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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[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
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to _____________________
Commission file number 0-26762
PEDIATRIX MEDICAL GROUP, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0271219
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1301 Concord Terrace, Sunrise, Florida 33323
(Address of principal executive offices) (Zip Code)
(954) 384-0175
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange On Which Registered
------------------- -----------------------------------------
Common Stock, par value New York Stock Exchange
$.01 per share
Securities registered pursuant to Section 12(g) of the Act: None.
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 (ss.229.405 of this chapter) 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 this Form 10-K. [ ]
The aggregate market value of shares of Common Stock, of the registrant
held by non-affiliates of the registrant as of March 20, 2002, was approximately
$645,241,000 based on a $38.42 closing sales price per share for the Common
Stock on the New York Stock Exchange on such date. For purposes of this
computation, all executive officers, directors and 5% beneficial owners of the
common stock of the registrant have been deemed to be affiliates. Such
determination should not be deemed to be an admission that such directors,
officers or 5% beneficial owners are, in fact, affiliates of the registrant.
The number of shares of Common Stock of the registrant outstanding as
of March 20, 2002, was 25,483,095.
DOCUMENTS INCORPORATED BY REFERENCE:
The Registrant's definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A, with respect to
the annual meeting of shareholders scheduled to be held on May 14, 2002, is
incorporated by reference in Part III of this Form 10-K to the extent stated
herein. Except with respect to information specifically incorporated by
reference in this Form 10-K, each document incorporated by reference herein is
deemed not to be filed as a part hereof.
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INDEX TO ITEMS
PART I .........................................................................................................3
Item 1. Business.....................................................................................3
Item 2. Properties..................................................................................20
Item 3. Legal Proceedings...........................................................................20
Item 4. Submission of Matters to a Vote of Security Holders.........................................21
PART II ........................................................................................................21
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters....................21
Item 6. Selected Financial Data......................................................................22
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................33
Item 8. Financial Statements and Supplementary Data..................................................34
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........56
PART III ........................................................................................................57
Item 10. Directors and Executive Officers of the Registrant...........................................57
Item 11. Executive Compensation.......................................................................57
Item 12. Security Ownership of Certain Beneficial Owners and Management...............................57
Item 13. Certain Relationships and Related Transactions...............................................57
PART IV ........................................................................................................58
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.............................58
Signatures.......................................................................................................63
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PART I
ITEM 1. BUSINESS
Unless the context requires otherwise, the terms "Pediatrix", "PMG",
"the Company", "we", "us" and "our" refer to Pediatrix Medical Group, Inc., a
Florida corporation, together with its subsidiaries and its affiliated
professional associations, corporations and partnerships (the "PA Contractors").
The PA Contractors are separate legal entities that contract with Pediatrix
Medical Group, Inc. to provide physician services in certain states and Puerto
Rico.
GENERAL
We are the nation's leading provider of physician services at
hospital-based neonatal intensive care units ("NICUs"). NICUs are staffed by
neonatologists, who are pediatricians with additional training to care for
newborn infants with low birth weight and other medical complications. In
addition, we are the nation's leading provider of perinatal physician services.
Perinatologists are obstetricians with additional training to care for women
with high risk and/or complicated pregnancies and their fetuses. We also provide
physician services at hospital-based pediatric intensive care units ("PICUs")
and pediatrics departments in hospitals. As of December 31, 2001, we provided
services in 27 states and Puerto Rico and employed or contracted with 588
practicing physicians.
We staff and manage NICUs and PICUs in hospitals, providing the
physicians and professional and administrative support, including physician
billing and reimbursement services. Our policy is to provide 24-hour coverage at
our NICUs and PICUs with on-site or on-call physicians. As a result of this
policy, physicians are available to provide pediatric support to other areas of
the hospital on an as-needed basis, particularly in the obstetrics, nursery and
pediatrics departments, where immediate accessibility to specialized care is
critical.
We also staff and manage perinatal practices, which involves the
operation of outpatient offices as well as the management of inpatient
maternal-fetal care in hospitals. In our perinatal practices, we generally
provide the physicians and other clinical professionals as needed, including
nurse midwives, ultrasonographers and genetic counselors. We also provide
administrative support and required medical equipment in our outpatient offices.
All of our perinatal practices are in markets in which we also provide neonatal
physician services, which allows us to pursue contractual arrangements with
hospitals and third party payors for the provision of care across the full
continuum of high risk maternal-fetal-neonatal medicine.
We established our leading position in neonatal and perinatal physician
services by developing a comprehensive care model, including management and
systems infrastructure, that addresses the needs of patients, hospitals, payor
groups and physicians. We address the needs of (i) patients by providing
comprehensive, professional quality care, (ii) hospitals by recruiting,
credentialing and retaining neonatologists, perinatologists, pediatric
intensivists and other physicians, and hiring related staff to provide services
in a cost-effective manner, (iii) payors by providing cost-effective care to
patients, and (iv) physicians by providing administrative support, including
professional billing and reimbursement expertise and services that enable
physicians to focus on providing care to patients, and by offering research,
education and career advancement opportunities within Pediatrix.
On May 15, 2001, we acquired Magella Healthcare Corporation ("Magella")
pursuant to a merger transaction that had been approved by our shareholders on
that date. As a result of the merger, Magella became a wholly owned subsidiary
of Pediatrix and the former stockholders of Magella became shareholders of
Pediatrix. The discussion of the business of Pediatrix, management's discussion
and analysis of financial condition and results of operations, and the
consolidated financial statements included in this report reflect the operations
and financial results of Pediatrix, which as of May 15,2001, includes the
business and operations of Magella.
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INDUSTRY OVERVIEW
The managed care environment has created substantial cost containment
pressures for all constituents of the health care industry. A trend among
hospitals is to contract with third parties to manage specialized functions in
an effort to contain costs, improve utilization management and reduce
administrative burdens. Physician organizations provide hospitals with
professional management of staff, including recruiting, staffing and scheduling
of physicians.
Our strategy is to continue growth through acquisitions, as physicians
remain receptive to joining or affiliating with a larger organization. In
addition, we continue to market our services to hospitals to obtain new
contracts. We believe that hospitals will continue to outsource certain units,
such as NICUs and PICUs, on a contract management basis. NICUs and PICUs present
significant operational challenges for hospitals, including complex billing
procedures, variable admissions rates, and difficulties in recruiting and
retaining qualified physicians. Traditionally, hospitals have staffed their
NICUs and PICUs through affiliations with small, local physician groups or with
independent practitioners. Hospitals are increasingly seeking to contract with
physician groups that have the capital resources, information and reimbursement
systems and management expertise that NICUs require in the current managed care
environment.
Of the approximately four million babies born in the United States
annually, approximately 10% to 15% require neonatal treatment. Demand for
neonatal services is primarily due to premature births, and to infants having
difficulty making the transition to extrauterine life. A majority of newborns
who will require neonatal treatment are not identified until the time of
delivery, thus heightening the need for continuous coverage by neonatologists.
