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AMSG > SEC Filings for AMSG > Form 10-Q on 1-Nov-2013All Recent SEC Filings

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Form 10-Q for AMSURG CORP


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, 2012 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, 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;

† our ability to generate sufficient cash flow to service our indebtedness;

† 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)


We acquire, develop and operate ambulatory surgery centers, or centers or ASCs, in partnership with physicians. As of September 30, 2013, we had 243 operating ASCs, of which we owned a majority interest (primarily 51%) in 237 ASCs and owned a minority interest in six ASCs (three of which are 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, 2013 and 2012. 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,
                                               2013        2012         2013          2012

Procedures                                    409,080     372,038     1,221,750     1,133,377
Continuing centers in operation, end of
period (consolidated)                             240         224           240           224
Continuing centers in operation, end of
period (unconsolidated)                             3           2             3             2
Average number of continuing centers in
operation, during period                          239         224           238           222
New centers added during period                     2           1             4             3
Centers discontinued during period                  1           -             1             2
Centers under letter of intent, end of
period                                              5          15             5            15

Of the continuing centers in operation at September 30, 2013, 151 centers performed gastrointestinal endoscopy procedures, 49 centers performed procedures in multiple specialties, 36 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. Our growth strategy for 2013 includes the acquisition and development of additional surgery centers, which on an annual basis we expect would generate additional operating income of $25 million to $29 million. We anticipate that because the majority of these acquisitions will occur in the latter part of 2013, their contribution to our 2013 operating income would not be significant. We expect a 0% to 1% increase in our same-center revenue for 2013, which reflects positive rate adjustments from the Centers for Medicare and Medicaid Services, or CMS, in 2013, but is offset by a statutory decrease in reimbursement for procedures associated with worker's compensation claims at our centers in California. Our same-center revenue guidance also reflects the expected impact of sequestration. During the nine months ended September 30, 2013, our same-center revenue was flat primarily due to the impact of sequestration and the effect of the reduced reimbursement rates related to the State of California's workers' compensation program during the nine months ended September 30, 2013 compared to the same 2012 period.

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 three non-consolidated entities are reported in equity in earnings of unconsolidated affiliates in our consolidated statement of earnings.

Sources of Revenues

Our revenues are derived from facility fees charged for surgical procedures performed in our surgery centers and, at certain of our surgery centers (primarily centers that perform gastrointestinal endoscopy procedures), charges for anesthesia services provided by medical professionals employed or contracted by our centers. These fees vary depending on the procedure, but usually include all charges for operating room usage, special equipment usage, supplies, recovery room usage, nursing staff and medications. Facility fees do not include professional fees charged by the physicians that perform the surgical procedures. Revenue is recorded at the time of the patient encounter and billings for such procedures are made on or about that same date. At the majority of our centers, it is our policy to collect patient co-payments and deductibles at the time the surgery is performed. Our revenues are recorded net of estimated contractual adjustments from third-party medical service payors. Our billing and accounting systems provide us historical trends of the surgery centers' cash collections and contractual write-offs, accounts receivable agings and established fee adjustments from third-party payors. These estimates are recorded and monitored monthly for each of our surgery centers as revenue is recognized. Our ability to accurately estimate contractual adjustments is dependent upon and supported by the fact that our surgery centers perform and bill for limited types of procedures, the range of reimbursement for those procedures within each surgery center specialty is very narrow and payments are typically received within 15 to 45 days of billing. These estimates are not, however, established from billing system generated contractual adjustments based on fee schedules for the patient's insurance plan for each patient encounter.

ASCs depend upon third-party reimbursement programs, including governmental and private insurance programs, to pay for substantially all of the services rendered to patients. We derived approximately 25% and 28% of our revenues in the nine months ended September 30, 2013 and 2012, respectively, from governmental healthcare programs, primarily Medicare and managed Medicare 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. Our surgery centers are not required to file cost reports and, accordingly, we have no unsettled amounts from governmental third-party payors.

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

ASCs are paid under the Medicare program based upon a percentage of the payments to hospital outpatient departments pursuant to the hospital outpatient prospective patient system and reimbursement rates for ASCs are increased annually based on increases in the consumer price index, or CPI. 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 is based on historical nationwide productivity gains. In 2012, reimbursement rates increased by 1.6%, which positively impacted our 2012 revenues by approximately $5.0 million and our net earnings per share by $0.05. The reimbursement rates for 2013 reflect a 0.6% net increase, which we estimate will positively impact our 2013 revenue by approximately $2.5 million and our 2013 net earnings per share by $0.02. There can be no assurance that CMS will not revise the ASC payment system, or that any annual CPI increases will be material. We estimate that preliminary reimbursement rates for 2014 recently announced by CMS, which are subject to final approval in November 2013, would positively impact our 2014 revenue by approximately $6.0 million.

