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




Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis of Financial Condition and Results of Operations is intended to assist in understanding and assessing the trends and significant changes in our results of operations and financial condition as of the dates and for the periods presented. Historical results may not indicate future performance. Our forward-looking statements, which reflect our current views about future events, are based on assumptions and are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from those contemplated by these statements. Factors that may cause differences between actual results and those contemplated by forward-looking statements include, but are not limited to, those discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 and our subsequent reports on Form 10-Q and Form 8-K filed with the Securities and Exchange Commission (the "SEC"). As used in this Management's Discussion and Analysis of Financial Condition and Results of Operations, the words, "we," "our," and "us" refer to Skilled Healthcare Group, Inc. and its wholly-owned subsidiaries. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our condensed consolidated financial statements and related notes included in this report. Business Overview
We are a holding company with subsidiaries that operate skilled nursing facilities, assisted living facilities, hospices, home health providers and a rehabilitation therapy business. These subsidiaries focus on providing high-quality care to our patients. We have an administrative service company that provides a full complement of administrative and consultative services that allows our affiliated operators and third-party operators with whom we contract to better focus on delivery of healthcare services. We have one such service agreement with an unrelated facility operator. Our subsidiaries that operate skilled nursing facilities have a strong commitment to treating patients who require a high level of skilled nursing care and extensive rehabilitation therapy, whom we refer to as high-acuity patients. As of September 30, 2012, we owned or leased 74 skilled nursing facilities and 22 assisted living facilities, together comprising 10,409 licensed beds. We also lease five skilled nursing facilities in California to an unaffiliated third party operator. Our skilled nursing and assisted living facilities, approximately 77.2% of which we own, are located in California, Texas, Iowa, Kansas, Missouri, Nebraska, Nevada and New Mexico, and are generally clustered in large urban or suburban markets. For the nine months ended September 30, 2012, we generated approximately 72.2% of our revenue from our skilled nursing facilities, including our integrated rehabilitation therapy services at these facilities. The remainder of our revenue is generated from our assisted living services, rehabilitation therapy services provided to third-party facilities, hospice care and home health services, and lease of five skilled nursing facilities to an unaffiliated third party operators.
Revisions to Prior Period Amounts
During the quarter ended June 30, 2012, we identified errors related to certain claims under Medicare Part B for blood glucose testing at certain of our affiliated companies. Although blood glucose tests are routinely ordered by physicians to safely monitor vulnerable patients' blood glucose levels, effective January 1, 2007, CMS redefined the criteria for "medical necessity" before a Medicare claim for such a test is payable. The new criteria specifies the nature of a physician order for the blood glucose test, the frequency of a physician's review of the test results and the frequency of a physician's utilization of the test results in the patient's plan of care or treatments. The documentation and other requirements for Medicare Part B billing of blood glucose testing that took effect in January 2007 significantly limited the number of blood glucose tests that are reimbursable compared to those that were previously reimbursable. Our internal policies changed at the time to be consistent with new Medicare regulations. Subsequent to January 1, 2007, a number of our affiliated companies incorrectly continued to bill Medicare under the rules that existed prior to January 1, 2007. The billing errors resulted in a cumulative overstatement of consolidated revenue in the amount of $5.8 million for the period from January 1, 2007 to December 31, 2011. The affiliated companies submitted approximately 30,000 claims related to blood glucose testing in the affected period that were not reimbursable under the revised standard. The affected providers have refunded all previously paid post-2006 Medicare Part B claims for blood glucose tests.
In accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") No. 250-10-S99 ("ASC 250-10-S99"), we evaluated these refunds and, based on an analysis of quantitative and qualitative factors, determined that they were not material to any of the prior reporting periods affected and, therefore, amendment of previously filed reports with the Securities and Exchange Commission ("SEC") was not required. However, if the adjustments to correct the cumulative effect of the aforementioned refunds had been recorded in the three and six months ended June 30, 2012, the impact would have been material to those two periods. Therefore, as required by Staff Accounting Bulletin ("SAB") 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements ("SAB 108"), beginning with our quarterly report on Form 10-Q for the quarter ended June 30, 2012, we have revised previously reported financial periods to reflect corrected financial information for the fiscal years ended December 31, 2011, 2010, 2009, 2008, and 2007, and for the quarterly periods in fiscal years 2011 and 2010. Also, in accordance with SAB 108, we will include this revised financial information when we file subsequent reports on Form 10-Q and Form 10-K or files a registration statement under the Securities Act of 1933, as amended.

