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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001
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
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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). $1,603,122 March 26, 2002.
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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 1, 2002, 90,000,000 shares of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Information Statement with respect to its 2001 Annual
Meeting of Stockholders, to be filed on or before April 30, 2002. (Part III)
2
TABLE OF CONTENTS
PART I
Item 1. Business ............................................................4
Item 2. Properties .........................................................28
Item 3. Legal Proceedings...................................................29
Item 4. Submission of Matters to a Vote of Security Holders.................32
PART II .....................................................................32
Item 5. Market Price for Registrant's Common Equity and Related
Stockholder Matters...............................................32
Item 6. Selected Financial Data.............................................33
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................34
Item 7A. Quantitative and Qualitative Disclosures About Market Risks.........43
Item 8. Consolidated Financial Statements and Supplementary Data............45
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..........................................45
PART III ....................................................................45
Item 10. Directors and Executive Officers of the Registrant .................45
Item 11. Executive Compensation..............................................45
Item 12. Security Ownership of Certain Beneficial Owners and Management......45
Item 13. Certain Relationships and Related Transactions......................45
PART IV .....................................................................45
Item 14. Exhibits, Consolidated Financial Statement Schedules, and
Reports on Form 8-K...............................................46
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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 2001 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,
and clinical laboratory testing services, and (ii) manufacturing and
distributing products and equipment for dialysis treatment, which accounted for
87% and 13% of 2001 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, 2001, the Company owned 1,033 outpatient dialysis
facilities in the U.S. (including Puerto Rico), treating approximately
76,600 chronic patients (26.7% of estimated U.S. patients). The
Company operated or managed an additional 54 facilities treating
approximately another 3,700 patients (1.3% of estimated U.S.
patients). Collectively, these company-operated facilities treated
27.9% of the estimated dialysis patients in the U.S. The Company
believes its next largest competitor treated approximately 14.6% of
U.S. patients. Additionally, the Company provides inpatient dialysis
services, therapeutic apheresis, hemoperfusion, 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 Center for Medicare &
Medicaid Services ("CMS") 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 273,300 at December 31, 2000
or at a compound annual rate of 8.2%. The Company attributes the continuing
growth in the number of dialysis patients principally to an increase in general
life
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expectancy and, thus, the overall aging of the general population, the shortage
of donor organs for kidney transplants, improved dialysis technology that has
expanded the patient population able to undergo life prolonging dialysis 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 14,300 patients received kidney transplants in
the U.S. during 2000. 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 CMS data, as of December 31, 2000, there were approximately
3,927 Medicare-certified dialysis treatment centers in the U.S. Ownership of
these centers was fragmented. The Company estimates that at that time, the five
largest multi-facility providers accounted for approximately 2,280 facilities
(58% of facilities) and 174,000 patients (64% of patients). The remaining 36% of
patients were divided among smaller multi-facility providers, freestanding
facilities (many privately owned by physicians) and hospital-affiliated
facilities.
The Company believes that these proportions remained similar in 2001. The
Company estimates that the five multi-center providers accounted for
approximately 189,000 patients, or 66% of estimated U.S. patients at December
31, 2001.
According to CMS, as of December 31, 2000, approximately 90% of dialysis
patients in the U.S. received in-center treatment (virtually all hemodialysis)
and approximately 10% 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 removes 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 CMS, as of December 31, 2000, hemodialysis patients
represented 90% 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
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some patients. First, certain patients cannot make the required sterile
connections of the peritoneal dialysis tubing to the catheter, leading to
excessive episodes of peritonitis, a bacterial infection of the peritoneum which
can result in serious adverse health consequences, including death. Second,
treatment by current forms of peritoneal dialysis may not be as effective as
hemodialysis in removing wastes and fluids for some patients.
STRATEGY
The Company's objective is to focus on generating revenue growth that
exceeds market growth of the dialysis industry, as measured by growth in patient
population, while maintaining the Company's leading position in the market and
increasing earnings at a faster pace than revenue growth.
