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| SKH > SEC Filings for SKH > Form 10-Q on 5-Aug-2008 | All Recent SEC Filings |
5-Aug-2008
Quarterly Report
Three Months Ended June 30,
2008 2007
Revenue Revenue Revenue Revenue
Dollars Percentage Dollars Percentage
Long-term care services:
Skilled nursing facilities $ 154,220 85.5 % $ 127,761 84.6 %
Assisted living facilities 4,732 2.6 4,292 2.8
Total long-term care services 158,952 88.1 132,053 87.4
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Three Months Ended June 30,
2008 2007
Revenue Revenue Revenue Revenue
Dollars Percentage Dollars Percentage
Third-party rehabilitation therapy services 16,820 9.3 17,280 11.4
Hospice 4,568 2.6 1,758 1.2
Total ancillary services 21,388 11.9 19,038 12.6
Other 8 - - -
Total $ 180,348 100.0 % $ 151,091 100.0 %
Six Months Ended June 30,
2008 2007
Revenue Revenue Revenue Revenue
Dollars Percentage Dollars Percentage
Long-term care services:
Skilled nursing facilities $ 308,503 85.4 % $ 249,796 84.5 %
Assisted living facilities 9,266 2.6 8,380 2.8
Total long-term care services 317,769 88.0 258,176 87.3
Ancillary services :
Third-party rehabilitation therapy services 34,300 9.5 34,166 11.5
Hospice 8,998 2.5 3,404 1.2
Total ancillary services 43,298 12.0 37,570 12.7
Other 8 - - -
Total $ 361,075 100.0 % $ 295,746 100.0 %
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Sources of Revenue
Long-Term Care Services Segment
Skilled Nursing Facilities. Within our skilled nursing facilities, we
generate our revenue from Medicare, Medicaid, managed care providers, insurers,
private pay and other sources. We believe that our skilled mix, which we define
as the number of Medicare and managed care patient days at our skilled nursing
facilities divided by the total number of patient days at our skilled nursing
facilities for any given period, is an important indicator of our success in
attracting high-acuity patients because it represents the percentage of our
patients who are reimbursed by Medicare and managed care payors, for whom we
receive higher reimbursement rates. Medicare and managed care payors typically
do not provide reimbursement for custodial care, which is a basic level of
healthcare.
The following table sets forth our Medicare, managed care, private pay/other
and Medicaid patient days for our skilled nursing facilities as a percentage of
total patient days for our skilled nursing facilities and the level of skilled
mix for our skilled nursing facilities:
Three Months Ended June 30, Six Months Ended June 30,
2008 2007 2008 2007
Medicare 17.6 % 18.7 % 18.0 19.1 %
Managed care 7.0 6.0 7.2 5.9
Skilled mix 24.6 24.7 25.2 25.0
Private and other 17.7 16.4 17.2 16.3
Medicaid 57.7 58.9 57.6 58.7
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Skilled mix in the first six months of 2008 was consistent with the same period in the prior year as we continue to focus on high-acuity residents and expand our Express Recovery Unit facilities. Skilled mix of 24.6% in the second quarter of 2008 reflected a decline from 25.7% in the first quarter of 2008, which is consistent with prior-year trends based on seasonality. We expect this downward trend to continue into the third quarter and to rebound in the fourth quarter.
The following table sets forth revenue by state and revenue by state as a percentage of total long-term care revenue for the periods (dollars in thousands):
Three Months Ended June 30,
2008 2007
Revenue Percentage of Revenue Percentage of
Dollars Revenue Dollars Revenue
California $ 65,787 41.4 % $ 63,615 48.2 %
Kansas 12,471 7.9 9,198 7.0
Missouri 14,033 8.8 12,953 9.8
Nevada 7,488 4.7 6,230 4.7
New Mexico 17,057 10.7 - -
Texas 42,116 26.5 40,057 30.3
Total $ 158,952 100.0 % $ 132,053 100.0 %
Six Months Ended June 30,
2008 2007
Revenue Percentage of Revenue Percentage of
Dollars Revenue Dollars Revenue
California $ 132,293 41.6 % $ 126,200 48.9 %
Kansas 22,949 7.2 18,393 7.1
Missouri 28,386 8.9 21,055 8.2
Nevada 14,907 4.7 12,374 4.8
New Mexico 34,426 10.8 - -
Texas 84,808 26.8 80,154 31.0
Total $ 317,769 100.0 % $ 258,176 100.0 %
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Assisted Living Facilities. Within our assisted living facilities, we
generate our revenue primarily from private pay sources, with a small portion
earned from Medicaid or other state specific programs.
