39.6
Total episodic-based revenue 795.0 257.2 1,052.2 619.9
Non-Medicare revenue 32.2 33.8 66.0 34.1
827.2 291.0 1,118.2 654.0
Hospice revenue:
Medicare revenue 44.8 20.0 64.8 40.7
Non-Medicare revenue 3.3 1.1 4.4 3.2
48.1 21.1 69.2 43.9
Total revenue:
Medicare revenue 773.1 261.2 1,034.3 621.0
Non-Medicare revenue 102.2 50.9 153.1 76.9
$ 875.3 $ 312.1 $ 1,187.4 $ 697.9
Internal episodic-based
revenue growth (1) 28 % 26 %
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(1) Internal episodic-based revenue growth is the percent increase in our base/start-up episodic-based revenue for the period as a percent of the total episodic-based revenue of the prior period.
(2) Our net service revenue for our base/start-up agencies of $875.3 million included $847.3 million from our base agencies and $28.0 million from our start-up agencies.
Our net service revenue increased $489.5 million from 2007 to 2008 and consisted of an increase of $177.4 million in our base/start-up agencies and $312.1 million from our acquisition agencies. The $177.4 million increase in our base/start-up agencies was primarily related to our internal episodic-based revenue, which increased by $175.1 million or 28% from 2007 to 2008. Our internal episodic-based revenue growth consisted of the following:
Internal
episodic-based
revenue growth
% increase
Volume (1) 19 %
Rate (2) 9 %
Total 28 %
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(1) Volume growth is calculated by multiplying the increase in internal episodic-based admissions and recertifications for the period by the average episodic-based revenue per completed episode for the period. See below for further details on the increase in the number of admissions and recertifications that we had from 2007 to 2008.
(2) Rate growth is calculated by multiplying the total internal episodic-based admissions and recertifications for the period by the increase in the average episodic-based revenue from the prior period to the current period.
Our average episodic-based revenue per completed episode increased from $2,660 to $2,854 from 2007 to 2008 and was due primarily to the development of our therapy intensive specialty programs; the focus of the new Medicare payment system on providing more payment for home health agencies that have patients with a higher acuity mix and multiple co-morbidities that require more intensive services; and the inclusion of the TLC agencies, which have had historically higher average revenue per completed episode primarily due to their presence in higher wage index areas (i.e. the Western and Northeastern part of the United States).
Home Health Statistics
The following table summarizes our growth in home health patient admissions:
For the Year Ended December 31, 2008 For the Year Ended
Base/Start-ups Acquisitions Total December 31, 2007
Admissions:
Medicare 129,640 51,050 180,690 119,961
Non-Medicare, episodic-based 14,648 4,033 18,681 9,688
Total episodic-based 144,288 55,083 199,371 129,649
Non-Medicare 21,039 13,644 34,683 22,183
165,327 68,727 234,054 151,832
Internal episodic-based
admission growth (1) 11 % 12 %
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(1) Internal episodic-based admission growth is the percent increase in our base/start-up episodic-based admissions for the period as a percent of the total episodic-based admissions of the prior period.
The following table summarizes our growth in home health patient recertifications:
For the Year Ended December 31, 2008 For the Year Ended
Base/Start-ups Acquisitions Total December 31, 2007
Recertifications:
Medicare 130,049 35,964 166,013 107,615
Non-Medicare, episodic-based 10,620 2,207 12,827 4,997
Total episodic-based 140,669 38,171 178,840 112,612
Non-Medicare 11,991 10,082 22,073 11,991
152,660 48,253 200,913 124,603
Internal episodic-based
recertification growth (1) 25 % 33 %
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(1) Internal episodic-based recertification growth is the percent increase in our base/start-up episodic-based recertifications for the period as a percent of the total episodic-based recertifications of the prior period.
Our recertifications increased 76,310 from 2007 to 2008, with 28,057 from our
base/start-up agencies and 48,253 from our acquisition agencies. The increase in
our base/start-up agencies was primarily related to a 25% internal
episodic-based recertification growth as a result of (a) the increasing acuity
of our patients, (b) the impact of our acquisition agencies moving into our base
agency classification after being owned for more than 12 months, (c) our opening
of start-up agencies and (d) our admissions growth. See Item 1, "Our Operations
- Home Health - Our Patients, Care Management Strategy and Clinical Value
Proposition" for further details on the acuity of our patients.
The rate has decreased over the past years, from 39% in 2006 to 33% in 2007 to 25% in 2008. This trend does not necessarily indicate that we anticipate our internal episodic-based recertification rate to decrease in the future nor is it a metric that we regularly use to measure growth within our organization. This rate varies based on the clinical acuity of our patients. We focus our efforts on providing the medically necessary care for our patients to achieve their desired clinical outcomes. Prior to providing additional episodes of care, we require the approval of an agency level, multidisciplinary care conference and the approval of the patients' attending physician.
