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AMSG > SEC Filings for AMSG > Form 10-Q on 5-Nov-2012All Recent SEC Filings

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Form 10-Q for AMSURG CORP


5-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains certain forward-looking statements (all statements other than with respect to historical fact) within the meaning of the federal securities laws, which are intended to be covered by the safe harbors created thereby. Investors are cautioned that all forward-looking statements involve known and unknown risks and uncertainties including, without limitation, those described in this report and in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and listed below in this report, some of which are beyond our control. Although we believe that the assumptions underlying the forward-looking statements contained herein are reasonable, any of the assumptions could be inaccurate. Therefore there can be no assurance that the forward-looking statements included in this report will prove to be accurate. Actual results could differ materially and adversely from those contemplated by any forward-looking statement. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that our objectives and plans will be achieved. We undertake no obligation to publicly release any revisions to any forward-looking statements in this discussion to reflect events and circumstances occurring after the date hereof or to reflect unanticipated events.

Forward-looking statements and our liquidity, financial condition and results of operations, may be affected by the following risks and uncertainties and the other risks and uncertainties discussed in this report, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 under "Item 1A. - Risk Factors" and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 under "Item 1A. - Risk Factors," as well as other unknown risks and uncertainties:

the risk that payments from third-party payors, including government healthcare programs, may decrease or not increase as our costs increase;

adverse developments affecting the medical practices of our physician partners;

our ability to maintain favorable relations with our physician partners;

our ability to compete for physician partners, managed care contracts, patients and strategic relationships;

our ability to acquire and develop additional surgery centers on favorable terms;

our ability to grow revenues by increasing procedure volume while maintaining operating margins and profitability at our existing centers;

our ability to manage the growth in our business;

our ability to obtain sufficient capital resources to complete acquisitions and develop new surgery centers;

adverse weather and other factors beyond our control that may affect our surgery centers;

adverse impacts on our business associated with current and future economic conditions;

our failure to comply with applicable laws and regulations;

the risk of changes in legislation, regulations or regulatory interpretations that may negatively affect us;

the risk of becoming subject to federal and state investigation;

uncertainties regarding the impact of the Health Reform Law;

the risk of regulatory changes that may obligate us to buy out the ownership interests of physicians who are minority owners of our surgery centers;

potential liabilities associated with our status as a general partner of limited partnerships;

liabilities for claims brought against our facilities;

our legal responsibility to minority owners of our surgery centers, which may conflict with our interests and prevent us from acting solely in our best interests;

potential write-off of all or a portion of intangible assets; and

potential liabilities relating to the tax deductibility of goodwill.


Item. 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)

Overview

We acquire, develop and operate ambulatory surgery centers, or centers or ASCs, in partnership with physicians. As of September 30, 2012, we had 229 operating ASCs, of which we owned a majority interest (primarily 51%) in 226 ASCs and owned a minority interest in three ASCs (one of which is consolidated). The following table presents the number of procedures performed at our continuing centers and changes in the number of ASCs in operation, under development and under letter of intent for the three and nine months ended September 30, 2012 and 2011. An ASC is deemed to be under development when a limited partnership or limited liability company has been formed with the physician partners to develop the ASC.

                                              Three Months Ended         Nine Months Ended
                                                 September 30,             September 30,
                                               2012        2011         2012          2011

Procedures                                    375,376     347,369     1,143,556     1,003,970
Continuing centers in operation, end of
period (consolidated)                             227         221           227           221
Continuing centers in operation, end of
period (unconsolidated)                             2           2             2             2
Average number of continuing centers in
operation, during period                          227         212           225           206
New centers added during period                     1          19             3            25
Centers discontinued during period                  -           2             2             6
Centers under development, end of period            -           1             -             1
Centers under letter of intent, end of
period                                             15           5            15             5

