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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2000
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). $3,384,368 March 23, 2001.
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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 April 2, 2001, 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 April 30, 2001. (Part III)
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TABLE OF CONTENTS
PART I
Item 1. Business ............................................................................. 4
Item 2. Properties ........................................................................... 24
Item 3. Legal Proceedings .................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders .................................. 27
PART II ...................................................................................... 27
Item 5. Market Price for Registrant's Common Equity and Related Stockholder Matters .......... 27
Item 6. Selected Financial Data .............................................................. 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 29
Item 7A Quantitative and Qualitative Disclosures About Market Risks .......................... 37
Item 8. Consolidated Financial Statements and Supplementary Data ............................. 39
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.. 39
PART III ..................................................................................... 39
Item 10. Directors and Executive Officers of the Registrant .................................. 39
Item 11. Executive Compensation .............................................................. 39
Item 12. Security Ownership of Certain Beneficial Owners and Management ...................... 39
Item 13. Certain Relationships and Related Transactions ...................................... 39
PART IV ...................................................................................... 39
Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K ....... 39
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PART I
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 2000 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. ("NMC"), Fresenius USA
Marketing Inc.; Fresenius USA Manufacturing Inc.; and SRC Holding Company, Inc.,
all Delaware corporations and Fresenius USA Inc., a Massachusetts 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 84% and 16% of 2000 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, 2000, the Company owned 921
outpatient dialysis facilities in the U.S. (including Puerto
Rico), treating approximately 67,950 chronic patients (24.6%
of estimated U.S. patients). The Company operated or managed
an additional 33 facilities treating approximately another
3,750 patients (1.4% of estimated U.S. patients).
Collectively, these company-operated facilities treated 26.0%
of the estimated dialysis patients in the U.S. The Company
believes its next largest competitor treated approximately
14.8% of U.S. patients. Additionally, the Company provides
inpatient dialysis services, therapeutic apheresis, hemo
perfusion, and other 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.
The Company's principal executive office is located at 95 Hayden Avenue,
Lexington, MA 02420-9192. Its telephone number is (781) 402-9000.
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 259,500 at December 31, 1999
or at a compound annual rate of 8.4%.
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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 13,500 patients received kidney transplants in
the U.S. during 1999. 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, 1999, there were approximately
3,740 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 2,280 facilities (61% of
facilities) and 176,000 patients (68% of patients). The remaining 32% of
patients were divided among freestanding facilities (many privately owned by
physicians) and hospital-affiliated facilities.
The Company believes that these proportions remained similar in 2000. The
Company estimates that the top ten multi-center providers accounted for
approximately 187,000 patients, or 68% of estimated U.S. patents at December 31,
2000.
According to HCFA, as of December 31, 1999, 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, 1999, 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.
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
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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 high
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 73,400 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 2000, the
Company acquired 30 clinics and opened 51 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 40% of the
dialysis patients in the United States. The Company has
developed disease state management methodologies which involve
total patient care for ESRD patients, 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 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, 2000
Fresenius Medical Care's product revenues were derived
approximately 18% from machine sales and 82% 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 technological
leadership in both hemodialysis and peritoneal dialysis
products. FMC has a research and development team with
approximately 220 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
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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 segments, 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).
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, 2000, the Company owned 921 dialysis centers in the
U.S. The centers are generally concentrated in areas of high population density.
In 2000, the Company acquired 30 existing centers, developed 51 new centers and
consolidated or sold 9 centers. The number of patients treated at the Company's
centers has increased from approximately 62,000 at December 31, 1999 to
approximately 68,000 at December 31, 2000.
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 staff. The staff
typically consists of registered nurses, licensed practical nurses, patient care
technicians, a social worker, a registered dietician, and 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 2001 to December
2001 with price guarantees and volume and outcome based discounts.
Other services provided to ESRD patients in the U.S. include: the
administration of vitamin D, iron, hepatitis vaccine, and blood transfusions;
the provision of interdialytic parenteral nutrition ("IDPN"), in which nutrients
are added to the
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patient's blood during hemodialysis; the provision, through SRM, of clinical
laboratory testing and renal services. 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., owners 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 73,400 dialysis patients), its comprehensive clinical and
administrative systems, manuals and policies, its 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 2000, the Company completed new acquisitions and
acquisitions of previously managed clinics totaling 30 dialysis facilities in
the U.S. providing care to approximately 2,755 patients. These acquisitions and
agreements expand the Company's presence in selected key areas of the United
States.
