The Annual Report on Form 10-K contains certain forward-looking statements that involve a
number of risks and uncertainties. Forward-looking statements may be identified by the use
of forward-looking terminology such as “may,” “will,”
“expect,” “believe,” “estimate,” “project,”
“anticipate,” “continue,” or similar terms, variations of those
terms or the negative of those terms. Important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements are set forth in
this document. These include but are not limited to risks and uncertainties relating to
whether the Company can identify, consummate and integrate on favorable terms acquisitions
or market penetrations; market acceptance; pricing and demand for the Company’s
services; changing regulatory environment; changing economic conditions; whether the
Company can attract and retain qualified personnel; ability to manage the Company’s
growth; and other risks detailed in this document. Please refer to “Risk
Factors” in Item 1A and “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in Item 7.
General
National Home Health Care Corp., a Delaware corporation, and its subsidiaries (the
“Company”), is a provider of home health care services, including
nursing care, personal care, supplemental staffing and other specialized health services in
the North Eastern part of the United States.
Industry Overview
United States health care spending continues to outpace the rate of inflation, and the
population of older Americans continues to increase. The Company believes that alternatives
to costly hospital and nursing home stays will continue to create demand for home health
care. Medicare, Medicaid and other managed care insurance companies continue to look for a
setting whereby the aged population can receive health care services most cost efficiently.
Home health care has evolved as the acceptable and most preferred alternative in this
continuum. Patient comfort and substantial cost savings can generally be realized through
treatment at home as an alternative to traditional institutional settings. Continuing
economic pressures within the home health care industry and the changes to Medicare
reimbursement have forced providers to modify the manner in which they provide home health
care services. Those companies that successfully operate with efficient business models can
provide quality patient care and manage costs under the current reimbursement system.
The home health care industry has traditionally been highly fragmented, composed of
not-for-profit and for-profit smaller local home health agencies offering limited services.
These smaller agencies do not generally have the necessary capital to expand their
operations or services and are often unable to achieve the cost efficiencies to compete
effectively. The implementation of the Medicare Prospective Payment system and other
legislation at the state levels has created major industry consolidation.
-1-
Home Health Care Services
Home health care services include four broad categories: (1) home health nursing services,
(2) infusion therapy, (3) respiratory therapy and (4) home medical equipment. According to
statistics from the Centers for Medicare and Medicaid Services (“CMS”) Office
of the Actuary, total expenditures by payers on home health nursing services was
approximately $43 billion in 2004. Medicare is the largest single payer, accounting for
approximately $16 billion in 2004.
The Company currently operates 29 offices consisting of one parent corporate office,
twenty-one offices that coordinate home health care services and seven satellite offices.
The Company has two Medicare provider numbers and is a Medicaid provider in each of the
four states in which it operates. The Company provides a wide variety of home health care
services including:
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Registered nurses who provide specialty services, such as skilled monitoring,
clinical nursing assessments, evaluations, clinical interventions, medication
supervision and/or administration.
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Licensed practical nurses who perform technical procedures, administer
medications and change surgical and medical dressings.
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Physical and occupational therapists who work to strengthen muscles, restore
range of motion and help patients perform the activities of daily living.
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Speech pathologists/therapists who work to restore communication and oral
skills.
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Medical social workers who help families address the problems associated with
acute and chronic illnesses.
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Home health aides who perform personal care such as bathing or assistance in
walking.
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Private duty services such as continuous hourly nursing care and sitter
services.
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The Company has five principal operating subsidiaries:
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Health Acquisition Corp., formerly Allen Health Care Services, Inc.
(“Allen Health Care”), a New York corporation that conducts home
health care operations in New York.
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New England Home Care, Inc. (“New England”), a Connecticut
corporation that conducts home health care operations in Connecticut.
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Connecticut Staffing Works Corp. (“Connecticut Staffing”), a
Connecticut corporation that conducts health care staffing operations in
Connecticut.
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-2-
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Accredited Health Services, Inc. (“Accredited”), a New Jersey
corporation that conducts home health care operations in New Jersey.
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Medical Resources Home Health Corp. (“Medical Resources”), a
Delaware corporation that conducts home health care operations in
Massachusetts.
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Health Ac
quisition Corp. d/b/a Allen Health Care Services.
Allen Health Care
is a provider of home health care services in New York State. Services are provided by
personal care aides, home health aides and homemakers (collectively,
“caregivers”). Allen Health Care is licensed by the State of New York
Department of Health (“DOH”). Allen Health Care maintains its principal
administrative office in Jamaica, New York and has a branch office in Hempstead, New York.
