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DVCR > SEC Filings for DVCR > Form 10-Q on 7-Nov-2013All Recent SEC Filings




Quarterly Report

Diversicare Healthcare Services, Inc. provides long-term care services to nursing center patients in eight states, primarily in the Southeast and Southwest. Our centers provide a range of health care services to their patients and residents that include nursing, personal care, and social services. In addition to the services usually provided in long-term care centers, we also offer a variety of comprehensive rehabilitation services as well as nutritional support services.As of September 30, 2013, the Company's continuing operations consist of 43 nursing centers with 4,882 licensed nursing beds. The Company owns 13 and leases 30 of its nursing centers. The nursing center and licensed bed count includes the 107-bed facility in Louisville, Kentucky, for which the Company entered into a lease agreement in August 2013. The Medicaid and Medicare certification processes for this facility are currently underway, and are expected to be completed in the fourth quarter of 2013. The nursing center and licensed nursing bed count also includes the Kansas centers acquired in May 2013, which comprise five skilled nursing centers and 418 licensed beds. The Medicaid certification process was completed for these facilities during the second quarter of 2013, the Medicare certification process was completed for these facilities during the third quarter of 2013. The count also includes the 88-bed skilled nursing center in Clinton, Kentucky for which the Company entered into a lease agreement in April 2012. The Company had a limited number of patients at this facility while it completed the Medicare certification process which was obtained in the fourth quarter of 2012. The Medicaid certification for the Clinton, Kentucky center was obtained in the first quarter of 2013. The nursing center and licensed nursing bed count also includes the 154-bed skilled nursing center leased in Louisville, Kentucky, that the Company has operated since September 2012. The Medicaid certification for the Louisville, Kentucky center was also obtained in the first quarter of 2013. Our continuing operations include centers in Alabama, Florida, Kansas, Kentucky, Ohio, Tennessee, Texas and West Virginia.
Discontinued Operations
Effective September 1, 2012, we sold an owned skilled nursing center in Arkansas to an unrelated party, and have reclassified the operations of this center as discontinued operations for all periods presented in the accompanying interim consolidated financial statements. Additionally, effective September 1, 2013, the Company finalized an agreement with Omega Healthcare Investors, Inc. ("Omega") to terminate its lease with respect only to eleven nursing centers with 1,181 licensed beds located in Arkansas and to concurrently transfer operations to an operator selected by Omega. The completion of this transaction represents disposal of all of the Company's operations in the state of Arkansas. The net income for the nursing centers included in discontinued operations does not reflect any allocation of regional or corporate general and administrative expense or any allocation of corporate interest expense. We considered these additional costs along with the future prospects of these nursing centers when determining the contribution of the skilled nursing centers to our operations. The assets and liabilities of the disposed skilled nursing centers have been reclassified and are segregated in the interim consolidated balance sheets as assets and liabilities of discontinued operations. The current asset amounts are primarily composed of net accounts receivable of $2.0 million and $4.6 million, and the current liabilities are primarily composed of trade payable and various accrued expenses such as payroll and real estate taxes of $0.6 million and $2.2 million at September 30, 2013 and December 31, 2012, respectively. The Company expects to collect the balance of the accounts receivable and pay the remaining trade payables and taxes in the ordinary course of business. The Company did not transfer the accounts receivable or liabilities to the new operators of these centers. Further, in accordance with Company accounting policy, the reserve for professional liability and workers' compensation will remain in the consolidated liability accounts as future payment of these liabilities will be paid through the Company's future operating cash flows. Strategic Operating Initiatives
During the third quarter of 2010, we identified several key strategic objectives to increase shareholder value through improved operations and business development. These strategic operating initiatives included: improving skilled mix in our nursing centers, improving our average Medicare rate, implementing Electronic Medical Records ("EMR") to improve Medicaid capture, accelerating center renovations and completing strategic acquisitions. We have experienced success in these initiatives and expect to continue to build on these improvements. We describe each of these below as well as provide metrics for our most recent quarter versus the third quarter of 2010, the quarter before we embarked on our strategic operating initiatives. Improving skilled mix and average Medicare rate:
Our strategic operating initiatives of improving our skilled mix and our average Medicare rate required investing in nursing and clinical care to treat more acute patients along with nursing center based marketing representatives to attract these patients.

