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| SKH > SEC Filings for SKH > Form 10-Q/A on 29-Jun-2009 | All Recent SEC Filings |
29-Jun-2009
Quarterly Report
policies and practices. As a result of its review, management recommended to the
Audit Committee that a restatement was required. The Audit Committee initiated
and directed a special investigation regarding the accounting and reporting
issues raised by the former employee's improper dating of accounts receivable.
Under the oversight of the Audit Committee, internal audit personnel with the
assistance of outside legal counsel and other advisors, investigated the matter
and reviewed our internal controls related to accounts receivable allowance for
doubtful accounts related to the LTC segment. The Company's investigation found
no evidence that anyone else within the Company knew of or participated in the
improper conduct.
Management conducted a review of whether the understated amounts of accounts
receivable allowance for doubtful accounts and other corresponding financial
data were material under Staff Accounting Bulletin No. 99, Materiality ("SAB
99") and Staff Accounting Bulletin No. 108, Considering Effects of Prior
Misstatements When Quantifying Misstatements in Current Year Financial
Statements ("SAB 108"), for one or more periods. Management determined that the
errors in the previously-reported amounts of allowance for doubtful accounts
related to its LTC accounts receivable and the corresponding adjustments
necessary to properly state the allowance for doubtful accounts related to its
LTC accounts receivable were material for the annual and quarterly periods in
fiscal years 2006 through 2008 and the first quarter of 2009. Accordingly,
management recommended to the Audit Committee that a restatement was required.
Note 2 to our restated condensed consolidated financial statements sets
forth, in a comparative presentation, the previously reported, restatement
adjustment and restated amounts for those accounts in the consolidated balance
sheets and the consolidated statements of operations and cash flow affected by
the restatement.
Throughout the following Management's Discussion and Analysis of Financial
Condition and Results of Operations, all referenced amounts reflect the balances
and amounts on a restated basis.
Revenue
Revenue by Service Offering
We operate our business in two reportable segments: long-term care services,
which include the operation of skilled nursing and assisted living facilities
and is the most significant portion of our business, and ancillary services,
which include our integrated and third-party rehabilitation therapy and hospice
businesses. Our administrative and consultative services which are attributable
to the reportable segments are allocated accordingly.
In our long-term care services segment, we derive the majority of our revenue
by providing skilled nursing care and integrated rehabilitation therapy services
to residents in our network of skilled nursing facilities. The remainder of our
long-term care segment revenue is generated by our assisted living facilities.
In our ancillary services segment, we derive revenue by providing related
healthcare services, including our rehabilitation therapy services provided to
third-party facilities, and hospice care.
The following table shows the revenue and percentage of our total revenue generated by each of these segments for the periods presented (dollars in thousands):
Three Months Ended March 31,
2009 2008
Revenue Revenue Revenue Revenue Increase/(Decrease)
Dollars Percentage Dollars Percentage Dollars Percentage
Long-term care services:
Skilled nursing
facilities $ 159,410 84.2 % $ 154,283 85.4 % $ 5,127 3.3 %
Assisted living
facilities 6,126 3.2 4,534 2.5 1,592 35.1
Total long-term care
services 165,536 87.4 158,817 87.9 6,719 4.2
Ancillary services :
Third-party
rehabilitation therapy
services 18,236 9.6 17,480 9.7 756 4.3
Hospice 5,679 3.0 4,430 2.4 1,249 28.2
Total ancillary services 23,915 12.6 21,910 12.1 2,005 9.2
Total $ 189,451 100.0 % $ 180,727 100.0 % $ 8,724 4.8 %
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Sources of Revenue
The following table sets forth revenue by state and revenue by state as a
percentage of total revenue for the periods (dollars in thousands):
Three Months Ended March 31,
2009 2008
Percentage of Percentage of
Revenue Dollars Revenue Revenue Dollars Revenue
California $ 84,856 44.8 % $ 81,603 45.3 %
Texas 47,378 25.0 47,071 26.0
New Mexico 21,752 11.5 19,428 10.7
Kansas 13,893 7.3 10,844 6.0
Missouri 13,814 7.3 14,351 7.9
Nevada 7,606 4.0 7,420 4.1
Other 152 0.1 10 -
Total $ 189,451 100.0 % $ 180,727 100.0 %
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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 as a percentage of total patient days and the level of skilled mix for our skilled nursing facilities:
Three Months Ended March 31,
2009 2008
Medicare 17.0 % 18.3 %
Managed care 7.3 7.4
Skilled mix 24.3 25.7
Private pay and other 17.9 16.8
Medicaid 57.8 57.5
Total 100.0 % 100.0 %
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Assisted Living Facilities. Within our assisted living facilities, which are
primarily in Kansas, 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 March 31, 2009, we provided rehabilitation
therapy services to a total of 178 healthcare facilities, including 66 of our
facilities, compared to 177 facilities, including 64 of our facilities, as of
March 31, 2008. In addition, we have 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.