Across the United States, NICUs are concentrated primarily among hospitals with
a higher volume of births. NICUs are important to hospitals since obstetrics
generates one of the highest volumes of admissions, and obstetricians generally
prefer to perform deliveries at hospitals with NICUs. Hospitals must maintain
cost-effective care and service in these units to enhance the hospital's
desirability to the community, physicians and managed care payors.
Our involvement in the field of perinatology was a natural extension of
our neonatal practice. Since many perinatal cases result in an admission to a
NICU, early involvement by the neonatologist helps yield better outcomes for
both mother and child. In addition, improved perinatal care has a positive
impact on neonatal outcomes. The expansion of the continuum of care provided by
Pediatrix to include perinatology has created an opportunity to strengthen our
relationships with patients, hospitals and payors.
STRATEGY
Our objective is to enhance our position as the nation's leading
provider of neonatal and perinatal physician services by adding new practices
and increasing same unit growth. The key elements of our strategy are as
follows:
FOCUS ON NEONATOLOGY, PERINATOLOGY AND PEDIATRICS. Since our
founding in 1979, we have focused primarily on neonatology and
pediatrics. As a result of this focus, we believe that we have (i)
developed significant expertise in the complexities of billing and
reimbursement for neonatal physician services and (ii) a competitive
advantage in recruiting and retaining neonatologists seeking to join a
group practice. In 1998, we expanded our business into perinatology. We
are continuing to focus our efforts in perinatology and are dedicated
to developing the same level of expertise in perinatology that we have
developed in neonatology over the past 20 years. We believe that our
continued focus will allow us to enhance our position as the nation's
leading provider of neonatal and perinatal physician services.
ACQUIRE NEONATAL AND PERINATAL PHYSICIAN GROUP PRACTICES. We
intend to further increase the number of locations at which we provide
physician services by acquiring established neonatal and perinatal
physician group practices. We completed our first acquisition of a
neonatology physician group practice in July 1995 and since have
acquired numerous established physician
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group practices. We intend to continue actively pursuing acquisitions
of additional neonatal and perinatal physician group practices.
However, we may not be able to identify future acquisition candidates
or consummate any future acquisitions. See "Risk Factors--Our failure
to find suitable acquisition candidates or successfully integrate any
future or recent acquisitions, particularly Magella, could harm our
business and results of operations" below.
DEVELOP REGIONAL NETWORKS. We intend to develop regional and
state-wide networks of NICUs and perinatal practices in geographic
areas with high concentrations of births. We operate combined regional
networks of NICUs and perinatal practices in the Austin, Dallas-Fort
Worth, Denver-Colorado Springs, Des Moines, Kansas City, Las Vegas,
Phoenix-Tucson, Reno, San Antonio, San Jose, Seattle-Tacoma and
Southern California metropolitan areas. In addition, we intend to
continue to acquire and develop perinatal practices in markets where we
currently provide NICU services. We believe that the development of
regional and state-wide networks will strengthen our position with
third party payors, such as Medicaid and managed care organizations,
because such networks will offer more choice to the patients of third
party payors.
INCREASE SAME UNIT GROWTH. We seek to provide our services to
hospitals where we can benefit from increased admissions, and we intend
to increase revenues at existing units by providing support to areas of
the hospital outside the NICU and PICU, particularly in the obstetrics,
nursery and pediatrics departments, where immediate accessibility to
specialized care is critical. These services generate incremental
revenue for us, contribute to our overall profitability, enhance the
hospital's profitability, strengthen our relationship with the
hospital, and assist the hospital in attracting more admissions by
enhancing the hospital's reputation in the community as a full-service
critical care provider.
ASSIST HOSPITALS TO CONTROL COSTS. We intend to continue
assisting hospitals to control costs. Our comprehensive care model,
which promotes early intervention by perinatologists and neonatologists
in emergency situations, as well as the retention of qualified
perinatologists and neonatologists, improves the overall cost
effectiveness of care. We believe that our ability to assist hospitals
to control costs will allow us to continue to be successful in adding
new units at which we provide physician services.
ADDRESS CHALLENGES OF MANAGED CARE ENVIRONMENT. We intend to
continue to develop new methods of doing business with managed care and
third party payors that will allow us to develop and strengthen our
relationships among payors and hospitals. We are also prepared to enter
into flexible arrangements with third party payors. As the nation's
leading provider of neonatal and perinatal physician services, we
believe that we are well-positioned to address the needs of managed
care organizations and other third party payors, which seek to contract
with cost-effective, quality providers of medical services.
PHYSICIAN SERVICES
We furnish physician management services to NICUs and PICUs, providing
(i) a medical director to manage the unit, (ii) recruiting, staffing and
scheduling services for physicians and certain other medical staff, (iii)
neonatology and pediatric support to other hospital departments, (iv) pediatric
subspecialty services, and (v) billing and reimbursement expertise and services.
These physician management services include:
UNIT MANAGEMENT. We staff each NICU, PICU and perinatal
practice that we manage with a medical director who reports to one of
our Regional Presidents ("RP"). The RPs and all medical directors at
these units are board certified or board eligible in neonatology,
perinatology, pediatrics, pediatric critical care or pediatric
cardiology, as appropriate. In addition to providing medical care and
physician management in the unit, the medical director is responsible
for (i) overall management of the unit, including quality of care,
professional discipline, utilization review and coordinating physician
recruitment, staffing and scheduling, (ii) serving as a liaison to the
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hospital administration, (iii) maintaining professional and public
relations in the hospital and the community, and (iv) monitoring our
financial success within the unit.
RECRUITING, STAFFING AND SCHEDULING. We are responsible for
recruiting, staffing and scheduling for neonatologists,
perinatologists, pediatricians and advanced registered nurse
practitioners ("ARNPs") within the NICUs and PICUs that we manage. Our
recruiting department maintains an extensive recruiting database of
neonatologists, perinatologists and pediatricians nationwide. We
pre-screen all candidates and check and verify their credentials,
licensure and references. The RPs and the medical directors play a key
role in the recruiting and interviewing process before candidates are
introduced to hospital administrators. The NICUs and PICUs that we
manage are staffed by at least one neonatologist or pediatrician on
site or available on call. These physicians are board certified or
board eligible in neonatology, perinatology, pediatrics, pediatric
critical care or pediatric cardiology, as appropriate. We also employ
or contract with ARNPs, who assist our physicians in operating the
NICUs and PICUs. All ARNPs have either a certificate as a neonatal
nurse practitioner or pediatric nurse practitioner or a masters degree
in nursing, and have previous neonatal or pediatric experience. With
respect to the physicians who are employed by or under contract with
us, we assume responsibility for salaries, benefits and physician
malpractice insurance. See "Contractual Relationships" below.
SUPPORT TO OTHER HOSPITAL DEPARTMENTS. As part of our
comprehensive care model, physicians provide support services to other
areas of hospitals, particularly in the obstetrics, nursery and
pediatrics departments, where immediate accessibility to specialized
care is critical. We believe that this support (i) improves our
relations with hospital staff and referring physicians, (ii) enhances
the hospital's reputation in the community as a full-service critical
care provider, (iii) increases admissions from referring obstetricians
and pediatricians, (iv) integrates the physicians into a hospital's
medical community, (v) generates incremental revenue that contributes
to our overall profitability, and (vi) increases the likelihood of our
renewing existing and adding new hospital contracts.