The Company's dialysis services and product businesses have grown faster
than the market in terms of revenues over the past five years, and the Company
believes that it is well positioned to continue this growth by focusing on the
following strategies:
- Continue to Provide High Standards of Patient Care. The Company
believes that its reputation for providing high standards of patient
care is a competitive advantage. The Company believes that NMC's
proprietary Patient Statistical Profile ("PSP") database, which
contains historical and current clinical and demographic data on more
than 290,000 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. By
improving dialysis outcomes and overall ESRD patient care, the Company
may be able to contain hospitalization and other costs of ESRD.
- Expand Presence in the U.S. The Company intends to continue to take
advantage of its reputation and market recognition by acquiring and
establishing new dialysis clinics within attractive markets. The
Company also expects to continue to enhance its presence in the U.S.
by acquiring individual or small groups of dialysis clinics in
selected markets, expanding existing clinics, and opening new clinics,
although the Company will consider large acquisitions in the U.S. if
suitable opportunities, such as Everest, become available to it.
- 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 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 ESRD
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. The Company expects that Optimal Renal
Care will double its patient volume in 2002. Optimal Renal Care is
expanding its focus to offer services to a wider range of chronic
kidney disease patients, which includes more mild impairment of renal
function. The Company has also formed Renaissance Health Care as a
joint venture with participating nephrologists. Renaissance is
currently contracted with 16 health plans, in 13 states. The Company
provides ESRD and Chronic Kidney Disease programs to more than 3,000
patients.
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- 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, 2001 the Company's product revenues were derived
approximately 23% from machine sales and 77% from sales of disposable
products. These disposable products provide 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 global
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 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.
- Expand into Related Services. In 2001, Fresenius Medical Care
Cardiovascular Resources Holdings ("FMC-CVR"), in which the Company
has 45% equity, purchased Edwards Lifesciences Cardiovascular
Resources Inc. a leading provider of perfusion and related
cardiovascular services. The addition of this business provides a
strong nationwide platform for expansion and innovation in the
extracorporeal service business which compliments our extracorporeal
dialysis service business well.
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 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
services are primarily provided by Spectra Renal Management ("SRM")
DIALYSIS SERVICES
As of December 31, 2001, the Company owned 1,033 dialysis centers in the
U.S. The centers are generally concentrated in areas of high population density.
In 2001, the Company acquired 64 existing centers, developed 58 new centers and
consolidated or sold 10 centers. The number of patients treated at the Company's
centers has increased from approximately 68,000 at December 31, 2000 to
approximately 76,600 at December 31, 2001.
With the Company's large patient population, it has developed the PSP
database which enables it to improve dialysis treatment outcomes, and improve
the quality and effectiveness of dialysis products, resulting in reduced
mortality rates. In addition to the Company's patient database, it believes
that local physicians, hospitals and managed care plans refer their ESRD
patients to its clinics for treatment due to:
- its reputation for quality patient care and treatment;
7
- its extensive network of dialysis clinics, which enables physicians to
refer their patients to conveniently located clinics; and
- its reputation for technologically advanced products for dialysis
treatment.
The Company treats approximately 26.7% of the dialysis patients in the
U.S., and based on publicly available reports, the Company believes its next
largest competitor treats approximately 14.6% of U.S. dialysis patients. For the
year 2001, dialysis services accounted for 87% of its total revenue.
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 or clinic
manager 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, a unit clerk
and biomedical technicians.
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 2002 to December
2003 with price guarantees and volume and outcome based discounts.
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 all supplies
and equipment, regardless of brand, are 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 generally
provide for payment at negotiated rates that are higher than the Medicare
reimbursement rates for chronic in-center treatments.
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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 88,700 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 Company paid aggregate consideration, consisting of both cash and
FMC preference shares, for acquisitions of new clinics of approximately $388
million in 2001 and approximately $116 million in 2000.
