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| ANCI > SEC Filings for ANCI > Form 10-Q on 9-Nov-2009 | All Recent SEC Filings |
9-Nov-2009
Quarterly Report
GENERAL
Management's discussion and analysis provides a review of the Company's operating results for the three and nine months ended September 30, 2009 and its financial condition at September 30, 2009. The focus of this review is on the underlying business reasons for significant changes and trends affecting the revenues, net income and financial condition of the Company. This review should be read in conjunction with the accompanying unaudited consolidated financial statements and the audited consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2008.
OVERVIEW
American CareSource Holdings, Inc. (the "Company", "ACS", "we", "us", or "our") is an ancillary benefits management company that offers cost effective access to a comprehensive national network of ancillary healthcare service providers. The Company's healthcare payor customers, which include preferred provider organizations ("PPOs"), third party administrators ("TPAs"), insurance companies, large self-funded organizations and Taft-Hartley union plans (i.e., employee benefit plans that are self-administered under collective bargaining agreements), engage the Company to provide them with a complete outsourced solution designed to manage each customer's obligations to its covered persons. The Company offers its customers this solution by:
· providing payor customers with a comprehensive network of ancillary healthcare services providers that is tailored to each payor customer's specific needs and is available to each payor customer's covered persons for covered services;
· providing payor customers with claims management, reporting, and processing and payment services;
· performing network/needs analysis to assess the benefits to payor customers of adding additional/different service providers to the payor customer-specific provider networks; and
· credentialing network service providers for inclusion in the payor customer-specific provider networks.
The Company's business model, illustrating the relationships among the persons involved, directly or indirectly, in the Company's business and its generation of revenue and expenses is depicted below:
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Our clients route healthcare claims to us after service has been performed by participant providers in our network. We process those claims and charge the client/payor according to its contractual rate for the services according to our contract with the client/payor. In processing the claim, we are paid directly by the client or the insurer for the service. We then pay the provider of service according to its independently-negotiated contractual rate. We assume the risk of generating positive margin, the difference between the payment we receive for the service and the amount we are obligated to pay the provider of service.
The Company recognizes revenues for ancillary healthcare services when services by providers have been authorized and performed, the claim has been billed to the payor and collections from payors are reasonably assured. Cost of revenues for ancillary healthcare services consist of amounts due to providers for providing ancillary health care services, client administration fees paid to our client payors to reimburse them for routing the claims to us for processing, and the Company's related direct labor and overhead of processing invoices, collections and payments. The Company is not liable for costs incurred by independent contract service providers until payment is received by us from the payors. The Company recognizes actual or estimated liabilities to independent contract service providers as the related revenues are recognized.
The Company markets its products to preferred provider organizations ("PPOs"), third party administrators ("TPAs"), insurance companies, large self-funded organizations and Taft-Hartley union plans, such as employee benefit plans that are self-administered under collective bargaining agreements.
The Company is seeking continuing growth in the number of client payor and service provider relationships by focusing on providing in-network services for its payors and aggressively pursuing additional PPOs, TPAs and other direct payors as its primary sales target. The Company believes that this strategy should increase the volume of claims the Company can process in addition to the expansion in the number of lives that are eligible to receive ancillary health care benefits. No assurances can be given that the Company can expand its service provider or payor relationships, nor that any such expansion will result in an improvement in the results of operations of the Company.
Although the Company has continued to experience revenue growth from 2008 to 2009, its financial condition has been impacted by the current economic crisis. First, the unemployment rate has caused fewer people to participate in insurance programs with our customers. Second, plan participants, seeking to spend less money, appear to be making less frequent use of some ancillary services. Third, the possibility exists that client and, or provider consolidation within our industry could adversely affect our business. To the extent that these trends continue, or become worse, we may receive less revenue and our profitability and growth could be adversely affected, depending on the extent of the declines. Finally, as with any business, the deterioration of the financial condition or sale or change of control of our significant customers (with two customers accounting for in excess of 84% and 88% of our revenue during the three and nine months ended September 30, 2009, respectively) could have a corresponding adverse effect on us. Additional risks that we do not consider material, or of which we are not currently aware, may also have an adverse impact on us.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's discussion and analysis of our financial condition and results of operations is based upon our condensed consolidated financial statements. These condensed consolidated financial statements have been prepared following the requirements of accounting principles generally accepted in the United States ("GAAP") for interim periods and require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, provider cost recognition, the resulting contribution margins, amortization and potential impairment of intangible assets and goodwill and stock-based compensation expense. As these are condensed consolidated financial statements, you should also read expanded information about our critical accounting policies and estimates provided in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" under the heading "Critical Accounting Policies," included in our Annual Report on Form 10-K for the year ended December 31, 2008. There have been no material changes to our critical accounting policies and estimates from the information provided in our Form 10-K for the year ended December 31, 2008.