Of the continuing centers in operation at September 30, 2012, 148 centers performed gastrointestinal endoscopy procedures, 39 centers performed procedures in multiple specialties, 35 centers performed ophthalmology procedures and seven centers performed orthopedic procedures. We intend to expand primarily through the acquisition and development of additional ASCs and through future same-center growth. During the nine months ended September 30, 2012, we experienced same-center revenue growth of 3%. We estimate that 1% of this increase was a result of improved winter weather conditions in 2012 compared to 2011. We expect our same-center revenue growth for the fiscal year ending December 31, 2012 to be 3%. Our growth strategy also includes the acquisition and development of additional surgery centers. We expect to acquire surgery centers during 2012 that generate annualized operating income in aggregate of approximately $60 million. This estimate is a significant increase from our previous acquisition target of centers generating annual operation income of $25 million to $29 million. We believe the unresolved budget and tax issues facing the federal government have accelerated physicians' interest to partner with us. We believe the increase in potential acquisition opportunities included in our centers under letter of intent as of September 30, 2012 is reflective, in part, of this acceleration. We anticipate that because the majority of these acquisitions would occur in the latter part of 2012, their contribution to our 2012 operating income would not be significant. There can be no assurance, however, that we will be successful in completing these acquisitions. While we expect to see continued momentum in acquisition opportunities beyond 2012, we believe that our annual acquisition targets will return to ranges closer to historical levels.

While we own less than 100% of each of the entities that own the centers, our consolidated statements of earnings include 100% of the results of operations of each of our consolidated entities, reduced by the noncontrolling partners' interests share of the net earnings or loss of the surgery center entities. The noncontrolling ownership interest in each limited partnership or limited liability company is generally held directly or indirectly by physicians who perform procedures at the center. Our share of the profits and losses of two non-consolidated entities are reported in equity in earnings of unconsolidated affiliates in our statement of earnings.

Sources of Revenues

Substantially all of our revenues are derived from facility fees charged for surgical procedures performed in our surgery centers. This fee varies depending on the procedure, but usually includes all charges for operating room usage, special equipment usage, supplies, recovery room usage, nursing staff and medications. Facility fees do not include the charges of the patient's surgeon, anesthesiologist or other attending physicians, which are billed directly. At certain of our centers, our revenues include charges for anesthesia services delivered by medical professionals employed or contracted by our centers. Our revenues are recorded net of estimated contractual adjustments from third-party medical service payors.

ASCs depend upon third-party reimbursement programs, including governmental and private insurance programs, to pay for services rendered to patients. The amount of payment a surgery center receives for its services may be adversely affected by market and cost factors as well as other factors over which we have no control, including changes to the Medicare and Medicaid payment systems and the cost containment and utilization decisions of third-party payors. We derived approximately 28% and 31% of our revenues in the nine months ended September 30, 2012 and 2011, respectively, from governmental healthcare programs, primarily Medicare and Medicare managed programs, and the remainder from a wide mix of commercial payors and patient co-pays and deductibles. The Medicare program currently pays ASCs in accordance with predetermined fee schedules.

Effective January 1, 2008, CMS revised the payment system for services provided in ASCs, and the phase-in of the revised rates was completed in 2011. Under the revised payment system, ASCs are paid based upon a percentage of the payments to hospital outpatient departments pursuant to the


Item. 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)

hospital outpatient prospective payment system and reimbursement rates for ASCs are increased annually based on increases in the consumer price index, or CPI. The revised payment system resulted in a significant reduction in the reimbursement rates for gastroenterology procedures, which comprised approximately 75% of the procedures performed by our surgery centers, and certain ophthalmology and pain procedures. We estimate that our net earnings per share were negatively impacted by the revised payment system by $0.05 in 2008, an additional $0.07 in 2009, an additional $0.06 in 2010 and an additional $0.05 in 2011.

Effective for fiscal year 2011 and subsequent years, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or the Health Reform Law, provides for the annual CPI increases applicable to ASCs to be reduced by a productivity adjustment, which will be based on historical nationwide productivity gains. The final reimbursement rates announced by CMS in November 2011 for 2012, reflect a 1.6% net increase, which we estimate will positively impact our 2012 revenue by approximately $5.0 million. There can be no assurance that CMS will not further revise the payment system, or that any annual CPI increases will be material. We estimate that recently announced final reimbursement rates for 2013 by CMS would positively impact our 2013 revenue by approximately $2.5 million, which is $1.5 million less than we had estimated based on the preliminary rates announced in July 2012.