On January 8, 2001, the Company acquired Everest Healthcare Services
Corporation through a merger of Everest into a subsidiary of Fresenius Medical
Care at a purchase price of $365 million. Approximately $99 million was funded
by the issuance of 2.25 million preference shares to Everest shareholders. The
remaining purchase price was paid with cash of $266 million including assumed
debt. Everest owns, operates or manages approximately 70 clinic facilities
providing therapy to approximately 6,800 patients in the eastern and central
United States. Everest also conducts extracorporeal blood services and acute
dialysis businesses which provide acute dialysis, apheresis and hemoperfusion
services to approximately 100 hospitals. The Company also expects to continue to
enhance its presence in the U.S. by acquiring individual or small groups of
dialysis clinics in selected markets, expanding existing clinics, and opening
new clinics, although it will consider large acquisitions in the U.S. if
suitable opportunities, such as Everest, become available to the Company.
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 2001, the Company completed new acquisitions and
acquisitions of previously managed clinics totaling 64 dialysis facilities in
the U.S. providing care to approximately 6,270 patients. These acquisitions and
agreements expand the Company's presence in selected key areas of the United
States.
QUALITY ASSURANCE IN DIALYSIS CARE
At each of the Company's dialysis clinics, a quality assurance committee is
responsible for reviewing quality of care reports that the PSP database
generates, setting goals for quality enhancement and monitoring the progress of
quality assurance initiatives. The Company believes that it enjoys a reputation
of providing high quality care to dialysis patients. In 2001, the Company
continued to develop and implement programs to assist in achieving its quality
goals. The Company's Access Intervention Management Program ("AIM"), started in
2001, detects and corrects arteriovenous access failure in hemodialysis
treatment, which is the major cause of hospitalization and morbidity. The
Company's PD Services program, a regionalization program to enhance peritoneal
dialysis services, has expanded from six regions in 2000 to seventeen at the end
of 2001. Kidney Options, a pre-ESRD program to educate patients about
prevention, slowing kidney failure and treatment options has been highly
successful, with its website generating over 900,000 hits since its inception in
October of 2000.
PATIENT DATA COLLECTION AND ANALYSIS
The Company engages in systematic efforts to measure, maintain and improve
the quality of the services at its dialysis clinics. Each clinic collects and
analyzes quality assurance and patient data, which its division and corporate
management regularly reviews.
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The Company's clinical laboratory results have been a critical element in
the development of its proprietary PSP database, which contains historical and
current clinical, laboratory and demographic data on over 290,000 dialysis
patients in the U.S. The Company uses this database to assist physicians in
providing quality care to dialysis patients. In addition, its PSP database 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.
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,
------------------------------
2001 2000 1999
----- ----- -----
Medicare ESRD program 59.7% 59.1% 60.2%
Private/alternative payors 31.2 32.1 30.3
Medicaid and other government 4.6 4.2 4.2
sources 4.5 4.6 5.3
Hospitals ----- ----- -----
Total 100.0% 100.0% 100.0%
===== ===== =====
Under the Medicare ESRD program, Medicare reimburses dialysis providers for
the treatment of certain individuals who are diagnosed as having ESRD,
regardless of age or financial circumstances. When Medicare assumes
responsibility as the primary payor, it pays for dialysis and certain specified
related services at 80% of the payment methodology commonly referred to as the
composite rate method ("Composite Rate"). In addition, subject to various
restrictions and co-payment limitations, Medicare pays separately for certain
dialysis-related 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. CMS 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. In addition, the
HMO
10
may have contracted with another provider, or may have stricter controls on
access the certain ancillary services that we typically provide to ESRD
patients. Any of the developments could limit the Company's future reimbursement
for services.
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.
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
11
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 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 SERVICES
The Company provides clinical laboratory testing 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 and Northern California.
In 2001, SRM performed over 34 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
historical & current clinical, laboratory and demographic data on more than
290,000 dialysis patients. The Company uses PSP to assist physicians in
providing quality care to dialysis patients. In addition, PSP is a key resource
in ongoing research, both within the Company and at outside research
institutions, to decrease mortality rates among dialysis patients and improve
their quality of life.
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.