The Budget Control Act of 2011, or 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. These BCA-mandated spending cuts are commonly referred to as "sequestration." Sequestration began on March 1, 2013, and CMS imposed a 2% reduction on Medicare claims as of April 1, 2013. Unless Congress and the President take action and reach an agreement to change the law, federal spending will be subject to sequestration until the end of federal fiscal year 2021. The full impact of sequestration on our operations is uncertain. We cannot predict with certainty what other deficit reduction initiatives may be proposed by Congress or whether Congress will attempt to restructure or suspend sequestration. We estimate that the imposed spending reductions will reduce our 2013 revenue and net earnings per share by approximately $5.0 million and $0.05, respectively.

In September 2012, the State of California enacted legislation that reduced the reimbursement rate beginning in 2013 for patients receiving care through the state's workers' compensation program. We estimate that the reduced rates will negatively impact our 2013 net 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. 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 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 establishment of, or participation in, 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 the provisions of the Health Reform Law will not become effective until 2014 or later, and the provisions may be amended, repealed or delayed or their impact could be offset by reductions in reimbursement under the Medicare program. It is unclear what the resulting impact of the Health Reform Law will be on the number of uninsured individuals. Further, employer mandate, which requires firms with 50 or more full-time employees to offer health insurance or pay fines, has been delayed until January 1, 2015. The federal online insurance marketplace has experienced significant technical issues that have negatively impacted the ability of individuals to purchase health insurance. These technical issues, especially if not corrected in a timely manner, could lead to the delay of the individual mandate tax penalties past the current March 31, 2014 deadline, delays in uninsured individuals obtaining health insurance and a reduction in the number of individuals choosing to purchase health insurance rather than paying the individual mandate tax penalties.

Because of the many variables involved, including the law's complexity, lack of implementing definitive regulations or interpretive guidance, gradual or partially delayed implementation, amendments, repeal, or further implementation delays, 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. CMS has promulgated three national coverage determinations that prevent Medicare from paying for certain serious, preventable medical errors performed in any healthcare facility, such as surgery performed on the wrong

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

patient or the wrong site. Several commercial payors also do not reimburse providers for certain preventable adverse events. CMS established a quality reporting program for ASCs under which ASCs that fail to report on five quality measures will receive a 2% reduction in reimbursement for calendar year 2014. We have implemented programs and procedures at each of our centers to comply with the quality reporting program prescribed by CMS. Further, as required by the Health Reform Law, HHS reported to Congress on its plan for implementing a value-based purchasing program for ASCs that would tie Medicare payments to quality and efficiency measures. 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 low­cost 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 2012 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 2012 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, 2012.

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 surgery centers in operation and the growth in procedure volume at existing centers. We increase our number of surgery centers through both acquisitions and developments of additional ASCs. Procedure growth at an 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. Revenues of our 2013 same-center group, comprised of 221 centers and constituting approximately 91% of our total number of centers, increased by 2% during the three months ended September 30, 2013 and was flat during the nine months ended September 30, 2013. We expect to have a 0% to 1% increase in our same-center revenue for 2013, which reflects positive rate adjustments from CMS in 2013, but is offset by 1% due to a statutory decrease in reimbursement for procedures associated with worker's compensation claims at our centers in California. In addition, the impact of sequestration effective April 1, 2013 is reflected in our 2013 same-center guidance.

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.

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 to noncontrolling interests have been subtracted.

Accordingly, the effective tax rate on pre-tax earnings as presented has been reduced to approximately 16.1%. 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 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.

Our interest expense results primarily from our borrowings used to fund acquisition and development activity, as well as interest incurred on capital leases.

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

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

The following table shows certain statement of earnings items expressed as a percentage of revenues for the three and nine months ended September 30, 2013 and 2012:

                                               Three Months Ended      Nine Months Ended
                                                  September 30,          September 30,
                                                2013        2012       2013        2012

Revenues                                        100.0%      100.0%     100.0%      100.0%

Operating expenses:
   Salaries and benefits                          31.7        32.1       31.1        31.4
   Supply cost                                    14.3        14.0       14.5        14.1
   Other operating expenses                       21.0        20.9       20.6        20.8
   Depreciation and amortization                   3.1         3.4        3.1         3.3

      Total operating expenses                    70.1        70.4       69.3        69.6

Gain on deconsolidation                              -           -        0.3           -
Equity in earnings of unconsolidated
affiliates                                         0.4         0.2        0.3         0.2

      Operating income                            30.3        29.8       31.3        30.6

Interest expense                                   2.7         1.6        2.8         1.8

   Earnings from continuing operations
   before income taxes                            27.6        28.2       28.5        28.8

Income tax expense                                 4.3         4.5        4.6         4.7

   Net earnings from continuing operations,
   net of income tax                              23.3        23.7       23.9        24.1

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

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

      Net earnings                                23.2        23.9       23.9        24.0

Less net earnings attributable to
noncontrolling interests:
   Net earnings from continuing operations        16.9        16.9       17.2        17.2
   Net earnings from discontinued
   operations                                        -         0.1          -         0.1

      Total net earnings attributable to
      noncontrolling interests                    16.9        17.0       17.2        17.3

      Net earnings attributable to AmSurg
      Corp. common shareholders                    6.3%        6.9%       6.7%        6.7%

Amounts attributable to AmSurg Corp. common
   Earnings from continuing operations, net
   of income tax                                   6.4%        6.8%       6.7%        6.9%
. . .
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