Ancillary Service Segment
Rehabilitation Therapy. As of June 30, 2008, we provided rehabilitation
therapy services to a total of 189 healthcare facilities, 75 of which were our
facilities and 114 of which were unaffiliated facilities, compared to 179
facilities, 64 of which were our facilities and 115 of which were unaffiliated
facilities as of June 30, 2007. In addition, we have management contracts to
manage the rehabilitation therapy services for our ten healthcare facilities in
New Mexico. Rehabilitation therapy revenue derived from servicing our own
facilities is included in our revenue from skilled nursing facilities. Our
rehabilitation therapy business receives payment for services from the
third-party skilled nursing facilities that it serves based on negotiated
patient per diem rates or a negotiated fee schedule based on the type of service
rendered.
Hospice. We provide hospice care in California and New Mexico. We derive
substantially all of the revenue from our hospice business from Medicare and
Medicaid reimbursement for hospice services.
Regulatory and Other Governmental Actions Affecting Revenue
Our revenue is derived from services provided to patients in the following
payor classes (dollars in thousands):
Three Months Ended June 30,
2008 2007
Revenue Percentage Revenue Percentage
Dollars of Revenue Dollars of Revenue
Medicare $ 66,804 37.0 % $ 56,134 37.1 %
Medicaid 55,399 30.7 45,746 30.3
Subtotal Medicare and Medicaid 122,203 67.7 101,880 67.4
Managed Care 17,859 10.0 12,668 8.4
Private and Other 40,286 22.3 36,543 24.2
Total $ 180,348 100.0 % $ 151,091 100.0 %
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Six Months Ended June 30,
2008 2007
Revenue Percentage Revenue Percentage
Dollars of Revenue Dollars of Revenue
Medicare $ 134,399 37.2 % $ 111,421 37.6 %
Medicaid 110,893 30.7 88,359 29.9
Subtotal Medicare and Medicaid 245,292 67.9 199,780 67.5
Managed Care 35,997 10.0 24,418 8.3
Private and Other 79,786 22.1 71,548 24.2
Total $ 361,075 100.0 % $ 295,746 100.0 %
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We derive a substantial portion of our revenue from government Medicare and
Medicaid programs. For the six months ended June 30, 2008, we derived 37.2% and
30.7% of our total revenue from the Medicare and Medicaid programs,
respectively, and for the six months ended June 30, 2007, we derived 37.6% and
29.9% of our total revenue from the Medicare and Medicaid programs,
respectively. In addition, our rehabilitation therapy services, for which we
receive payment from private payors, are significantly dependent on Medicare and
Medicaid funding, as those private payors are generally reimbursed by these
programs.
Medicare. Medicare is a federal health insurance program for people age 65 or
older, people under age 65 with certain disabilities, and people of all ages
with End-Stage Renal Disease. The Medicare program has Part A hospital insurance
that helps to cover inpatient care in hospitals and in skilled nursing
facilities (not custodial or long-term care). It also helps cover hospice care
and some home health care. Skilled nursing facilities are paid on the basis of a
prospective payment system, or PPS. The PPS payment rates are adjusted for case
mix and geographic variation in wages and cover all costs of furnishing covered
skilled nursing facilities services (routine, ancillary, and capital-related
costs). The amount to be paid is determined by classifying each patient into a
resource utilization group, or RUG, category, which is based upon each patient's
acuity level. Payment rates have historically increased each Federal fiscal year
using a skilled nursing facilities market basket index.