12
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 2001, 2000 and 1999 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)
-----------------------------------------------------------------
2001 2000 1999
-------------------- ------------------- -------------------
Total % of Total % of Total % of
Revenues Total Revenues Total Revenues Total
-------- -------- -------- -------- -------- --------
Hemodialysis Products $340,841 71% $334,447 70% $329,561 67%
Peritoneal Dialysis Products 83,653 18 90,985 19 105,096 21
Other 53,324 11 54,635 11 56,254 12
-------- -------- -------- -------- -------- --------
Total $477,818 100% $480,067 100% $490,911 100%
======== ======== ======== ======== ======== ========
HEMODIALYSIS PRODUCTS
The Company believes that it 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 suppliers. FMC
introduced its first dialysis machine in 1980, and their dialysis machines are
currently in their fifth generation of development. The Company sells its
dialysis machines as Series 2008H and 2008K models in the U.S. The Company's
dialysis machines offer the following features and advantages:
- Volumetric dialysate balancing and ultrafiltration control system.
This system, was introduced in 1977, provides for safe and more
efficient use of highly permeable dialyzers, permitting faster
dialysis with controlled rates of fluid removal;
- Proven hydraulic systems, providing reliable operation and servicing
flexibility;
- Compatibility with all manufacturers' dialyzers and a wide variety of
blood-lines and dialysis solutions, permitting maximum flexibility in
both treatment and disposable products usage;
- Modular design, which permits us to offer dialysis clinics a broad
range of options to meet specific patient or regional treatment
requirements. Modular design also allows upgrading through module
substitution without the need to replace the entire machine;
- Additional modules that provide monitoring and response capability for
selected bio-physical patient parameters, such as body temperature,
relative blood volume and electrolyte balances. This concept, known as
physiological dialysis, permits hemodialysis treatments with lower
incidence of a variety of symptoms or side effects, which still occur
frequently in standard hemodialysis. Our most recent module, the Blood
Volume Monitor(TM) controls removal of excess fluid from the patient;
13
- Sophisticated microprocessor controls, and display and readout panels
that are adaptable to meet local language requirements;
- Battery backup, which continues operation of the blood circuit and all
protective systems for 15 to 20 minutes following a power failure;
- Online clearance, measurement of dialyzer clearance for quality
assurance with the On-Line Clearance Module, providing immediate
effective clearance information, real time treatment outcome
monitoring, and therapy adjustment during dialysis without requiring
invasive procedures or blood samples;
- On-line data collection capabilities and computer interfacing with our
Hypercare module and FDS08(R) system. Our machines can:
- monitor and assess prescribed therapy;
- connect a large number of hemodialysis machines and peripheral
devices, such as patient scales, blood chemistry analyzers and
blood pressure monitors, to a personal computer network;
- enter nursing records automatically at bedside to register and
document patient treatment records, facilitate billing, and
improve record-keeping and staff efficiency;
- adapt to new data processing devices and trends;
- perform home hemodialysis with remote monitoring by a staff
caregiver; and
- record and analyze trends in medical outcome factors in
hemodialysis patients; and
Dialyzers. The Company manufactures dialyzers using hollow fiber
polysulfone membranes, a synthetic material. FMC 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 15 years' experience in applying the technology required to mass produce
polysulfone membranes. FMC believes that polysulfone offers the following
superior performance characteristics compared to other materials used in
dialyzers:
- higher biological compatibility, resulting in reduced incidence of
adverse reactions to the fibers;
- greater capacity to clear uremic toxins from patient blood during
dialysis, permitting more thorough, more rapid dialysis, resulting in
shorter treatment time; and
- a complete range of permeability, or membrane pore size, which permits
dialysis at prescribed rates -- high flux, medium flux and low flux,
as well as ultra flux for acute dialysis, and allows tailoring of
dialysis therapy to individual patients.
FMC's full line of polysulfone dialyzers includes the new F Series Optiflux
family as well as the traditional reuse and non-reuse dialyzers. Single use
dialyzers are becoming more popular, and the Company has increased production of
single-use dialyzers at its Ogden, Utah facility to meet demand for these
products.
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 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.
14
PERITONEAL DIALYSIS PRODUCTS
The Company offers a full line of peritoneal dialysis products. The Company
manufactures 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.