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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,
-----------------------
2000 1999 1998
---- ---- ----
Medicare ESRD program ....... 59.1% 60.2% 57.0%
Private/alternative payors .. 32.1 30.3 33.8
Medicaid and other government
sources..................... 4.2 4.2 4.1
Hospitals ................... 4.6 5.3 5.1
----- ----- -----
Total ..................... 100.0% 100.0% 100.0%
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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").
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. If
successful, this pilot program could result in the elimination of the regulation
that precludes ESRD patients from enrolling in managed care organizations. If
Medicare HMO enrollments increase and the number of ESRD patients in managed
care plans also increases, managed care plans' leverage to negotiate lower rates
or reduce services provided by the Company may become greater.
The Company has 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 joint venture between the Company and participating
nephrologists throughout the U.S. Optimal Renal Care, LLC is a joint venture
between Permanente Medical Group of Southern California, a subsidiary of Kaiser
Permanente and the Company. The Company believes a significant increase in 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.
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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.
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. 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, former 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 services business in
the future.
Because services to the majority of patients in the U.S. are primarily
reimbursed under government programs, competition for patients is based
primarily on quality and accessibility of service and the ability to obtain
referrals from physicians and hospitals. However, extension of periods during
which commercial insurers are primarily responsible for reimbursement and the
growth of managed care has placed greater emphasis on service costs. The Company
believes that it competes effectively in all of these areas. In particular,
based upon the Company's knowledge and understanding of other
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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.
LABORATORY AND RENAL DIAGNOSTIC SERVICES
The Company provides clinical laboratory testing and renal services
through its business unit known as Spectra Renal Management ("SRM"). 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
laboratories are located in New Jersey, Illinois, and Northern California.
In 2000, SRM performed approximately 37 million tests for more than
100,000 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 to offer assistance with the pre-ESRD patient base.
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 the 73,400 dialysis patients
currently receiving treatment. 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.
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
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, 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 for 2000, 1999 and 1998 actual net revenues 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)
-------------------------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------------------------
Total % of Total % of Total % of
Revenues Total Revenues Total Revenues Total
--------- ---------- --------- ---------- ----------- ---------
Hemodialysis Products $334,447 70% $329,561 67% $296,361 63%
Peritoneal Dialysis Products 93,742 20 108,145 22 123,389 26
Other 51,878 10 53,205 11 51,234 11
--------- ---------- --------- ---------- ----------- ---------
Total $480,067 100% $490,911 100% $470,984 100%
========= ========== ========= ========== =========== =========
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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. 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 dialyzers, bloodlines, dialysis solutions and concentrates, fistula
needles, connectors, data management systems, machines and supplies for the
reuse of dialyzers.
Dialysis Machines. 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 FMC 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.
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, FMC 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. FMC'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. FMC's Polysulfone(TM) dialyzers are
available in both reuse and non reuse series.
The Company also sells dialyzer reprocessing and rinse. These machines
cleanse dialyzers after dialysis, permitting multiple usage for the same patient
before disposal of the dialyzer. The machines facilitate the reuse of disposable
dialyzers and, therefore, permit hemodialysis providers to reduce operating
costs.
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.
The Company 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 the Company'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.
New Hemodialysis Products. The Company has introduced the FX-class and
Optiflux dialyzers. Both of these dialyzers use polysulfone-based Helixone
membranes, which significantly increase clearance. FX-class dialyzers provide
simplified handling and more secure treatment and improve waste management,
logistics and handling through weight reduction and environmentally improved
materials. Optiflux polysulfone dialyzers deliver small and middle molecular
weightsolute clearance. Both dialyzers have outstanding biocompatibility,
continuing the Company's efforts to provide patient care in the most
biocompatible way.
The Company has also introduced the 2008K hemodialysis machine, which
provides innovative elements such as improved operator interface, an improved
blood pump, level detector and heparin pump modules, and fluid removal
measurement combined with a feedback control mechanism to monitor and avoid
sudden declines in blood pressure and resulting complications.
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.
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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.
Cyclers. While there are two main forms of peritoneal dialysis therapy,
the Company believes that CCPD therapy offers benefits over CAPD therapy for
patients who need more therapy due to body size, ultrafiltration loss or any
other similar reasons. 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.
The Company 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 the Company, can only be performed using the Fresenius Freedom
Cycler(TM) and special tubing using Safe-Lock(R)connectors.
FMC 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 FMC Stay-Safe(TM) 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.
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.
New Peritoneal Dialysis Products. The Company has 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
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significant cause of inadequate dialysis and poor clinical outcomes. With
IQcard, the physician has a tool for assessing patient compliance and making
adjustments to the prescription as necessary to meet therapy goals.
The Company also manufactures the 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 offers the physician the
ability to prescribe larger dosages without requiring the patient to do more
exchanges during the day.