ANALYSIS OF RESULTS OF OPERATIONS
Revenues
The following table sets forth a comparison of our revenues for the periods
presented ended September 30:
Third Quarter Nine Months
Change Change
($ in thousands) 2009 2008 $ % 2009 2008 $ %
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The Company's net revenues are generated from ancillary healthcare service claims. Revenue is recognized when we bill our client payors for services performed. The increase in revenue for the three and nine months ended September 30, 2009 as compared to the same periods in 2008 was due primarily to the progression of our client relationships, which allowed the Company access to a greater number of payors and allowed us to benefit from the external growth and expansion of our clients. In addition, revenues were positively impacted by growth in our ancillary service provider network.
During the three months and nine months ended September 30, 2009, revenues from seven clients (one of which is an affiliate of one of our two existing significant customers), all added in 2008 increased over the same prior year periods by $1.5 million and $3.2 million, respectively, which was due to the progression and development of our client relationships, resulting in an increased number of payors and increased claims volume. Clients added during 2009 contributed an incremental $2.1 million and $3.2 million for the three and nine months ended September 30, 2009. The increases are a direct result of a concentrated effort to diversify our revenue base. For the three and nine months ended September 30, 2009, our two significant customers accounted for 84% and 88%, respectively, as compared to 97% and 98% for the same periods in 2008, respectively.
The increase in revenues in the third quarter of 2009 from clients added in 2008 and 2009, was offset by a decline in revenues from our legacy clients (those added in 2007 or earlier) of $1.5 million, or 10%. The decrease was attributable primarily to reductions in revenue from our two largest customers, which were impacted by macro-economic factors, as previously discussed. Revenues from those same clients added in 2007 and prior increased $4.4 million, or 11%, for the nine months ended September 30, 2009 compared to the prior year period.
The following table details revenues generated by clients and the periods in which those clients were added for the periods presented ended September 30 (amounts in thousands):
Year of implementation 2007 and prior 2008 2009 Total Third quarter 2009 $ 14,355 $ 1,754 $ 2,126 $ 18,235 Third quarter 2008 15,886 225 - 16,111 Nine months 2009 $ 44,747 $ 3,478 $ 3,200 $ 51,425 Nine months 2008 40,395 234 - 40,629 |
The Company will continue to seek growth in the number of client payor and service provider relationships by focusing on providing in-network services for its payors and aggressively pursuing additional PPOs, TPAs and other direct payors as its primary sales target. In addition, we are targeting service providers that will specifically enhance our network as determined through collaboration with our clients. The Company believes that this strategy should increase the volume of claims the Company can process, as well as expand the number of lives that are eligible to receive ancillary health care benefits. No assurances can be given that the Company can expand its service provider or payor relationships, nor that any such expansion will result in an improvement in the results of operations of the Company.
In addition, during the three and nine months ended September 30, 2009, the number of billed claims increased by 29% and 42%, respectively, compared to the same prior year periods. The increase in claim volume was driven by the expansion of existing client relationships, new clients implemented during the first nine months of 2009 as well as through expansion of our network of service providers.
