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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM_____ TO_____ .
COMMISSION FILE NUMBER 1-3720
FRESENIUS MEDICAL CARE HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEW YORK 13-3461988
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
(JURISDICTION OF INCORPORATION
OR ORGANIZATION)
95 HAYDEN AVE., LEXINGTON, MA 02420
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: 781-402-9000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Class D Special Dividend Preferred Stock, par value $.10 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to the
Form 10-K.
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing. (See
definition of affiliate in Rule 405). $11,132,750 March 30, 2000.
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Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date:
As of March 30, 2000, 90,000,000 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Information Statement with respect to its 2000 Annual
Meeting of Stockholders, to be filed on or before May 1, 2000. (Part III)
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TABLE OF CONTENTS
PART I
Item 1. Business ......................................................... 4
Item 2. Properties ....................................................... 26
Item 3. Legal Proceedings ................................................ 27
Item 4. Submission of Matters to a Vote of Security Holders .............. 32
PART II .................................................................. 32
Item 5. Market Price for Registrant's Common Equity and Related
Stockholder Matters .............................................. 32
Item 6. Selected Financial Data .......................................... 33
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................ 34
Item 7A. Quantitative and Qualitative Disclosures About Market Risks ..... 42
Item 8. Consolidated Financial Statements and Supplementary Data ......... 43
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure ............................................. 43
PART III ................................................................. 43
Item 10. Directors and Executive Officers of the Registrant .............. 43
Item 11. Executive Compensation .......................................... 43
Item 12. Security Ownership of Certain Beneficial Owners and Management .. 43
Item 13. Certain Relationships and Related Transactions .................. 43
PART IV .................................................................. 43
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports
on Form 8-K ...................................................... 43
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ITEM 1. BUSINESS
This section contains certain forward-looking statements that are subject
to various risks and uncertainties. Such statements include, without limitation,
discussions concerning the outlook of Fresenius Medical Care Holdings, Inc.
(collectively with all its direct and indirect subsidiaries, the "Company"),
government reimbursement, future plans and management's expectations regarding
future performance. Actual results could differ materially from those contained
in these forward-looking statements due to certain factors including, without
limitation, changes in business, economic and competitive conditions, regulatory
reforms, foreign exchange rate fluctuations, uncertainties in litigation or
investigative proceedings, the realization of anticipated tax deductions, and
the availability of financing. These and other risks and uncertainties, which
are more fully described elsewhere in this 1999 Form 10-K and in the Company's
reports filed from time to time with the Securities and Exchange Commission (the
"Commission") could cause the Company's results to differ materially from the
results that have been or may be projected by or on behalf of the Company.
Fresenius Medical Care Holdings, Inc., a New York corporation is a
subsidiary of Fresenius Medical Care AG, a German corporation ("FMC" or
Fresenius Medical Care"). The Company conducts its operations through five
principal subsidiaries, National Medical Care, Inc., a Delaware corporation
("NMC"); Fresenius USA, Marketing Inc., and Fresenius USA Manufacturing Inc.,
Delaware corporations and Fresenius USA Inc, a Massachusetts corporation
(collectively "Fresenius USA" or "FUSA") and SRC Holding Company, Inc., a
Delaware corporation.
The Company is primarily engaged in (i) providing kidney dialysis
services, clinical laboratory testing and renal diagnostic services, and (ii)
manufacturing and distributing products and equipment for dialysis treatment,
which accounted for 83% and 17% of 1999 net revenues, respectively.
- KIDNEY DIALYSIS AND OTHER SERVICES. The Company is the
largest private provider in the U.S. of kidney dialysis and
related services. At December 31, 1999, the Company
operated 849 outpatient dialysis facilities in the U.S.
(including Puerto Rico), treating approximately 65,700
chronic patients. The company treats approximately 24% of
the dialysis patients in the U.S., and believes its next
largest competitor treats approximately 16% of U.S.
dialysis patients. Additionally, the Company provides
inpatient dialysis services under contract to hospitals in
the U.S.
- DIALYSIS PRODUCTS. The Company manufactures a comprehensive
line of dialysis products, including hemodialysis machines,
peritoneal dialysis systems and disposable products. The
Company manufactures innovative and technologically advanced
products, including the Fresenius Polysulfone(TM) dialyzer,
which the Company believes is the best-performing,
mass-produced dialyzer on the market, and Delflex(R)
peritoneal solutions with Safe-Lock(R) connectors.
Since 1995, NMC, a subsidiary of the Company and certain of NMC's
subsidiaries had been the subject of an investigation (the "OIG Investigation")
by the Office of Inspector General ("OIG") of the United States Department of
Health and Human Services, the United States Attorney for the District of
Massachusetts (the "U.S. Attorney's Office") and other authorities concerning
possible violations of federal laws, including the anti-kickback status and the
False Claims Act.
On January 18, 2000, the Company, NMC and certain affiliated companies
executed definitive agreements (the "Settlement Agreements") with the United
States Government (the "Government") to settle (i) the matters covered in the
OIG Investigation and (ii) NMC's claim with respect to approximately $153.5
million of outstanding Medicare receivables for nutrition therapy rendered on or
before December 31, 1999 (collectively, the "Settlement"). The Settlement was
approved by the United States District Court for the District of Massachusetts
on February 2, 2000. See "Legal Proceedings - Settlement of the U.S. Government
Investigation", See "Notes to Consolidated Financial Statements - Note 7,
Special Charge for Settlement of Investigation and Related Costs, Note 8-
Discontinued Operations and Note 16 - Commitments and Contingencies - Legal
Proceedings - Settlement of U.S. Government Investigation".
The Company's principal executive office is located at 95 Hayden Avenue,
Lexington, MA 02420-9192. Its telephone number is (781) 402-9000.
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RENAL INDUSTRY OVERVIEW
END-STAGE RENAL DISEASE
End-stage renal disease ("ESRD") is the state of advanced chronic kidney
disease that is characterized by the irreversible loss of kidney function and
requires routine dialysis treatment or kidney transplantation to sustain life. A
normally functioning human kidney removes waste products and excess water from
the blood, preventing toxin buildup, eventual poisoning of the body and water
overload. Chronic kidney disease can be caused by a number of conditions,
primarily nephritis, inherited diseases, hypertension and diabetes. Nearly 60%
of all people with ESRD acquire the disease as a complication of one or more of
these primary conditions.
Based on the most recent information published by the Health Care
Financing Administration ("HCFA") of the Department of Health and Human Services
("HHS"), the number of patients in the U.S. who received chronic dialysis grew
from approximately 66,000 in 1982 to approximately 246,000 at December 31, 1998
or at a compound annual rate of 8.6%. The Company attributes the continuing
growth in the number of dialysis patients principally to an increase in general
life expectancy and, thus, the overall aging of the general population, the
shortage of donor organs for kidney transplants and better treatment and
survival of patients with hypertension, diabetes and other illnesses that lead
to ESRD. Moreover, improved technology has enabled older patients and those who
previously could not tolerate dialysis due to other illnesses to benefit from
this life-prolonging treatment.
There are currently only two methods for the treatment of ESRD: dialysis
and kidney transplantation. Transplants are limited by the scarcity of
compatible kidneys. Approximately 13,200 patients received kidney transplants in
the U.S. during 1998. Therefore, most patients suffering from ESRD must rely on
dialysis, which is the removal of toxic waste products and excess fluids from
the body by artificial means. There are two major dialysis modalities commonly
used today, hemodialysis and peritoneal dialysis. Generally, the method of
treatment used by an ESRD patient is chosen by the physician in consultation
with the patient, and is based on the patient's medical conditions and needs.
According to HCFA data, as of December 31, 1998, there were approximately
3,600 Medicare-certified ESRD treatment centers in the U.S. Ownership of these
centers was fragmented. The Company estimates that at that time, the ten largest
multi-facility providers accounted for approximately 1,800 facilities (56% of
facilities) and 136,000 patients (59% of patients). Freestanding facilities
(many privately owned by physicians) and hospital-affiliated facilities were the
sites of treatment for the remaining 23% and 21% of patients, respectively.
There was substantial further consolidation in the market in 1998 leading
the Company to estimate that the top ten multi-center providers accounted for
approximately 157,500 patients, or 64% of the estimated market at December 31,
1998.
According to HCFA, as of December 31, 1998, approximately 88% of dialysis
patients in the U.S. received in-center treatment (virtually all hemodialysis)
and approximately 12% were treated at home. Of those treated at home, more than
94% received peritoneal dialysis.
TREATMENT OPTIONS FOR ESRD
Hemodialysis. Hemodialysis removes waste products and excess fluids from
the blood extracorporeally. In hemodialysis, the blood flows outside the body by
means of plastic tubes known as bloodlines into a specially designed filter, a
dialyzer, which functions as an artificial kidney by separating waste products
and excess water from the blood by diffusion and ultrafiltration. Dialysis
solution carries away the waste products and excess water, and the cleansed
blood is returned to the patient. The movement of the blood and dialysis
solution is controlled by a hemodialysis machine, which pumps blood, adds
anti-coagulants, regulates the purification process and controls the mixing of
dialysis solution and the rate of its flow through the system. This machine may
also monitor and record the patient's vital signs.
According to HCFA, as of December 31, 1998, hemodialysis patients
represented 88% of all dialysis patients in the U.S. Hemodialysis treatments are
generally administered to a patient three times per week and typically last from
two and one-half to four hours or longer. The majority of hemodialysis patients
are referred to outpatient dialysis centers, such as those operated by Fresenius
Medical Care, where hemodialysis treatments are performed with the assistance of
a nurse or dialysis technician under the general supervision of a physician.
Hemodialysis is the only form of treatment (other than
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transplantation) currently available to patients who have very low residual or
nonexistent renal function and are inadequately dialyzed using peritoneal
dialysis.
Peritoneal Dialysis. Peritoneal dialysis removes waste products and excess
fluids from the blood by use of the peritoneum, the membrane lining covering the
internal organs located in the abdominal area. Most peritoneal dialysis
treatments are self-administered by patients in their own homes and workplaces,
either by a treatment known as continuous ambulatory peritoneal dialysis
("CAPD") or by a treatment introduced by Fresenius USA in 1980 known as
continuous cycling peritoneal dialysis ("CCPD"). In both of these treatments,
the patient has a catheter surgically implanted to provide access to the
peritoneal cavity. Using this catheter, a sterile dialysis solution is
introduced into the peritoneal cavity and the peritoneum operates as the
dialyzing membrane. A typical CAPD peritoneal dialysis program involves the
introduction and disposal of solution four times a day. With CCPD a machine is
used to "cycle" solution to and from the patient's peritoneum during sleep.
In both CAPD and CCPD the patient undergoes dialysis daily, and typically
does not experience the buildup of toxins and fluids experienced by hemodialysis
patients on the days they are not treated. In addition, because the patient is
not required to make frequent visits to a hemodialysis clinic, and because the
solution exchanges can be accomplished at convenient (although more frequent)
times, a patient on peritoneal dialysis may experience much less disruption to
his or her life than a patient on hemodialysis. Certain aspects of peritoneal
dialysis, however, limit its use as a long-term therapy for some patients.