Case coordinating of patients is performed at these two offices. In addition, Allen Health
Care has satellite offices in Brooklyn, Mount Vernon and the Bronx, New York. The satellite
offices are primarily used for the recruitment and training of home health aides. Services
are provided in the following counties in the State of New York: Nassau, Westchester,
Suffolk, Queens, Kings, New York and the Bronx.
Home health care personnel are licensed or certified under a New York State approved
program and can be engaged on a full-time, part-time or live-in basis. Since July 1996,
Allen Health Care has required criminal background investigations for all new personnel. In
addition, urine drug testing is part of the pre-employment screening process and thereafter
is performed annually. In accordance with DOH regulations, effective April 1, 2005, all new
non-licensed employees who are employed to provide direct care or supervision to clients of
Allen Health Care will undergo a criminal history record check by the Federal Bureau of
Investigation. In March 2005, Allen Health Care was re-surveyed by the Joint Commission of
Accreditation of Health Care Organizations (the “Joint Commission”), an
accrediting body for health care providers. The Joint Commission accreditation is
associated with providing quality services. This status is required by many of the
certified home health care agencies (“CHHAs”) and long-term home health care
programs (“LTHHCPs”) that Allen Health Care currently services. The re-survey
resulted in Allen Health Care extending its accredited status through March 2008.
Allen Health Care is reimbursed primarily by CHHAs and LTHHCPs that subcontract their home
health aides from Allen Health Care, as well as by private payers and the Nassau and
Westchester County Departments of Social Services Medicaid Programs, for which Allen Health
Care is a participating provider.
Allen Health Care provides home health aide services to its clients twenty-four hours per
day, seven days per week. Although Allen Health Care’s offices are open during normal
business hours, personnel are available twenty-four hours per day to respond to emergencies
and to provide other service requests. The registered nurses of Allen Health Care, in
accordance with DOH regulations and contract requirements, visit patients regularly and
review records of service completed by the home health aide and personal care aides. These
records are maintained by Allen Health Care. In addition, a home care coordinator ensures
that appropriate coverage is maintained for all patients and acts as the liaison among
family members, aides and professional staff.
-3-
Allen Health Care has expanded in recent years through selected acquisitions of
complementary businesses or assets in its geographic region. These acquisitions included
the August 1998 acquisition of certain assets of Bryan Employment Agency, Inc., d/b/a Bryan
Home Care Services (“Bryan HomeCare”), a New York licensed home health care
agency that provided home health aide services in Westchester County, New York. This
acquisition expanded the geographic presence of Allen Health Care and enabled it to become
a participating provider in the Westchester County Department of Social Services Medicaid
Program.
To a large extent, Allen Health Care’s continued growth depends on, among other
things, its ability to recruit and maintain qualified personnel. Allen Health Care’s
training program for home health aides has been approved by the New York State Department
of Health. Allen Health Care believes that it offers competitive salaries and fringe
benefits and has been able to keep its caregivers working on a steady basis.
New England Home Care, Inc.
In August 1995, the Company acquired New England. New
England is a Medicare certified and state licensed home health care company in Connecticut.
In February 2005, New England was re-surveyed by the Joint Commission, resulting in New
England extending its accredited status through February 2008. New England provides
services throughout Connecticut. Services include skilled nursing, physical therapy,
occupational therapy, medical social services, home health aide and homemaker services. In
addition, New England provides specialty services consisting of adult/geriatric, pediatric,
post-acute rehabilitation and behavioral health. New England provides full-service home
health care twenty-four hours per day, seven days per week. Weekends, holidays and
after-hours are supported by an on-call system for each office location with medical
supervision by a registered nurse at all times. All home health care personnel are licensed
or certified under a Connecticut state-approved program and can be engaged on a full-time,
part-time or live-in basis. New England performs a multi-state pre-employment criminal
background check on all new hires. In addition, a Social Security number verification,
satisfactory employer references and a pre-employment drug screen are required.
New England maintains its principal administrative office in Cromwell, Connecticut. In
addition, New England has administrative offices in New Haven, West Hartford, Shelton and
Waterbury, Connecticut, and a satellite office in Norwich, Connecticut. Case coordinating
of patients is performed at the administrative offices. Reimbursement for New
England’s services is primarily provided by the State of Connecticut Department of
Social Services Medicaid Program, the Federal Medicare Program, managed care companies,
private payers, hospices and other Medicare certified home health agencies and long-term
care providers that subcontract their home health aides from New England.
New England has expanded its operations through increased penetration of market share in
Connecticut and selected acquisitions of complementary assets in its geographic region. In
November 1999, New England acquired certain assets of Optimum Care Services of Connecticut,
Inc., Optimum Home Health of Connecticut, Inc. and Optimum Home Care of Connecticut, Inc.