Revenue per claim declined for the periods presented due to lower than estimated collection rates related to our new client relationships, limited benefits offered by certain recently implemented clients and the change in mix of provider specialties driving our claim volume during the first nine months of 2009. In particular, we have experienced accelerated growth in categories such as laboratory services with lower average revenue per claim while other higher average revenue per claim categories such as dialysis services have not grown as rapidly. The decline was offset somewhat by an increase in claims from the diagnostic imaging services category. Revenues from the diagnostic imaging services increased as a percent of total revenue for the third quarter 2009 as compared to the same prior year period as a result of our expanding relationship with a third-party which manages and maintains a national imaging network. Revenue per claim can vary significantly depending upon factors including the types of services consumed by clients members, the quantity of services delivered, client negotiated pricing, provider negotiated service rates, the rate of collections based upon the client and members financial responsibility and other factors. The following table provides information with respect to claims processed, claims billed and the associated revenue per claim metrics for the periods ended September 30:
Three months ended Nine months ended
2009 2008 2009 2008
Claims processed (in thousands) 117 87 329 220
Claims billed (in thousands) 101 78 282 198
Revenue per processed claim $ 156 $ 185 $ 156 $ 185
Revenue per billed claim 181 207 182 205
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Cost of Revenues and Contribution Margin
The following table sets forth a comparison of the components of our cost of
revenues, for the three months ended September 30:
Third Quarter
Change
% of % of
($ in thousands) 2009 revenues 2008 revenues $ %
Provider
payments $ 13,800 75.7 % $ 11,744 72.9 % $ 2,056 17.5 %
Administrative
fees 900 4.9 928 5.8 (28 ) (3.0 )
Claims
administration
and provider
development 1,178 6.5 882 5.5 296 33.6
Total cost of
revenues $ 15,878 87.1 % $ 13,554 84.2 % $ 2,324 17.1 %
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The following table sets forth a comparison of the components of our cost of revenues, for the nine months ended September 30:
Nine Months
Change
% of % of
($ in thousands) 2009 revenues 2008 revenues $ %
Provider
payments $ 38,670 75.2 % $ 26,690 73.1 % $ 11,980 44.9 %
Administrative
fees 2,495 4.9 2,381 5.9 114 4.8
Claims
administration
and provider
development 3,258 6.3 2,395 5.9 863 36.0
Total cost of
revenues $ 44,423 86.4 % $ 31,466 77.4 % $ 12,957 41.1 %
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Cost of revenues is comprised of payments to our providers, administrative fees paid to our client payors for converting claims to electronic data interchange and routing them to both the Company for processing and to their payors for payment, and the costs of our claims administration and provider development organizations. Payments to providers is the largest component of our cost of revenues and it consists of our payments for ancillary care services in accordance with contracts negotiated separately with providers for specific ancillary services.
In the third quarter of 2009, cost of revenues related to payments to providers increased as compared to the third quarter of 2008 as a result of increased claims volume and increased revenues, and the fluctuation in the mix of types of services provided by the Company. Payments made to providers as a percent of net revenues were 75.7% during the third quarter of 2009 and 72.9% during the same period in 2008. Provider payments as a percent of revenues increased due primarily to lower margins in our laboratory services, dialysis services and infusion services specialties. These category margins were impacted by the execution of new provider agreements, pricing for associated services on recently implemented and existing client contracts, the mix of services delivered in each category, the mix of providers delivering the services and overall pricing pressures which have resulted in lower client rates.
Further, in the third quarter of 2009, administrative fees increased due to increased claim volume as a result of expanded relationships with existing clients as well as increased services provided to recently implemented clients. Administrative fees paid to clients as a percent of net revenues were 4.9% during the third quarter of 2009 and 5.8% during the same period in 2008. The decrease in administrative fees as a percent of net revenues was due to a shift in revenues to clients that carry lower contracted administrative fee rates.
During the nine months ended September 30, 2009, provider payments were 75.2% of revenues, compared to 73.1% for the same prior year period. Provider payments as a percent of revenues increased due primarily to lower margins in our dialysis and infusion services specialties, offset by improvements in margins in our laboratory and diagnostic imaging specialties. These category margins were impacted by the execution of new provider agreements, pricing for associated services on recently implemented and existing client contracts, the mix of services delivered in each category, the mix of providers delivering the services and overall pricing pressures which have resulted in lower client rates.
Further, during the first nine months of 2009, administrative fees increased due to increased claim volume as a result of expanded relationships with existing clients as well as recently implemented clients. Administrative fees paid to clients as a percent of net revenues were 4.9% during the first nine months of 2009 and 5.9% during the same period in 2008. The decrease in administrative fees as a percent of net revenues was due to a shift in revenues to clients that carry lower contracted administrative fee rates.
The detail of the costs of our claims administration and provider development organizations are as follows for the periods presented ending September 30 (amounts in thousands):
Third Quarter
Claims Administration Provider Development Total
Increase Increase Increase
2009 2008 (Decrease) 2009 2008 (Decrease) 2009 2008 (Decrease)
Total wages,
incentives
and benefits $ 602 $ 471 $ 131 28 % $ 409 $ 222 $ 187 84 % $ 1,011 $ 693 $ 318 46 %
Contract
labor and
consulting
fees 142 194 (52 ) -27 % 24 3 21 nm % 166 197 (31 ) (16) %
Capitalized
development
costs (135 ) (68 ) (67 ) 99 % - - - 0 % (135 ) (68 ) (67 ) 98 %
Other 37 2 35 nm % 22 9 13 144 % 59 11 48 436 %
Allocation of
shared
overheads (35 ) (19 ) (16 ) 84 % 112 68 44 65 % 77 49 28 57 %
$ 611 $ 580 $ 31 5 % $ 567 $ 302 $ 265 88 % $ 1,178 $ 882 $ 296 34 %
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Our claims administration organization consists of our operations and information technology groups. Our operations group is responsible for all aspects of the claims management and processing including billing, quality assurance and collections efforts. Our information technology group is responsible for maintaining and enhancing the technological capabilities and applications with the claims management process. Our provider development group is responsible for developing our network of ancillary healthcare service providers, which includes contracting with providers to be included in the network, credentialing new service providers and maintaining a relationship with existing providers, all for the purpose of enhancing our ancillary service provider network offering to our client payors.