Regulatory and Other Governmental Actions Affecting Revenue
The following table summarizes the amount of revenue that we received from
each of the payor classes (dollars in thousands):
Three Months Ended March 31,
2009 2008
Revenue Revenue Revenue Revenue
Dollars Percentage Dollars Percentage
Medicare $ 68,826 36.3 % $ 67,596 37.4 %
Medicaid 58,467 30.9 55,493 30.7
Subtotal Medicare and Medicaid 127,293 67.2 123,089 68.1
Managed Care 18,273 9.6 18,139 10.0
Private pay and other 43,885 23.2 39,499 21.9
Total $ 189,451 100.0 % $ 180,727 100.0 %
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We derive a substantial portion of our revenue from government Medicare and
Medicaid programs. 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 often 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 July 31, 2008, the Centers for Medicare and Medicaid Services, or 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. Additionally, in the final rule issued July 31, 2008, CMS
decided to defer consideration of a possible $770.0 million reduction in
payments to skilled nursing facilities related to a proposed adjustment to the
refinement of nine new case mix groups until 2009 when the fiscal year 2010 per
diem payment rates are set. While the federal fiscal year 2008 Medicare skilled
nursing facility payment rates did not reduce payments to skilled nursing
facilities, the loss of revenue associated with future changes in skilled
nursing facility payments could, in the future, have an adverse impact on our
financial condition or results of operations.
On July 15, 2008, the Medicare Improvement for Patients and Providers Act of
2008 (H.R. 6331) became effective and 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 occupational therapy services for each patient. These caps
may result in decreased demand for rehabilitation therapy services that would be
otherwise reimbursable 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, but
were extended by H.R. 6331 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. H.R. 6331 now includes payment for such telehealth services if the
patient is in a skilled nursing facility, and if the services provided are
separately payable under the Medicare Physician Fee Schedule when furnished in a
face-to-face encounter at a skilled nursing facility, effective January 1, 2009.
Beginning January 1, 2006, the Medicare Modernization Act of December 2003,
or MMA, implemented a major expansion of the Medicare program through the
introduction of a prescription drug benefit under Medicare Part D. Medicare
beneficiaries who elect Part D coverage and are dual eligible beneficiaries,
those eligible for both Medicare and Medicaid benefits, are enrolled
automatically in Part D and have their outpatient prescription drug costs
covered by this Medicare benefit, subject to certain limitations. Most of the
skilled nursing facility residents we serve whose drug costs are currently
covered by state Medicaid programs are dual eligible beneficiaries. Accordingly,
Medicaid is no longer a significant payor for the prescription pharmacy services
provided to these residents.
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 2008 Annual
Report on Form 10-K filed with the Securities and Exchange Commission and "Risk
Factors -Reductions in Medicare reimbursement rates, including annual caps that
limit the amounts that can be paid for outpatient therapy services rendered to
any Medicare beneficiary, 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 2008 Annual Report on Form
10-K/A 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. However, California has extended its cost-based Medi-Cal reimbursement
system enacted through Assembly Bill 1629 through the 2009-2010 and 2010-2011
rate years with a growth rate of up to five (5) percent for both years.
Nevertheless, 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 senior 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
During the three months ended March 31, 2009, there were no significant
changes 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 2008 Annual Report on Form 10-K/A 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 March 31,
2009 2008
Revenue 100.0 % 100.0 %
Expenses (as restated) :
Cost of services (exclusive of rent cost of revenue and
depreciation and amortization shown below) (as restated) 79.3 79.1
Rent cost of revenue 2.4 2.5
General and administrative 3.3 3.4
Depreciation and amortization 2.9 2.8
87.9 87.8
Other income (expenses):
Interest expense (4.3 ) (5.3 )
Interest income 0.1 0.1
Other income - 0.1
Equity in earnings of joint venture 0.4 0.2
Total other income (expenses), net (3.8 ) (4.9 )
Income before provision for income taxes (as restated) 8.3 7.3
Provision for income taxes (as restated) 3.0 2.9
Net income (as restated) 5.3 % 4.4 %
EBITDA margin (as restated) 15.4 % 15.4 %
Adjusted EBITDA Margin (as restated) 15.4 % 15.4 %
Three Months Ended March 31,
2009 2008
Reconciliation of net income to EBITDA and Adjusted EBITDA
(in thousands):
Net income (as restated) $ 10,003 $ 7,984
Interest expense, net of interest income 7,899 9,439
Provision for income taxes (as restated) 5,751 5,167
Depreciation and amortization expense 5,477 5,160
EBITDA (as restated) 29,130 27,750
Loss on disposal of asset 60 -
Adjusted EBITDA (as restated) $ 29,190 $ 27,750
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We define EBITDA as net income before depreciation, amortization and interest
expense (net of interest income) and the provision for 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:
• 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; and
• the write-off of deferred financing costs of extinguished debt.
We believe that the presentation of EBITDA and Adjusted EBITDA provides
useful information regarding our operational performance because they enhance
the overall understanding of the financial performance and prospects for the
future of our core business activities.
Specifically, we believe that a report of EBITDA and Adjusted EBITDA provides
consistency in our financial reporting and provides a basis for the comparison
of results of core business operations between our current, past and future
periods. EBITDA and Adjusted EBITDA are two of the primary indicators management
uses for planning and forecasting in future periods, including trending and
. . .
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