Pursuant to the Budget Control Act of 2011, or BCA, a bipartisan joint congressional committee was formed to identify deficit reductions of $1.2 trillion by November 23, 2011. Because the committee failed to propose a plan to cut the deficit by the deadline, the BCA requires automatic spending reductions of $1.2 trillion for federal fiscal years 2013 through 2021, minus any deficit reductions enacted by Congress and debt service costs. The percentage reduction for Medicare may not be more than 2% for a fiscal year, with a uniform percentage reduction across all Medicare programs. We are unable to predict how these spending reductions will be structured or how they would impact the Company, what other deficit reduction initiatives may be proposed by Congress or whether Congress will attempt to suspend or restructure the automatic budget cuts.

In September 2012, the State of California enacted legislation that would reduce the reimbursement rate beginning in 2013 for patients receiving care through the state's workers' compensation program. We estimate that the impact of the reduced rates will negatively impact our 2013 earnings per share by approximately $0.06.

The Health Reform Law represents significant change across the healthcare industry. The Health Reform Law contains a number of provisions designed to reduce Medicare program spending, including the annual productivity adjustment, discussed above, that reduces payment updates to ASCs, effective since fiscal year 2011. However, the Health Reform Law also expands coverage of uninsured individuals through a combination of public program expansion and private sector health insurance reforms. For example, the Health Reform Law, as enacted, expands eligibility under existing Medicaid programs, imposes financial penalties on individuals who fail to carry insurance coverage, creates affordability credits for those not enrolled in an employer-sponsored health plan, requires the establishment of a health insurance exchange for each state and permits states to create federally funded, non-Medicaid plans for low-income residents not eligible for Medicaid. The Health Reform Law also establishes a number of private health insurance market reforms, including a ban on lifetime limits and pre-existing condition exclusions, new benefit mandates and increased dependent coverage.

Many health plans are required to cover, without cost-sharing, certain preventive services designated by the U.S. Preventive Services Task Force, including screening colonoscopies. Medicare must now also cover these preventive services without cost-sharing, and, beginning in 2013, states that provide Medicaid coverage of these preventive services without cost-sharing will receive a one percentage point increase in their federal medical assistance percentage for these services.

Health insurance market reforms that expand insurance coverage may result in an increased volume for certain procedures at our centers. However, many of these provisions of the Health Reform Law will not become effective until 2014 or later, and these provisions may be amended or repealed or their impact could be offset by reductions in reimbursement under the Medicare program. On June 28, 2012, the United States Supreme Court upheld the constitutionality of the Health Reform Law except for provisions that would have allowed the Department of Health and Human Services to penalize states that do not implement the Medicaid expansion provisions of the law with the loss of existing federal Medicaid funding. It is unclear how many states will decline to implement the Medicaid expansion and what the resulting impact will be on the number of uninsured individuals. Repeal of the Health Reform Law continues to be a theme in political campaigns during this election year.

Because of the many variables involved, including the law's complexity, lack of implementing regulations or interpretive guidance, gradual implementation, and possible amendment or repeal, we are unable to predict the net effect of the reductions in Medicare spending, the expected increases in revenues from increased procedure volumes, and numerous other provisions in the law that may affect the Company. We are further unable to foresee how individuals and employers will respond to the choices afforded them by the Health Reform Law. Thus, we cannot predict the full impact of the Health Reform Law on the Company at this time.

CMS is increasing its administrative audit efforts through the nationwide expansion of the recovery audit contractor, or RAC, program. RACs are private contractors that conduct post-payment reviews of providers and suppliers that bill Medicare to detect and correct improper payments for services. The Health Reform Law expands the RAC program's scope to include Medicaid claims. In addition to RACs, other contractors, such as Medicaid Integrity Contractors, perform payment audits to identify and correct improper payments. We could incur costs associated with appealing any alleged overpayments and be required to repay any alleged overpayments identified by these or other administrative audits.