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 FMC 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 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 FMC as well as other suppliers. 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 450,000 square-foot facility in Ogden, Utah which
operates as a fully integrated manufacturing and research and development
facility for polysulfone dialyzers and peritoneal dialysis solutions. This
facility uses automated equipment for the production of polysulfone dialyzers
and sterile solutions in flexible plastic containers. The Company, also has the
capability to purchase dialyzers and polysulfone bundles from FMC. 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 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 four 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. The
facility in Walnut Creek, California received ISO 9001 Certification in 2000.
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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, FMC 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 as a secondary source of supply to the Company's self manufactured
blood lines from Reynosa, Mexico. The new agreement expires in 2002.
RESEARCH AND DEVELOPMENT
Current research and development activities of the Company are primarily
conducted through FMC 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.
FMC 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. FMC employs approximately 220 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. FMC's research and development
expenses were $32 million in 2000.
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, FMC holds rights under more than 997 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,
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., Norway, and Europe. Other
pending patents include the new generation of "DIASAFE plus"(R) filters.
For peritoneal dialysis, FMC 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. The Company's
intellectual property includes the Inpersol(R)trademark and rights to certain
manufacturing know-how, and a paid-up non-exclusive global sublicense from
Baxter, Inc. to certain CAPD and connector technology.
The Company believes that its success will depend, in large part, on FMC's
technology. While FMC, 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
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could reduce the value of FMC'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 Gambro AB, Baxter International 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. 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, 2000, the Company employed approximately 26,732 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 23,195 employees; and dialysis products, approximately
3,537 employees. Medical Directors of the Company's dialysis centers are
retained as independent contractors and are excluded from the employee total.
Management believes that its relations with its employees are good.
Approximately 600, 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.
The Company has entered into a corporate integrity agreement with the U.S.
government which requires that the Company staff and maintain a comprehensive
compliance program, including a written code of conduct, training program and
compliance policies and procedures. 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 other disposables (including hemodialysis and peritoneal
dialysis equipment and solutions, dialyzers, bloodlines and other disposables)
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
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obtain regulatory approval or clearances could have a materially adverse effect
on the business, financial condition and results of operations of the Company.
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 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 13 states, including 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.
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.
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The Medicare program is the primary source of Dialysis Services revenues
from dialysis treatment. For example, in 2000, approximately 59% 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.
When Medicare assumes responsibility as primary payor (see
"Reimbursement -- Coordination of Benefits"), Medicare is responsible for
payment of 80% of the Composite Rates set by HCFA for dialysis treatments. The
Composite Rates govern 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
Rates consists of labor and non labor components with adjustments made for
regional wage costs subject to a national payment rate schedule. The Composite
Rates for 2001 were increased by an average of 2.4% (as a result of set
increases over the year), with a new payment ceiling of $144 per treatment. Some
exceptions based on specified criteria are paid at a higher rate.
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.
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.
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 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 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.
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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.
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. The provision of
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 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, 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, Medicaid or a state renal program
are responsible for payment.
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Patients who are covered by 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 generally cover a total of 33 months, the 3 month
waiting period plus the 30 month coordination period.
Patients who already are eligible for Medicare based on age when they
become ESRD patients are dual eligible patients. If these patients are covered
under an EGHP that is their primary payor for covered services, 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. All ESRD
patients or patients over 65 who do not have a health insurance retirement
benefit plan can purchase Medigap plans.
Possible Changes in Medicare. Because the Medicare program represents a
substantial portion of the federal budget, 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 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.
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.
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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.
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.
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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. Pursuant to proposed regulations implementing Stark I and II,
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.
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.
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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.
17,500 leased Warehouse Space - Machine components
Ogden, Utah 450,000 owned (1) Manufacture polysulfone membranes and dialyzers
and peritoneal dialysis solutions; research and
development.
Delran, New Jersey 42,000 leased Manufacture of liquid hemodialysis concentrate
solutions.
Perrysburg, Ohio 35,000 leased Manufacture of dry hemodialysis concentrates.
Livingston, California 32,000 leased Manufacture of liquid hemodialysis concentrates.
Irving, Texas 70,000 leased Manufacture of liquid hemodialysis solution.
Reynosa, Mexico 150,000 leased Manufacture of bloodlines.
Fremont, California 72,000 leased Clinical laboratory testing
Chicago, Illinois 670 leased Clinical laboratory testing
Rockleigh, New Jersey 85,000 leased Clinical Laboratory testing
(1) Land and majority of equipment is leased, building is owned.
The lease on the Walnut Creek facility expires in 2002. The Company leases
17 warehouses throughout the U.S. These warehouses are used as regional
distribution centers for the Company's peritoneal dialysis products business.