BILLING AND REIMBURSEMENT. We assume responsibility for all
aspects of the billing, reimbursement and collection related to
physician services. Third party payors and/or patients receive a bill
from us for physician services. The hospital bills and collects
separately for services it provides. To address the increasingly
complex and time-consuming process of obtaining reimbursement for
medical services, we have invested in both the technical and human
resources necessary to create an efficient billing and reimbursement
process, including specific claim forms and software systems. We begin
this process by providing training to physicians that emphasizes a
detailed review of and proper coding protocol for all procedures
performed and services provided to achieve appropriate collection of
revenues for physician services. Our billing and collection operations
are conducted from our corporate offices in Sunrise, Florida, as well
as our regional business offices. See "From time to time we are subject
to billing investigations by federal and state government authorities
which could have an adverse effect on our business and results of
operations and the trading prices of our shares" below.
MARKETING
Historically, most of our growth was generated internally through
marketing efforts and referrals. Beginning in the latter part of 1995, we
significantly increased our acquisition activities to capitalize on the
opportunities created by the trend toward consolidation in the health care
industry. Our marketing program to neonatal and perinatal physician groups
consists of (i) market research to identify established physician groups, (ii)
telemarketing to identify and contact acquisition candidates, as well as
hospitals with high demand for perinatal and NICU services, and (iii) on-site
visits conducted by business development personnel together with senior
management. We also advertise our services in hospital and health care trade
journals, participate at hospital and physician trade conferences, and market
our services directly to hospital administrators and medical staff. In addition,
we focus on developing additional regional and statewide networks to strengthen
our position with managed care organizations.
6
MANAGEMENT INFORMATION SYSTEMS
We maintain several systems to support our day-to-day operations,
business development and ongoing clinical and business analysis, including (i) a
clinical tracking system designed to assist our physicians with their paperwork
and to consolidate clinical information used to support our education, research
and quality assurance programs, (ii) a decision tree system designed to assist
our physicians in selecting the appropriate billing codes for services provided,
(iii) a website (NATALU) designed to disseminate clinical research and education
materials to physicians and patients, (iv) electronic interchange with payors
using electronic benefits verification, claims submission, and remittance
advice, (v) a database used by the business development and marketing
departments in recruiting physicians and identifying potential physician group
acquisition candidates, which is updated through telemarketing activities,
personal contacts, professional journals and mail solicitation, and (vi) a
company-wide electronic mail system to assist intracompany communications and
conferencing. Ongoing development will provide even greater streamlining of
information from the clinical systems through the reimbursement process, thereby
expediting the overall process.
Our management information system is an integral component of the
billing and reimbursement process. Our system enables us to track numerous and
diverse third party payor relationships and payment methods and provides for
electronic interchange in support of insurance benefits verification and claims
processing to payors accepting electronic submission. Our system was designed to
meet our requirements by providing maximum flexibility as payor groups upgrade
their payment and reimbursement systems. See "Risk Factors -- If we do not
maintain effective and efficient information systems, our operations may be
adversely affected" below.
CONTRACTUAL RELATIONSHIPS
HOSPITAL RELATIONSHIPS. Many of our contracts with hospitals grant us
the exclusive right and responsibility to manage the provision of physician
services to the NICUs and PICUs. The contracts typically have terms of one to
five years and renew automatically for additional terms of one to five years
unless earlier terminated. The contracts typically provide that the hospital or
we may terminate the agreement upon 90 days' written notice.
We typically bill for physicians' services on a fee-for-service basis
separately from other charges billed by the hospital. Certain contracting
hospitals that do not generate sufficient patient volume agree to pay us
administrative fees to assure a minimum revenue level. Administrative fees
include guaranteed payments to us, as well as fees paid to us by certain
hospitals for administrative services performed by our medical directors at such
hospitals. Administrative fees accounted for 6%, 7% and 6% of our net patient
service revenue during 1999, 2000 and 2001, respectively. The hospital contracts
typically require that we and the physicians performing services maintain
minimum levels of professional and general liability insurance. We contract and
pay the premiums for such insurance on behalf of the physicians. See
"Professional Liability and Insurance" below.
PAYOR RELATIONSHIPS. Substantially all our contracts with third party
payors are discounted fee-for-service contracts. Although we have a minor number
of small capitated arrangements (in which we are paid a flat monthly fee based
on the number of individuals covered by a particular insurance plan) with
certain payors, we are prepared to enter into additional capitation arrangements
with other third party payors. If we enter into relationships with third party
payors with respect to regional and statewide networks, such relationships may
be on a capitated basis.
PA CONTRACTOR RELATIONSHIPS. PMG has entered into management agreements
("PA Management Agreements") with PA Contractors in all states in which we
operate, other than Alaska, Idaho, Florida, and certain operations in Missouri.
Each PA Contractor is owned by a licensed physician. Subject to applicable state
laws, under the PA Management Agreements, the PA Contractors delegate to PMG
only the administrative, management and support functions (and not any functions
constituting the practice of medicine) that the PA Contractors have agreed to
provide to the hospital. In consideration of such services, each PA Contractor
pays PMG either a percentage of the PA Contractor's gross revenue (but in
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no event greater than the net profits of such PA Contractor), or a flat fee. PMG
has the discretion to determine whether the fee shall be paid on a monthly,
quarterly or annual basis. The management fee may be adjusted from time to time
to reflect industry standards and the range of services provided by the PA
Contractor. The PA Management Agreements provide that the term of the
arrangements are not less than 40 years, and in most cases permanent, subject
only to termination by PMG, except in the case of gross negligence, fraud or
bankruptcy of PMG. Also, the PA Management Agreements provide that PMG has the
right, but not the obligation to purchase, or to designate a person or persons
to purchase, the stock of the PA Contractor for a nominal amount. Separately, in
its sole discretion, PMG has the right to assign its interest in the PA
Management Agreements. See Note 2 to our Consolidated Financial Statements and
"Risk Factors--Regulatory authorities or other parties may assert that our
arrangements with our affiliated professional contractors constitute
fee-splitting or the corporate practice of medicine which could result in civil
or criminal penalties or invalidation of our contracts, which in turn could have
an adverse effect on our financial condition and results of operations" below.
PHYSICIAN RELATIONSHIPS. We contract with the PA Contractors to provide
the medical services required to fulfill our obligations to hospitals. The
physician employment agreements typically have terms of three to five years and
can be terminated by either party at any time upon 90 days' prior written
notice. Each physician generally receives a base salary plus an incentive bonus.
Each physician is required to hold a valid license to practice medicine in the
appropriate state in which the physician practices and to become a member of the
medical staff, with appropriate privileges, at each hospital at which he or she
practices. We are responsible for billing patients and third party payors for
services rendered by the physician, and we have the exclusive right to establish
the schedule of fees to be charged for such services. Substantially all the
physicians employed by PMG or the PA Contractors have agreed not to compete with
PMG or the PA Contractor within a specified radius of any hospital at which PMG,
the PA Contractor or the physician is rendering services for a period of two to
three years after termination of employment.