First, certain patients cannot make the required sterile connections of the
peritoneal dialysis tubing to the catheter, leading to excessive episodes of
peritonitis, a bacterial infection of the peritoneum which can result in serious
adverse health consequences, including death. Second, treatment by current forms
of peritoneal dialysis may not be as effective as hemodialysis in removing
wastes and fluids for some patients.
STRATEGY
The Company's objective is to focus on generating revenue growth that
exceeds market growth of the dialysis industry, as measured by growth in patient
population, while maintaining the Company's leading position in the market and
increasing earnings at a faster pace than revenue growth.
The Company's dialysis services and product businesses have grown faster
than the market in terms of revenues over the past five years, and the Company
believes that it is well positioned to continue this growth by focusing on the
following strategies:
- Continue to Provide High Standards of Patient Care. The Company
believes that its reputation for providing the highest standards of
patient care is a competitive advantage. The Company believes that
NMC's proprietary Patient Statistical Profile ("PSP") database,
which contains clinical and demographic data on approximately 65,700
dialysis patients, is the most comprehensive body of information
about dialysis patients in the world. The Company believes that this
database provides a unique advantage in continuing to improve
dialysis treatment outcomes, reduce mortality rates and improve the
quality and effectiveness of dialysis products.
- Expand Presence in the U.S. Over the past several years, the Company
has significantly expanded its U.S. provider operations through the
acquisition of existing dialysis clinics as well as the opening of
new clinics. In 1999, the Company acquired 15 clinics and opened 57
new clinics. As a result, the Company now has an established
presence in each of its targeted markets in the U.S. Prospectively,
the Company expects to enhance its presence in the U.S. by focusing
its expansion on the acquisition of individual or small groups of
dialysis centers in selected markets, expansion of existing clinics,
and opening of new centers, although the Company will consider large
acquisitions if suitable opportunities become available.
- Increase Spectrum of Dialysis Services. One of the Company's
objectives is to continue to expand its role within the broad
spectrum of services provided to dialysis patients. The Company has
begun to implement this strategy by providing expanded and enhanced
patient services, including laboratory and diagnostic services, to
both its own clinics and those operated by third parties. The
Company estimates that Spectra Renal Management provides laboratory
services for 37% of the dialysis patients in the United States. The
Company has developed disease state management methodologies that it
believes are attractive to managed care payors. The Company has
formed Optimal Renal Care, LLC, a joint venture with Permanente
Medical Group of Southern California, a subsidiary of Kaiser
Permanente which has the
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largest dialysis patient population of any managed care
organization, and has formed Renaissance Health Care as a joint
venture with certain of the Company's nephrologists.
- Continue to Offer Complete Dialysis Product Lines. The Company
offers broad and competitive hemodialysis and peritoneal dialysis
product lines. These product lines enjoy broad market acceptance and
enable customers to purchase all of their dialysis machines, systems
and disposable products from a single source. During the year ended
December 31, 1999 Fresenius Medical Care's product revenues were
derived approximately 16% from machine sales and 84% from sales of
disposable products. These disposable products provide FMC with a
continuing source of revenue from our installed base of dialysis
equipment.
- Extend Our Position as an Innovator in Product and Process
Technology. The Company is committed to being a technology
leader in both hemodialysis and peritoneal dialysis products.
FMC has a research and development team with approximately 238
members focused on developing dialysis systems that are safer,
more effective and easier to use and that can be easily
customized to meet the differing needs of customers around the
world. The Company believes that its extensive expertise in
patient treatment and clinical data will further enhance its
ability to develop more effective products and treatment
methodologies. The Company's ability to manufacture dialysis
products on a cost-effective and competitive basis results in
large part from our process technologies. Over the past several
years, the Company has reduced manufacturing costs per unit
through development of proprietary manufacturing technologies
that have streamlined and automated its production processes.
Fresenius Medical Care intends to further improve its
proprietary, highly automated manufacturing system to further
reduce product manufacturing costs, while continuing to achieve a
high level of quality control and reliability.
For a description of other elements of the Company's strategy see
" --Dialysis Services" and " -- Dialysis Products Business." For additional
information in respect to the Company's industry sections, see Notes to
Consolidated Financial Statements - Note 18, "Industry Segments and
Information about Foreign Operations."
DIALYSIS SERVICES
OVERVIEW
The Company is the largest provider in the U.S. of kidney dialysis and
related services to patients suffering from chronic kidney disease. The Company
also provides clinical laboratory testing and renal diagnostic services for
dialysis patients (Company owned and non-Company owned clinics). Such diagnostic
services include electrocardiograms, doppler flow testing, nerve conduction
velocity, and other tests.
The Company's provider business is primarily operated through the Dialysis
Services business unit ("Dialysis Services"). Clinical laboratory testing and
renal diagnostic services are primarily provided by Spectra Renal Management
("SRM")
DIALYSIS SERVICES
As of December 31, 1999, the Company owned or managed 849 dialysis centers
in the U.S. The centers are generally concentrated in areas of high population
density. In 1999, the Company acquired 15 existing centers, developed 57 new
centers and consolidated or sold 5 centers. The number of patients treated at
the Company's centers has increased from approximately 58,627 at December 31,
1998 to approximately 61,700 at December 31, 1999.
At the Company's centers, hemodialysis treatments are provided at
individual "stations" through the use of dialysis machines. A nurse or dialysis
technician attaches the necessary tubing to the patient and monitors the
dialysis equipment and the patient's vital signs. The capacity of a center is a
function of the number of stations and such factors as the type of treatment,
patient requirements, length of time per treatment and local operating practices
and ordinances regulating hours of operation. Most of the Company's centers
operate two or three patient shifts per day.
Each of the Company's dialysis centers is under the general supervision of
a medical director ("Medical Director") and, in some cases, one or more
Associate Medical Directors, who are physicians. See "Patient, Physician and
Other Relationships." Each dialysis center also has an administrator who
supervises the day-to-day operations of the facility and the
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staff. The staff typically consists of registered nurses, licensed practical
nurses, patient care technicians, a social worker, a registered dietician, a
unit clerk and biomedical technicians.
The Company engages in systematic efforts to measure, maintain and improve
the quality of the services that it delivers at its dialysis centers. Each
center collects and analyzes quality assurance and patient data, which in turn
is regularly reviewed by Dialysis Services and corporate management. At each
center, a quality assurance committee is responsible for reviewing quality of
care reports generated by the Company's PSP system, setting goals for quality
enhancement and monitoring the progress of quality assurance initiatives. The
Company believes that it enjoys a reputation of providing superior quality care
to dialysis patients.
As part of the dialysis therapy, the Company provides various related
services to ESRD patients in the U.S. at its dialysis centers, including the
administration of erythropoietin ("EPO"), a bioengineered protein that
stimulates the production of red blood cells. EPO is used to treat anemia, a
medical complication frequently experienced by ESRD patients, and is
administered to most of the Company's patients.. EPO is produced by a single
source manufacturer, Amgen Inc., and any interruption of supply could materially
adversely affect the Company's business and results of operations. The Company's
current contract with Amgen Inc. covers the period from January 2000 to
December 2000 with price guarantees and volume and outcome based discounts.
Other services provided to ESRD patients in the U.S. include the administration
of calcium, iron and hepatitis vaccine and blood transfusions; the provision of
interdialytic perenteral nutrition ("IDPN"), in which nutrients are added to the
patient's blood during hemodialysis; the provision, through SRM, of clinical
laboratory testing; the provision of electrocardiograms; and Doppler flow
testing of the effectiveness of the patient's vascular access for dialysis.
These tests and other ancillary services are provided by specific prescription
of the patient's attending physician.
The Company's centers also offer services for home dialysis patients, the
majority of whom are treated with peritoneal dialysis. For such patients, the
Company provides certain materials, training and patient support services,
including clinical monitoring, supply of EPO, follow-up assistance and
arrangements for the delivery of the supplies to the patient's residence. See
" -- Regulatory and Legal Matters -- Reimbursement" and " -- Legal Proceedings"
for a discussion of billing for such products and services.
The manner in which each center conducts its business is dependent, in
large part, upon applicable laws, rules and regulations of the jurisdiction in
which the center is located, as well as the Company's clinical policies.
However, a patient's attending physician (who may be the center's Medical
Director or an unaffiliated physician with staff privileges at the center) has
medical discretion as to the particular treatment modality and medications to be
prescribed for that patient. Similarly, the attending physician has discretion
in selecting the particular medical products prescribed, although equipment,
regardless of brand, is typically purchased by the center in consultation with
the medical director through the Company's central purchasing operations.
The Company also provides dialysis services under contract to hospitals in
the U.S. on an "as needed" basis for patients suffering from acute kidney
failure and for ESRD patients who are hospitalized. The Company services these
patients either at their bedside, using portable dialysis equipment, or at a
dialysis site maintained by the hospital. Contracts with hospitals provide for
payment at negotiated rates that are higher than the Medicare reimbursement
rates for chronic in-center treatments.
ACQUISITIONS
The Company's growth in revenues and operating earnings in prior years has
resulted, in significant part, from its ability to effect acquisitions of health
care businesses, particularly dialysis centers, on reasonable terms. In the
U.S., doctors may be motivated to sell their centers to obtain relief from
day-to-day administrative responsibilities and changing governmental
regulations, to focus on patient care and to realize a return on their
investment. While price is typically the key factor in securing acquisitions,
the Company believes that it will be an attractive acquirer or partner to many
dialysis center owners due to its reputation for patient treatment, its
proprietary PSP database (which contains clinical and demographic data on
approximately 65,700 dialysis patients), its comprehensive clinical and
administrative systems, manuals and policies, its
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ability to provide ancillary services to dialysis centers and patients and its
reputation for technologically advanced products. The Company believes that
these factors will also be advantages when opening new centers.
The U.S. health care industry has experienced significant consolidation in
recent years, particularly in the dialysis service sectors in which the Company
competes, resulting, in some cases, in increased costs of acquisitions in these
sectors. Moreover, because of the ongoing consolidation in the dialysis services
industry, the availability of acquisitions may decrease. The Company's ability
to make acquisitions also will depend, in part, on the Company's available
financial resources and the limitations imposed under two credit facilities
(collectively, "the NMC Credit Facilities"). See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations-
Liquidity and Capital Resources." The inability of the Company to continue to
effect acquisitions in the provider business on reasonable terms could have an
adverse impact on growth in its business and on its results of operations.
The Company regularly evaluates and explores opportunities with various
other health care companies and other businesses regarding acquisitions and
joint business ventures. In 1999, the Company completed new acquisitions and
acquisitions of previously managed clinics totaling 15 dialysis facilities in
the U.S. providing care to approximately 1,274 patients. These acquisitions and
agreements expand the Company's presence in selected key areas of the United
States.
SOURCES OF DIALYSIS SERVICES NET REVENUES
The following table provides information for the periods indicated
regarding the percentage of the Company's U.S. dialysis treatment services net
revenues provided by (a) the Medicare ESRD program, (b) private/alternative
payors, such as commercial insurance and private funds, (c) Medicaid and other
government sources and (d) hospitals.
YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
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Medicare ESRD program .... 60.2% 57.0% 64.5%
Private/alternative payors 30.3 33.8 25.8
Medicaid and other
government sources ....... 4.2 4.1 4.6
Hospitals ................ 5.3 5.1 5.1
------ ------ ------
Total .................. 100.0% 100.0% 100.0%
====== ====== ======
Under the Medicare ESRD program, Medicare reimburses dialysis providers
for the treatment of certain individuals who are diagnosed as having ESRD,
regardless of age or financial circumstances. When Medicare assumes
responsibility as the primary payor, it pays for dialysis and certain specified
related services at 80% of the payment methodology commonly referred to as the
composite rate method ("Composite Rate"). In addition, subject to various
restrictions and co-payment limitations, Medicare pays separately for certain
dialysis-related diagnostic and therapeutic services not included in the
Composite Rate. A secondary payor, usually a Medicare supplemental insurer, a
state Medicaid program or, to a lesser extent, the patient or the patient's
private insurer, is responsible for paying any co-payment (typically 20%), other
approved services not paid by Medicare and the annual deductible. Most of the
states in which the Company currently operates dialysis centers provide Medicaid
benefits to qualified recipients to supplement their Medicare entitlement.
Prior to the time at which Medicare becomes the primary payor, most
dialysis treatments are paid for by another third-party payor, such as the
patient's private insurer, or by the patient. ESRD patients under age 65 who are
covered by an employer health plan must wait 33 months (consisting of a
three-month entitlement waiting period and an additional 30-month "coordination
of benefits period") before Medicare becomes the primary payor. During this
33-month period, the employer health plan is responsible for payment as primary
payor at its negotiated rate or, in the absence of such a rate, at the Company's
usual and customary rates (which generally are higher than the rates paid by
governmental payors, such as Medicare), and Medicare is the secondary payor. See
" -- Regulatory and Legal Matters -- Reimbursement"
A significant portion of the Company's revenues for dialysis services are
derived from reimbursement provided by non-governmental third-party payors. A
substantial portion of third-party health insurance in the U.S. is now furnished
through some type of managed care plan, including health maintenance
organizations ("HMOs"). Managed care plans have increased their market share
overall, and in the Medicare population in particular. This trend may continue
as a result of the merger and consolidation of providers and payors in the
health care industry, as well as the discussions among members of Congress and
the executive branch regarding ways to increase the number of Medicare and
Medicaid beneficiaries served through managed care plans. The Company estimates
that approximately 12% of Dialysis Services' net revenues for the twelve months
ended December 31, 1999 was attributable to managed care plans.
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Non-governmental payors generally reimburse for dialysis treatments at
higher rates than governmental payors such as Medicare. However, managed care
plans have been more aggressive in selectively contracting with a smaller number
of providers willing to furnish services for lower rates and subject to a
variety of service restrictions. For example, managed care plans and traditional
indemnity third-party payors increasingly are demanding alternative fee
structures, such as capitation arrangements whereby a provider receives a fixed
payment per month per enrollee and bears the risk of loss if the costs of
treating such enrollee exceed the capitation payment. These market forces have
resulted in pressures to reduce the reimbursement the Company receives for its
services and products.
The Company's ability to secure rates with indemnity and managed care
plans has largely been due to the relatively small number of ESRD patients which
any single HMO has enrolled. By regulation, ESRD patients have been prohibited
from joining an HMO unless they are otherwise eligible for Medicare coverage,
due to age or disability, and are members of a managed care plan when they first
experience kidney failure. HCFA has a pilot evaluation underway for treatment of
Medicare ESRD patients by managed care companies under capitated contracts, with
three organizations. If successful, this pilot program could result in the
elimination of the pre-existing condition requiring ESRD patients to enroll in
managed care organizations. As Medicare HMO enrollments increase and the number
of ESRD patients in managed care plans also increases, managed care plans'
leverage to negotiate lower rates may become greater. In addition, the HMO may
have contracted with another provider, or may have tighter utilization controls
with respect to certain ancillary services typically provided by the Company to
ESRD patients, which could limit the Company's future payments for such
services.
HCFA has initiated the ESRD demonstration projects that are likely to be
conducted over the next three to four years and that will seek to evaluate the
feasibility of "privatizing" the Medicare ESRD program. The Company believes
that the elimination of "pre-existing conditions" exclusions would greatly
facilitate the enrollment of ESRD patients into managed care plans. The
likelihood and timing of this decision is impossible to predict. Should
legislation to implement this change be enacted, the Company believes it would
likely increase the number of patients enrolled in managed care plans, and might
also cause these plans to look closer at outsourcing ESRD care to ESRD companies
such as the Company's joint decrease state management ventures (Optimal Renal
Care and Renaissance Health Care).
The Company formed two joint ventures seeking to contract "at risk" with
managed care organizations for the care of ESRD patients. Renaissance Health
Care, Inc. is a 50/50 joint venture between the Company and participating
nephrologists throughout the U.S. Optimal Renal Care, LLC is a 50/50 joint
venture between Permanente Medical Group of Southern California, a subsidiary of
Kaiser Permanente and the Company.
As managed care programs expand market share and gain greater bargaining
power vis-a-vis health care providers, there will be increasing pressure to
reduce the amounts paid for services and products furnished by the Company.
These trends would be accelerated if future changes to the Medicare ESRD program
require private payors to assume a greater percentage of the cost of care given
to dialysis patients. The Company is presently seeking to expand the portion of
its revenues attributable to non-governmental private payors. However, the
Company believes that the historically higher rates of reimbursement paid by
non-governmental payors may not be maintained at such levels. If substantially
more patients of the Company join managed care plans or such plans reduce
reimbursements to the Company, the Company's business and results of operations
could be adversely affected, possibly materially. See " -- Regulatory and Legal
Matters -- Reimbursement," " -- Anti-Kickback Statutes, False Claims Act, Stark
Law and Fraud and Abuse Laws -- Changes in the Health Care Industry
PATIENT, PHYSICIAN AND OTHER RELATIONSHIPS
The Company believes that its success in establishing and maintaining dialysis
centers, in the U.S. depends in significant part upon its ability to obtain the
acceptance of, and referrals from, local physicians, hospitals and managed care
plans. A dialysis patient generally seeks treatment at a center that is
convenient to the patient and at which the patient's nephrologist has staff
privileges. Virtually all of the Company's clinics maintain open staff
privileges for local nephrologists. The Company's ability to provide quality
dialysis care and otherwise to meet the needs of local patients and physicians
is central to its ability to attract nephrologists to the Company's centers and
to receive referrals from such physicians. See " -- Anti-kickback Statutes,
False Claims Act, Stark Law and Fraud and Abuse Laws."
The conditions for coverage under the Medicare ESRD program require that
treatment at a dialysis center be under the general supervision of a Medical
Director. Generally, the Medical Director must be board certified or board
eligible in internal medicine and have at least 12 months of training or
experience in the care of patients at ESRD centers. The Company's Medical
Directors maintain their own private practices.
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The Company has written agreements with the physicians who serve as
Medical Directors at its centers. The Medical Director agreements entered into
by the Company generally have terms of three years, although some have terms of
as long as five to ten years. The compensation of Medical Directors and other
physicians under contract with the Company is individually negotiated and
generally depends upon competitive factors in the local market, the physician's
professional qualifications, experience and responsibilities and the size of and
services provided by the center. Until January 1, 1995, Medical Director
compensation typically included a component based on some measure of the
financial performance of the clinics under the supervision of that Medical
Director. See " -- Legal Proceedings --Settlement of U.S. Government
Investigation". Since 1995, the Company has entered into new agreements, or
amended existing agreements, for substantially all of its Medical Directors.
Under the new arrangements, the aggregate compensation of the Medical Directors
and other physicians under contract is fixed in advance for a period of one year
or more and is based in part on various efficiency and quality incentives. The
Company believes that compensation is paid at fair market value.
Virtually all of the Medical Director agreements, as well as the typical
contract under which the Company acquires existing dialysis centers, include
noncompetition covenants covering specified activities within specified
geographic areas for specified periods of time, although they do not prohibit
the physicians from providing direct patient care services at other locations
and, consistent with law, do not require a physician to refer patients to the
Company or particular centers or to buy or use specific medical products. In
certain states, non-competition covenants may not be enforceable.
COMPETITION
Dialysis Services. The dialysis services industry is highly competitive.
Ownership of dialysis centers in the U.S. is fragmented, with a large number of
operators each owning 10 or fewer centers and a small number of larger
providers, the largest of which is the Company. Consolidation of the industry
has been ongoing over the last decade. In urban areas, where many of the
Company's dialysis centers are located, there frequently are many competing
centers in proximity to the Company's centers. The Company experiences direct
competition from time to time from former Medical Directors or other employees
or referring physicians who establish their own centers. Furthermore, other
health care providers or product manufactures, some of which have significant
operations or resources, may decide to enter the dialysis business in the
future.
Because in most cases the prices of dialysis services in the U.S. are
directly or indirectly regulated by Medicare, competition for patients is based
primarily on quality and accessibility of service and the ability to obtain
referrals from physicians and hospitals. However, the growth of managed care has
placed greater emphasis on service costs for patients insured by
non-governmental payors. The Company believes that it competes effectively in
all of these areas. In particular, based upon the Company's knowledge and
understanding of other providers of dialysis treatments, as well as from
information obtained from publicly available sources, the Company believes that
it is among the most cost-efficient providers of kidney dialysis services. In
addition, as a result of its large size relative to most other dialysis service
providers, the Company enjoys economies of scale in areas such as purchasing,
billing, collections and data processing.
Competition in the dialysis industry is particularly intense with respect
to the acquisition of existing dialysis centers, which has resulted in an
increase in the cost of such acquisitions, and in enlisting and retaining
qualified physicians to act as Medical Directors.
LABORATORY AND RENAL DIAGNOSTIC SERVICES
The Company provides clinical laboratory testing and renal diagnostic
services through its business unit known as Spectra Renal Management ("SRM").
SRM was created as a result of the acquisition of Spectra Laboratories, Inc.
("Spectra") in June of 1997 and its combination with the Company's existing
laboratory business at that time ("LifeChem") and its renal diagnostic testing
business. SRM is the leading U.S. dialysis clinical laboratory providing blood,
urine and other bodily fluid testing services to assist physicians in
determining whether a dialysis patient's therapy regimen, diet and medicines
remain optimal. SRM oversees the operation of three laboratories, one in New
Jersey operated by Spectra East, Inc. one in Northern California operated by
(Spectra) and one in Illinois. Spectra and Spectra East, Inc. are operated as
separate, indirect subsidiaries of the Company.
In 1999, SRM performed approximately 31 million tests for more than 96,000
dialysis patients across the United States. SRM also provided testing services
to clinical research projects and others. The Company plans to expand SRM into
related markets such as hospital dialysis units and physician office practices,
particularly nephrologists.
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The Company's clinical laboratory results have been a critical element in
the development of the Company's proprietary PSP database, which contains
clinical, laboratory and demographic data on approximately 65,700 dialysis
patients. The Company uses PSP to assist physicians in providing quality care to
dialysis patients. In addition, PSP is a key resource in ongoing research, both
within the Company and at outside research institutions, to decrease mortality
rates among dialysis patients and improve their quality of life. See " -- Legal
Proceedings, Settlement of U.S. Government Investigation".