CAPD Systems. The Company manufactures standard and specialized peritoneal
dialysis solutions. The Company believes that its peritoneal dialysis products
offer significant advantages for CAPD, including:
- ease of use and greater protection against contamination by touch than
other peritoneal dialysis systems presently available. Its products
incorporate our Safe-Lock(R) connection system for introducing and
draining dialysis solution into and from the abdominal cavity, using
the same bag for introduction and drainage;
- Safe-Lock(R) products may be used only by peritoneal dialysis patients
whose catheters include the Safe-Lock connector, which attaches to a
solution bag fitted with the other part.
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.
CCPD Products. The Company introduced the first peritoneal dialysis cycler
machine in 1980. The Company believes that CCPD therapy offers benefits over
CAPD therapy for patients who need more therapy due to body size,
ultrafiltration loss or other reasons. In a standard CAPD program, a patient
manually introduces two liters of fresh peritoneal dialysis solution and drains
the used solution four times over a 24-hour period. Treatment occurs seven days
per week and the patient must perform the treatment while awake. With CCPD
therapy, the cycler automatically 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. CCPD therapy offers the following benefits over CAPD:
- Solution exchanges take place automatically, which may reduce the risk
of peritonitis due to less frequent handling of the catheter and
connections;
15
- The patient can cycle at home, throughout the night while asleep. The
patient has complete daytime freedom, wearing only the surgically
implanted catheter and capping device; and
- 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 cycling equipment incorporates microprocessor technology, and
the patient, hospital or clinic staff can easily program it 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. Our CCPD products and therapies include:
- PD-PLUS(R), a variant on CCPD therapy the Company introduced in 1994.
PD-PLUS(R)therapy provides a more tailored therapy than regular CCPD
using a simpler nighttime cycler and, where necessary, includes one
manual dialysis solution exchange during the day. The Company believes
that PD-PLUS(R)therapy is less costly and easier to administer than
typical CCPD. The Company also believes that PD-PLUS(R)therapy
improves toxin removal by more than 40% compared to CAPD. By
increasing the effectiveness of peritoneal dialysis treatments,
PD-PLUS(R)may also effectively prolong the time period during which a
patient will be able to remain on peritoneal dialysis before requiring
hemodialysis. PD-PLUS(R)therapy can only be performed using the
Fresenius Freedom(TM) Cycler and special tubing using
Safe-Lock(R)connectors; and
- IQcard(TM), for use with the Freedom TM Cycler PD-PLUS(R) to monitor
CCPD therapy for a full treatment history and improved therapy
compliance.
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 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.
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.
16
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 an approximately 600,000 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 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 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 five 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.
The Company is expanding its manufacturing capacity substantially. During
the first quarter of 2001, the Company started with the increase in dialyzer
production capacity at its Ogden, Utah manufacturing facility, where the Company
also produces peritoneal dialysis solutions and dry concentrates. Dialyzer
production capacity will be increased by 200% over the next 24 months in order
to accommodate the continuous trend towards single-use dialyzers in the U.S. In
2001, the single-use high performance Optiflux(TM) series dialyzer was
introduced. Optiflux(TM) polysulfone fibers are engineered to deliver superior
small (urea) and middle molecular weight solute clearance coupled with superior
membrane composition and biocompatibility. Fresenius Medical Care's polysulfone
dialyzer production technology is developed to allow segmentation and selection
of portions of the technology to be implemented on a regional basis depending on
the market needs with minimal redundant capital. Demand for this dialyzer was
strong during 2001. It accounted for 18% of the dialyzers we sold in the United
States during the fourth quarter of 2001.
Construction of the liquid concentrate manufacturing facility in Irving,
Texas was completed in 2001. In addition, the Company increased production
capacity for dry concentrate in its Perrysburg, Ohio facility. With these
additions the Company now can achieve greater distribution efficiencies for the
concentrate products in the U.S. In December 2001, the Mexican Reynosa
manufacturing bloodline facility was awarded the State Secretary of Health
Recognition Award for outstanding support of the Reynosa Regional General
Hospital, which serves a population of 1 million in the state of Tamaulipas,
Mexico.
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
17
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.
Incoming raw materials for solutions undergo tests, such as, infrared,
ultraviolet and physical and chemical analyses to assure quality and
consistency. During the production cycle, sampling and testing take place in
accordance with established quality assurance procedures to ensure the finished
product's sterility, safety and potency. Pressure, temperature and time for
various processes are monitored to assure consistency of semi-finished goods.