ACQUISITIONS. We structure acquisitions of physician practice groups as
asset purchases, stock purchases or mergers. Generally, these structures provide
for (i) the assignment to us or a PA Contractor of the contracts between the
physician practice group and the hospital at which the physician practice group
provides medical services, (ii) the procurement of physician "tail insurance"
coverage, under which we are an insured party, that covers malpractice claims
filed after the date of acquisition that are based on events that occurred prior
to the acquisition, and (iii) the indemnification to us by the previous owners
of the practice group for breaches of their representations and warranties
contained in the purchase agreement. Generally, in acquisitions structured as
asset purchases, we do not acquire the physician practice group's receivables or
liabilities, including malpractice claims, arising from the physician practice
group's activities prior to the date of the acquisition. Generally, in
acquisitions structured as stock purchases or mergers, the physician practice
group's receivables (net of any liabilities accruing prior to the acquisition
and permitted indemnification claims) are assigned to the former owners of the
physician practice group. It should be noted, however, that in our recent
acquisition of Magella, neither Magella nor any of its stockholders provided us
with indemnification.
GOVERNMENT REGULATION
Our operations and relationships are subject to extensive and complex
governmental and regulatory requirements relating to the conduct of our
business. We are also subject to laws and regulations that relate to business
corporations in general. We exercise care in an effort to structure our
practices and arrangements with hospitals and physicians to comply with
applicable federal, state and local laws and regulations and we believe that
such practices and arrangements comply in all material respects with all such
existing applicable laws and regulations.
Approximately 23% of our net patient service revenue in 2001, exclusive
of administrative fees, was derived from payments made by government-sponsored
health care programs (principally Medicaid). These programs are subject to
substantial regulation by the federal and state governments. Any change in
reimbursement regulations, policies, practices, interpretations or statutes that
places material limitations on reimbursement amounts or practices could
adversely affect our operations. In addition,
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funds received under these programs are subject to audit with respect to the
proper billing for physician and ancillary services and, accordingly,
retroactive adjustments of revenue from these programs may occur. See "Risk
Factors--Limitations of, reductions in, or retroactive adjustments to
reimbursement amounts or rates by government-sponsored health care programs
could adversely affect our financial condition and results of operations" below.
For more information about the various regulatory requirements to which
we are subject, see "Risk Factors--The health care industry is highly regulated
and our failure to comply with laws or regulations, or a determination that in
the past we have failed to comply with laws or regulations, could have an
adverse effect on our financial condition and results of operations", "Risk
Factors--If we are found to have violated anti-kickback or self-referral laws,
we could be subject to monetary fines, civil and criminal penalties and
exclusion from participation in government-sponsored health care programs, which
would have an adverse effect on our business and results of operations", "Risk
Factors--Regulatory authorities or other parties may assert that our
arrangements with our affiliated professional contractors constitute
fee-splitting or the corporate practice of medicine which could result in civil
or criminal penalties or invalidation of our contracts which, in turn, could
have an adverse effect on our financial condition and results of operations",
"Risk Factors -- Federal and state laws that protect patient health information
may increase our costs and limit our liability to collect and use that
information", and "Risk Factors--Federal and state health care reform, or
changes in the interpretation of government-sponsored health care programs, may
have an adverse effect on our financial condition and results of operations"
below.
In April 1999, we received requests from investigators in Arizona,
Colorado and Florida for information related to our billing practices for
services reimbursed by the Medicaid programs in these states and the Tricare
program for military dependents. Our disclosure of the investigations caused our
share price to substantially decrease.
On May 25, 2000, we entered into a settlement agreement with the Office
of the Attorney General for the State of Florida, pursuant to which we paid the
State of Florida $40,000 to settle any claims regarding our receipt of
overpayments from the Florida Medicaid program from January 7, 1997 through the
effective date of the settlement agreement. On August 28, 2000, we entered into
a settlement agreement with the State of Arizona's Medicaid Agency, pursuant to
which we paid the State of Arizona $220,000 in settlement of potential claims
regarding payments received by Pediatrix and its affiliated physicians and
physician practices from the Arizona Medicaid program for neonatal, newborn and
pediatric services provided over a ten-year period, from January 1, 1990 through
the effective date of the settlement agreement. Additionally, we reimbursed the
State of Arizona for costs related to its investigation. The Florida and Arizona
settlement agreements both stated that the investigations conducted by those
states revealed a potential overpayment, but no intentional fraud, and that any
overpayment was due to a lack of clarity in the relevant billing codes.
The Colorado Medicaid and Tricare investigations, which involve
criminal, civil and administrative components, are active and ongoing, and these
matters, along with the Arizona and Florida matters, have prompted inquiries by
Medicaid officials in other states. We cannot predict whether the Colorado
investigation or any other inquiries will have a material adverse effect on our
business, financial condition or results of operations or on the trading prices
of our shares. We believe that additional billing audits, inquiries and
investigations from government agencies will continue to occur in the ordinary
course of our business and in the health care services industry in general from
time to time. See "From time to time we are subject to billing investigations by
federal and state government authorities which could have an adverse effect on
our business and results of operations and the trading prices of our shares"
below.
On February 7, 2002, we and certain of our officers executed a
definitive agreement relating to our previously announced settlement of the
securities class action litigation filed against us and certain of our officers
in the United States District Court for the Southern District of Florida.
Pursuant to the terms of the settlement agreement, we agreed to make a cash
payment $12.0 million, which amount is expected to be covered under insurance
policies. The settlement, which has received preliminary court approval, is
subject to final approval of the District Court. See "Item 3. Legal Proceedings"
below.
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PROFESSIONAL LIABILITY AND INSURANCE
Our business entails an inherent risk of claims of physician
professional liability. We maintain professional liability insurance and general
liability insurance on a claims-made basis in accordance with standard industry
practice. We believe that our coverage is appropriate based upon our claims
experience and the nature and risks of our business. There can be no assurance
that a pending or future claim or claims will not be successful or if successful
will not exceed the limits of available insurance coverage. See "Item 3. Legal
Proceedings" and "Risk Factors--We may be subject to malpractice and other
lawsuits, some of which we may not be fully insured against" below.
In order to maintain hospital privileges, the physicians who are
employed by or under contract with us are required to obtain professional
liability insurance coverage. We contract and pay the premiums for such
insurance for the physicians. Our current professional liability insurance
policy expires May 1, 2002, and we are currently reviewing our coverage options,
which will include a higher self-insured retention. There can be no assurance
that we can obtain substantially similar coverage upon expiration or that such
coverage will continue to be available at acceptable costs and on favorable
terms. Based upon current insurance markets, we expect that our professional
liability insurance premiums will increase over prior periods.
COMPETITION
The health care industry is highly competitive and has been subject to
continual changes in the method in which health care services are provided and
the manner in which health care providers are selected and compensated. We
believe that private and public reforms in the health care industry emphasizing
cost containment and accountability will result in an increasing shift of
neonatal and perinatal care from highly fragmented, individual or small practice
providers to larger physician groups. Companies in other health care industry
segments, such as managers of other hospital-based specialties or large
physician group practices, some of which have financial and other resources
greater than ours, may become competitors in providing management of perinatal,
neonatal and pediatric intensive care services to hospitals. Competition in our
business is generally based upon reputation and experience, and the physicians'
ability to provide cost-effective, quality care. See "Risk Factors--Our industry
is already competitive, and increased competition could adversely affect our
revenues" below.