(collectively, the “Optimum Entities”). The Optimum Entities included a
Medicare certified and licensed home health care company engaged in providing home health
care services in Connecticut. The acquisition of these assets was coupled with a successful
penetration of the market share made available as a result of the liquidation of the
Optimum Entities.
-4-
In October 2004, New England acquired certain assets from On Duty Metropolitan Connecticut,
LLC, a Medicare certified and licensed home health care company engaged in providing
nursing and home health care services in New Haven and Fairfield Counties, Connecticut.
The continued growth of New England depends on, among other things, its ability to recruit
and retain qualified personnel. New England recruits personnel through employee referrals,
newsprint media, internet sourcing, direct mailings and industry networking. New England
believes that it offers competitive salaries and fringe benefits and has been able to keep
its employees working on a steady basis.
Connecticut Staffing Works Corp.
Connecticut Staffing was organized in October 1999
to operate certain of the assets acquired from the Optimum Entities. Connecticut Staffing
is a full-service health care staffing company, maintaining its main administrative office
in Cromwell, Connecticut. It provides temporary staffing to hospitals, skilled nursing
facilities, long-term care centers, occupational health sites, juvenile detention centers,
correctional facilities, group homes, schools and other institutions. Staffing personnel
include registered nurses, licensed practical nurses, certified nursing assistants, medical
secretaries and medical assistants. Staffing services are provided twenty-four hours per
day, seven days per week. Staffing coordinators are available in the office Monday to
Friday 6:00 a.m. to 5:00 p.m., Saturday 6:00 a.m. to 2:00 p.m. and Sunday 6:00 a.m. to 12
noon. Holidays and after hours are supported by an on-call system which pages a staffing
coordinator. Connecticut Staffing performs a multi-state pre-employment criminal background
check on all new hires. In addition, a Social Security number verification, satisfactory
employer references and a pre-employment drug screen are required.
Connecticut Staffing maintains a roster of quality professional personnel. The continued
success of Connecticut Staffing is dependent on, among other things, its ability to
maintain a steady roster of per diem workers to meet the staffing requirements of its
clients. Connecticut recruits personnel through employee referrals, newsprint media,
internet sourcing, direct mailings and industry networking. Connecticut Staffing believes
that it offers competitive salaries and fringe benefits and has been able to keep its
personnel working on a steady basis.
Accredited Health Services, Inc.
In October 1998, the Company acquired Accredited.
Accredited is a licensed health care service firm that provides home health aide services
in Bergen, Hudson, Passaic, Essex, Morris, Union, Somerset, Middlesex, Monmouth and Ocean
Counties, New Jersey. Accredited maintains its principal administrative office in
Hackensack, New Jersey and has branch offices in East Orange and Toms River, New Jersey.
Case coordinating of patients is performed in Hackensack and the other two branch offices.
Accredited also has satellite offices in Jersey City, Union City and Paterson, New Jersey
that are used for recruitment, in services and orientation of home health aides.
Accredited provides home health care services to its clients twenty-four hours per day,
seven days per week. Weekends, holidays and after-hours are supported by an on-call system
for each office. All home health aides are certified under a New Jersey state-approved
program and can be engaged on a full-time, part-time or live-in basis. Accredited has been
approved by the New Jersey Board of Nursing for the training of home health aides in the
State of New Jersey. Effective November 2003, all home health aides of Accredited have
criminal background checks performed by the State of New Jersey.
-5-
In September 2006, Accredited was re-surveyed by the Commission on Accreditation for Home
Care (CAHC), one of the accrediting bodies required for participation as a Medicaid
provider in New Jersey. This accreditation was extended for an additional year. In
September 2007, Accredited was re-surveyed; the results of that survey have not been
received. Reimbursement for Accredited’s services is primarily by the State of New
Jersey Medicaid Program, Medicare certified home health care agencies that subcontract
their home health aides from Accredited and private payers.
In May 2005, Accredited completed the acquisition of Helping Hands Health Care
(“Helping Hands”). Helping Hands provided home health aide services in Bergen,
Hudson, Passaic, Essex, Morris, Union, Middlesex, Somerset, Monmouth and Ocean Counties,
New Jersey.
Accredited’s growth depends on, among other things, its ability to recruit and retain
qualified home health aides. Recruiting is conducted primarily through advertising, direct
contact with community groups and employment programs, and programs designed to encourage
new employee referrals by existing employees. Accredited believes that it offers
competitive salaries and fringe benefits and has been able to keep its caregivers working
on a steady basis.
Medical Resources Home Health Corp.
In September 2002, the Company, through a
wholly-owned subsidiary, acquired certain assets of Medical Resources, Inc. and related
entities (collectively, the “Medical Resources Entities”). The Medical
Resources Entities provided home care services in Massachusetts.