The increase in costs during the second quarter of 2009 as compared to the same prior year period is due primarily to the following:
· Investments in our claims administration and provider development organizations. Wages, incentives and benefits increased due to resource additions. Headcount as of September 30, 2009 and 2008 were as follows: Operations -- 20 and 15, respectively; Information Technology -- 10 and 8, respectively; and Provider Development -- 13 and 11, respectively. The increases in headcount were made to facilitate growth through the enhancement of our network of ancillary care providers, and to grow our claims processing and management capabilities consistent with growth in claims volume;
· We incurred incremental costs in our provider development organization; consultants were hired which assisted us in improving the integrity of our provider data, creating mechanisms to manage provider credentialing to facilitate greater quality in our network and supplementing our provider data; and
· The aforementioned cost increases were offset by a decrease in consulting fees related to an information technology initiative in which a platform was developed to create data analysis efficiencies. The fees were primarily incurred during the second and third quarters of 2008.
The detail of the costs of our claims administration and provider development organizations are as follows for the periods presented ending September 30 (amounts in thousands):
Nine Months
Claims Administration Provider Development Total
Increase Increase Increase
2009 2008 (Decrease) 2009 2008 (Decrease) 2009 2008 (Decrease)
Total wages,
incentives and
benefits $ 1,744 $ 1,298 $ 446 34 % $ 1,089 $ 596 $ 493 83 % $ 2,834 $ 1,894 $ 940 50 %
Contract labor
and consulting
fees 431 540 (109 ) -20 % 27 13 14 107 % 458 553 (95 ) (17) %
Capitalized
development
costs (464 ) (352 ) (112 ) 32 % - - - 0 % (464 ) (352 ) (112 ) 32 %
Other 100 60 40 66 % 116 15 101 673 % 216 75 141 188 %
Allocation of
shared
overheads (84 ) 46 (130 ) 283 % 299 179 120 67 % 215 225 (10 ) 4 %
$ 1,727 $ 1,592 $ 135 8 % $ 1,531 $ 803 $ 728 91 % $ 3,258 $ 2,395 $ 863 36 %
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The increase in costs during the nine months ended September 30, 2009 as compared to the same prior year period is due primarily to the following:
· Investments in our claims administration and provider development organizations. Wages, incentives and benefits increased due to resource additions as described above;
· The utilization of consultants by our provider development organization which assisted us in improving the integrity of our provider data, creating mechanisms to manage provider credentialing to facilitate greater quality in our network and supplementing our provider data; and
· The aforementioned cost increases were offset by a decrease in consulting fees related to an information technology initiative in which a platform was developed to create data analysis efficiencies. The fees were primarily incurred during the second and third quarters of 2008.
The following table sets forth a comparison of contribution margin percentage for the periods presented ending September 30:
Second Quarter Nine months
Change Change
2009 2008 % pts 2009 2008 % pts
Contribution
margin
percentage 12.9 % 15.9 % (3.0) % 13.6 % 15.2 % (1.6) %
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Contribution margin percentage is calculated by dividing the difference between net revenues and total cost of revenues by net revenues. The contribution margin was impacted by changes in its components for the three and nine month periods as follows: Provider payments - declines of 2.2% and 1.8%, respectively; administrative fees - increases of 0.9% and 1.0%, respectively; and cost of claims administration and provider development - declines of 1.5% and 0.7%, respectively. The overall decline in contribution margin percentage was discussed in detail in the preceding comments. Our contribution margin percentage fluctuates from quarter to quarter due to changes in the prices we charge our client payors as compared to the financial terms of our provider agreements, changes in costs of our claims administration and provider development organizations and changes in the mix of services we provide. There can be no assurances that we will be able to maintain contribution margin at current levels, either in absolute or in percentage terms.
Selling, General and Administrative Expenses
The following table sets forth a comparison of our selling, general and
administrative ("SG&A") expenses for the three months ended September 30:
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