SERVICE MARKS
We have registered the service marks "Pediatrix Medical Group" and
"Obstetrix Medical Group" and their design as well as the baby design logo with
the United States Patent and Trademark Office. In addition, we have pending
applications to register the trademark "NatalU" and service mark "NatalU - A
University Without Walls".
EMPLOYEES AND PROFESSIONALS UNDER CONTRACT; GEOGRAPHIC COVERAGE
In addition to the 588 practicing physicians employed by or under
contract with us as of December 31, 2001, Pediatrix employed or contracted with
564 other clinical professionals and 932 other full-time and part-time
employees. None of our employees are subject to a collective bargaining
agreement.
We provide services in Alaska, Arizona, Arkansas, California, Colorado,
Florida, Georgia, Idaho, Indiana, Iowa, Kansas, Maryland, Missouri, Nevada, New
Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Puerto Rico, South
Carolina, Tennessee, Texas, Utah, Virginia, Washington and West Virginia.
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RISK FACTORS
FROM TIME TO TIME WE ARE SUBJECT TO BILLING INVESTIGATIONS BY FEDERAL AND STATE
GOVERNMENT AUTHORITIES WHICH COULD HAVE AN ADVERSE EFFECT ON OUR BUSINESS AND
RESULTS OF OPERATIONS AND THE TRADING PRICES OF OUR SHARES.
State and federal statutes impose substantial penalties, including
civil and criminal fines, exclusion from participation in government health care
programs, and imprisonment, on entities or individuals (including any individual
corporate officers or physicians deemed responsible) that fraudulently or
wrongfully bill governmental or other third party payors for health care
services. In addition, federal laws allow a private person to bring a civil
action in the name of the United States government for false billing violations.
In April 1999, we received requests, and in one case a subpoena, from
investigators in Arizona, Colorado and Florida for information related to our
billing practices for services reimbursed by the Medicaid programs in these
states and by the Tricare program for military dependents. Our disclosure of the
investigations caused our share price to substantially decrease.
The Colorado Medicaid and Tricare investigations, which involve
criminal, civil and administrative components, are active and ongoing, and these
matters, along with the Arizona and Florida matters, have prompted inquiries by
Medicaid officials in other states. We cannot predict whether the Colorado
investigation or any other inquiries will have a material adverse effect on our
business, financial condition or results of operations or on the trading prices
of our shares. We believe that additional billing audits, inquiries and
investigations by government agencies will continue to occur in the ordinary
course of our business and in the health care services industry in general from
time to time.
THE HEALTH CARE INDUSTRY IS HIGHLY REGULATED AND OUR FAILURE TO COMPLY WITH LAWS
OR REGULATIONS, OR A DETERMINATION THAT IN THE PAST WE HAVE FAILED TO COMPLY
WITH LAWS OR REGULATIONS, COULD HAVE AN ADVERSE EFFECT ON OUR FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The health care industry and physicians' medical practices are highly
regulated. We believe that this industry will continue to be subject to
increasing regulation, the scope and effect of which we cannot predict.
Neonatal, perinatal and other health care services that we and our affiliated
professional contractors provide are subject to extensive and complex federal,
state and local laws and regulations governing various matters such as the
licensing and certification of our facilities and personnel, the conduct of our
operations, our billing and coding policies and practices, our policies and
practices with regard to patient privacy and confidentiality, and prohibitions
on payments for the referral of business and self-referrals. As a result of our
desire to assure compliance with the increasingly complex regulatory environment
for the health care industry, we maintain a company-wide compliance program.
Nevertheless, we may become the subject of additional regulatory or other
investigations or proceedings, and our interpretations of applicable laws and
regulations may be challenged. The defense of any such challenge could result in
substantial cost to us and a diversion of management's time and attention. Thus,
any such challenge could have a material adverse effect on our business,
regardless of whether it ultimately is successful. If we fail to comply with
these laws, or a determination is made that in the past we have failed to comply
with these laws, our financial condition and results of operations could be
adversely affected. In addition, changes in health care laws or regulations may
restrict our existing operations, limit the expansion of our business or impose
additional compliance requirements. These changes, if enacted, could reduce our
opportunities for continued growth and impose additional compliance costs on us
that we may not recover through price increases.
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LIMITATIONS OF, REDUCTIONS IN OR RETROACTIVE ADJUSTMENTS TO REIMBURSEMENT
AMOUNTS OR RATES BY GOVERNMENT-SPONSORED HEALTH CARE PROGRAMS COULD ADVERSELY
AFFECT OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Approximately 23% of our net patient service revenue in 2001, exclusive
of administrative fees, was derived from payments made by government-sponsored
health care programs (principally Medicaid). These government programs, as well
as private insurers, have taken and may continue to take steps to control the
cost, use and delivery of health care services. There can be no assurance that
payments from government or private payors will remain at levels comparable to
present levels. Our business could be adversely affected by reductions in or
limitations of reimbursement amounts or rates under these programs, reductions
in funding of these programs, or elimination of coverage for certain individuals
or treatments under these programs, which may be implemented as a result of:
o increasing budgetary and cost containment pressures on the
health care industry generally;
o new federal or state legislation reducing state Medicaid
funding and reimbursements or increasing state discretionary
funding;
o new state legislation encouraging or mandating state Medicaid
managed care;
o state Medicaid waiver requests granted by the federal
government, increasing discretion with respect to, or reducing
coverage or funding for, certain individuals or treatments
under Medicaid, in the absence of new federal legislation;
o increasing state discretion in Medicaid expenditures which may
result in decreased reimbursement for, or other limitations
on, the services that we provide; or
o other changes in reimbursement regulations, policies or
interpretations that place material limitations on
reimbursement amounts or practices for services that we
provide.
In addition, these government-sponsored health care programs generally
provide for reimbursements on a fee schedule basis rather than on a
charge-related basis. Therefore, we generally cannot increase our revenues by
increasing the amount we charge for our services. To the extent our costs
increase, we may not be able to recover our increased costs from these
government programs. In states where Medicaid managed care is encouraged and may
become mandated, Medicaid reimbursement payments to us could be reduced as
managed care organizations bargain for reimbursement with competing providers
and contract with these states to provide benefits to Medicaid enrollees.
Moreover, cost containment measures and market changes in non-governmental
insurance plans have generally restricted our ability to recover, or shift to
non-governmental payors, these increased costs.