The Massachusetts State Home Care Program provides services to approximately 40,000 frail,
low income elders throughout the state. The funds and services are managed through
twenty-seven Aging Service Access Points (“ASAPs”) that are not-for-profit
organizations geographically dispersed throughout the state. Services provided through this
state program include homemaking, personal care and companion. Medical Resources has
contracts with certain of these ASAPs to provide homemaking and personal care services.
Services are provided twenty-four hours per day, seven days per week. Weekends, holidays
and after-hours are supported by an on-call system staffed by coordinators and registered
nurses. From inception, Medical Resources has performed criminal background investigations
on all new personnel.
Medical Resources maintains its principal administrative office in Newton, Massachusetts
and has satellite offices in Boston, Lynn, Framingham, North Andover, Leominster,
Worcester, Chicopee, Bellingham, North Dartmouth and North Easton, Massachusetts. Case
coordinating of patients is performed in Newton and the satellite offices. The satellite
offices are also used as drop-off offices for paperwork, recruitment, in services, training
and orientation of new personnel.
In April 2003, Medical Resources received its Medicare certification from the CMS. In June
2003, Medical Resources received its Medicaid provider number from the Commonwealth of
Massachusetts. As a result of receiving these certifications, Medical Resources expanded
its services to include nursing, physical therapy, occupational therapy, speech therapy,
medical social services and home health aide services to Medicare and Medicaid
recipients.
-6-
The growth of Medical Resources depends on, among other things, its ability to recruit and
retain staff as well as its ability to generate referrals of Medicare, Medicaid and Managed
Care patients. Medical Resources believes that it offers competitive salaries and fringe
benefits and has been able to keep its employees working on a steady basis.
Organization
The Company’s corporate headquarters is located in Scarsdale, New York, where all
senior corporate administrative functions are performed. The Company’s operations are
conducted by its five operating subsidiaries. Although the Company maintains separate
subsidiaries in its various jurisdictions of operations, it reviews its operations
primarily on an integrated rather than geographic or separate-subsidiary basis. Each
subsidiary has a main administrative office where all management functions are performed
and overseen by the subsidiary President. Each administrative office performs intake and
case coordinating of patients, corporate compliance, human resources, marketing and all
financial and accounting functions.
Insurance
The Company and its subsidiaries maintain casualty coverages for all of its operations,
including professional and general liability, workers’ compensation, automobile,
property, fiduciary liability and directors and officers insurance. The Company reviews its
insurance coverages throughout the year to insure that adequate coverages are in place. In
the State of New York, the Company self insures up to specified limits certain risks
related to workers’ compensation. While the Company believes its insurance policies
are adequate, in the wake of the terrorist events of September 11, 2001, the Company has
experienced substantial increases in the cost of its insurance coverage. As a result, there
can be no assurance that coverage will continue to be available in adequate amounts or at a
reasonable cost.
Employees and Labor Relations
As of October 27, 2007, the Company had approximately 3,680 full and part-time employees.
The Company currently employs the following classifications of personnel: administrative
employees which consist of a senior management team (CEO and CFO) of the parent company and
a COO, CFO and vice-presidents at each subsidiary company; office administrative staff,
nursing directors and clinical managers; sales and marketing executives; licensed and
certified professional staff (RNs, LPNs, therapists); and non-licensed care givers (home
health and personal care aides). The Company has standardized procedures for recruiting,
interviewing and reference checking prospective health care personnel. All nurses and home
health aides must be licensed or certified by appropriate authorities.
Effective July 1, 2007, Allen Health Care and District Council 1707, American Federation of
State, County and Municipal Employees (“AFSCME”), concluded negotiations on a
new three-year labor contract. The previous labor contract expired on April 30, 2007. This
new labor contract provides “covered” home health aides with some additional
benefits, consisting of an immediate wage increase, an increase in minimum hourly base
rates, a bonus program and holiday premium pay. The Company has no other union contracts
with any of its employees. The Company believes its relationship with its employees is
satisfactory.
-7-
On February 28, 2006, Lerai Jones,
individually and on behalf of all other persons similarly situated, filed a lawsuit against
the Company for alleged unpaid overtime wages pursuant to the New York Labor Law. Plaintiff
seeks to certify a class of regular full-time hourly employees working within the State of
New York. The legal issues in this case are closely intertwined and connected to the legal
issues in the matter of Coke v. Long Island Care at Home, 376 F.3d 118 (2d Cir. 2004) which
involves the exemption for home health care aides under the Fair Labor Standards Act. On
August 31, 2006, upon a remand from the United States Supreme Court, the United States
Court of Appeals for the Second Circuit affirmed the decision of the United States District
Court for the Southern District of New York ruling that the exemption did not apply to home
health aides employed by third parties.