These initiatives developed referral and Managed Care relationships that have attracted and are expected to continue to attract quality payor sources for patients covered by Medicare and Managed Care. A comparison of our most recent quarter versus the third quarter of 2010, the quarter before we embarked on our strategic operating initiatives, reflects our success with these strategic operating initiatives:

                                          Three Months Ended
                                                        September 30,
                                 September 30, 2013         2010
As a percent of total census:
Medicare census                              11.0 %             12.3 %
Managed Care census                           2.9 %              1.3 %
Total skilled mix census                     13.9 %             13.6 %
As a percent of total revenues:
Medicare revenues                            26.3 %             29.3 %
Managed Care revenues                         5.6 %              2.8 %
Total skilled mix revenues                   31.9 %             32.1 %

Medicare average rate per day: $ 430.73 $ 394.23

The initiatives have developed positive skilled results, increasing the Managed Care census to 2.9% of total census in the third quarter of 2013, as compared to 1.3% in the third quarter of 2010, and total skilled mix census from 13.6% to 13.9% over the same period.
Implementing Electronic Medical Records to improve Medicaid capture:
As another part of our strategic operating initiative, we implemented EMR to improve activity documentation, primarily in our states where Medicaid payments are acuity-based. We completed the implementation of EMR in all our nursing centers in December 2011, on time and under budget. A comparison of our most recent quarter versus the third quarter of 2010 reflects the increase in our average Medicaid rate per day:

                                          Three Months Ended
                                                        September 30,
                                September 30, 2013           2010
Medicaid average rate per day: $             162.08    $        147.93

Accelerating center renovations:
As part of our strategic operating initiatives, we have accelerated our program for improving our physical plants. Since 2005, we have been completing strategic renovations of certain centers that improve quality of care and profitability. We plan to continue these nursing center renovation projects and accelerate this strategy using the knowledge obtained in the first few years of this program. A comparison of our most recent quarter versus the third quarter of 2010 reflects our success with accelerating center renovations:

                                                                             September 30,
                                                   September 30, 2013             2010
Renovated nursing centers*                                         17                    14
Amounts expended on renovations (in millions)*   $               28.1      $           20.9

*The amounts above include renovations which were performed on six homes within the state of Arkansas that have since been disposed of and recorded within discontinued operations. Renovation spending on these facilities totaled $7.3 million. Completing strategic acquisitions:
Our strategic operating initiatives include a renewed focus on completing strategic acquisitions. We continue to pursue and investigate opportunities to acquire, lease or develop new centers, focusing primarily on opportunities within our existing areas of operation. We expect to announce additional development projects in the near future. We have added three skilled nursing centers in Kentucky, one in West Virginia, and five in Kansas. As detailed further in our results of operations, we experienced a significant amount of expenses related to start-up activities during 2012 at our two newly opened centers, while the center in Louisville, Kentucky, was accretive to earnings during 2012. We expect our West Virginia nursing center, our two newly leased Kentucky nursing centers, and the five Kansas centers to be accretive to earnings in 2013.

These investments in business initiatives have increased our operating expenses during 2013 and 2012. While we expect to see additional start-up losses at some of these centers, we also expect our investments to create additional revenue and improved profitability over the next several quarters.
As part of our strategic efforts, we have also performed thorough analysis on our existing centers in order to determine whether continuing operations within certain markets or regions was in line with the short-term and long-term strategy of the business. As a result, we disposed of an owned building in Arkansas in 2012, and reached an agreement to terminate our lease for eleven other facilities in Arkansas in 2013. As a result of these transactions, we no longer operate within the state of Arkansas. Basis of Financial Statements
Our patient revenues consist of the fees charged for the care of patients in the nursing centers we own and lease. Our operating expenses include the costs, other than lease, professional liability, depreciation and amortization expenses, incurred in the operation of the nursing centers we own and lease. Our general and administrative expenses consist of the costs of the corporate office and regional support functions. Our interest, depreciation and amortization expenses include all such expenses across the range of our operations.