All such warehouses are subject to leases with remaining terms not exceeding ten
years. At December 31, 2000, the Company distributed its products through all
these 17 warehouse facilities
The Company leases its corporate headquarters in Lexington, Massachusetts.
This lease expires on October 31, 2007.
The Company's subsidiaries lease most of the dialysis centers,
manufacturing, laboratory, distribution and administrative and sales facilities
in the U.S. on terms which the Company believes are customary in the industry.
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ITEM 3. LEGAL PROCEEDINGS
COMMERCIAL INSURER LITIGATION
In 1997, the Company, NMC, and certain named NMC subsidiaries, were served
with a civil complaint filed by Aetna Life Insurance Company in the U.S.
District Court for the Southern District of New York. The lawsuit alleges
inappropriate billing practices for nutritional therapy, diagnostic and clinical
laboratory tests and misrepresentations. In April 1999, Aetna amended its
complaint to include its affiliate, Aetna U.S. Healthcare, Inc., as an
additional plaintiff, and to make certain other limited changes in its pleading.
The amended complaint seeks unspecified damages and costs. In February 2000, the
Company was served with a similar complaint filed by Connecticut General Life
Insurance Company, Equitable Life Assurance Society for the United States, Cigna
Employee Benefits Services, Inc. and Guardian Life Insurance Company of America,
Inc. (Connecticut General Life Insurance Company et al v. National Medical Care
et al, 00-Civ-0932) seeking unspecified damages and costs. However, the Company,
NMC and its subsidiaries believe that there are substantial defenses to the
claims asserted, and intend to vigorously defend both lawsuits. Other private
payors have contacted the Company and may assert that NMC received excess
payment and, similarly, may join either lawsuit or file their own lawsuit
seeking reimbursement and other damages.
The Company has filed counterclaims against the plaintiffs in these
matters based on inappropriate claim denials and delays in claim payments.
Although the ultimate outcome on the Company of these proceedings cannot
be predicted at this time, an adverse result could have a material adverse
effect on the Company's business, financial condition and result of operations.
OBRA 93
The Omnibus Budget Reconciliation Act of 1993 affected the payment of
benefits under Medicare and employer health plans for dual-eligible ESRD
patients. In July 1994, the Health Care Financing Administration issued an
instruction to Medicare claims processors to the effect that Medicare benefits
for the patients affected by that act would be subject to a new 18-month
"coordination of benefits" period. This instruction had a positive impact on
NMC's dialysis revenues because, during the 18-month coordination of benefits
period, patients' employer health plans were responsible for payment, which was
generally at rates higher than those provided under Medicare.
In April 1995, the Health Care Financing Administration issued a new
instruction, reversing its original instruction in a manner that would
substantially diminish the positive effect of the original instruction on NMC's
dialysis business. The Health Care Financing Administration further proposed
that its new instruction be effective retroactive to August 1993, the effective
date of the Omnibus Budget Reconciliation Act of 1993.
NMC ceased to recognize the incremental revenue realized under the
original instruction as of July 1, 1995, but it continued to bill employer
health plans as primary payors for patients affected by the Omnibus Budget
Reconciliation Act of 1993 through December 31, 1995. As of January 1, 1996, NMC
commenced billing Medicare as primary payor for dual eligible ESRD patients
affected by the act, and then began to re-bill in compliance with the revised
policy for services rendered between April 24 and December 31, 1995.
On May 5, 1995, NMC filed a complaint in the U.S. District Court for the
District of Columbia (National Medical Care, Inc. and Bio-Medical Applications
of Colorado, Inc. d/b/a Northern Colorado Kidney Center v. Shalala, C.A.