This decision, however, was stayed
pending an appeal to the United States Supreme
Court
. Because of this
appeal of the Coke
decision, the parties in the matter of Lerai
Jones, et al. v. National Home Health Care, entered into a stipulation extending the
defendant’s time to answer the complaint or agreeing to have plaintiff stipulate to a
discontinuance of this matter within thirty (30) days after a ruling in the Coke decision
by the United States Supreme Court. On June 11, 2007, the United States Supreme
Court
unanimously
overturned
the decision of the United States Court of
Appeals for the Second Circuit and upheld the exemption from overtime wages for home health
aides.
The Company is in the process of effectuating discontinuance of this
matter.
On May 13, 2005, Accredited received a copy of a Petition for Certification of
Representative, pursuant to the provisions of the National Labor Relations Act. On March
21, 2006 the home health aides of Accredited, in a mail ballot election, rejected union
representation by SEIU 1199 New Jersey.
Competition
The home health care field is highly competitive in each state in which the Company
operates. The Company is competing with numerous other licensed as well as certified home
health care agencies in each of the markets it serves. In addition, the Company competes
with companies that, in addition to providing home health aide and skilled nursing
services, also, unlike the Company, provide pharmaceutical products and other home health
care services that generate additional referrals. The Company believes it is one of the
largest competitors in the state of Connecticut. However, the Company believes that
numerous competitors in the other principal markets served by the Company (
i.e.,
the
states of Massachusetts, New York and New Jersey) have substantially greater personnel,
financial and other resources than the Company. Competition also involves the quality of
services provided and the pricing for such services. The Company’s largest
competitors include Gentiva Health Services, Inc., Premier Health Services, Patient Care,
Inc., New York Health Care, Inc. and Personal Touch Home Care, Inc. As a result of changes
in Medicare reimbursement and the competitive pressures of managed care, the home health
care industry continues to experience consolidation. In addition, the Company believes that
smaller, less financially secure home health agencies will continue to find it difficult to
compete for market share and comply with regulatory compliance standards.
The Company’s ability to attract a staff of highly trained personnel is a material
element of its business. There currently is intense competition for qualified personnel and
there can be no assurance that the Company will be successful in maintaining or in securing
additional qualified personnel. The Company’s competition for personnel comes from
other industries as well. If and to the extent that reimbursement rates and other factors
constrain wages and other benefits to caregivers, other industries offering more attractive
compensation and other benefits also may attract eligible home health care personnel. The
Company recruits personnel principally through newspaper advertisements and through
referrals from existing personnel.
-8-
Customers
The Company provides its services to four types of payer sources. These sources include
federal and state funded public assistance programs (Medicare and Medicaid), other third
party payers (subcontracts), insurance companies and private payers.
A substantial portion of the Company’s revenue is derived from subcontracts that the
Company has with Medicare certified home health care agencies and long-term health care
provider programs that subcontract our caregivers. From time to time, some of these
agencies have requested bids from the home care agencies to which they subcontract. If the
Company is not successful in maintaining these contracts as they come up for bid, it could
have a materially adverse effect on the Company’s results of operations.
For the fiscal years ended July 31, 2007, 2006 and 2005, the State of Connecticut
Department of Social Services Medicaid Program accounted for 27%, 27% and 28%,
respectively, of the Company’s net patient revenue and the New Jersey Department of
Human Services Division of Medical Assistance and Health Services Program accounted for
12%, 13% and 12%, respectively, of the Company’s net patient revenue. The loss of or
a significant adverse change in the business terms with either of the foregoing customers
would have a material adverse effect on the Company.
Government Regulation and Licensing
The health care industry is highly regulated. The Company’s business is subject to
substantial and frequently changing regulations by federal, state and local authorities.
The Company must comply with state licensing along with federal and state eligibility
standards for certification as a Medicare and Medicaid provider. The ability of the Company
to operate profitably will depend in part upon the Company obtaining and maintaining all
necessary licenses and other approvals in compliance with applicable health care
regulations.
The Health Insurance Portability and Accountability Act.
The Health Insurance
Portability and Accountability Act (“HIPAA”), enacted by the Federal government
on August 12, 1996, requires organizations to adhere to certain standards to protect data
integrity, confidentiality and availability. HIPAA mandates, among other things, that the
Department of Health and Human Services adopt standards for the exchange of electronic
health information in an effort to encourage overall administrative simplification and
enhance the effectiveness and efficiency of the health care industry. Organizations were
required to be in compliance with certain HIPAA provisions relating to security and privacy
beginning April 14, 2003. Organizations are subject to significant fines and penalties if
found not to be compliant with the provisions outlined in the regulations. Regulations
issued pursuant to HIPAA impose ongoing obligations relative to training, monitoring and
enforcement, and management has implemented processes and procedures to ensure continued
compliance with these regulations.