Critical Accounting Policies and Judgments A "critical accounting policy" is one which is both important to the understanding of our financial condition and results of operations and requires management's most difficult, subjective or complex judgments often involving estimates of the effect of matters that are inherently uncertain. Actual results could differ from those estimates and cause our reported net income or loss to vary significantly from period to period. Our critical accounting policies are more fully described in our 2012 Annual Report on Form 10-K. Revenue Sources
We classify our revenues from patients and residents into four major categories:
Medicaid, Medicare, Managed Care, and Private Pay and other. Medicaid revenues are composed of the traditional Medicaid program established to provide benefits to those in need of financial assistance in the securing of medical services. Medicare revenues include revenues received under both Part A and Part B of the Medicare program. Managed Care revenues include payments for patients who are insured by a third-party entity, typically called a Health Maintenance Organization, often referred to as an HMO plan, or are Medicare beneficiaries who assign their Medicare benefits to a Managed Care replacement plan often referred to as Medicare replacement products. The Private Pay and other revenues are composed primarily of individuals or parties who directly pay for their services. Included in the Private Pay and other are patients who are hospice beneficiaries as well as the recipients of Veterans Administration benefits. Veterans Administration payments are made pursuant to renewable contracts negotiated with these payors.
The following table sets forth net patient and resident revenues related to our continuing operations by payor source for the periods presented (dollar amounts in thousands):

                                    Three Months Ended                            Nine Months Ended
                                      September 30,                                 September 30,
                               2013                    2012                   2013                 2012
Medicaid              $ 38,897        55.3 %   $ 33,023       53.4 %   $108,536    54.1%    $96,075     52.6%
Medicare                18,532        26.3       18,381       29.7      55,114     27.5      56,108     30.7
Managed Care             3,966         5.6        3,092        5.0      12,036      6.0      9,049       5.0
Private Pay and other    8,958        12.8        7,328       11.9      24,816     12.4      21,566     11.7
Total                 $ 70,353       100.0 %   $ 61,824      100.0 %   $200,502   100.0%    $182,798   100.0%

The following table sets forth average daily skilled nursing census by payor source for our continuing operations for the periods presented:

                              Three Months Ended                     Nine Months Ended
                                 September 30,                         September 30,
                             2013              2012               2013               2012
Medicaid              2,610     70.8 %   2,282     70.1 %   2,461     70.3 %   2,252     69.7 %
Medicare                404     11.0       417     12.8       409     11.7       420     13.0
Managed Care            105      2.9        79      2.4       106      3.0        79      2.4
Private Pay and other   565     15.3       478     14.7       527     15.0       479     14.9

Total 3,684 100.0 % 3,256 100.0 % 3,503 100.0 % 3,230 100.0 %

Consistent with the nursing home industry in general, changes in the mix of a facility's patient population among Medicaid, Medicare, Managed Care, and Private Pay and other can significantly affect the profitability of the facility's operations.