COMPETITION
SRM competes in the U.S. with large nationwide laboratories, dedicated
dialysis laboratories and numerous local and regional laboratories, including
hospital laboratories. In the laboratory services market, companies compete on
the basis of performance, including quality of laboratory testing, timeliness of
reporting test results and cost-effectiveness. The Company believes that SRM's
services are competitive in these areas. While the main competition is local
hospitals, SRM is competitive based upon the quality and accessibility of the
service.
DIALYSIS PRODUCTS BUSINESS
The Company manufactures and distributes equipment and disposable products
for the treatment of kidney failure using both hemodialysis and peritoneal
dialysis. Such products include hemodialysis machines, peritoneal dialysis
cyclers and related equipment, dialyzers, peritoneal dialysis solutions in
flexible plastic bags, hemodialysis concentrates and solutions, granulate mixes,
bloodlines, and disposable tubing assemblies and equipment for water treatment
in dialysis centers. Other products manufactured by third parties and
distributed by the Company include dialyzers, special blood access needles,
heparin (used to prevent blood clotting) and commodity supplies such as
bandages, clamps and syringes.
OVERVIEW
The following table shows actual net revenues for 1999, 1998 and 1997, of
the Company's products business related to hemodialysis products, peritoneal
dialysis products and other activities, principally technical service:
YEAR ENDED DECEMBER 31,
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------- ------------------------- --------------------------
Total % of Total % of Total % of
Revenues Total Revenues Total Revenues Total
-------- ----- -------- ----- -------- -----
Hemodialysis Products....... $329,561 67% $296,361 63% $265.066 60%
Peritoneal Dialysis Products 108,145 22 123,389 26 131,830 30
Other ...................... 53,205 11 51,235 11 46,332 10
-------- --- -------- --- -------- ---
Total ........ $490,911 100% $470,985 100% $443,228 100%
======== === ======== === ======== ===
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HEMODIALYSIS PRODUCTS
The Company believes that Fresenius Medical Care is a leader in the
hemodialysis product field and continually strives to extend and improve the
capabilities of its hemodialysis systems to offer an advanced treatment mode at
reasonable cost. In North America, the Company, through its Dialysis Products
business unit ("Dialysis Products") offers a comprehensive hemodialysis product
line, consisting of hemodialysis machines, modular accessories for dialysis
machines, polysulfone and cuprophane dialyzers, bloodlines, dialysis solutions
and concentrates, fistula needles, connectors, data management systems, machines
and supplies for the reuse of dialyzers and other similar supplies.
Dialysis Machines. Through Fresenius USA, the Company assembles, tests and
calibrates hemodialysis machines and sells these machines in the U.S., Canada
and Mexico. Components for these machines are provided by Fresenius Medical Care
and other vendors. Hemodialysis machines manufactured by the Company provide a
unique volumetric dialysate balancing and ultrafiltration control system. This
system, first developed and introduced by Fresenius AG in 1977, provides for the
safe and more efficient use of highly permeable dialyzers. The Company also
provides machine upgrade kits to allow for advanced therapy modes, thus offering
the customer maximum performance with highly permeable polysulfone dialyzers.
The Company's hemodialysis machines are capable of operating with dialyzers
manufactured by all manufacturers, and are compatible with a wide variety of
bloodlines and dialysis concentrates. Fresenius USA has extended the Fresenius
Series 2008 hemodialysis machine for the North American market through the
development of the model 2008H, which combines the reliable hydraulic system of
the Series 2008 with electronic systems developed by Fresenius USA. Dialysis
machines sold by the Company employ the same modular design as those of
Fresenius Medical Care, but are tailored to local markets. Modular design also
permits the Company to offer dialysis centers a broad range of options to meet
specific patient or regional treatment requirements. The display panel can also
be adapted using different modules to meet local language requirements.
Dialyzers. All dialyzers manufactured by the Company use hollow fiber
polysulfone membranes, a synthetic material. The Company believes that the
Fresenius Medical Care Polysulfone(TM) dialyzer is the best-performing
mass-produced dialyzer on the market. Fresenius Medical Care is the leading
worldwide producer of polysulfone dialyzers. While competitors currently sell
polysulfone membranes in the market, Fresenius Medical Care developed and is the
only manufacturer with more than 13 years' experience in applying the technology
required to mass produce polysulfone membranes. The Company believes that
polysulfone has superior performance characteristics compared to other materials
used in dialyzers, including a higher biocompatibility and greater clearing
capacities for uremic toxins. Fresenius Medical Care's Polysulfone(TM) dialyzer
line consists of a complete range of permeability (high, medium and low flux) to
allow tailoring of the dialysis therapy to the individual patient. Fresenius
Medical Care's Polysulfone(TM) dialyzers are also available in an "NR" Series
for acute dialysis.
The Company also sells dialyzer reprocessing and rinse machines
manufactured by Fresenius USA for Seratronics, Inc. ("Seratronics"). These
machines cleanse dialyzers after dialysis, permitting multiple usage for the
same patient before disposal of the dialyzer. The Seratronics machines
facilitate the reuse of disposable dialyzers and, therefore, permit hemodialysis
providers to reduce operating costs. The reuse business of Seratronics is
managed by the Company through Fresenius USA.
Other Hemodialysis Products. The Company manufactures and distributes
arterial, venous, single needle and pediatric bloodlines. The Company produces
both liquid and dry dialysate concentrates. Liquid dialysate concentrate is
mixed with purified water by the hemodialysis machine to produce dialysis
solution, which is used in hemodialysis treatment to remove the waste products
and excess water from the patient's blood. Dry acid concentrate, developed more
recently, requires less storage space. The Company also produces dialysis
solutions in bags, including solutions for priming and rinsing hemodialysis
bloodlines, as well as connection systems for central concentrate supplies and
devices for mixing dialysis solutions and supplying them to hemodialysis
machines. Other distributed products include solutions for priming bloodlines,
disinfecting and decalcifying hemodialysis machines, fistula needles,
hemodialysis catheters, and products for acute renal treatment.
Fresenius USA has developed the Fresenius Data System FDS08(TM) ("FDS08")
computerized treatment monitoring and documentation system. The FDS08 can
automatically monitor and record machine and treatment information from as many
as 32 hemodialysis machines. The FDS08 is a PC-based system which has found many
applications for improving record keeping and increasing staff efficiency. The
FDS08 system has been used to pioneer new therapies such as remote monitoring of
patients during nightly home hemodialysis, which enables a patient to be
dialyzed at home while a staff caregiver monitors the machine performance via a
modem link. Additionally the FDS08 system can be linked to Fresenius USA's
Hypercare(TM) Medical Records System. The Hypercare(TM) Medical Records System
is a medical records system which can record and analyze trends in medical
outcome factors in hemodialysis patients.
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PERITONEAL DIALYSIS PRODUCTS
The Company offers a full line of products for peritoneal dialysis
patients. Peritoneal dialysis products manufactured by the Company include
peritoneal dialysis solutions in bags, peritoneal dialysis cycling machines for
CCPD and disposable products for both CAPD and CCPD, such as tubing, sterile
solutions and sterile kits to prepare patients for dialysis. The Company also
distributes (primarily to its own dialysis centers) other manufacturers'
peritoneal dialysis products.
Peritoneal Dialysis Systems. The Company manufactures a range of
peritoneal dialysis solutions. The Company believes that its peritoneal solution
products with Safe-Lock(R) connection systems offer significant advantages for
CAPD and CCPD home patients, including ease of use and greater protection
against touch contamination than other peritoneal dialysis systems presently
available. The Safe-Lock(R) standard system involves the connection procedure of
introducing and draining the dialysis solution into and from the abdominal
cavity through the use of the same bag for introduction and drainage. To use
Safe-Lock(R) products, a catheter that has been surgically implanted in the
patient is fitted with one part of the Safe-Lock(R) connector, and the
peritoneal dialysis solution bag and tubing are fitted with the other part of
the Safe-Lock(R) connector. The Company also manufactures disposable double bag
systems utilizing a special drainage bag and a snap-off Y-shaped piece that is
connected to the Safe-Lock(R) connector at the catheter. These double bag
systems further reduce possible entry of contaminants during peritoneal
dialysis. The Company's Inpersol(R) line of peritoneal dialysis products
acquired by Fresenius USA from Abbott Laboratories in 1993 is interchangeable
and competitive with the peritoneal dialysis products offered by Baxter, the
Company's major competitor in this field. Therefore, the addition of the
Inpersol(R) product line to the Company's other products enables the Company to
expand the potential customer base for which it competes, because the Company
now supplies peritoneal dialysis products usable by all peritoneal dialysis
patients in the U.S.
Cyclers. While there are two main forms of peritoneal dialysis therapy,
the Company believes that CCPD therapy offers patients benefits over CAPD
therapy for patients who need more therapy due to body size, ultrafiltration
loss or any other reason. In a standard CAPD program, a patient typically
undergoes four manual two-liter exchanges of peritoneal dialysis solution over a
24-hour period, with treatment occurring seven days per week. CAPD must be
performed by the patient when he or she is awake. With CCPD therapy, peritoneal
dialysis cyclers provide automated dialysis solution exchange. The cycler
delivers a prescribed volume of dialysis solution into the peritoneal cavity
through an implanted catheter, allows the solution to dwell for a specified
time, and completes the process by draining the solution. Cycling may be
performed by patients at home throughout the night while sleeping. CCPD delivers
more effective therapy than CAPD due to the supine position of the patient
during the night, higher volume exchanges and preferable cycle management. The
Company's cycling equipment incorporates microprocessor technology, that can be
easily programmed by the patient, hospital or clinic staff to perform specific
prescribed therapy for a given patient. Since all components are monitored and
programmable, these machines allow the physician to prescribe any of a number of
current therapy procedures. With nighttime cycling, the patient has complete
daytime freedom, wearing only the surgically-implanted catheter and capping
device. In addition, the Company believes that CCPD reduces the risk of
peritonitis due to less frequent handling of the catheter.
Fresenius USA introduced the first CCPD machine in 1980 and, in 1994,
introduced a new variant on CCPD therapy, PD-Plus(TM) ,that is offered by the
Company in other parts of the world. Normally, a CCPD patient undergoes five or
six two-liter solution exchanges at night, and carries no solution during the
day. PD-Plus(TM) therapy provides a more tailored therapy using a simpler
nighttime cycler, and, where necessary, one exchange during the day. Compared
with typical CCPD therapy, the Company believes that PD-Plus(TM) therapy is less
costly and easier to administer. In addition, compared with CAPD therapy, the
Company believes that PD-Plus(TM) therapy improves toxin removal by more than
40% and therefore is attractive to patients and physicians alike. By increasing
the effectiveness of peritoneal dialysis treatments, at an acceptable increase
in cost over CAPD therapy, PD-Plus(TM) therapy may also effectively prolong the
time period during which a patient will be able to remain on peritoneal dialysis
before requiring hemodialysis. PD-Plus(TM) therapy, as developed by Fresenius
USA, can only be performed using the Fresenius Freedom Cycler and special tubing
using Safe-Lock(R) connectors.