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The prior period financial statements included in this filing have been revised to reflect the correction of the aforementioned errors, see Note 2 - "Correction of Previously Issued Consolidated Financial Statements," to our Condensed Consolidated Financial Statements included in Item 1 for additional information on these revisions. The condensed consolidated statement of operations for the quarter ended March 31, 2012 has not been restated. Revenue for the quarter ended March 31, 2012 was overstated by $0.3 million. This correction has been recorded as an adjustment to revenue in the quarter ended June 30, 2012, as this amount was not material to the operating results for the period then ended. Despite the fact that our affected subsidiaries have refunded all of the reimbursements they received in connection with the Medicare Part B claims for all blood glucose tests after January 1, 2007, some refunded claims could nonetheless potentially lead to allegations that any of the affected subsidiaries are subject to sanctions under the Federal False Claims Act or the Federal Civil Monetary Penalties Law. Such sanctions could lead to any combination of a variety of criminal, civil and administrative penalties, which could be material both individually and in the aggregate. We cannot determine the likelihood that any penalties might be imposed related to this refund and have not accrued for any such penalties. See "Revenue we receive from Medicare and Medicaid is subject to potential retroactive reduction or repayment" in Part II, Item 1A of this report for additional information.

Industry Trends
Medicare and Medicaid Reimbursement
Rising healthcare costs due to a variety of factors, including an aging population and increasing life expectancies, has in recent years increased demand for post-acute healthcare services, such as skilled nursing, assisted living, home health care, hospice care and rehabilitation therapy. In an effort to mitigate the cost of providing healthcare benefits, third party payors including Medicare, Medicaid, managed care providers, insurance companies and others have increasingly encouraged the treatment of patients in lower-cost care settings. As a result, in recent years skilled nursing facilities, which typically have significantly lower cost structures than acute care hospitals and certain other post-acute care settings, have generally been serving larger populations of higher-acuity patients than in the past. Despite this growth in demand, uncertainty over Medicare and Medicaid reimbursement rates persists. Medicare and Medicaid reimbursement rates are subject to change from time to time and, because revenue derived directly or indirectly from Medicare and Medicaid reimbursement has historically comprised the most significant portion of our consolidated revenue, a reduction in rates could materially and adversely impact our revenue.
Medicare reimburses our skilled nursing facilities under a prospective payment system ("PPS") for certain inpatient covered services. Under the PPS, facilities are paid a predetermined amount per patient, per day, based on the anticipated costs of treating patients. The amount to be paid is determined by classifying each patient into a resource utilization group ("RUG") category that is based upon each patient's acuity level. In October 2010, the number of RUG categories was expanded from 53 to 66 as part of the implementation of the RUGs IV system and the introduction of a revised and substantially expanded patient assessment tool called the minimum data set (MDS) version 3.0.
On July 29, 2011, the Centers for Medicare & Medicaid Services ("CMS") issued a final rule providing for, among other things, a net 11.1% reduction in PPS payments to skilled nursing facilities for CMS's fiscal year 2012 (which began October 1, 2011) as compared to PPS payments in CMS's fiscal year 2011 (which ended September 30, 2011). The 11.1% reduction was on a net basis, after the application of a 2.7% market basket increase, and reduced by a 1.0% multi-factor productivity adjustment required by the Patient Protection and Affordable Care Act of 2010 ("PPACA"). The final CMS rule also adjusted the method by which group therapy is counted for reimbursement purposes, and changed the timing in which patients who are receiving therapy must be reassessed for purposes of determining their RUG category.
The Middle Class Tax Relief and Job Creation Act of 2012 was signed into law on February 22, 2012, extending the Medicare Part B outpatient therapy cap exceptions process through December 31, 2012. The statutory Medicare Part B outpatient therapy cap for occupational therapy (OT) is $1,880 for 2012, and the combined cap for physical therapy (PT) and speech-language pathology services (SLP) is also $1,880 for 2012. This is the annual per beneficiary therapy cap amount determined for each calendar year. Similar to the therapy cap, Congress established a threshold of $3,700 for PT and SLP services combined and another threshold of $3,700 for OT services. All therapy services rendered above the $3,700 are subject to manual medical review and certain providers will be required to submit a request for an exception. The law requires an exceptions process to the therapy cap that allows providers to receive payment from Medicare for medically necessary therapy services above the therapy cap amount.
Beginning October 1, 2012 some therapy providers are required to submit requests for exceptions (pre-approval for up to 20 therapy treatment days for beneficiaries at or above the $3,700 threshold). The $3,700 figure is the defined threshold that triggers the requirement for an exception request. Prior to October 1, 2012 there was no requirement for an exception request when the threshold was exceeded. We expect the Medicare Part B therapy cap exception requirements that went into effect October 1, 2012 to negatively impact our therapy business in the fourth quarter of 2012.
On July 27, 2012, CMS issued a final rule providing for, among other things, a net 1.8% increase in PPS payments to skilled nursing facilities for CMS's fiscal year 2013 (which begins October 1, 2012) as compared to PPS payments in CMS's