In attempts to limit federal spending, there have been, and we expect
that there will continue to be, a number of proposals to limit Medicare and
Medicaid reimbursement for various services. For example, the Balanced Budget
Act of 1997 has made it easier for states to reduce their Medicaid reimbursement
levels. Some states have enacted or are considering enacting measures that are
designed to reduce their Medicaid expenditures. This Act also mandated that the
Centers for Medicare and Medicaid Services, or CMS (formerly known as Health
Care Financing Administration, or HCFA), conduct competitive bidding
demonstrations for certain Medicare services. Two such demonstrations are
currently being conducted. These competitive bidding demonstrations could
provide CMS and Congress with a model for implementing competitive pricing in
other federal health care programs. If, for example, such a competitive bidding
system were implemented for Medicaid services, it could result in lower
reimbursement rates, exclude certain services from coverage or impose limits on
increases in reimbursement rates. Our business may be significantly and
adversely affected by any such changes in reimbursement policies and other
legislative initiatives aimed at reducing health care costs associated with
Medicare and Medicaid.
12
In addition, funds we receive from third party payors, including
government programs, are subject to audit with respect to the proper billing for
physician and ancillary services and, accordingly, our revenue from these
programs may be adjusted retroactively.
IF OUR PHYSICIANS DO NOT APPROPRIATELY RECORD AND DOCUMENT THE SERVICES THAT
THEY PROVIDE, OUR REVENUES COULD BE ADVERSELY AFFECTED.
Physicians employed or under contract with our affiliated professional
contractors are responsible for assigning reimbursement codes and maintaining
sufficient supporting documentation in respect of the services that they
provide. We use this information to seek reimbursement for their services from
third party payors. If our physicians do not appropriately code or document
their services, our revenues could be adversely affected. For instance, in
response to billing investigations or other governmental inquiries, our
affiliated physicians could take an unduly conservative approach to coding their
services by, for example, increasing the use of non-critical care codes, for
which our reimbursement is lower than critical care codes, as they may have in
the past. As a result, we could receive lower reimbursements from third party
payors which could have a material adverse effect on our revenues and results of
operations.
OUR FAILURE TO FIND SUITABLE ACQUISITION CANDIDATES OR SUCCESSFULLY INTEGRATE
ANY FUTURE OR RECENT ACQUISITIONS, PARTICULARLY MAGELLA, COULD HARM OUR BUSINESS
AND RESULTS OF OPERATIONS.
We have expanded and intend to continue to expand our geographic and
market penetration primarily through acquisitions of physician group practices.
However, we may not be able to implement our acquisition strategy, and our
strategy may not be successful. In implementing our acquisition strategy, we
compete with other potential acquirers, some of which may have greater financial
or operational resources than we do. Competition for acquisitions may intensify
due to the ongoing consolidation in the health care industry, which may increase
the costs of capitalizing on such opportunities.
In addition, completion of acquisitions could result in us incurring or
assuming additional indebtedness and issuing additional equity. The issuance of
shares of our common stock for an acquisition may result in dilution to our
existing shareholders.
Although we conduct due diligence reviews of potential acquisition
candidates, including with respect to financial matters and compliance with
applicable laws, we cannot be certain that the acquired business will continue
to maintain its pre-acquisition revenues and growth rates following the
acquisition, nor can we be certain as to the absence or extent of any unknown or
contingent liabilities, including liabilities for failure to comply with
applicable laws. While we generally seek indemnification from the prior owners
of acquired businesses covering these matters (although we have no
indemnification in our Magella acquisition), we may incur material liabilities
for past activities of acquired businesses.
Moreover, integrating acquisitions, including Magella, into our
existing operations involves numerous additional short and long-term risks,
including:
o diversion of our management's attention;
o failure to retain key personnel;
o long-term value of acquired intangible assets; and
o one-time acquisition expenses.
We cannot assure you that we will complete or integrate acquisitions in
new states; but if we do, we will be required to comply with the laws and
regulations of those states, which may differ from those of the states in which
our operations are currently conducted. Many of our acquisition-related expenses
may have a negative effect on our results of operations until, if ever, these
expenses are offset by
13
increased revenues. We cannot assure you that we will identify suitable
acquisition candidates in the future or that we will complete future
acquisitions or, if completed, that any acquisition, including our recent
acquisitions, will be integrated successfully into our operations or that we
will be successful in achieving our objectives.
REGULATORY AUTHORITIES OR OTHER PARTIES MAY ASSERT THAT OUR ARRANGEMENTS WITH
OUR AFFILIATED PROFESSIONAL CONTRACTORS CONSTITUTE FEE-SPLITTING OR THE
CORPORATE PRACTICE OF MEDICINE WHICH COULD RESULT IN CIVIL OR CRIMINAL PENALTIES
OR INVALIDATION OF OUR CONTRACTS, WHICH IN TURN COULD HAVE AN ADVERSE EFFECT ON
OUR FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Many states have laws that prohibit business corporations, such as PMG,
from practicing medicine, exercising control over medical judgments or decisions
of physicians, or engaging in certain arrangements, such as fee-splitting, with
physicians. In these states, we maintain long-term management contracts with
professional associations and partnerships that are owned by licensed
physicians, and these affiliated professional contractors in turn employ or
contract with physicians to provide physician services. In states where we are
not permitted to practice medicine, we perform only non-medical administrative
services, do not represent that we offer medical services and do not exercise
influence or control over the practice of medicine by the physicians employed by
our affiliated professional contractors. In states where fee-splitting is
prohibited, the fees that we receive from our affiliated professional
contractors have been established on a basis that we believe complies with the
applicable states' laws. Although we believe that we are in compliance with
applicable state laws in relation to the corporate practice of medicine and
fee-splitting, we cannot assure you of this. Regulatory authorities or other
parties, including our affiliated physicians, may assert that, despite these
arrangements, we are engaged in the corporate practice of medicine or that our
contractual arrangements with our affiliated professional contractors constitute
fee-splitting or the corporate practice of medicine, in which case we could be
subject to civil and criminal penalties, our contracts could be found legally
invalid and unenforceable (in whole or in part) or we could be required to
restructure our contractual arrangements with our affiliated professional
contractors. We cannot assure you that this will not occur or, if it does, that
we would be able to restructure our contractual arrangements on terms that are
similar or at least as favorable to us. If we were unable to so restructure our
contractual arrangements, our financial condition and results of operations
could suffer.
IF WE ARE FOUND TO HAVE VIOLATED ANTI-KICKBACK OR SELF-REFERRAL LAWS, WE COULD
BE SUBJECT TO MONETARY FINES, CIVIL AND CRIMINAL PENALTIES AND EXCLUSION FROM
PARTICIPATION IN GOVERNMENT-SPONSORED HEALTH CARE PROGRAMS, WHICH WOULD HAVE AN
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS.
Our business is subject to extensive federal and state regulation with
respect to financial relationships and "kickbacks" among health care providers,
physician self-referral arrangements and other fraud and abuse issues. Federal
anti-kickback laws and regulations prohibit certain offers, payments or receipts
of remuneration in return for (1) referring Medicaid or other
government-sponsored health care program patients or patient care opportunities
or (2) purchasing, leasing, ordering or arranging for, or recommending any
service or item for which payment may be made by a government-sponsored health
care program. In addition, federal physician self-referral legislation, known as
the Stark law, prohibits Medicare or Medicaid payments for certain services
furnished by a physician who has a financial relationship with various
physician-owned or physician-interested entities. These laws are broadly worded
and, in the case of the anti-kickback law, have been broadly interpreted by
federal courts, and potentially subject many business arrangements to government
investigation and prosecution, which can be costly and time consuming.