Environmental conditions are monitored to assure that particulate and
bacteriological levels do not exceed specified maximums. The Company maintains
continuing quality control and Good Manufacturing Policies education and
training programs for its employees. See "Regulatory and Legal Matters."
The Company obtains bloodlines under an agreement with Medisystems
Corporation as a secondary source of supply to the Company's self manufactured
bloodlines from Reynosa, Mexico. The agreement expires in 2002.
ENVIRONMENTAL MANAGEMENT
The Company's vision to innovate for a better life also extends to our
daily efforts to preserve nature and its resources for the benefit of both
present and future generations.
The Company plans to achieve environmental certification. With this in
mind, the Company will continually intensify its waste minimization program
efforts for solid, medical and hazardous waste. This will be accomplished by
monitoring all medical waste costs in its dialysis clinics on a quarterly basis.
This monitoring focuses on the generation of medical waste and its correct
separation and disposal. Recycling programs for cardboard, plastics and metal
waste generated at its Ogden production facility has been initiated. The Company
is promoting further community-centered activities by utilizing high-efficiency
heating, ventilation and air-conditioning equipment. The Company has thereby
achieved reductions in energy consumption. In addition, the Company expects its
suppliers to meet certain environmental requirements and avoid any adverse
environmental impact on the community. For the year 2002, the Company will
further pursue its environmental policy and plans to reduce the quantities and
costs of waste.
RESEARCH AND DEVELOPMENT
Current research and development activities ae primarily conducted through
two FMC locations in the U.S. Walnut Creek, California and Ogden, Utah. We
remain strongly focused on the development of new products, technologies, and
treatment concepts to optimize the quality of treatment for dialysis patients.
FMC focused in 2001 on the introduction of new products, enhancement of
existing products and the advancement of key projects. Examples of our
activities are briefly described below.
- - Online Clear Monitor. Monitor patient access flow rate without the need for
additional expensive equipment or specifically trained personnel.
- - 2008H and 2008K Hemodialysis Machine Module. Provides immediate information
on treatment efficiency.
- - 2008K Hemodialysis Machine. Improved operator interface. Logically
designed displays and information presentation. Modular design allows easy
upgrading. Flexible treatment options.
- - Optiflux Dialyzer Family (NR and A Series). Superior small (Urea) and
middle molecular weight solute clearance through the use of Optimal
Dialysate Flow (ODF)/KD+ technology. Superior member composition and
biocompatibility.
- - Newton IQ(TM) Cycler. Developed to take advantage of higher flow rates
available with gravity fill and drain. Cycler software includes automatic
prescription upload from physician-programmed IQ Card(TM).
- - Premier(TM) Plus Double Bag. Twin bag system, incorporating solution bag
and tubing. Utilizes Safe-lock(TM) connectology and Snap(TM) disconnect
features. Fewer connections for the patient lowers risk of infection
- - Bio-Plexus PUNCTUR-GUARD(R). Patented technology developed to improve
clinical staff safety when using blood access fistula needles. The needle
point can be covered prior to removal from the patient.
- - Neutrolin(TM) Catheter Lock Solution. A patented solution in development to
decrease the risks of infection among patients using catheters from dialysis
treatments.
18
PATENTS, TRADEMARKS AND LICENSES
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 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., 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.
19
EMPLOYEES
At December 31, 2001, the Company employed approximately 30,195 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 26,514 employees; and dialysis products, approximately
3,681 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 650, or 2% of the Company's employees are covered by union
agreements.
20
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
21
assurance that the Company will obtain necessary regulatory approvals or
clearances within reasonable time frames, if at all. Any such delay or failure
to obtain regulatory approval or clearances could have a materially adverse
effect on the business, financial condition and results of operations of the
Company.
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 CMS. 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, as a
result of a state's internal determination of its dialysis services needs,
prevent entry to new companies seeking to provide services in these states, and
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.