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fiscal year 2012 (which ends September 30, 2012). The 1.8% increase was on a net basis, after the application of a 2.5% market basket increase, and reduced by a 0.7% multi-factor productivity adjustment required by PPACA. After our wage index adjustment, our net increase was 1.7%.
In July 2012, CMS issued its final rule for hospice services for its 2013 fiscal year. The rule includes a market basket increase of 2.6% less 0.3% reduction in the market basket as a result of the PPACA and a 0.7% reduction due to productivity adjustment. After adjusting for the wage index in our hospice agencies, we estimate that the net impact on our hospice service operations will be an increase of 0.9% in our reimbursement rates effective October 1, 2012. Should future changes in PPS include further reduced rates or increased standards for reaching certain reimbursement levels (including as a result of automatic cuts tied to federal deficit cut efforts or otherwise), our Medicare revenues derived from our skilled nursing facilities (including rehabilitation therapy services provided at our skilled nursing facilities) could be reduced, with a corresponding adverse impact on our financial condition and results of operation. Our rehabilitation therapy, hospice and home health care businesses are also to a large degree directly or indirectly dependent on (and therefore affected by changes in) Medicare and Medicaid reimbursement rates. For example, our rehabilitation therapy business may have difficulty increasing or maintaining the rates it has negotiated with third party nursing facilities in light of the reduced PPS reimbursement rates that took effect on October 1, 2011 as discussed above or future reductions in reimbursement rates.
We also derive a substantial portion of our consolidated revenue from Medicaid reimbursement, primarily through our skilled nursing business. Medicaid programs are administered by the applicable states and financed by both state and federal funds. Medicaid spending nationally has increased substantially in recent years, becoming an increasingly significant component of state budgets. This, combined with slower state revenue growth and other state budget demands, has led both the federal government and many states, including California and other states in which we operate, to institute measures aimed at controlling the growth of Medicaid spending (and in some instances reducing it).
Historically, adjustments to reimbursement under Medicare and Medicaid have had a significant effect on our revenue and results of operations. Recently enacted, pending and proposed legislation and administrative rulemaking at the federal and state levels could have similar effects on our business. Efforts to impose reduced reimbursement rates, greater discounts and more stringent cost controls by government and other payors are expected to continue for the foreseeable future and could adversely affect our business, financial condition and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and adversely affect our business, financial condition and results of operations.