Other Peritoneal Dialysis Products. The Company also manufactures and
distributes pediatric treatment systems for administration of low volumes of
dialysis solutions, assist devices to facilitate automated bag exchange for
handicapped patients, catheters, catheter implantation instruments, silicon
glue, Pack-PD(TM) (a computer program which analyzes patient and peritoneal
characteristics to present a range of treatment options for individual
therapies), disinfectants, bag heating plates, adapters, and products to assist
and enhance connector sterility. The Company also provides scientific and
patient information products, including support materials, such as brochures,
slides, videos, instructional posters and training manuals.
Fresenius Medical Care has also developed a new CAPD system, comprising
tubing, connectors and a peritoneal dialysis double bag, together with the
process technology for the manufacture of the system. The Fresenius Medical Care
Stay-Safe(TM)
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peritoneal dialysis system utilizes a single switching mechanism that replaces
the three tubing clamps to control drainage of solution, flushing of tubes that
connect solution bags to catheters, the introduction of new solution, and the
tight closure of the line. The control device also further reduces the
possibility of catheter contamination during connection and disconnection by
sealing the catheter access and surrounding the catheter adapter with a
disinfectant solution.
New Peritoneal Dialysis Products. Fresenius USA has recently introduced the
IQcard(TM) system which has been developed to monitor patient compliance in
Automated Peritoneal Dialysis Therapy. The IQcard is used with the Freedom(TM)
Cycler PD+ to monitor the delivered dose of APD Therapy and record a full
treatment history for each patient. It is estimated that patient non-compliance
with prescribed Peritoneal Dialysis Therapy varies from 11% to 80%. Lack of
compliance may be the most significant cause of inadequate dialysis and poor
clinical outcomes. With IQcard, the physician has a tool for assessing patient
compliance and make adjustments to the prescription as necessary to meet therapy
goals.
In March 1996, Fresenius USA received approval by the U.S. Food and Drug
Administration ("FDA") of its new Premier Plus twin bag CAPD system. This system
comprises a single product, the Delflex(R) solution bag and the tubing and
drainage set necessary for CAPD exchanges. The Premier Plus twin bag system also
utilizes Safe-Lock(R) connectors and, because fewer connections are required,
may help to reduce patient complications associated with peritoneal dialysis
therapy. The Premier Plus twin bag system also includes new fill volumes which
offer the physician the ability to prescribe larger dosages without requiring
the patient to do more exchanges during the day. Fresenius USA began limited
marketing of the Premier Plus twin bag system during July 1996. Additionally, in
December 1997, Fresenius Medical Care submitted to the FDA a file for review of
a more advanced Premier Plus twin bag system that utilizes additional features
beyond those approved in March 1996. This application was approved in May 1999.
Trials were conducted later that year and the product was launched at the
National Peritoneal Dialysis conference in February 2000.
MARKETING, DISTRIBUTION AND SERVICE
Most of the Company's products are sold to hospitals, clinics and
specialized treatment centers. With its comprehensive product line and years of
experience in dialysis, the Company believes that it has been able to establish
and maintain very close relationships with its clinic customer base . Close
interaction among the Company's sales force and research and development
personnel enables concepts and ideas that develop in the field to be considered
and integrated into product development. The Company maintains a direct sales
force of trained salespersons engaged in the sale of both hemodialysis and
peritoneal dialysis products. This sales force engages in direct promotional
efforts, including visits to physicians, clinical specialists, hospitals,
clinics and dialysis centers, and represents the Company at industry trade
shows. The Company also sponsors medical conferences and scientific symposia as
a means for disseminating product information. The sales force is assisted by
clinical nurses who provide clinical support, training and assistance to
customers. The Company also utilizes outside distributors to provide sales
coverage in countries not serviced by its internal sales force.
The Company offers customer service, training and education, and technical
support such as field service, spare parts, repair shops, maintenance, and
warranty regulation. The Company also provides training sessions on the
Company's equipment. The Company provides supportive literature on the benefits
of its core business products. The Company's management believes its service
organizations have a reputation for reliability and high quality service.
MANUFACTURING OPERATIONS
The Company assembles, tests, and calibrates equipment, including
hemodialysis machines, dialyzer reuse devices and peritoneal dialysis cyclers,
at its facility in Walnut Creek, California. Components of the Company's
hemodialysis machines are supplied by Fresenius Medical Care as well as other
suppliers, and the Company has experienced no difficulties in obtaining
sufficient quantities of such components. In connection with the sale and
installation of the machines, Company technicians and engineers calibrate the
machines and add computer software for record keeping and monitoring.
The Company owns a 344,000 square-foot facility in Ogden, Utah which
operates as a fully integrated manufacturing and research and development
facility for polysulfone dialyzers. This facility uses automated equipment for
the production of polysulfone dialyzers and sterile solutions in flexible
plastic containers. The Company, through Fresenius USA, also purchases dialyzers
and polysulfone bundles from Fresenius Medical Care. The Company believes that
it is the principal manufacturer of polysulfone dialyzers in the U.S. While the
Company obtains the film used in the manufacture of its plastic bags used with
its peritoneal solutions from one supplier located in The Netherlands, the
Company believes that there are readily available
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alternative sources of supply for which the FDA could grant expedited approval.
The Company also intends to manufacture its own plastic film for peritoneal
dialysis solution bags.
The Company also manufactures dialysis products at additional plants in
the U.S. Bloodlines and PD sets are produced at a facility in Reynosa, Mexico,
and concentrates are produced at three facilities in the U.S.
Each step in the manufacture of the Company's products, from the initial
processing of raw materials through the final packaging of the completed
product, is carried out under controlled quality assurance procedures required
by law and under Good Manufacturing Practices ("GMP"), as well as under
comprehensive quality management systems, such as the internationally recognized
ISO 9000-9004 and CE Mark standards, which are mandated by regulatory
authorities in the countries in which the Company operates. The facilities in
Ogden, Utah and Reynosa, Mexico received ISO 9001 certification in 1999.
SOURCES OF SUPPLY
Raw materials essential to the Company's dialysis products business are
purchased worldwide from numerous suppliers and no serious shortages or delays
in obtaining raw materials have been encountered. To assure continuous high
quality, Fresenius Medical Care has single supplier agreements for many of its
polymers, including polysulfone, polyvinylpyrrolidone, and polyurethane for
dialyzer production, and for certain other raw materials. Wherever single
supplier agreements exist, the Company believes alternative suppliers are
available. However, use of raw materials obtained from alternative suppliers
could cause costs to rise due to necessary adjustments in the production process
or interruptions in supply.
The Company obtains bloodlines under an agreement with Medisystems
Corporation whose principal source of bloodlines is a single FDA-approved plant
located in Thailand. A new Medisystems agreement was signed in 1999 that
provides for Medisystems as a secondary source of supply to the Company's self
manufactured blood lines from Reynosa, Mexico. The new agreement has a three
year term.
RESEARCH AND DEVELOPMENT
Current research and development activities of the Company are primarily
conducted through Fresenius Medical Care and are strongly focused on the
development of new products, technologies and treatment concepts to optimize the
quality of treatment for dialysis patients, and on process technology for the
manufacture of the Company's products.
Fresenius Medical Care intends to continue to maintain its central
research and development operations for disposable products, at its St. Wendel
facility and for durable products at its facilities in Schweinfurt and Bad
Homburg, Germany. It expects that as its dialysis products business continues to
expand internationally, research and development activities by its international
operations, including the Company, will rely primarily on the research and
development activities conducted at St. Wendel, Schweinfurt, and Bad Homburg
which will transfer production technology FMC develops to FMC production
centers. Local activities focusing on cooperative efforts with those facilities
to develop new products and product modifications for local markets. The
Company's product development staff works closely with the Fresenius Medical
Care research and development group in this regard. Fresenius Medical Care
employs approximately 238 persons in research and development (including medical
doctors, engineers, technicians and research scientists), and conducts its
activities at three locations in Germany (at the St. Wendel facility, the
Schweinfurt facility and the Bad Homburg facility), and in Walnut Creek,
California and Ogden, Utah. Fresenius Medical Care's research and development
expenses were $32 million in 1999.
The Company seeks to maintain its profile in scientific circles through
articles in scientific and medical journals, participation in academic symposia,
relationships with scientists and physicians in relevant fields and the
organization of scientific meetings and workshops. The Company will continue to
establish scientific advisory boards and works with medical and other
consultants.
PATENTS, TRADEMARKS AND LICENSES
As the owner of or licensee under patents and trademarks throughout the
world, Fresenius Medical Care holds rights under more than 855 patents and
patent applications relating to dialysis technology in major markets. Patented
technologies that relate to dialyzers include polysulfone hollow fiber, in-line
sterilization method, and sterile closures for in-line sterilized medical
devices. For dialysis machines, patents include, the location for a filter
device for sterile filtering dialysate in the dialysis machine circuit, the
safety concept for the ultrafiltration device in a dialysis machine used for
high flux dialysis, a process for the on-line preparation of substitution fluid
in hemodiafiltration machine, conductivity sensor arrangements in the dialysis
machine circuit,
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conductivity sensor devices and mathematical algorithms for using such devices,
patents relating to controlled bicarbonate dialysis and patents related to
control thermal balance during dialysis. The connector system for the Fresenius
Medical Care biBag (TM) has been patented in the U.S. and Europe, while national
applications in Japan, Finland, and Norway are still pending. Other pending
patents include the new generation of "DIASAFE plus"(R) filters.
For peritoneal dialysis, Fresenius Medical Care holds rights on the
Safe-Lock(R) system. Pending patents include non-PVC film (Biofine(TM)) for
general use in intravenous and peritoneal dialysis applications and a special
film for a peelable, non-PVC double bag for peritoneal dialysis solutions.
Fresenius USA's intellectual property includes the Inpersol(R) trademark and
rights to certain manufacturing know-how Fresenius USA obtained from Abbott, and
a paid-up non-exclusive global sublicense from Baxter, Inc. to certain CAPD and
connector technology.
The patent family covering Fresenius Medical Care Polysulfone(TM) high
flux membranes has been subject to opposition by competitors in Europe and
Japan. FMC patents have been upheld in both Europe and Japan. FMC successfully
defended an appeal in the European Union, but an appeal by the Japanese
opposition is still pending. While Fresenius Medical Care believes that these
patents are valid in the relevant jurisdictions, a successful opposition could
have a material adverse effect on the Company.
The Company believes that its success will depend, in large part, on
Fresenius Medical Care's technology. While Fresenius Medical Care, as a standard
practice, obtains such legal protections it believes are appropriate for its
intellectual property, such intellectual property is subject to infringement or
invalidation claims. In addition, technological developments in ESRD therapy
could reduce the value of Fresenius Medical Care's existing intellectual
property, which reduction could be rapid and unanticipated.
COMPETITION
The markets in which the Company sells its dialysis products are highly
competitive. Among the Company's competitors in the sale of hemodialysis and
peritoneal dialysis products are CGH Medical (an affiliate of Gambro AB), Baxter
International Inc., Althin CD Medical, Inc. which has been recently acquired by
Baxter, Inc., Asahi Medical Co., Ltd., Bellco S.p.A. (a subsidiary of Sorin
Biomedica S.p.A.), Bieffe Medital S.p.A., ( an affiliate of Baxter, Inc.), B.