The following table summarizes our home health completed episodes:
For the Year Ended December 31, 2008 For the Year Ended
Base/Start-ups Acquisitions Total December 31, 2007
Completed Episodes:
Medicare 241,137 83,995 325,132 208,547
Non-Medicare, episodic-based 22,283 5,661 27,944 11,308
Total episodic-based 263,420 89,656 353,076 219,855
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Cost of Service, excluding Depreciation and Amortization
Our cost of service consists of the following expenses incurred by our clinical and clerical personnel in our agencies:
• salaries, taxes and benefits (including health care insurance and workers' compensation insurance);
• travel and training expenses (primarily reimbursed mileage at a standard rate); and
• supplies and services expenses (including payments to contract therapists).
We have reclassified certain costs (primarily health care insurance) from our general and administrative expenses to our cost of service. As a result of this reclassification, we have conformed the prior period results to the current year presentation and thus have reclassified $20.3 million for 2007 from general and administrative expenses to cost of service.
The following summarizes our cost of service, visit and cost per visit information:
For the Year Ended December 31, 2008 For the Year Ended
Base/Start-ups Acquisitions Total December 31, 2007
Cost of service (amounts in
millions):
Home health $ 370.0 $ 153.6 $ 523.6 $ 302.2
Hospice 28.5 10.5 39.0 26.8
$ 398.5 $ 164.1 $ 562.6 $ 329.0
Home health:
Visits during the period:
Medicare 4,369,843 1,463,823 5,833,666 3,657,847
Non-Medicare,
episodic-based 396,602 92,611 489,213 237,485
Total episodic-based 4,766,445 1,556,434 6,322,879 3,895,332
Non-Medicare 386,138 295,183 681,321 407,498
5,152,583 1,851,617 7,004,200 4,302,830
Home health cost per visit
(1) $ 71.81 $ 82.98 $ 74.76 $ 70.23
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(1) We calculate home health cost per visit as home health cost of service divided by total home health visits during the period.
Of the $233.6 million increase in cost of service, $69.5 million is related to increased costs from our base/start-up agencies and $164.1 million is related to acquisitions. The $69.5 million increase in base/start-up expenses consisted primarily of $67.6 million related to salaries, taxes and benefits and $1.7 million related to travel and training.
Our base or mature agencies are primarily concentrated in the southeastern part of the United States, as compared to our recent acquisitions, which include states outside of our southeastern concentration. These other states have a higher wage index compared to our base agencies, which results in higher labor costs. Additionally, often the agencies we acquire pay visiting staff on a salary basis compare to a per visit basis. As part of the process of converting acquired agencies to our operations, we convert our visiting staff from salary to a pay per visit model, which we believe promotes labor efficiencies and lowers cost. Typically, acquired agencies take up to 18 to 24 months to reach the labor efficiencies of existing operations.
General and Administrative Expenses, Provision for Doubtful Accounts, Depreciation and Amortization and Other (Expense) Income, Net
The following table summarizes our general and administrative expenses, provision for doubtful accounts, depreciation and amortization expense and other (expense) income, net (amounts in millions):
For the Years Ended
December 31,
2008 2007
General and administrative expenses:
Salaries and benefits $ 264.0 $ 151.0
Non-cash compensation 6.4 3.2
Other 152.9 92.5
Provision for doubtful accounts 24.0 12.0
Depreciation and amortization 20.4 13.7
Other (expense) income, net (15.7 ) 6.9
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Salaries and benefits increased $113.0 million due primarily to increased personnel costs for our field administrative staff necessitated by our internal growth and acquisitions. Of the $113.0 million increase, $53.1 million related to our acquisitions, which included an increase of $5.2 million for TLC corporate staff and $1.9 million related to certain TLC severance costs. TLC had 103 employees at their corporate office in Lake Success when we acquired them on March 26, 2008 and as of December 31, 2008, 8 remained employed by us.
Non-cash compensation expense increased $3.2 million due to additional employee share-based awards made in 2008.
Other general and administrative expenses increased $60.4 million, which consisted of $29.4 million in acquisition agency expenses, $22.6 million in base agency expenses and $8.4 million in start-up agency expenses. The increase in acquisition expenses was primarily related to $7.2 million in rent expense and $7.1 million in supplies expense and the increase in base agency expenses was primarily related to $8.5 million in travel and training expense and $7.2 million in purchased services expense and $2.1 million for certain costs associated with the conversion of the acquired TLC agencies to our operating systems including our Point of Care network.
Provision for doubtful accounts increased $12.0 million primarily as a result of the increase in our non-Medicare net service revenue during 2008 compared to 2007. For additional information on our provision for doubtful accounts see "Liquidity and Capital Resources - Outstanding Patient Accounts Receivable."