-9-
Medicare.
Title XVIII of the Social Security Act authorizes Part A of the Medicare
program, the health insurance program that pays for home health care services for covered
persons (typically, those aged 65 and older and long-term disabled). Home health care
providers may participate in the Medicare program subject to certain conditions of
participation and upon acceptance of a provider agreement by the Secretary of Health and
Human Services. Only enumerated services, upon satisfaction of certain coverage criteria,
are eligible for reimbursement as a Medicare provider. The Company is currently Medicare
certified in Connecticut and Massachusetts. Approximately 4%, 4% and 6% of the
Company’s net patient revenue for the fiscal years ended July 31, 2007, 2006 and
2005, respectively, were derived from the Medicare program (see
“Risk Factors
-
Risks Related to Federal and State
Regulations”
below
for a discussion regarding the Company’s participation
in the Connecticut Medicare program)
.
Medicare Fraud and Abuse.
Provisions of the Social Security Act under Medicare and
Medicaid generally prohibit soliciting, receiving, offering or paying, directly or
indirectly, any form of remuneration in return for the referral of Medicare or state health
care program patients or patient care opportunities, or in return for the purchase, lease
or order of any facility item or service that is covered by Medicare or a state health care
program. The federal government has published regulations that provide exceptions, or
“safe harbors,” for business transactions that will be deemed not to violate
the anti-kickback statute. Violations of the statute may result in civil and criminal
penalties and exclusion from participation in the Medicare and Medicaid programs. The
Company believes that its current operations are not in violation of the anti-kickback
statute.
Medicaid.
Approximately 47%, 47% and 46% of the Company’s net patient revenue
for the fiscal years ended July 31, 2007, 2006 and 2005, respectively, were derived from
state sponsored Medicaid programs. Reimbursement for home health care services rendered to
eligible Medicaid recipients is made in an amount determined in accordance with procedures
and standards established by state law under federal guidelines. States differ as to
reimbursement policies and rates. The Company is a licensed Medicaid provider in
Connecticut, New Jersey, Massachusetts and in Nassau and Westchester Counties, New York.
Future Medicaid reimbursement rates may be reduced in response to state economic and
budgetary constraints, as well as in response to changes in the Medicare program (see
“Risk Factors
-
Risks Related to Federal and
State Regulations”
below for a discussion
regarding the Company’s participation in the Connecticut Medicaid
program)
.
Surveys
. From March 1, 2004 through August 23, 2005, the Division of Health Services
Regulation for the Connecticut Department of Public Health (the “DPH”)
conducted various licensing and certification inspections of New England. In December 2005,
New England and the DPH entered into a Consent Order for the purpose of resolving the
DPH’s findings at the conclusion of those inspections. The Consent Order provides for
the adoption of certain policies and procedures pursuant to a Plan of Correction approved
by the DPH. The terms of the Consent Order will generally remain in effect until the fall
of 2007
.
A failure by New England to achieve Medicare certification would result in
New England’s termination from participation in the Medicare and Medicaid programs.
Revenues derived from New England’s participation in these programs for the fiscal
year ended July 31, 2007 were 29% of the Company’s net patient revenues.
Audit
. In August 2005, the Connecticut Department of Social Services, Office of
Quality Assurance (the “Department”) performed an audit of Medical Assistance
claims paid to New England covering the period April 1, 2003 through March 31, 2005. The
audit included a review of relevant claim information maintained by the Department and a
review of the appropriate medical and administrative records maintained by New England. New
England received approximately $53,000,000 in reimbursement during the audit period. In
October 2006, the Company received the results of the audit, which resulted in a liability
of $151,000 to the Department.
-10-
This section summarizes certain risks, among others, that should be considered by
stockholders and prospective investors in the Company. Many of these risks are also
discussed in other sections of this report.
Risks Related to the Company’s Ability to Attract Qualified Caregivers.
The Company relies significantly on its ability to attract and retain caregivers who
possess the skills, experience and licenses necessary to meet the requirements of the
Company’s customers. The Company competes for home health care services personnel
with other providers of home health care services. The Company must continually evaluate
and expand its network of caregivers to keep pace with its customers’ needs.
Currently, there is a shortage of qualified nurses and a diminishing pool of home health
aides in the states in which the Company conducts its business, competition for nursing
personnel is increasing and wages and benefit costs have risen. The Company may be unable
to continue to increase the number of caregivers that it recruits, adversely affecting the
potential for growth of the Company’s business. The Company’s ability to
attract and retain caregivers depends on several factors, including the Company’s
ability to provide such caregivers with assignments that they view as attractive and with
competitive wages and benefits. There can be no assurance that the Company will be
successful in any of these areas. The cost of attracting caregivers and providing them with
attractive benefit packages may be higher than the Company anticipates and, as a result, if
it is unable to obtain increased reimbursement rates, the Company’s profitability
could decline. Moreover, if the Company is unable to attract and retain caregivers, the
quality of its services to its customers may decline and, as a result, it could lose
certain customers.