On May 7, 2008, CMS published its proposed rule on the fiscal year 2009 per
diem payment rates for skilled nursing facilities, proposing a market basket
increase factor of 3.1 percent, which would result in an estimated increase in
aggregate payments by approximately $710 million. On July 31, 2008, CMS released
its final rule on the fiscal year 2009 per diem payment rates for skilled
nursing facilities. Under the final rule, CMS revised and rebased the skilled
nursing facility market basket, resulting in a 3.4% market basket increase
factor. Using this increase factor, the final rule increased aggregate payments
to skilled nursing facilities nationwide by approximately $780.0 million.
President Bush's proposed budget for 2009 includes a provision that would
establish a zero percent market basket update for fiscal years 2009 through
2011. The President's proposed market basket increase can be implemented only
through legislation passed by Congress. We cannot predict at this time whether
the President's proposal would be adopted and implemented.
CMS also proposed on May 7, 2008 to adjust the refinements to nine new
case-mix groups recently developed under the prospective payment system, or PPS,
for treating beneficiaries requiring extensive medical and rehabilitation
services. These new case-mix groups were designed to reflect the variability in
the use of non-therapy ancillary services, and under the proposed adjustment,
would result in a negative $770 million in payments to skilled nursing
facilities. In the final rule issued July 31, 2008, CMS decided to defer
consideration of the $770 million reduction in payments to skilled nursing
facilities until 2009 when the fiscal year 2010 per diem payment rates are set.
Recent legislation, effective July 15, 2008, known as the Medicare
Improvement for Patients and Providers Act of 2008 (H.R. 6331), extended certain
therapy cap exceptions. These caps, effective January 1, 2006, imposed a limit
to the annual amount that Medicare Part B (covering outpatient services) will
pay for outpatient physical, speech language and occupation therapy services for
each patient. These caps may result in decreased demand for rehabilitation
therapy services reimbursed under Part B but for the caps. The Deficit Reduction
Act of 2005, or DRA, established exceptions to the therapy caps for a variety of
circumstances. These exceptions were scheduled to expire on June 30, 2008 and
the recently enacted H.R. 6331 now extends the exception process through
December 31, 2009.
Medicare Part B also provides payment for certain professional services,
including professional consultations, office visits and office psychiatry
services, provided by a physician or practitioner located at a distant site.
Such telehealth services previously were reimbursed only if the patient was
located in the office of a physician or
practitioner, a critical access hospital, a rural health clinic, a federally
qualified health center or a hospital. The new H.R. 6331 now includes payment
for such telehealth services if the patient is in a skilled nursing facility. We
are unable to predict the impact of this aspect of the new legislation on our
revenues and business at this time.
Historically, adjustments to reimbursement levels under Medicare have had a
significant effect on our revenue. For a discussion of historic adjustments and
recent changes to the Medicare program and related reimbursement rates see
"Business - Sources of Reimbursement" in Part 1, Item 1 in our 2007 Annual
Report on Form 10-K filed with the Securities and Exchange Commission and "Risk
Factors - Reductions in Medicare reimbursement rates or changes in the rules
governing the Medicare program could have a material adverse effect on our
revenue, financial condition and results of operations" in Part 1, Item 1A of
our 2007 Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
Medicaid. Medicaid is a state-administered medical assistance program for the
indigent, operated by the individual states with the financial participation of
the federal government. Each state has relatively broad discretion in
establishing its Medicaid reimbursement formulas and coverage of service, which
must be approved by the federal government in accordance with federal
guidelines. All states in which we operate cover long-term care services for
individuals who are Medicaid eligible and qualify for institutional care.
Generally, Medicaid payments are made directly to providers, who must accept the
Medicaid reimbursement level as payment in full for services rendered, except in
New Mexico, which has implemented a managed Medicaid program where providers
receive Medicaid payments from insurance companies. Rapidly increasing Medicaid
spending, combined with slow state revenue growth, has led many states to
institute measures aimed at controlling spending growth. Given that Medicaid
outlays are a significant component of state budgets, we expect continuing cost
containment pressures on Medicaid outlays for skilled nursing facilities in the
states in which we operate. In addition, the Deficit Reduction Act of 2005
limited the circumstances under which an individual may become financially
eligible for Medicaid and nursing home services paid for by Medicaid.