Federal Health Care Reform
In addition to the matters described above affecting Medicare and Medicaid
participating providers, PPACA enacted several reforms with respect to skilled
nursing facilities, home health agencies and hospices, including payment
measures to realize significant savings of federal and state funds by deterring
and prosecuting fraud and abuse in both the Medicare and Medicaid programs.
While many of the provisions of PPACA will not take effect for several years or
are subject to further refinement through the promulgation of regulations, some
key provisions of PPACA are presently effective.
            Enhanced CMPs and Escrow Provisions. PPACA includes expanded civil
             monetary penalty ("CMP") and related provisions applicable to all
             Medicare and Medicaid providers. CMS rules adopted to implement
             applicable provisions of PPACA also provide that assessed CMPs may
             be collected and placed in whole or in part into an escrow pending
             final disposition of the applicable administrative and judicial
             appeals processes. To the extent our businesses are assessed large
             CMPs that are collected and placed into an escrow account pending
             lengthy appeals, such actions could adversely affect our results of

            Nursing Home Transparency Requirements. In addition to expanded CMP
             provisions, PPACA imposes new transparency requirements for
             Medicare-participating nursing facilities. In addition to previously
             required disclosures regarding a facility's owners, management and
             secured creditors, PPACA expanded the required disclosures to
             include information regarding the facility's organizational
             structure, additional information on officers, directors, trustees
             and "managing employees" of the facility (including their names,
             titles, and start dates of services), and information regarding
             certain parties affiliated with the facility. The transparency
             provisions could result in the potential for greater government
             scrutiny and oversight of the ownership and investment structure for
             skilled nursing facilities, as well as more extensive disclosure of
             entities and individuals that comprise part of skilled nursing
             facilities' ownership and management structure.

            Face-to-Face Encounter Requirements. PPACA imposes new patient
             face-to-face encounter requirements on home health agencies and
             hospices to establish a patient's ongoing eligibility for Medicare
             home health services or hospice services, as applicable. A
             certifying physician or other designated health care professional
             must conduct the face-to-face encounters within specified
             timeframes, and failure of the face-to-face encounter to occur and
             be properly documented during the applicable timeframes could render
             the patient's care ineligible for reimbursement under Medicare.

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            Suspension of Payments During Pending Fraud Investigations. PPACA
             provides the federal government with expanded authority to suspend
             Medicare and Medicaid payments if a provider is investigated for
             allegations or issues of fraud. This suspension authority creates a
             new mechanism for the federal government to suspend both Medicare
             and Medicaid payments for allegations of fraud, independent of
             whether a state exercises its authority to suspend Medicaid payments
             pending a fraud investigation. To the extent the suspension of
             payments provision is applied to one of our businesses for
             allegations of fraud, such a suspension could adversely affect our
             results of operations.

            Overpayment Reporting and Repayment; Expanded False Claims Act
             Liability. PPACA enacted several important changes that expand
             potential liability under the federal False Claims Act. Overpayments
             related to services provided to both Medicare and Medicaid
             beneficiaries must be reported and returned to the applicable payor
             within specified deadlines, or else they are considered obligations
             of the provider for purposes of the federal False Claims Act. This
             new provision substantially tightens the repayment and reporting
             requirements generally associated with operations of health care
             providers to avoid False Claims Act exposure.

            Home and Community Based Services. PPACA provides that states can
             provide home and community-based attendant services and supports
             through the Community First Choice State plan option. States
             choosing to provide home and community based services under this
             option must make them available to assist with activities of daily
             living, instrumental activities of daily living and health related
             tasks under a plan of care agreed upon by the individual and his/her
             representative. For states that elect to make coverage of home and
             community-based services available through the Community First
             Choice State plan option, the percentage of the state's Medicaid
             expenses paid by the federal government will increase by 6
             percentage points. PPACA also includes additional measures related
             to the expansion of community and home based services and authorizes
             states to expand coverage of community and home-based services to
             individuals who would not otherwise be eligible for them. The
             expansion of home-and-community based services could reduce the
             demand for the facility based services that we provide.