Risks Related to Collective Bargaining.
Effective July 1, 2007, Allen Health Care and District Council 1707, AFSCME concluded
negotiations on a new three-year labor contract. The Company is unable to estimate how
future negotiations will affect the Company’s future results of operations or
financial condition. On May 13, 2005, Accredited received a copy of a Petition for
Certification of Representative, pursuant to the provisions of the National Labor Relations
Act. Although on March 21, 2006, the home health aides of Accredited, in a mail ballot
election, rejected union representation by SEIU 1199 New Jersey, there can be no assurance
that further unionizing activity will not occur at this or other subsidiaries of the
Company or that any such activity or any new collective bargaining agreements will not have
a material adverse effect on the Company.
Risks Related to Competition.
The home health care business is highly competitive. Some of the Company’s
competitors, unlike the Company, provide pharmaceutical products and other home health care
services that generate additional referrals. Some of the Company’s competitors also
may have greater marketing and financial resources than the Company. The Company believes
that the primary competitive factors in obtaining and retaining customers are the quality
of services provided and the pricing of such services. Competition for referrals may
increase in the future and, as a result, the Company may not be able to remain competitive.
To the extent competitors gain or retain market share by reducing prices or increasing
marketing expenditures, the Company could lose market share or otherwise experience a
material adverse effect. The Company does not have long-term agreements or exclusive
guaranteed order contracts with its customers. The success of the Company’s business
is dependent upon its ability to continually secure new business from its customers and to
service such new business with its caregivers. The Company’s customers are free to
seek services from the Company’s competitors and to use caregivers that such
competitors offer them. Therefore, the Company must maintain positive relationships with
its customers; otherwise, the Company may be unable to generate new business for its
caregivers, which could have a material adverse effect on the Company.
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Risks Related to Medicaid Retroactive Adjustments and Recoupments.
New England, as a Connecticut Medicaid provider, is subject to retroactive adjustments due
to prior year audits, reviews and investigations, government fraud and abuse initiatives
and other similar actions. Federal regulations also provide for withholding payments to
recoup amounts payable under the Medicaid program. While the Company believes it is in
material compliance with applicable Medicaid reimbursement regulations, there can be no
assurance that the Company, pursuant to such audits, reviews and investigations, among
other things, will be found to be in compliance in all respects with such reimbursement
regulations. A determination that the Company is in violation of any such reimbursement
regulations could result in retroactive
adjustments and
recoupments and have a material adverse effect on the Company. As a Medicaid provider, the
Company is also subject to routine, unscheduled audits, which
may have an adverse
impact on the Company’s results of operations. For information on a recent audit
performed by the Connecticut Department of Social Services, Office of Quality Assurance,
see “Government Regulation and Licensing – Audit.”
Risks Related to Federal and State Regulations.
The Company is subject to substantial and frequently changing federal,
state
and local regulations. The Company must also
comply with state licensing along with federal and state eligibility standards for
certification as a Medicare and Medicaid provider. In addition, new laws and regulations
are adopted periodically to regulate new and existing services in the health care industry.
Changes in laws or regulations or new interpretations of existing laws or regulations can
have a dramatic effect on operating methods, costs and reimbursement amounts provided by
government and other third-party payers. Federal laws governing the Company’s
activities include regulation of Medicare reimbursement and certification and certain
financial relationships with health care providers (collectively, the “fraud and
abuse laws”). Although the Company intends to comply with all applicable federal and
state fraud and abuse laws, these laws are not always clear and may be subject to a range
of potential interpretations. (For further discussion on such fraud and abuse laws, see
“Government Regulation and Licensing – Medicare Fraud and Abuse.”) There
can be no assurance that administrative or judicial clarification or interpretation of
existing laws or regulations, or legislative enactment of new laws or regulations, will not
have a material adverse effect on the Company. In addition, the Balanced Budget Act of
1997, as amended (the “Balanced Budget Act”), introduced several government
initiatives causing changes to Medicare reimbursement. These changes have resulted in the
Company experiencing a decline in revenue from its Medicare certified subsidiary in
Connecticut. (For further discussion on the Balanced Budget Act, see “Government
Regulation and Licensing – Medicare.”)