Depreciation and amortization expense increased $6.7 million primarily due to additions in our equipment and furniture and computer software, which are depreciated over three to seven years. Additionally, due to finalization of our TLC purchase accounting, we reduced depreciation expense by $1.0 million, which had been recorded in previous quarters, as the basis of TLC property and equipment was adjusted.
Other (expense) income, net changed $22.6 million from 2007 to 2008. The change was primarily attributable to an increase of $15.8 million in interest expense as a result of outstanding debt incurred in connection with our TLC acquisition and the $4.2 million conclusion of the Alliance bankruptcy in 2007.
Income Tax Expense
The following table summarizes our income tax expense and estimated income tax
rate (amounts in millions, except for estimated income tax rate):
For the Years Ended
December 31,
2008 2007
Income before income taxes and minority interest $ 141.4 $ 103.4
Income tax (expense) (54.7 ) (38.3 )
Estimated income tax rate 38.7 % 37.0 %
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The increase in income tax expense of $16.4 million is attributable to an increase in income before income taxes and minority interests and an increase in the estimated income tax rate. The increase in the estimated income tax rate was primarily attributable to the reversal of the Alliance liabilities during 2007 resulting from the conclusion of the Alliance Bankruptcy, which was a nontaxable event and caused the 2007 rate to be lower. For both 2008 and 2007 we benefited from Federal income tax credits created as a result of Hurricanes Katrina, Rita and Wilma and continued by The Emergency Economic Stabilization Act of 2008.
Year Ended December 31, 2007 Compared to the Year Ended December 31, 2006
Net Service Revenue
Approximately 89% and 93% of our net service revenue was derived from Medicare for 2007 and 2006, respectively. The change in concentration of our net services revenue was primarily due to Medicare patients transitioning to other insurance carriers, including Medicare Advantage programs.
The following table summarizes our net service revenue growth (amounts in millions):
For the Year Ended December 31, 2007 For the Year Ended
Base/Start-ups Acquisitions Total December 31, 2006
Home health revenue:
Medicare revenue $ 555.6 $ 24.7 $ 580.3 $ 469.1
Non-Medicare revenue 64.5 9.2 73.7 35.4
620.1 33.9 654.0 504.5
Hospice revenue:
Medicare revenue 34.8 5.9 40.7 33.3
Non-Medicare revenue 2.9 0.3 3.2 3.3
37.7 6.2 43.9 36.6
Total revenue:
Medicare revenue 590.4 30.6 621.0 502.4
Non-Medicare revenue 67.4 9.5 76.9 38.7
$ 657.8 $ 40.1 $ 697.9 $ 541.1
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Our net service revenue increased $156.8 million, primarily as a result of our internal growth and acquisitions. We experienced growth in our base business, inclusive of start-ups of $116.7 million, primarily as a result of an increased number of admissions and completed episodes, with a 21% increase in total completed Medicare episodes from 2006. In addition, our acquisitions added $40.1 million in net service revenue.
The following table summarizes our growth in home health patient admissions:
For the Year Ended December 31, 2007 For the Year Ended
Base/Start-ups Acquisitions Total December 31, 2006
Admissions:
Medicare 113,173 6,788 119,961 104,455
Non-Medicare 27,574 4,297 31,871 26,591
140,747 11,085 151,832 131,046
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During 2007, our home health internal growth rate was 12% as compared to 14% in 2006, with total episodic-based admissions for our base / start-up agencies of 121,297 and total episodic-based admissions of 129,649 for 2007 as compared to total episodic-based admissions of 108,140 in 2006.
Cost of Service
As a result of the reclassification discussed above, we have conformed 2007 and
2006 results to the current year presentation and thus have reclassified $20.3
million and $16.7 million, respectively from general and administrative expenses
to cost of service. The following summarizes cost of service, our visit and cost
per visit information:
For the Year Ended December 31, 2007 For the Year Ended
Base/Start-ups Acquisitions Total December 31, 2006
Cost of service (amounts in
millions):
Home health $ 280.6 $ 21.6 $ 302.2 $ 230.8
Hospice 23.3 3.5 26.8 21.4
$ 303.9 $ 25.1 $ 329.0 $ 252.2
Home health:
Visits during the period:
Medicare 3,516,903 140,944 3,657,847 3,019,106
Non-Medicare 564,458 80,525 644,983 418,775
4,081,361 221,469 4,302,830 3,437,881
Home health cost per visit
(1) $ 68.74 $ 97.73 $ 70.23 $ 67.17
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(1) We calculate home health cost per visit as home health cost of service divided by total home health visits during the period.
Our cost of service increased $76.8 million, with $51.7 million related to our . . .
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