Violations of these laws are punishable by monetary fines, civil and criminal
penalties, exclusion from participation in government-sponsored health care
programs and forfeiture of amounts collected in violation of such laws, which
could have an adverse effect on our business and results of operations. Certain
states in which we do business also have similar anti-kickback and self-referral
laws, imposing substantial penalties for violations. The relationships,
including fee arrangements, among our affiliated professional contractors,
hospital clients and physicians have not been
14
examined by federal or state authorities under these anti-kickback and
self-referral laws and regulations.
FEDERAL AND STATE LAWS THAT PROTECT THE PRIVACY OF PATIENT HEALTH INFORMATION
MAY INCREASE OUR COSTS AND LIMIT OUR ABILITY TO COLLECT AND USE THAT
INFORMATION.
Numerous federal and state laws and regulations govern the collection,
dissemination, use and confidentiality of patient-identifiable health
information, including the federal Health Insurance Portability and
Accountability Act of 1996 and related rules ("HIPAA"). The U.S. Department of
Health and Human Services has proposed standards for patient-identifiable health
information pursuant to HIPAA that have not yet been finalized. As part of our
medical record keeping, third party billing, research and other services, we
collect and maintain patient-identifiable health information. We cannot predict
the effect of the HIPAA privacy standards on our operations nor estimate the
cost of compliance with such standards, which may be revised prior to their
current scheduled effective date in February 2003. New health information
standards, whether implemented pursuant to HIPAA, congressional action or
otherwise, could have a significant effect on the manner in which we handle
health care related data and communicate with payors, and the cost of complying
with these standards could be significant. If we do not comply with existing or
new laws and regulations related to patient health information we could be
subject to criminal or civil sanctions.
FEDERAL AND STATE HEALTH CARE REFORM, OR CHANGES IN THE INTERPRETATION OF
GOVERNMENT-SPONSORED HEALTH CARE PROGRAMS, MAY HAVE AN ADVERSE EFFECT ON OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Federal and state governments have recently focused significant
attention on health care reform. In recent years, many legislative proposals
have been introduced or proposed in Congress and some state legislatures that
would effect major changes in the health care system. Among the proposals which
are being or have been considered are cost controls on hospitals, insurance
reforms and the creation of a single government health plan that would cover all
citizens. Some proposals under consideration, or others which may be introduced,
could, if adopted, have a material adverse effect on our financial condition and
results of operations. We cannot predict which, if any, proposal that has been
or will be considered will be adopted or what effect any future legislation will
have on us.
WE MAY NOT BE ABLE TO SUCCESSFULLY RECRUIT ADDITIONAL AND RETAIN EXISTING
QUALIFIED PHYSICIANS TO SERVE AS OUR INDEPENDENT CONTRACTORS OR EMPLOYEES.
Our business strategy is dependent upon our ability to recruit and
retain qualified neonatologists and perinatologists. We compete with many types
of health care providers, including teaching, research, and government
institutions, for the services of qualified physicians. In addition, upon the
expiration of the employment contracts of our affiliated physicians, which
typically have terms of three to five years, we generally seek the renewal of
such contracts. We may not be able to continue to recruit and retain, through
renewal of existing contracts or otherwise, a sufficient number of qualified
neonatologists and perinatologists who provide services in markets served by us
on terms similar to our current arrangements. Our inability to recruit
additional or retain our current physicians on terms that are similar to our
current arrangements (or that are otherwise acceptable to us) could adversely
affect our ability to service existing or new units at hospitals or expand our
business, which could have a material adverse effect on our financial condition
and results of operations.
WE MAY BE SUBJECT TO MALPRACTICE AND OTHER LAWSUITS, SOME OF WHICH WE MAY NOT BE
FULLY INSURED AGAINST.
Our business entails an inherent risk of claims medical malpractice
claims against our physicians and us. We periodically become involved as a
defendant in medical malpractice lawsuits, some of which are currently ongoing,
and are subject to the attendant risk of substantial damage awards. A
significant source of potential liability is negligence or alleged negligence by
physicians employed or contracted by
15
us or our affiliated professional contractors. To the extent these physicians
are our employees, or are regarded as our agents, we could be held liable. In
addition, our contracts with hospitals generally require us to indemnify them
and their affiliates for losses resulting from the negligence of physicians who
are associated with us.
From time to time we have been subject to other lawsuits. We recently
settled a class action lawsuit brought by a class of open market purchasers of
our common stock. The class action lawsuit alleged that we had violated federal
securities laws. We may be subject to lawsuits in the future which may involve
large claims and significant defense costs. Although we currently maintain
liability insurance intended to cover such claims, the coverage limits of such
insurance policies may prove to be inadequate or all such claims may not be
covered by the insurance. In addition, our commercial insurance policies must be
renewed annually. We cannot assure you that a pending or future lawsuits will
not be successful or, if successful, will not exceed the limits of our available
insurance coverage or that this coverage will continue to be available at
acceptable costs and on favorable terms. Liabilities in excess of our insurance
coverage could have a material adverse effect on our financial condition and
results of operations. In addition, claims, regardless of their merit or
eventual outcome, also may have a material adverse effect on our business and
reputation.
WE MAY WRITE-OFF INTANGIBLE ASSETS, SUCH AS GOODWILL.
Recent accounting rules require that we evaluate long-lived assets,
including goodwill and other identifiable intangibles, at each balance sheet
date and record an impairment whenever events or changes in circumstances
indicate that the carrying value of such assets may not be fully recoverable.
Under current standards, the recoverability of such assets, which consist
primarily of goodwill, is measured by a comparison of the carrying value of the
assets to the future undiscounted cash flows before interest charges to be
generated by the assets. For goodwill, we consider external factors relating to
each acquired business, including hospital and physician contract charges, local
market developments, changes in third-party payments, national health care
trends, and other publicly-available information. If these factors indicate that
goodwill is impaired, the impairment to be recognized is measured as the excess
of the carrying value over the estimated fair value. As circumstances after an
acquisition can change, we cannot assure you that the value of intangible assets
will be realized by us. If we record an impairment of our intangible assets, it
could have an adverse effect on our results of operations for the year in which
the impairment is recorded.
FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD HARM OUR BUSINESS AND RESULTS OF
OPERATIONS.
We have experienced rapid growth in our business and number of
employees in recent years. Continued rapid growth may impair our ability to
provide our services efficiently and to manage our employees adequately. While
we are taking steps to manage our growth, our future results of operations could
be materially adversely affected if we are unable to do so effectively.
IF WE DO NOT MAINTAIN EFFECTIVE AND EFFICIENT INFORMATION SYSTEMS, OUR
OPERATIONS MAY BE ADVERSELY AFFECTED.
Our operations are dependent on the continued and uninterrupted
performance of our information systems. Failure to maintain reliable information
systems or disruptions in our information systems could cause disruptions in our
business operations, including disruptions in billing and collections; loss of
existing patients; difficulty in satisfying requirements of contractual
obligations with hospitals; disputes with patients and payors; problems
maintaining patient privacy and confidentiality, patient records, research and
other databases; regulatory problems; decreased intra-company communications;
increased administrative expenses; or other adverse consequences, any or all of
which could have a material adverse effect on our operations.