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New England, as a participant in the State of Connecticut Department of Social Services
Medicaid program, is subject to survey and audits of operational, clinical and financial
records with respect to proper applications of general regulations governing operations and
billing of claims. These audits can result in retroactive adjustments for payments received
from this program. There can be no assurance that federal, state or local governments will
not change existing standards or impose additional standards. Any failure to comply with
existing or future standards could have a material adverse effect on the Company. For
information as to surveys of New England conducted by DPH, see “Government Regulation
and Licensing – Surveys.” A failure by New England to retain Medicare
certification would result in New England’s termination from participating in the
Medicare and Medicaid programs. Revenues derived from New England’s participation in
these programs for the fiscal year ended July 31, 2007 were 29% of the Company’s net
patient revenues.
Risks Related to the Company’s Exposure to Professional Liabilities.
Provision of home health care services entails an inherent risk of liability. Certain
participants in the home health care industry may be subject to lawsuits that may involve
large claims and significant defense costs. It is expected that the Company periodically
will be subject to such suits as a result of the nature of its business. The Company
currently maintains professional liability insurance intended to cover such claims in
amounts which management believes are in accordance with industry standards. There can be
no assurance that the Company will be able to obtain liability insurance coverage in the
future on acceptable terms, if at all. There can be no assurance that claims in excess of
the Company’s insurance coverage or claims not covered by the Company’s
insurance coverage will not arise. A successful claim against the Company in excess of the
Company’s insurance coverage could have a material adverse effect on the Company.
Claims against the Company, regardless of their merit or eventual outcome, may also have a
material adverse effect on the Company’s ability to attract customers or to expand
its business. In addition, one of the Company’s subsidiaries is self-insured for its
workers compensation and is at risk for claims up to certain levels.
Risks Related to Third Party Payers.
For the twelve months ended July 31, 2007, 2006 and 2005, the percentage of the
Company’s net patient revenues derived from Medicare and Medicaid was 50%, 51% and
51%, respectively. The revenues and profitability of the Company are affected by the
continuing efforts of all third-party payers to contain or reduce the costs of health care
by lowering reimbursement rates, narrowing the scope of covered services, increasing case
management review of services and negotiating reduced contract pricing. Any changes in
reimbursement levels under Medicare, Medicaid or other payer sources and any changes in
applicable government regulations could have a material adverse effect on the Company. See
Item 7 – “Management’s Discussion and Analysis of Financial Condition and
Results of Operations -- Certain Trends Expected to Impact Future Results of
Operations.” Changes in the mix of the Company’s patients among Medicare,
Medicaid and other payer sources may also affect the Company’s revenues and
profitability.
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Risks Related to the Company’s Acquisition Strategy.
In recent years, the Company’s strategic focus has been on the acquisition of small
to medium sized home health care agencies, or of certain of their assets, in targeted
markets. These acquisitions involve significant risks and uncertainties, including
difficulties integrating acquired personnel and other corporate cultures into the
Company’s business, the potential loss of key employees or customers of acquired
companies, the assumption of liabilities and exposure to unforeseen liabilities of acquired
companies and the diversion of management attention from existing operations. The Company
may not be able to fully integrate the operations of the acquired businesses with its own
in an efficient and cost-effective manner. The failure to effectively integrate any of
these businesses could have a material adverse effect on the Company. In addition, the
Company’s growth over the last several years has principally resulted from
acquisitions and penetration of markets abandoned by competitors. There can be no assurance
that the Company will be able to identify suitable acquisitions or available market share
in the future nor that any such opportunities, if identified, will be consummated on terms
favorable to the Company, if at all. In the absence of such successful transactions, there
can be no assurance that the Company will experience further growth, nor that such
transactions, if consummated, will result in further growth.
In addition, a
lthough the Company attempted in its
acquisitions to determine the nature and extent of any pre-existing liabilities, and has
obtained indemnification rights from the previous owners for acts or omissions arising
prior to the date of the acquisition, resolving issues of liability between the parties
could involve a significant amount of time, manpower and expense on the part of the
Company. If the Company or any of its subsidiaries were to be unsuccessful in a claim for
indemnity from a seller, the liability imposed on the Company or its subsidiary could have
a material adverse effect on the Company.
The Company has grown significantly over the past few years. This growth, which has
resulted primarily from acquisitions and which management intends to continue to pursue,
poses a number of difficulties and risks for the
Company
. As the Company has grown and may continue to
grow (as to which there can be no assurance) in both revenue and geographical scope, such
growth stretches the various resources of the Company, including management, information
systems, regulatory compliance, logistics and other controls. There can be no assurance
that such resources will keep pace with such growth. If the Company does not maintain such
pace, then its prospects would be materially adversely affected.
Risks Related to the Company’s Dependence on Senior Management.
The Company believes that the success of its business strategy and its ability to operate
profitably depends on the continued employment of its senior management team. If any member
of the Company’s senior management team becomes unable or unwilling to continue in
his present position, the Company’s business and financial results could be
materially adversely affected.
None.
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