Health Care Industry
The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, quality of resident care and Medicare and Medicaid fraud and abuse. Over the last several years, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of fraud and abuse laws and regulations as well as laws and regulations governing quality of care issues in the skilled nursing profession in general. Violations of these laws and regulations could result in exclusion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with such laws and regulations is subject to ongoing government review and interpretation, as well as regulatory actions in which government agencies seek to impose fines and penalties. The Company is involved in regulatory actions of this type from time to time. In March 2010, significant legislation concerning health care and health insurance was passed, including the "Patient Protection and Affordable Care Act," ("Affordable Care Act") along with the "Health Care and Education Reconciliation Act of 2010" ("Reconciliation Act") collectively defined as the "Legislation." As previously noted, we expect this Legislation to impact our Company, our employees and our patients and residents in a variety of ways. This Legislation significantly changes the future responsibility of employers with respect to providing health care coverage to employees in the United States. Two of the main provisions of the Legislation become effective in 2014 whereby most individuals will be required to either have health insurance or pay a fine and employers with 50 or more employees will either have to provide minimum essential coverage or will be subject to additional taxes. On July 2, 2013, the United States Treasury Department announced that it will delay the employer reporting mandate, which was to be effective for 2014, until 2015 to allow additional time for process improvement and system integration. We have not estimated the financial impact of the Legislation and the costs associated with complying with the increased levels of health insurance we will be required to provide our employees and their dependents in future years. We expect the Legislation will result in increased operating expenses.
We also expect for this Legislation to continue to impact our Medicaid and Medicare reimbursement as well, though the exact timing and level of that impact is currently unknown. The Legislation expands the role of home-based and community services, which may place downward pressure on our ability to maintain our population of Medicaid residents.
On June 28, 2012, the United States Supreme Court ruled that the enactment of the Affordable Care Act did not violate the Constitution of the United States. This ruling permits the implementation of most of the provisions of the Affordable Care Act to proceed. The provisions of the Affordable Care Act discussed above are only examples of federal health reform provisions that we believe may have a material impact on the long-term care industry and on our business. We anticipate that many of the provisions of the Legislation may be subject to further clarification and modification through the rule making process and could have a material adverse impact on our results of operations. Medicare and Medicaid Reimbursement
A significant portion of our revenues are derived from government-sponsored health insurance programs. Our nursing centers derive revenues under Medicaid, Medicare, Managed Care, Private Pay and other third party sources. We employ third-party specialists in reimbursement and also use these services to monitor regulatory developments to comply with reporting requirements and to ensure that proper payments are made to our operated nursing centers. It is generally recognized that all government-funded programs have been and will continue to be under cost containment pressures, but the extent to which these pressures will affect our future reimbursement is unknown. Medicare

Effective October 1, 2011, Medicare rates were reduced by a nationwide average of 11.1%, the net effect of a reduction to restore overall payments to their intended levels on a prospective basis and the application of a 2.7% market basket increase and a negative 1.0% productivity adjustment required by the Affordable Care Act. The final Centers for Medicare and Medicaid Services ("CMS") rule also adjusts the method by which group therapy is counted for reimbursement purposes and, for patients receiving therapy, changes the timing of reassessment for purposes of determining patient RUG categories. These October 2011 Medicare reimbursement changes decreased our Medicare revenue and our Medicare rate per patient day. The new regulations also resulted in an increase in costs to provide therapy services to our patients.
The Budget Control Act of 2011 ("BCA"), enacted on August 2, 2011, increased the United States debt ceiling and linked the debt ceiling increase to corresponding deficit reductions through 2021. The BCA also established a 12 member joint committee of Congress known as the Joint Select Committee on Deficit Reduction ("Super Committee"). The Super Committee's objective was to create proposed legislation to reduce the United States federal budget deficit by $1.5 trillion for fiscal years 2012 through 2021. Part of the BCA required this legislation to be enacted by December 23, 2011, or approximately $1.2 trillion in spending reductions would automatically begin through sequestration on January 1, 2013, split between domestic and defense spending. As no legislation was passed that would achieve the targeted savings outlined in the BCA, payments to Medicare providers have been reduced by 2% from planned levels effective April 1, 2013. As a result of sequestration, we experienced an approximate decrease in revenue of $901,000 for the quarter ended September 30, 2013.
In July 2013, CMS issued Medicare payment rates, effective October 1, 2013, that increased reimbursement to skilled nursing centers by approximately 0.6% compared to the fiscal year ending September 30, 2013. The increase is the net effect of a 2.5% inflation increase as measured by the SNF market basket, offset by a 0.7% negative productivity adjustment required by the Affordable Care Act, and a 1.2% budget neutrality adjustment. This adjustment if further offset by the ongoing sequestration from the BCA as mentioned above. The 2% sequestration is not applied to the payment rate, but rather it is applied to Medicare claims after determining coinsurance, any applicable deductibles, and any applicable Medicare secondary payment adjustments.
Therapy Services. There are annual Medicare Part B reimbursement limits on therapy services that can be provided to an individual. The limits impose a $1,900 per patient annual ceiling on physical and speech therapy services, and a separate $1,900 per patient annual ceiling on occupational therapy services. CMS established an exception process to permit therapy services in certain situations and we provide services that are reimbursed under the exceptions process. The exceptions process has been extended several times, most recently by the American Taxpayer Relief Act of 2012, which extended this exception process through December 31, 2013.
Related to the exceptions process discussed above, for services provided with dates of service between January 1, 2013, through March 31, 2013, providers were required to submit a request for an exception for therapy services above the threshold of $3,700 which will then be manually medically reviewed. Similar to the therapy cap exceptions process, the threshold process will have a $3,700 per patient threshold on physical and speech therapy services, and a separate $3,700 per patient threshold on occupational therapy services. The exception reviews were conducted by Medicare Administrative Contractors during this period. Effective April 1, 2013, Recovery Auditors began conducting prepayment and postpayment reviews of claims dated April 1, 2013 and later.
It is unknown if any further extension of the therapy cap exceptions or the new threshold process will be included in future legislation or CMS policy decisions. If the exception process is discontinued or if the manual review process for therapy in excess of $3,700 negatively impacts our Medicare Part B reimbursement, we would likely see a reduction in our therapy revenues which would negatively impact our operating results and cash flows.
On November 2, 2010, CMS released a final proposed rule as part of the Medicare Physician Fee Schedule ("MPFS") that was effective January 1, 2011. The policy impacts the reimbursement we receive for Medicare Part B therapy services in our facilities. The policy provides that Medicare Part B pay the full rate for the therapy unit of service that has the highest Practice Expense ("PE") component for each patient on each day they receive multiple therapy treatments. Reimbursement for the second and subsequent therapy units for each patient each day they receive multiple therapy treatments is reimbursed at a rate equal to 75% of the applicable PE component through March 31, 2013. Effective April 1, 2013, the rate at which these services are reimbursed was reduced to 50% of the applicable PE component.
Medicare Part B therapy services in our centers are determined according to MPFS. Annually since 1997, the MPFS has been subject to a Sustainable Growth Rate Adjustment ("SGR") intended to keep spending growth in line with allowable spending. Each year since the SGR was enacted, this adjustment produced a scheduled negative update to payment for physicians, therapists and other healthcare providers paid under the MPFS. Congress has stepped in with so-called "doc fix" legislation numerous times to stop payment cuts to physicians, most recently by the Middle Class Tax Relief and Job Creation Act of 2012, which stopped these payment cuts through December 31, 2012. Effective April 1, 2013, MPFS included a reduction of