Managed Care. Our managed care patients consist of individuals who are
insured by a third-party entity, typically called a senior Health Maintenance
Organization, or HMO, plan, or are Medicare beneficiaries who assign their
Medicare benefits to a senior HMO plan.
Private Pay and Other. Private pay and other sources consist primarily of
individuals or parties who directly pay for their services or are beneficiaries
of the Department of Veterans Affairs or hospice beneficiaries.
Critical Accounting Policies and Estimates Update
There have been no significant changes during the three- and six-month
periods ended June 30, 2008 to the items that we disclosed as our critical
accounting policies and estimates in our discussion and analysis of financial
condition and results of operations in our 2007 Annual Report on Form 10-K filed
with the Securities and Exchange Commission.
Results of Operations
The following table sets forth details of our revenue and earnings as a
percentage of total revenue for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
Revenue 100.0 % 100.0 % 100.0 % 100.0 %
Expenses:
Cost of services (exclusive of rent cost
of revenue and depreciation and
amortization shown below) 78.9 79.1 78.8 78.9
Rent cost of revenue 2.5 1.7 2.5 1.8
General and administrative 3.1 2.9 3.3 3.1
Depreciation and amortization 2.8 2.8 2.8 2.8
87.3 86.5 87.4 86.6
Other income (expenses):
Interest expense (5.1 ) (7.9 ) (5.2 ) (8.1 )
Interest income 0.1 0.4 0.1 0.3
Other income - 0.1 0.1 -
Equity in earnings of joint venture 0.4 0.2 0.3 0.3
Debt retirement costs - (7.7 ) - (3.9 )
Change in fair value of interest rate
hedge - - - -
Total other income (expenses), net (4.6 ) (14.9 ) (4.7 ) (11.4 )
Income (loss) before provision for income
taxes 8.1 (1.4 ) 7.9 2.0
Provision for (benefit from) income taxes 3.2 (0.4 ) 3.1 1.0
Net income (loss) 4.9 % (1.0 )% 4.8 % 1.0 %
EBITDA margin 16.0 % 8.9 % 15.9 % 12.6 %
Adjusted EBITDA margin 16.0 % 16.6 % 15.9 % 16.5 %
Three months ended June 30, Six months ended June 30,
2008 2007 2008 2007
Reconciliation of net income to EBITDA
and Adjusted EBITDA (in thousands):
Net income (loss) $ 8,924 $ (1,553 ) $ 17,368 $ 3,101
Interest expense, net of interest income 9,039 11,339 18,478 23,104
Provision for (benefit from) income
taxes 5,830 (556 ) 11,296 2,822
Depreciation and amortization expense 5,073 4,239 10,233 8,200
EBITDA 28,866 13,469 57,375 37,227
Premium on redemption of debt and
write-off of related deferred financing
costs - 11,648 - 11,648
Change in fair value of interest rate
hedge - - - 33
Adjusted EBITDA $ 28,866 $ 25,117 $ 57,375 $ 48,908
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We define EBITDA as net income (loss) before depreciation, amortization and interest expense (net of interest income) and the provision for (benefit from) income taxes. EBITDA margin is EBITDA as a percentage of revenue. We calculate Adjusted EBITDA by adjusting EBITDA (each to the extent applicable in the appropriate period) for:
discontinued operations, net of tax;
the effect of a change in accounting principle, net of tax;
the change in fair value of an interest rate hedge;
reversal of a charge related to the decertification of a facility;
gains or losses on sale of assets;
provision for the impairment of long-lived assets;
the write-off of deferred financing costs of extinguished debt; and
the premium we paid in connection with the repayment of debt using a portion of the proceeds of our initial public offering.
We believe that the presentation of EBITDA and Adjusted EBITDA provides useful information regarding our operational performance because they enhance . . .
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