            Health Care-Acquired Conditions. PPACA provides that the Secretary
             of Health and Human Services must prohibit payments to states for
             any amounts expended for providing medical assistance for certain
             medical conditions acquired during the patient's receipt of health
             care services. CMS adopted a final rule to implement this provision
             of PPACA in the third quarter of 2011. The rule prohibits states
             from making payments to providers under the Medicaid program for
             conditions that are deemed to be reasonably preventable. It uses
             Medicare's list of preventable conditions in inpatient hospital
             settings as the base (adjusted for the differences in the Medicare
             and Medicaid populations) and provides states the flexibility to
             identify additional preventable conditions and settings for which
             Medicaid payment will be denied.

            Value-Based Purchasing. PPACA requires the Secretary of Health and
             Human Services to develop a plan to implement a value-based
             purchasing ("VBP") program for payments under the Medicare program
             for skilled nursing facilities and to submit a report containing the
             plan to Congress. The intent of the provision is to potentially
             reconfigure how Medicare pays for health care services, moving the
             program towards rewarding better value, outcomes, and innovations,
             instead of volume. According to the plan submitted to Congress in
             June 2012, the funding for the VBP program could come from payment
             withholds from poor-performing skilled nursing facilities or by
             holding back a portion of the base payment rate or the annual update
             for all skilled nursing facilities. If a VBP program is ultimately
             implemented, it is uncertain what effect it would have upon skilled
             nursing facilities, but its funding or other provisions could
             negatively affect skilled nursing facilities.

            Anti-Kickback Statute Amendments. PPACA amended the Anti-Kickback
             Statute so that (i) a claim that includes items or services
             violating the Anti-Kickback Statute also would constitute a false or
             fraudulent claim under the federal False Claims Act and (ii) the
             intent required to violate the Anti-Kickback Statute is lowered such
             that a person need not have actual knowledge or specific intent to
             violate the Anti-Kickback Statute in order for a violation to be
             deemed to have occurred. These modifications of the Anti-Kickback
             Statute could expose us to greater risk of inadvertent violations of
             the statute and to related liability under the federal False Claims

The provisions of PPACA discussed above are examples of recently enacted federal health reform provisions that we believe may have a material impact on the long-term care profession generally and on our business. However, the foregoing discussion is not intended to constitute, nor does it constitute, an exhaustive review and discussion of PPACA. It is possible that other provisions of PPACA may be interpreted, clarified, or applied to our businesses in a way that could have a material adverse impact on our business, financial condition and results of operations. Similar federal and/or state legislation that may be adopted in the future could have similar effects.

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Revenue by Service Offering

We operate our business in three reportable operating segments: (i) long-term care services, which includes the operation of skilled nursing and assisted living facilities and is the most significant portion of our business; (ii) our rehabilitation therapy services business; and (iii) our hospice and home health businesses. Our reporting segments are business units that offer different services, and that are managed separately due to the nature of services provided.
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 affiliated skilled nursing facilities. The remainder of our long-term care segment revenue is generated by our assisted living facilities, by our administration of an unaffiliated third party skilled nursing facility, and from our leasing of five skilled nursing facilities to an unaffiliated third party operator. In our therapy services segment, we derive revenue by providing rehabilitation therapy services to third-party facilities. In our hospice and home health services segment, we provide hospice and home health services. 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 September 30,
                              2012                          2011
                      Revenue        Revenue       Revenue        Revenue         Increase/(Decrease)
                      Dollars      Percentage      Dollars      Percentage       Dollars      Percentage
Long-term care
Skilled nursing
facilities         $   156,550          72.3 %   $  164,140          75.8 %   $    (7,590 )       (4.6 )%
Assisted living
facilities               7,133           3.3          7,021           3.2             112          1.6
Administration of
third party
facility                   132           0.1            309           0.1            (177 )      (57.3 )
Facility lease
revenue                    769           0.3            746           0.3              23          3.1
Total long-term
care services          164,584          76.0        172,216          79.4          (7,632 )       (4.4 )
Therapy services:
therapy services        26,161          12.1         23,158          10.7           3,003         13.0
. . .
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