Medicare Part B therapy services reimbursements of 7%. This reduction in reimbursements has resulted in a reduction in revenue of $478,000 for the three-month period ended September 30, 2013.
The Middle Class Tax Relief and Job Creation Act of 2012 also resulted in a reduction of bad debt treated as an allowable cost. Prior to this act, Medicare reimbursed providers for beneficiaries' unpaid coinsurance and deductible amounts after reasonable collection efforts at a rate between 70 and 100 percent of beneficiary bad debt. This provision reduced bad debt reimbursement exposure for all providers to 65 percent.
Several states in which we operate face budget shortfalls, which could result in reductions in Medicaid funding for nursing centers. The federal government made an effort to address the financial challenges state Medicaid programs are facing by increasing the amount of Medicaid funding available to states. Pressures on state budgets are expected to continue in the future and are expected to result in Medicaid rate reductions.
We receive the majority of our annual Medicaid rate increases during the third quarter of each year. The rate changes received in the third quarter of 2012 and the third quarter of 2011, along with increased Medicaid acuity in our acuity based states, was the primary contributor to our 3.0% increase in average rate per day for Medicaid patients in 2013 compared to 2012. Based on the rate changes received during the third quarter of 2013, we expect downward pressure on our rate per day for Medicaid patients as we move into 2014 due to modest rate decreases in many of the states within which we operate. We are unable to predict what, if any, reform proposals or reimbursement limitations will be implemented in the future, or the effect such changes would have on our operations. For the nine months ended September 30, 2013, we derived 27.5% and 54.1% of our total patient revenues related to continuing operations from the Medicare and Medicaid programs, respectively. Any health care reforms that significantly limit rates of reimbursement under these programs could, therefore, have a material adverse effect on our profitability.
We will attempt to increase revenues from non-governmental sources to the extent capital is available to do so. However, private payors, including Managed Care . . .

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