No.95-0860 (WBB) seeking to preclude the Health Care Financing Administration
from retroactively enforcing its April 24, 1995 implementation of the Omnibus
Budget Reconciliation Act of 1993 provision relating to the coordination of
benefits for dual eligible ESRD patients. On May 9, 1995, NMC moved for a
preliminary injunction to preclude the Health Care Financing Administration from
enforcing its new policy retroactively, that is, to billing for services
provided between August 10, 1993 and April 23, 1995. On June 6, 1995, the court
granted NMC's request for a preliminary injunction and in December of 1996, NMC
moved for partial summary judgment seeking a declaration from the Court that the
Health Care Financing Administration's retroactive application of the April 1995
rule was legally invalid. The Health Care Financing Administration cross-moved
for summary judgment on the grounds that the April 1995 rule was validly applied
prospectively. In January 1998, the court granted NMC's motion for partial
summary judgment and entered a declaratory judgment in favor of NMC, holding the
Health Care Financing Administration's retroactive application of the April 1995
rule legally invalid. Based on its finding, the Court also permanently enjoined
the Health Care Financing Administration from enforcing and applying the April
1995 rule retroactively against NMC. The Court took no action on the Health Care
Financing Administration's motion for summary judgment pending
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completion of the outstanding discovery. On October 5, 1998, NMC filed its own
motion for summary judgment requesting that the Court declare the Health Care
Financing Administration's prospective application of the April 1995 rule
invalid and permanently enjoin Health Care Financing Administration from
prospectively enforcing and applying the April 1995 rule. The Court has not yet
ruled on the parties' motions. The Health Care Financing Administration elected
not to appeal the Court's June 1995 and January 1998 orders. The Health Care
Financing Administration may, however, appeal all rulings at the conclusion of
the litigation. If the Health Care Financing Administration should successfully
appeal so that the revised interpretation would be applied retroactively, NMC
may be required to refund the payment received from employer health plans for
services provided after August 10, 1993 under the Health Care Financing
Administration's original implementation, and to re-bill Medicare for the same
services, which would result in a loss to NMC of approximately $120 million
attributable to all periods prior to December 31, 1995. Also, in this event, the
Company's business, financial condition and results of operations would be
materially adversely affected.
In July, 2000, NMC filed a complaint in the U.S. District Court for the
Eastern District of Virginia (National Medical Care, Inc. and Bio-Medical
Applications of Virginia, Inc. v. Aetna Life Insurance, Co., Inc. Aetna U.S.
Healthcare, Inc. and John Does 1-10) seeking recovery against Aetna U.S.
Healthcare and health plans administered by Aetna U.S. Healthcare for claims
related to primary payor liability for dual eligible ESRD patients under the
Omnibus Budget Reconciliation Act of 1993. On January 16, 2001, the Court stayed
the action pending resolution of the District of Columbia Court action.
OTHER LITIGATION AND POTENTIAL EXPOSURES
From time to time, the Company is a party to or may be threatened with
other arising in the ordinary course of its business. Management regularly
analyzes current information including, as applicable, the Company's defenses
and insurance coverage and, as necessary, provides accruals for probable
liabilities for the eventual disposition of these matters. The ultimate outcome
of these matters is not expected to materially affect the Company's financial
position, results of operations or cash flows.
The Company, like other health care providers, conducts its operations
under intense government regulation and scrutiny. The Company must comply with
regulations which relate to or govern the safety and efficacy of medical
products and supplies, the operation of manufacturing facilities, laboratories
and dialysis clinics, and environmental and occupational health and safety. The
Company must also comply with the U.S. anti-kickback statute, the False Claims
Act, the Stark Law, and other federal and state fraud and abuse laws. Applicable
laws or regulations may be amended, or enforcement agencies or courts may make
interpretations that differ from the Company's or the manner in which the
Company conduct its business. In the U.S., enforcement has become a high
priority for the federal government and some states. In addition, the provisions
of the False Claims Act authorizing payment of a portion of any recovery to the
party bringing the suit encourage private plaintiffs to commence "whistle
blower" actions. By virtue of this regulatory environment, as well as our
corporate integrity agreement with the government, the Company expects that its
business activities and practices will continue to be subject to extensive
review by regulatory authorities and private parties, continuing inquiries,
claims and litigation relating to its compliance with applicable laws and
regulations. The Company may not always be aware that an inquiry or action has
begun, particularly in the case of "whistle blower" actions, which are initially
filed under court seal.
The Company operates a large number of facilities throughout the U.S. In
such a decentralized system, it is often difficult to maintain the desired level
of oversight and control over the thousands of individuals employed by many
affiliate companies. The Company relies upon its management structure,
regulatory and legal resources, and the effective operation of its compliance
program to direct, manage and monitor the activities of these employees. On
occasion, the Company may identify instances where employees, deliberately or
inadvertently, have submitted inadequate or false billings. The actions of such
persons may subject the Company and its subsidiaries to liability under the
False Claims Act, among other laws, and the Company cannot predict whether law
enforcement authorities may use such information to initiate further
investigations of the business practices disclosed or any of its other business
activities.
Physicians, hospitals and other participants in the health care industry
are also subject to a large number of lawsuits alleging professional negligence,
malpractice, product liability, worker's compensation or related claims, many of
which involve large claims and significant defense costs. The Company has been
subject to these suits due to the nature of its business and the Company expects
that those types of lawsuits may continue. Although the Company maintains
insurance at a level which it believes to be prudent, the Company cannot assure
that the coverage limits will be adequate or that ins