Braun Melsungen AG, Nissho Corporation (including Nissho Nipro Corporation
Ltd.), Nikkiso Co., Ltd., Terumo Medical Corporation and Toray Medical Co., Ltd.
Some the Company's competitors possess greater financial, marketing and research
and development resources than the Company.
The Company believes that in the dialysis product market, companies
compete primarily on the basis of product performance, cost-effectiveness,
reliability, assurance of supply and service and continued technological
innovation. The Company believes its products are highly competitive in all of
these areas. Independent dialysis centers and dialysis centers acquired by other
product manufacturers may elect to limit or terminate their purchases of the
Company's dialysis products in order to avoid purchasing products manufactured
by a competitor. The Company believes, however, that customers will continue to
consider its long-term customer relationships and reputation for product quality
in making product purchasing decisions, and the Company intends to compete
vigorously for such customers.
EMPLOYEES
At December 31, 1999, the Company employed approximately 24,828 employees,
including part-time and per diem employees. Such persons are employed by the
Company's principal businesses as follows: dialysis treatment and laboratory
services, approximately 21,480 employees; and dialysis products, approximately
3,348 employees. Medical Directors of the Company's dialysis centers are
retained as independent contractors. Management believes that its relations with
its employees are good. Approximately 500, or 2% of the Company's employees are
covered by union agreements.
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REGULATORY AND LEGAL MATTERS
REGULATORY OVERVIEW
The operations of the Company are subject to extensive governmental
regulation at the federal, state and local levels regarding the operation of
dialysis centers, laboratories and manufacturing facilities, the provision of
quality health care for patients, the maintenance of occupational, health,
safety and environmental standards and the provision of accurate reporting and
billing for governmental payments and/or reimbursement. In addition, some states
prohibit ownership of health care providers by for-profit corporations or
establish other regulatory barriers to direct ownership by for-profit
corporations. In those states, the Company works within the framework of local
laws to establish alternative contractual arrangements for the provision of
services to those facilities.
Any failure by the Company or its subsidiaries to receive required
licenses, certifications or other approvals for new facilities, significant
delays in such receipt, loss of its various federal certifications, termination
of licenses under the laws of any state or other governmental authority or
changes resulting from health care reform or other government actions that
reduce reimbursement or reduce or eliminate coverage for particular services
rendered by the Company or its subsidiaries could have a material adverse effect
on the business, financial condition and results of operations of the Company.
The Company must comply with legal and regulatory requirements under which
it operates, including the federal Medicare and Medicaid Fraud and Abuse
Amendments of 1977, as amended (the "anti-kickback statute"), the federal
restrictions on certain physician referrals (commonly known as the "Stark Law")
and other fraud and abuse laws and similar state statutes, as well as similar
laws in other countries. Moreover, there can be no assurance that applicable
laws, or the regulations thereunder, will not be amended, or that enforcement
agencies or the courts will not make interpretations inconsistent with those of
the Company, any one of which could have a material adverse effect on its
business, reputation, financial condition and results of operations of the
Company. Sanctions for violations of these statutes may include criminal or
civil penalties, such as imprisonment, fines or forfeitures, denial of payments,
and suspension or exclusion from the Medicare and Medicaid programs. In the
U.S., these laws have been broadly interpreted by a number of courts, and
significant government funds and personnel have been devoted to their
enforcement because such enforcement has become a high priority for the federal
government and some states. The Company, and the health care industry in
general, will continue to be subject to extensive federal, state and foreign
regulation, the full scope of which cannot be predicted.
In connection with the Company's settlement of the U.S. government
investigation of National Medical Care and certain of its subsidiaries, the
Company entered into a corporate integrity agreement with the U.S. government.
This agreement requires that the Company staff and maintain a comprehensive
compliance program, including a written code of conduct, training program and
compliance policies and procedures relating to the areas covered by the U.S.
government investigation. The corporate integrity agreement requires annual
audits by an independent review organization and periodic reporting to the
government. The corporate integrity agreement permits the U.S. government to
exclude the Company and its subsidiaries from participation in U.S. federal
health care programs if there is a material breach of the agreement that is not
cured by the Company within thirty days after the Company receives written
notice of the breach.
PRODUCT REGULATION
In the U.S., the FDA and comparable state regulatory agencies impose
requirements on certain subsidiaries of the Company as a manufacturer and a
seller of medical products and supplies under their jurisdiction. These require
that products be manufactured in accordance with GMP and that the Company comply
with FDA requirements regarding the design, safety, advertising, labeling,
recordkeeping and reporting of adverse events related to the use of its
products. In addition, in order to clinically test, produce and market certain
medical products and supplies (including hemodialysis and peritoneal dialysis
equipment and solutions, dialyzers, bloodlines and cell separators) for human
use, the Company must satisfy mandatory procedures and safety and efficacy
requirements established by the FDA or comparable state and foreign governmental
agencies. Such rules generally require that products be approved by the FDA as
safe and effective for their intended use prior to being marketed. The Company's
peritoneal dialysis solutions have been designated as drugs by the FDA
and, as such, are subject to additional FDA regulation under the Food, Drug and
Cosmetic Act of 1938 ("FDC Act").
The approval process is expensive, time consuming and subject to
unanticipated delays. The FDA may also prohibit the sale or importation of
products, order product recalls or require post-marketing testing and
surveillance programs to monitor a product's effects. The Company believes that
it has filed for or obtained all necessary approvals for the manufacture and
sale of its products in jurisdictions in which those products are currently
produced or sold. There can be no assurance that the Company will obtain
necessary regulatory approvals or clearances within reasonable time frames, if
at all. Any such delay or failure to obtain regulatory approval or clearances
could have a materially adverse effect on the business, financial condition and
results of operations of the Company. See - "Legal Proceedings - District of New
Jersey Investigation" for information about the settlement of a District of New
Jersey federal grand jury investigation into NMC's historical activities.
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FACILITIES AND OPERATIONAL REGULATION
The Clinical Laboratory Improvement Amendments of 1988 ("CLIA") subject
virtually all clinical laboratory testing facilities, including those of the
Company, to the jurisdiction of HHS. CLIA establishes national standards for
assuring the quality of laboratories based upon the complexity of testing
performed by a laboratory. Certain operations of the Company are also subject it
to federal laws governing the repackaging and dispensing of drugs and the
maintenance and tracking of certain life sustaining and life-supporting
equipment.
The operations of the Company are subject to various U.S. Department of
Transportation, Nuclear Regulatory Commission and Environmental Protection
Agency requirements and other federal, state and local hazardous and medical
waste disposal laws. As currently in effect, laws governing the disposal of
hazardous waste do not classify most of the waste produced in connection with
the provision of dialysis, or laboratory services as hazardous, although
disposal of nonhazardous medical waste is subject to specific state regulation.
However, the Company's laboratory businesses do generate hazardous waste which
is subject to specific disposal requirements. The operations of the Company are
also subject to various air emission and wastewater discharge regulations.
Federal, state and local regulations require the Company to meet various
standards relating to, among other things, the management of facilities,
personnel qualifications and licensing, maintenance of proper records,
equipment, quality assurance programs, the operation of pharmacies, and
dispensing of controlled substances. All of the operations of the Company in the
U.S. are subject to periodic inspection by federal and state agencies and other
governmental authorities to determine if the operations, premises, equipment,
personnel and patient care meet applicable standards. To receive Medicare
reimbursement, the Company's dialysis centers, renal diagnostic support business
and laboratories must be certified by HCFA. All of the Company's dialysis
centers, and laboratories that furnish Medicare services are so certified.
Certain facilities of the Company and certain of their employees are also
subject to state licensing statutes and regulations. These statutes and
regulations are in addition to federal and state rules and standards that must
be met to qualify for payments under Medicare, Medicaid and other government
reimbursement programs. Licenses and approvals to operate these centers and
conduct certain professional activities are customarily subject to periodic
renewal and to revocation upon failure to comply with the conditions under which
they were granted.
The Occupational Safety and Health Administration ("OSHA") regulations
require employers to provide employees who work with blood or other potentially
infectious materials with prescribed protections against blood-borne and
air-borne pathogens. The regulatory requirements apply to all health care
facilities, including dialysis centers, laboratories and renal diagnostic
support business, and require employers to make a determination as to which
employees may be exposed to blood or other potentially infectious materials and
to have in effect a written exposure control plan. In addition, employers are
required to provide hepatitis B vaccinations, personal protective equipment,
blood-borne pathogens training, post-exposure evaluation and follow-up, waste
disposal techniques and procedures, engineering and work practice controls and
other OSHA-mandated programs for blood-borne and air-borne pathogens.
Some states in which the Company operates have Certificate of Need ("CON")
laws that require any person or entity seeking to establish a new health care
service or to expand an existing service to apply for and receive an
administrative determination that the service is needed. The Company currently
operates in 40 states and the District of Columbia and Puerto Rico that have CON
laws applicable to dialysis centers. These requirements may provide a barrier to
entry to new companies seeking to provide services in these states, but also may
constrain the Company's ability to expand its operations in these states.
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REIMBURSEMENT
Dialysis Services. The Company's dialysis centers provide outpatient
hemodialysis treatment and related services for ESRD patients. In addition, some
of the Company's centers offer services for the provision of peritoneal dialysis
and hemodialysis treatment at home.
The Medicare program is the primary source of Dialysis Services revenues
from dialysis treatment. For example, in 1999, approximately 60% of Dialysis
Services revenues resulted from Medicare's ESRD program. As described below,
Dialysis Services is reimbursed by the Medicare program in accordance with the
Composite Rate for certain products and services rendered at the Company's
dialysis centers. As described in the next paragraph, other payment
methodologies apply to Medicare reimbursement for other products and services
provided at the Company's dialysis centers and for products (such as those sold
by the Company) and support services furnished to ESRD patients receiving
dialysis treatment at home (such as those of Dialysis Products). Medicare
reimbursement rates are fixed in advance and are subject to adjustment from time
to time by the U.S. Congress. Although this form of reimbursement limits the
allowable charge per treatment, it provides the Company with predictable per
treatment revenues and allows the Company to retain any profit earned.
When Medicare assumes responsibility as primary payor (see "Reimbursement
- -- Coordination of Benefits"), Medicare is responsible for payment of 80% of the
Composite Rate set by HCFA for dialysis treatments. The Composite Rate governs
the Medicare reimbursement available for a designated group of dialysis
services, including the dialysis treatment, supplies used for such treatment,
certain laboratory tests and certain medications. The Composite Rate consists of
labor and nonlabor components with adjustments made for regional wage costs,
subject to a national payment floor and ceiling currently ranging from $118 to
$141 per treatment, reflecting a 1.2% increase at January 1, 2000, with
exceptions based on specified criteria. In certain instances, products sold by
Fresenius USA and RPD are included in the non-labor component of the Composite
Rate as described below.
The method under which the Company is reimbursed for home dialysis is
based on which supplier is selected to provide dialysis supplies and equipment.