We expect value-based purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. Effective January 15, 2009, CMS promulgated three national coverage


Item. 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)

determinations that prevent Medicare from paying for certain serious, preventable medical errors performed in any healthcare facility, such as surgery performed on the wrong patient or the wrong site. Several commercial payors also do not reimburse providers for certain preventable adverse events. In addition, a 2006 federal law authorizes CMS to require ASCs to submit data on certain quality measures. In addition, CMS established a quality reporting program for ASCs under which ASCs that fail to report on five quality measures beginning on October 1, 2012 will receive a 2% reduction in reimbursement for calendar year 2014. As of October 1, 2012, we have implemented programs and procedures at each of our centers to comply with the quality reporting program prescribed by CMS. Further, the Health Reform Law required the Department of Health and Human Services, or HHS, to present a plan to Congress for implementing a value-based purchasing system that would tie Medicare payments to ASCs to quality and efficiency measures. On April 18, 2011, HHS reported to Congress on its plan for implementing a value-based purchasing program for ASCs. HHS recommended a phase-in timeframe for implementation and described the initial steps to include a quality reporting program such as CMS is implementing this year. The Health Reform Law also requires HHS to study whether to expand to ASCs its current policy of not paying additional amounts for care provided to treat conditions acquired during an inpatient hospital stay.

In addition to payment from governmental programs, ASCs derive a significant portion of their revenues from private healthcare insurance plans. These plans include both standard indemnity insurance programs as well as managed care programs, such as PPOs and HMOs. The strengthening of managed care systems nationally has resulted in substantial competition among providers of surgery center services that contract with these systems. Exclusion from participation in a managed care network could result in material reductions in patient volume and revenue. Some of our competitors have greater financial resources and market penetration than we do. We believe that all payors, both governmental and private, will continue their efforts over the next several years to reduce healthcare costs and that their efforts will generally result in a less stable market for healthcare services. While no assurances can be given concerning the ultimate success of our efforts to contract with healthcare payors, we believe that our position as a low?cost alternative for certain surgical procedures should enable our surgery centers to compete effectively in the evolving healthcare marketplace.

Critical Accounting Policies

A summary of significant accounting policies is disclosed in our 2011 Annual Report on Form 10-K. Our critical accounting policies are further described under the caption "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2011 Annual Report on Form 10-K. There have been no changes in the nature of our critical accounting policies or the application of those policies since December 31, 2011.

Results of Operations

Our revenues are directly related to the number of procedures performed at our centers. Our overall growth in procedure volume is impacted directly by the increase in the number of centers in operation and the growth in procedure volume at existing centers. We increase our number of centers through both acquisitions and developments. Procedure growth at any existing center may result from additional contracts entered into with third-party payors, increased market share of our physician partners, additional physicians utilizing the center and/or scheduling and operating efficiencies gained at the surgery center. A significant measurement of how much our revenues grow from year to year for existing centers is our same-center revenue percentage. We define our same-center group each year as those centers that contain full year-to-date operations in both comparable reporting periods, including the expansion of the number of operating centers associated with a limited partnership or limited liability company. Our 2012 same-center group, comprised of 202 centers and constituting approximately 88% of our total number of centers, had 2% and 3% revenue growth during the three and nine months ended September 30, 2012, respectively. We have revised our same-center revenue growth expectations for 2012 to a 3% increase, previously 2% to 3%, due to our results through the first nine months of 2012.

Expenses directly and indirectly related to procedures performed at our surgery centers include clinical and administrative salaries and benefits, supply cost and other operating expenses such as linen cost, repair and maintenance of equipment, billing fees and bad debt expense. The majority of our corporate salary and benefits cost is associated directly with the number of centers we own and manage and tends to grow in proportion to the growth of our centers in operation. Our centers and corporate offices also incur costs that are more fixed in nature, such as lease expense, legal fees, property taxes, utilities and depreciation and amortization.