22
The Medicare program is the primary source of Dialysis Services revenues
from dialysis treatment. For example, in 2001, approximately 60% of Dialysis
Services revenues resulted from Medicare's ESRD program. As described below,
Dialysis Services is reimbursed by the Medicare program in accordance with the
Composite Rate for certain products and services rendered at the Company's
dialysis centers. As described in the next paragraph, other payment
methodologies apply to Medicare reimbursement for other products and services
provided at the Company's dialysis centers and for products (such as those sold
by the Company) and support services furnished to ESRD patients receiving
dialysis treatment at home (such as those of Dialysis Products). Medicare
reimbursement rates are fixed in advance and are subject to adjustment from time
to time by the U.S. Congress. Although this form of reimbursement limits the
allowable charge per treatment, it provides the Company with predictable per
treatment revenues.
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 CMS 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. Effective January 1,
2000, the reimbursement rate was increased by 1.2%. In December 2000 an
additional increase of 2.4% was approved for the year 2001. Accordingly, there
was a 1.2% reimbursement increase on January 1, 2001. A second increase was
delayed until April 1, 2001, when rates were increased 1.6% to make up for the
delay.
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
23
payments for supplemental medical insurance and/or medigap insurance on behalf
of indigent ESRD patients, including patients of the Company.
Laboratory Tests. A substantial portion of SRM's net revenues are derived
from Medicare, which pays for clinical laboratory services provided to dialysis
patients in two ways.
First, payment for certain routine tests is included in the Composite Rate paid
to the centers. As to such services, the dialysis centers obtain the services
from a laboratory and pay the laboratory for such services. In accordance with
industry practice, SRM usually provides such testing services under capitation
agreements with its customers pursuant to which it bills a fixed amount per
patient per month to cover the laboratory tests included in the Composite Rate
at the designated frequencies. In October 1994, the OIG issued a special fraud
alert in which it stated its view that the industry practice of providing tests
covered by the Composite Rate at below fair market value raised issues under the
anti-kickback statutes, as such an arrangement with an ESRD facility appeared to
be an offer of something of value (Composite Rate tests at below market value)
in return for the ordering of additional tests billed directly to Medicare. See
"--Anti-kickback Statutes, False Claims Act, Stark Law and Fraud and Abuse Laws"
for a description of this statute.
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 to be effective November 2002. 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.
EPO. 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.
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
24
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 statute,
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 statute or other federal or state
laws.
ANTI-KICKBACK STATUTES
The federal anti-kickback statute establishes 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 statute
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
statute, 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 statute.
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 statute under certain
circumstances. The False Claims Act generally provides for the imposition of
civil penalties of $5,500 to $11,000 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.
25
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 fraud 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
federal 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.
STARK LAW
The original Stark Law, known as "Stark I" and enacted as part of the
Omnibus Budget Reconciliation Act of 1989, prohibits a physician from referring
Medicare patients for clinical laboratory services to entities with which the
physician (or an immediate family member) has a financial relationship, unless
certain exceptions apply. Sanctions for violations of the Stark Law may include
denial of payment, refund obligations, civil monetary penalties and exclusion of
the provider from the Medicare and Medicaid programs. The Stark Law prohibits
the entity receiving the referral from filing a claim or billing for services
arising out of the prohibited referral.
Provisions of OBRA 93, known as "Stark II," amended Stark I to revise and
expand upon various statutory exceptions, to expand the services regulated by
the statute to a list of "Designated Health Services," and to prohibit Medicaid
referrals where a financial relationship exists. The provisions of Stark II
generally became effective on January 1, 1995, with the first phase of Stark II
regulations finalized on January 4, 2001. 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 phase I of the final regulations implementing the Stark
Law, erythropoietin (EPO) and certain other dialysis-related outpatient
prescription drugs furnished in or by an ESRD facility are excepted under the
self-referral law. Further, the final regulations also adopt a definition of DME
which effectively excludes ESRD equipment and supplies from the category of
Designated Health Services.
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.
26
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 Medicare 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 officials from 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.
27
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 590,000 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
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 2012. The Company leases
16 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, 2001, the Company distributed its products through all
these 16 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.