If the center is designated as the supplier ("Method I"), the center provides
all dialysis treatment related services, including equipment and supplies, and
is reimbursed using a methodology based on the Composite Rate. If Dialysis
Products is designated as the direct supplier ("Method II"), Dialysis Products
provides the patient directly with all necessary equipment and supplies and is
reimbursed by Medicare subject to a capitated ceiling. Clinics provide home
support services to Method II patients and these services are reimbursed at a
monthly fee for service basis subject to a capitated ceiling. The reimbursement
rates under Method I and Method II differ, although both are prospectively
determined and are subject to adjustment from time to time by Congress.
Certain items and services that the Company furnishes at its dialysis
centers are not included in the Composite Rate and are eligible for separate
Medicare reimbursement, typically on the basis of established fee schedule
amounts. Such items and services include certain drugs (such as EPO), blood
transfusions and certain diagnostic tests. The rate of utilization by the
Company's facilities of items and services that are not included in the
Composite Rate was a subject of the OIG Investigation. See " -- Legal
Proceedings -- Settlement of U.S. Government Investigation."
Medicare payments are subject to change by legislation and pursuant to
deficit reduction measures. The Composite Rate was unchanged from commencement
of the ESRD program in 1972 until 1983. From 1983 through December 1990,
numerous congressional actions resulted in a net reduction of the average
reimbursement rate from $138 per treatment in 1983 to approximately $125 per
treatment in 1990. Congress increased the ESRD reimbursement rate, effective
January 1, 1991, to an average rate of $126 per treatment.
In 1990, Congress required that the Prospective Payment Assessment
Commission ("PROPAC") study dialysis costs and reimbursement and make reports
annually to Congress with a recommendation as to the appropriateness of changes
to the ESRD reimbursement rates. In 1993, PROPAC recommended a 2.5% increase in
the Composite Rate for independent freestanding dialysis facilities, which was
not implemented by Congress. In March 1994 and again in 1995, PROPAC recommended
that no changes be made in the reimbursement rate. In March 1996, PROPAC
recommended a 2% increase in the Composite Rate for independent freestanding
dialysis facilities. In March 1997, the Medicare Payment Advisory Commission
("MedPAC") recommended a 2.8% increase in the Composite Rate for both
independent freestanding dialysis facilities and hospital-based dialysis
facilities for fiscal year 1998 which was not implemented by Congress. Congress
is not required to, and no congressional action was taken to, implement the
MedPAC recommendations and Congress could establish a different reimbursement
rate. The Company is unable to predict what, if any, future changes may occur in
the rate of Medicare reimbursement. Any significant decreases in the Medicare
reimbursement rates could have a material adverse
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effect on the Company's provider business and, because the demand for products
is affected by Medicare reimbursement, on its products business. Increases in
operating costs that are affected by inflation, such as labor and supply costs,
without a compensating increase in reimbursement rates, also may adversely
affect the Company's business and results of operations.
The patient or third-party insurance payors, including employer-sponsored
health insurance plans, commercial insurance carriers and the Medicaid program,
are responsible for paying any co-payment amounts for approved services not paid
by Medicare (typically the annual deductible and 20% co-insurance), subject to
the specific coverage policies of such payors. The extent to which the Company
is actually paid the full co-payment amounts depends on the particular
responsible party. Each third-party payor, including Medicaid, makes payment
under contractual or regulatory reimbursement provisions which may or may not
cover the full 20% co-payment or annual deductible. Where the patient has no
third-party insurance or the third party insurance does not cover copayment or
deductible and is not eligible for Medicaid, the patient is responsible for
paying the co-payments or the deductible, which the Company frequently does not
collect fully despite reasonable collection efforts. Under an advisory opinion
from the Office of the Inspector General, subject to specified conditions, the
Company and the other similarly situated providers may make contributions to a
non-profit organization that has volunteered to make premium payments for
supplemental medical insurance and/or medigap insurance on behalf of indigent
ESRD patients, including patients of the Company.
Laboratory Tests. A substantial portion of SRM's net revenues are derived
from Medicare, which pays for clinical laboratory services provided to dialysis
patients in two ways.
First, payment for certain routine tests is included in the Composite Rate
paid to the centers. As to such services, the dialysis centers obtain the
services from a laboratory and pay the laboratory for such services. In
accordance with industry practice, SRM usually provides such testing services
under capitation agreements with its customers pursuant to which it bills a
fixed amount per patient per month to cover the laboratory tests included in the
Composite Rate at the designated frequencies. In October 1994, the OIG issued a
special fraud alert in which it stated its view that the industry practice of
providing tests covered by the Composite Rate at below fair market value raised
issues under the anti-kickback statutes, as such an arrangement with an ESRD
facility appeared to be an offer of something of value (Composite Rate tests at
below market value) in return for the ordering of additional tests billed
directly to Medicare. See " -- Anti-kickback Statutes, False Claims Act, Stark
Law and Fraud and Abuse Laws" for a description of this statute. LifeChem's use
of capitation rates in billing for tests in the Composite Rate was a subject of
the OIG Investigation. See " -- Legal Proceedings -- Settlement of U.S.
Government Investigation".
Second, laboratory tests performed by SRM for Medicare beneficiaries that
are not included in the Composite Rate are separately billable directly to
Medicare. Such tests are paid at 100% of the Medicare fee schedule amounts,
which are limited by national ceilings on payment rates, called National
Limitation Amounts ("NLAs"). Congress has periodically reduced the fee schedule
rates and the NLAs, with the most recent reductions in the NLAs occurring in
January 1998. (As part of the Balanced Budget Act of 1997, Congress lowered the
NLAs from 76% to 74% effective January 1, 1998.) Congress has also approved a
five year freeze on the inflation updates based on the Consumer Price Index
(CPI) for 1998-2002.
Medicare carriers have aggressively implemented Local Medical Review
Policies (LMRPs) limiting the coverage of certain clinical laboratory services
to an established list of diagnosis codes supporting medical necessity. These
LMRPs set forth medical necessity criteria based on diagnosis coding as well as
frequency of service provisions. Provisions in the Balanced Budget Act of 1997,
require the Secretary of HHS to adopt uniform coverage and payment policies for
laboratory testing by July 1, 1999. The adoption of additional coverage policies
would reduce the number of covered services and could materially affect the
Company's revenues. Laboratory tests are ordered only by physicians based on the
needs of their patients.
IDPN. Among its other services, SRM administers IDPN to chronic dialysis
patients who suffer from gastrointestinal malfunctions. These services are
covered by the Medicare program under the Medicare Parenteral and Enteral
Nutrition ("PEN") benefit, which requires extensive documentation and individual
physician certification of medical necessity for each patient. Treatment by IDPN
has been shown to increase the body content of vital, high biologic value
proteins like albumin. Deficiency of such proteins has been shown to be
associated with substantially higher risk of death, among dialysis patients.
Under the Company's settlement of the government investigation, the
Company will receive $59.2 million in respect of outstanding claims for IDPN
therapy, which will be applied to payment of the overall settlement obligation.
The remaining $94.3 million of claims was written off. See " -- Legal
Proceedings - Settlement of the U.S. Government Investigation".
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SRM has continued to provide IDPN therapy to malnourished dialysis
patients. Analyses of data from the Company's PSP database, both internal and as
published in peer-reviewed medical journals, indicate that malnutrition measured
by a serum albumin value of 3.4 g/dl or less is associated with significantly
increased mortality risk in the chronic dialysis population and that IDPN is
effective in increasing serum albumin and moderating mortality risk for such
malnourished patients. These studies show that when these initial albumin levels
were 3.0 g/dl or less, IDPN treatment was accompanied by a 70% improvement in
survival. Similarly, when the initial albumin was 3.4 g/dl or less, survival
with IDPN treatment was improved by about 15%. IDPN treatment is therefore
associated with improved odds of survival at albumin concentration lower than
3.4 g/dl and the amount of improvement increases as albumin concentrates falls.
A statistical review conducted in March 1996 suggests that about 5% of dialysis
patients suffer from albumin concentration that is 3.0 g/dl or less.
Under the corporate integrity agreement, the Company agreed to submit
claims for payment of IDPN and other PEN therapies in accordance with coverage
criteria of the Health Care Financing Administration as in effect from time to
time.
EPO. In 1999, the Office of the Inspector General and the Clinton
Administration announced their intention to seek a 10% reduction in Medicare
reimbursement for EPO, from $11.00 to $10.00 per 1,000 units, although this
proposal was not enacted. Future changes in the EPO reimbursement rate,
inclusion of EPO in the Medicare Composite Rate, changes in the typical dosage
per administration or increases in the cost of EPO purchased by NMC could
adversely affect the Company's business and results of operations, possibly
materially.
Coordination of Benefits. Medicare entitlement begins for most patients in
the fourth month after the initiation of chronic dialysis treatment at a
dialysis center. During the first three months, considered to be a waiting
period, the patient or patient's insurance, Medicare or a state renal program
are responsible for payment.
Patients who have Medicare and are also covered by an employer group
health plan ("EGHP") are subject to a 30 month coordination period during which
the EGHP is the primary payor and Medicare the secondary payor. During this
coordination period the EGHP pays a negotiated rate or in the absence of such a
rate, the Company's standard rate or a rate defined by its plan documents. The
payments are generally higher than the Medicare Composite Rate. Insurance will
therefore cover a total of 33 months, the 3 month waiting period plus the 30
month coordination period.
Patients who already have Medicare based on age when they become ESRD
patients are dual eligible patients. If these patients have an EGHP that is
paying primary then these patients will have a 30 month coordination period. If
Medicare is already the primary payor when ESRD entitlement begins, Medicare
remains the primary payor, the EGHP is the secondary payor and no coordination
period will apply. Most patients over 65 are retired and fall into this second
category. Patients who do not have a health insurance retirement benefit plan
can purchase Medigap plans offered by AARP and many other insurance companies.
Possible Changes in Medicare. Because the Medicare program represents a
substantial portion of the federal budget, in order to reduce the federal
government deficit, and for other reasons, the U.S. Congress takes action in
almost every legislative session to modify the Medicare program by refining the
amounts payable to health care providers. Legislation or regulations may be
enacted in the future that could substantially modify or reduce the amounts paid
for services and products offered by the Company and its subsidiaries. It is
also possible that statutes may be adopted or regulations may be promulgated in
the future that impose additional eligibility requirements for participation in
the federal and state health care programs. Such new legislation or regulations
may adversely affect the Company's businesses and results of operations.
ANTI-KICKBACK STATUTES, FALSE CLAIMS ACT, STARK LAW AND FRAUD AND ABUSE LAWS
Various operations of the Company are subject to federal and state
statutes and regulations governing financial relationships between health care
providers and potential referral sources and reimbursement for services and
items provided to Medicare and Medicaid patients. Such laws include the
anti-kickback statutes, health care fraud statutes, the False Claims Act, the
Stark Law, other federal fraud and abuse laws and similar state laws. These laws
apply because the Company's Medical Directors and other physicians with whom the
Company has financial relationships refer patients to, and order diagnostic and
therapeutic services from, the Company's dialysis centers and other operations.