Our interest expense results primarily from our borrowings used to fund acquisition and development activity, as well as interest incurred on capital leases. See "- Liquidity and Capital Resources."

Surgery center profits are allocated to our noncontrolling partners in proportion to their individual ownership percentages and reflected in the aggregate as total net earnings attributable to noncontrolling interests and are presented after net earnings. The noncontrolling partners of our center limited partnerships and limited liability companies typically are organized as general partnerships, limited partnerships or limited liability companies that are not subject to federal income tax. Each noncontrolling partner shares in the pre-tax earnings of the center of which it is a partner. Accordingly, net earnings attributable to the noncontrolling interests in each of our center limited partnerships and limited liability companies are generally determined on a pre-tax basis, and pre-tax earnings are presented before net earnings attributable tononcontrolling interests have been subtracted.

Accordingly, the effective tax rate on pre-tax earnings as presented has been reduced to approximately 16%. However, the effective tax rate based on pre-tax earnings attributable to AmSurg Corp. common shareholders, on an annual basis, will remain near the historical percentage of 40%. We


Item. 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (continued)

file a consolidated federal income tax return and numerous state income tax returns with varying tax rates. Our income tax expense reflects the blending of these rates.

Net earnings from continuing operations attributable to AmSurg Corp. common shareholders are disclosed on the unaudited consolidated statements of earnings.

The following table shows certain statement of earnings items expressed as a percentage of revenues for the three and nine months ended

September 30, 2012 and 2011:



                                               Three Months Ended      Nine Months Ended
                                                  September 30,          September 30,
                                               2012         2011       2012        2011

Revenues                                        100.0%       100.0%     100.0%      100.0%

Operating expenses:
   Salaries and benefits                         32.1         31.0       31.4        30.9
   Supply cost                                   13.9         12.9       14.1        12.8
   Other operating expenses                      20.9         22.1       20.8        21.6
   Depreciation and amortization                  3.4          3.4        3.3         3.3

      Total operating expenses                   70.3         69.4       69.6        68.6

Equity in earnings of unconsolidated
affiliates                                        0.1          0.1        0.2           -

      Operating income                           29.8         30.7       30.6        31.4

Interest expense                                  1.5          1.9        1.8         2.0

   Earnings from continuing operations
   before income taxes                           28.3         28.8       28.8        29.4

Income tax expense                                4.6          4.3        4.7         4.6

   Net earnings from continuing operations,
   net of income tax                             23.7         24.5       24.1        24.8

Discontinued operations:
   Earnings from operations of discontinued
   interests in surgery centers,
      net of income tax expense                     -            -          -         0.1
   Loss on disposal of discontinued
   interests in surgery centers,
      net of income tax expense                     -        (0.1)      (0.2)       (0.2)

      Net loss from discontinued operations         -        (0.1)      (0.2)       (0.1)

      Net earnings                               23.7         24.4       23.9        24.7

Less net earnings attributable to
noncontrolling interests:
   Net earnings from continuing operations       16.9         17.8       17.3        18.1
   Net (loss) earnings from discontinued
   operations                                       -        (0.1)          -         0.1

      Total net earnings attributable to
      noncontrolling interests                   16.9         17.7       17.3        18.2

      Net earnings attributable to AmSurg
      Corp. common shareholders                   6.8%         6.7%       6.6%        6.5%

Amounts attributable to AmSurg Corp. common
shareholders:
   Earnings from continuing operations, net
   of income tax                                  6.8%         6.7%       6.8%        6.7%
   Discontinued operations, net of income
   tax                                              -            -      (0.2)       (0.2)

      Net earnings attributable to AmSurg
      Corp. common shareholders                   6.8%         6.7%       6.6%        6.5%

The number of procedures performed in our ASCs increased by 28,007, or 8%, to 375,376, and 139,586, or 14%, to 1,143,556 in the three and nine months ended . . .

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