28
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
COMMERCIAL LITIGATION
Since 1997, the Company, NMC, and certain NMC subsidiaries have been
engaged in litigation with Aetna Life Insurance Company and certain of its
affiliates ("Aetna") concerning allegations of inappropriate billing practices
for nutritional therapy and diagnostic and clinical laboratory tests and
misrepresentations. In January 2002, the Company entered into an agreement in
principle with Aetna to establish a process for resolving these claims and the
Company's counterclaims relating to overdue payments for services rendered by
the Company to Aetna's beneficiaries.
Other insurance companies have filed claims against the Company, similar to
those filed by Aetna, that seek unspecified damages and costs. The Company, NMC
and its subsidiaries believe that there are substantial defenses to the claims
asserted, and intend to vigorously defend all lawsuits. The Company has filed
counterclaims against the plaintiffs in these matters based on inappropriate
claim denials and delays in claim payments. Other private payors have contacted
the Company and may assert that NMC received excess payments and, similarly, may
join the lawsuits or file their own lawsuit seeking reimbursement and other
damages. 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 results of
operations.
In light of the Aetna agreement in principle the Company established a
pre-tax accrual of $55 million at December 31, 2001 to provide for the
anticipated settlement of the Aetna lawsuit and estimated legal expenses related
to the continued defense of other commercial insurer claims and resolution of
these claims, including overdue payments for services rendered by the Company to
these insurers' beneficiaries. No assurance can be given that the anticipated
Aetna settlement will be consummated or that the costs associated with such a
settlement or a litigated resolution of Aetna's claims and the other commercial
insurers' claims will not exceed the $55 million pre-tax accrual.
On September 28, 2000, Mesquita, et al. v. W. R. Grace & Company, et al.
(Sup. Court of Calif., S.F. County, #315465) was filed as a class action by
plaintiffs claiming to be creditors of W. R. Grace & Co.-Conn ("Grace
Chemicals") against Grace Chemicals, the Company and other defendants,
principally alleging that the Merger which resulted in the original formation of
the Company (described in greater detail in "Indemnification by W. R. Grace &
Co. and Sealed Air Corporation" below) was a fraudulent transfer, violated the
uniform fraudulent transfer act, and constituted a conspiracy. An amended
complaint (Abner et al. v. W. R. Grace & Company, et al.) and additional class
actions were filed subsequently with substantially similar allegations; all
cases have either been stayed and transferred to the U.S. District Court or are
pending before the U.S. Bankruptcy Court in Delaware in connection with Grace's
Chapter 11 proceeding. The Company has requested indemnification from Grace
Chemicals and Sealed Air Corporation pursuant to the Merger agreements (see
"Indemnification by W.R. Grace & Co. and Sealed Air Corporation"). If the Merger
is determined to have been a fraudulent transfer, if material damages are proved
by the plaintiffs, and if the Company is not able to collect, in whole or in
part on the indemnity, from W.R. Grace & Co., Sealed Air Corporation, or their
affiliates or former affiliates or their insurers, and if the Company is not
able to collect against any party that may have received distributions from W.R.
Grace & Co., a judgment could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company is
confident that no fraudulent transfer or conspiracy occurred and intends to
defend the cases vigorously.
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 Centers for Medicare and Medicaid Services (CMS)
(formerly known as the Health Care Financing Administration, or HCFA) 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, CMS 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. CMS further proposed that
its new instruction be effective retroactive to August 1993, the effective date
of the Omnibus Budget Reconciliation Act of 1993.
29
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 CMS 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 CMS
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
CMS' retroactive application of the April 1995 rule was legally invalid. CMS
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 CMS' retroactive application of the April 1995 rule legally invalid.
Based on its finding, the Court also permanently enjoined CMS from enforcing and
applying the April 1995 rule retroactively against NMC. The Court took no action
on CMS' motion for summary judgment pending completion of the outstanding
discovery. On October 5, 1998, NMC filed its own motion for summary judgment
requesting that the Court declare CMS' prospective application of the April 1995
rule invalid and permanently enjoin CMS from prospectively enforcing and
applying the April 1995 rule. The Court has not yet ruled on the parties'
motions. CMS elected not to appe