As is generally true in the dialysis industry, at each dialysis facility a small
number of physicians account for all or a significant portion of the patient
referral base. An ESRD patient generally seeks treatment at a center that is
convenient to the patient and at which the patient's nephrologist has staff
privileges. Virtually all of the Company's centers maintain open staff
privileges for local nephrologists. The ability of the Company to provide
quality dialysis care and to otherwise meet the needs of patients and
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local physicians is central to its ability to attract nephrologists to dialysis
facilities and to receive referrals from such physicians.
The U.S. federal government, many states and private third-party insurance
payors have made combating health care waste, fraud and abuse one of their
highest enforcement priorities, resulting in increasing resources devoted to
this problem. Consequently, the OIG and other enforcement authorities are
increasing scrutiny of arrangements between physicians and health care providers
for possible violations of the anti-kickback statutes or other federal laws. See
" -- Legal Proceedings Settlement of the U.S Government Investigation" for
information concerning the OIG's investigations of NMC's activities under these
provisions.
ANTI-KICKBACK STATUTES
The federal anti-kickback statutes establish criminal prohibitions against
and civil penalties for the knowing and willful solicitation, receipt, offer or
payment of any remuneration, whether direct or indirect, in return for or to
induce the referral of patients or the ordering or purchasing of items or
services payable in whole or in part under Medicare, Medicaid or other federal
health care programs. Sanctions for violations of the anti-kickback statutes
include criminal and civil penalties, such as imprisonment or criminal fines of
up to $25,000 per violation, and civil penalties of up to $50,000 per violation,
and exclusion from the Medicare or Medicaid programs and other federal programs.
In addition, certain provisions of federal criminal law that may be applicable
provide that if a corporation is found guilty of a criminal offense it may be
fined no more than twice any pecuniary gain to the corporation, or, in the
alternative, no more than $500,000 per offense.
Some states also have enacted statutes similar to the anti-kickback
statutes, which may include criminal penalties, applicable to referrals of
patients regardless of payor source, and may contain exceptions different from
state to state and from those contained in the federal anti-kickback statutes.
FALSE CLAIMS ACT AND RELATED CRIMINAL PROVISIONS
The federal False Claims Act (the "False Claims Act") imposes civil
penalties for making false claims with respect to governmental programs, such as
Medicare and Medicaid, for services not rendered, or for misrepresenting actual
services rendered, in order to obtain higher reimbursement. Moreover, private
individuals may bring qui tam or "whistle blower" suits against providers under
the False Claims Act, which authorizes the payment of a portion of any recovery
to the individual bringing suit. Such actions are initially required to be filed
under seal pending their review by the Department of Justice. A few federal
district courts have recently interpreted the False Claims Act as applying to
claims for reimbursement that violate the anti- kickback statutes under certain
circumstances. The False Claims Act generally provides for the imposition of
civil penalties of $5,000 to $10,000 per claim and for treble damages, resulting
in the possibility of substantial financial penalties for small billing errors
that are replicated in a large number of claims, as each individual claim could
be deemed to be a separate violation of the False Claims Act. Criminal
provisions that are similar to the False Claims Act provide that if a
corporation is convicted of presenting a claim or making a statement that it
knows to be false, fictitious or fraudulent to any federal agency it may be
fined not more than twice any pecuniary gain to the corporation, or, in the
alternative, no more than $500,000 per offense. Some states also have enacted
statutes similar to the False Claims Act which may include criminal penalties,
substantial fines, and treble damages.
THE HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT OF 1996
HIPAA was enacted in August 1996 and substantively changed federal fraud
and abuse laws by expanding their reach to all federal health care programs,
establishing new bases for exclusions and mandating minimum exclusion terms,
creating an additional exception to the anti-kickback penalties for risk-sharing
arrangements, requiring the Secretary of HHS to issue advisory opinions,
increasing civil money penalties to $10,000 (formerly $2,000) per item or
service and assessments to three times (formerly twice) the amount claimed,
creating a specific health care offense and related health fraud crimes, and
expanding investigative authority and sanctions applicable to health care fraud.
It also prohibits provider payments which could be deemed an inducement to
patient selection of a provider.
The law expands criminal sanctions for health care fraud involving any
governmental or private health benefit program, including freezing of assets and
forfeiture of property traceable to commission of a health care offense.
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BALANCED BUDGET ACT OF 1997
The Balanced Budget Act of 1997 ("the BBA") contained sweeping adjustments
to both the Medicare and Medicaid programs, as well as further expansion of the
fraud and abuse laws. Specifically, the BBA created a civil monetary penalty for
violations of the federal anti-kickback statute whereby violations will result
in damages equal to three times the amount involved as well as a penalty of
$50,000 per violation. In addition, the new provisions expanded the exclusion
requirements so that any person or entity convicted of three health care
offenses is automatically excluded from federally funded health care programs
for life. Individuals or entities convicted of two offenses are subject to
mandatory exclusion of 10 years, while any provider or supplier convicted of any
felony may be denied entry into the Medicare program by the Secretary of HHS if
deemed to be detrimental to the best interests of the Medicare program or its
beneficiaries.
The BBA also provides that any person or entity that arranges or contracts
with an individual or entity that has been excluded from a federally funded
health care program will be subject to civil monetary penalties if the
individual or entity "knows or should have known" of the sanction.
Finally, the BBA creates a Medicare+Choice Program that is designed to
provide a variety of options to Medicare beneficiaries, almost all of whom may
enroll in a Medicare+Choice Plan. The options include provider sponsored
organizations, coordinated care plans, HMOs with and without point of service
options involving out-of-network providers, and medical savings accounts offered
as a demonstration project.
STARK LAW
The original Stark Law, known as "Stark I" and enacted as part of the
Omnibus Budget Reconciliation Act of 1989, prohibits a physician from referring
Medicare patients for clinical laboratory services to entities with which the
physician (or an immediate family member) has a financial relationship, unless
certain exceptions apply. Sanctions for violations of the Stark Law may include
denial of payment, refund obligations, civil monetary penalties and exclusion of
the provider from the Medicare and Medicaid programs. The Stark Law prohibits
the entity receiving the referral from filing a claim or billing for services
arising out of the prohibited referral.
Provisions of OBRA 93, known as "Stark II," amended Stark I to revise and
expand upon various statutory exceptions, to expand the services regulated by
the statute to a list of "Designated Health Services," and to prohibit Medicaid
referrals where a financial relationship exists. The provisions of Stark II
generally became effective on January 1, 1995. The additional Designated Health
Services include: physical therapy services; occupational therapy services;
radiology services, including magnetic resonance imaging, computer axial
tomography scans and ultrasound services; durable medical equipment and
supplies; parenteral and enteral nutrients, equipment and supplies; home health
services; outpatient prescription drugs; and inpatient and outpatient hospital
services. The Company has determined that the Stark Law does apply to
dialysis-related Designated Health Services not paid for under the Composite
Rate as well as to certain services provided by SRM's renal support business.
However, pursuant to proposed regulations implementing Stark II, published on
January 9, 1998, erythropoietin (EPO) provided to ESRD patients as part of a
renal dialysis treatment plan is specifically exempted as a Designated Health
Service. Further, in the proposed regulations discussing Durable Medical
Equipment, ESRD equipment and supplies are excluded from coverage as a
Designated Health Service because the ESRD benefit is distinguished under
Medicare from the DME benefit. Outpatient prescription drugs and in-hospital
treatments would also be excluded.
Prior to the effective date of Stark II, NMC had compensated the
substantial majority of its Medical Directors on the basis of a percentage of
net pre-tax earnings of the facilities. In response to Stark II, since January
1, 1995, NMC has compensated its Medical Directors on a fixed compensation
arrangement intended to comply with the requirements of Stark II. See " -- Legal
Proceedings -- OIG Investigation" and " -- Medical Director Compensation."
On August 14, 1995, HCFA promulgated a final regulation implementing Stark
I and its statutory restrictions on referrals for clinical laboratory services.
One of the provisions of the regulation significantly affecting dialysis
providers is HCFA's interpretation that the Stark Law applies to
dialysis-related laboratory services. However, in proposed regulations published
on January 9, 1998, HCFA proposed a regulatory exception for clinical laboratory
services paid for as part of the Composite Rate. The proposed Stark II
regulations follow the provisions set forth in the Stark I regulation in that
any service included as part of the Composite Rate is not considered a
Designated Health Service. The government has not yet finalized the Stark II
regulations.
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Several states in which the Company operates have enacted self-referral
statutes similar to the Stark Law. Such state self-referral laws may apply to
referrals of patients regardless of payor source and may contain exceptions
different from each other and from those contained in the Stark Law.
OTHER FRAUD AND ABUSE LAWS
The Company's operations are also subject to a variety of other federal
and state fraud and abuse laws, principally designed to ensure that claims for
payment to be made with public funds are complete, accurate and fully comply
with all applicable program rules.
The civil monetary penalty provisions are triggered by violations of
numerous rules under the statute, including the filing of a false or fraudulent
claim and billing in excess of the amount permitted to be charged for a
particular item or service. Violations may also result in suspension of
payments, exclusion from the Medicare and Medicaid programs, as well as other
federal health care benefit programs, or forfeiture of assets.
In addition to the statutes described above, other criminal statutes may
be applicable to conduct that is found to violate any of the statutes described
above.
HEALTH CARE REFORM
Health care reform is considered by many in the U.S. to be a national
priority. Members of Congress from both parties and the executive branch are
continuing to consider many health care proposals, some of which are
comprehensive and far-reaching in nature. Several states are also currently
considering health care proposals. It cannot be predicted what additional
action, if any, the federal government or any state may ultimately take with
respect to health care reform or when any such action will be taken. Health care
reform may bring radical changes in the financing and regulation of the health
care industry, which could have a material adverse effect on the business of the
Company and the results of its operations.
CHANGES IN THE HEALTH CARE INDUSTRY
Significant changes in the health care industry are occurring as a result
of market driven forces that are creating significant downward pressure on
reimbursement rates that the Company and its subsidiaries will receive for their
services and products. A substantial portion of third-party health insurance is
now furnished through some type of managed care plan, including HMOs.
Managed care plans have increased their market share within the last
decade. This trend may continue as a result of the merger and consolidation of
providers and payors in the health care industry and as a result of the
discussions among members of Congress and the executive branch regarding ways to
increase the number of Medicare and Medicaid beneficiaries served through such
managed care plans. At the same time, private purchasing cooperatives and the
government are attempting to limit premium increases for these plans. In
response to this environment, managed care plans have been aggressive in seeking
lower reimbursement levels. For some populations, plans have sought to limit
their own financial risk by negotiating capitation agreements under which
providers assume responsibility for delivering a range of services at a fixed
payment amount. If substantially more patients of the Company join managed care
plans or if such plans reduce reimbursements or capitate competitor companies,
the Company's business and results of operations could be adversely affected,
possibly materially.
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ITEM 2. PROPERTIES
The table below describes the Company's principal facilities as of the
date hereof.
FLOOR AREA
(APPROXIMATE CURRENTLY OWNED
Location SQUARE FEET) OR LEASED USE
-------- ------------ --------- ---
Lexington, Massachusetts 200,000 leased Corporate headquarters and administration.
Walnut Creek, California 85,000 leased Manufacture of hemodialysis machines and
peritoneal dialysis cyclers; research and
development.
Ogden, Utah 334,000 owned Manufacture polysulfone membranes and dialyzers