16
OUR QUARTERLY RESULTS WILL LIKELY FLUCTUATE, WHICH COULD CAUSE THE VALUE OF OUR
COMMON STOCK TO DECLINE.
We have recently experienced and expect to continue to experience
quarterly fluctuations in our net patient service revenue and associated net
income primarily due to volume and cost fluctuations. We have significant fixed
operating costs, including physician costs, and, as a result, are highly
dependent on patient volume and capacity utilization of our affiliated
professional contractors to sustain profitability. Our results of operations for
any quarter are not necessarily indicative of results of operations for any
future period or full year. As a result, our results of operations may fluctuate
significantly from period to period. In addition, there recently has been
significant volatility in the market price of securities of health care
companies that in many cases we believe has been unrelated to the operating
performance of these companies. We believe that certain factors, such as
legislative and regulatory developments, quarterly fluctuations in our actual or
anticipated results of operations, lower revenues or earnings than those
anticipated by securities analysts, and general economic and financial market
conditions, could cause the price of our common stock to fluctuate
substantially.
IF WE ARE UNABLE TO COLLECT REIMBURSEMENTS FROM THIRD PARTY PAYORS IN A TIMELY
MANNER FOR OUR SERVICES, OUR REVENUES COULD BE ADVERSELY AFFECTED.
A significant portion of our revenue is derived from reimbursements
from various third party payors, including government-sponsored health care
plans, private insurance plans and managed care plans, for services provided by
our affiliated professional contractors. In addition to being responsible for
submitting reimbursement requests to third party payors, we are also responsible
for the collection of reimbursements and assume the financial risks relating to
uncollectible and delayed reimbursements by third party payors. In the current
health care reimbursement environment, we may continue to experience
difficulties in collecting reimbursements to which we are entitled for services
that we have provided from third party payors, including Medicaid programs and
managed care payors. As part of their efforts to manage costs in an increasingly
competitive environment, third party payors may seek to reduce, by appeal or
otherwise, or delay reimbursements to which we are entitled for services that we
have provided. If we are not reimbursed in a timely manner for the services that
we provide, our revenues could be adversely affected.
IF OUR PHYSICIANS LOSE THE ABILITY TO PROVIDE SERVICES IN ANY HOSPITALS OR
ADMINISTRATIVE FEES PAID TO US BY HOSPITALS ARE REDUCED, OUR REVENUES COULD BE
ADVERSELY AFFECTED.
Our net patient service revenue is derived primarily from
fee-for-service billings for patient care provided by our physicians and from
administrative fees. Our arrangements with certain hospitals provide that if the
hospital does not generate sufficient patient volume it will pay us
administrative fees in order to guarantee that we receive a specified minimum
revenue level. We also receive administrative fees from hospitals for
administrative services performed by physicians providing medical director
services at the hospital. Administrative fees accounted for 6%, 7% and 6% of our
net patient service revenue during 1999, 2000 and 2001, respectively. Our
contractual arrangements with hospitals generally are for periods of one to five
years and may be terminated by us or the hospital upon 90 days' written notice.
While we have in most cases been able to renew these arrangements, hospitals may
cancel or not renew our arrangements, or may not pay us administrative fees in
the future. To the extent that our arrangements with hospitals are canceled, or
are not renewed or replaced with other arrangements with at least as favorable
terms, our financial condition and results of operations could be adversely
affected. In addition, to the extent our physicians lose their privileges in
hospitals or hospitals enter into arrangements with other physicians, our
revenues could be adversely affected.
OUR INDUSTRY IS ALREADY COMPETITIVE, AND INCREASED COMPETITION COULD ADVERSELY
AFFECT OUR REVENUES.
The health care industry is competitive and subject to continual
changes in the method in which services are provided and the manner in which
health care providers are selected and compensated. We
17
believe that private and public reforms in the health care industry emphasizing
cost containment and accountability will result in an increasing shift of
neonatal and perinatal care from highly fragmented, individual or small practice
providers to larger physician groups. Companies in other health care industry
segments, such as managers of other hospital-based specialties or currently
expanding large physician group practices, some of which have greater financial
and other resources than we do, may become competitors in providing neonatal,
perinatal and pediatric intensive care physician services to hospitals. We may
not be able to continue to compete effectively in this industry, additional
competitors may enter our markets, and this increased competition may have an
adverse effect on our revenues.
WE ARE DEPENDENT UPON OUR KEY MANAGEMENT PERSONNEL FOR OUR FUTURE SUCCESS.
Our success depends to a significant extent on the continued
contributions of our key management, business development, sales and marketing
personnel, including one of our principal shareholders, Chief Executive Officer
and co-founder, Dr. Roger Medel, for our management and implementation of our
growth strategy. The loss of Dr. Medel or other key personnel could have a
material adverse effect on our financial condition, results of operations and
plans for future development.
THE SUBSTANTIAL NUMBER OF OUR SHARES THAT WILL BE ELIGIBLE FOR SALE IN THE NEAR
FUTURE COULD CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO FALL.
The market price of our common stock could fall as a result of sales of
a large number of shares of common stock in the market, or the price could
remain lower because of the perception that such sales may occur. These factors
could also make it more difficult for us to raise funds through future offerings
of our common stock.
As of December 31, 2001, there were 24,961,103 shares of our common
stock outstanding, all of which are freely tradable without restriction, with
the following exceptions:
o 829,089 shares, which are owned by certain of our officers,
directors and affiliates, may be resold publicly at any time
subject to the volume and other restrictions under Rule 144 of
the Securities Act of 1933; and
o 2,254,893 shares, which are owned by Welsh, Carson, Anderson &
Stowe VII, L.P. and certain of its affiliates, may not be
resold without our consent until May 15, 2002.
As of December 31, 2001, there were also:
o 6,723,116 shares of our common stock reserved for issuance
under options issued pursuant to our amended and restated
stock option plan, of which options for an aggregate of
4,844,860 shares of common stock were issued and outstanding
and options for an aggregate of 2,653,856 shares of common
stock were exercisable;
o 848,931 shares of our common stock reserved for issuance under
presently exercisable stock options issued by Magella which
options were exercisable into shares of our common stock at
the time of our acquisition of Magella;
o 437,566 shares of our common stock reserved for issuance under
our employee stock purchase plans; and
o 35,000 shares of our common stock reserved for issuance under
convertible notes issued by Magella which were convertible
into shares of our common stock at the time of our acquisition
of Magella.
All shares of common stock issued under the convertible notes, upon the
exercise of stock option or under our employee stock purchase plans will be
freely tradable, subject to the volume trading
18
limitations under Rule 144 of the Securities Act of 1933 in respect of shares
acquired by our affiliates. Our stock options and convertible notes, entitle
holders to purchase shares of our common stock at prices which may be less than
the current market price per share of our common stock. Holders of these options
and convertible notes will usually exercise or convert them at a time when the
market price of our common stock is greater than their exercise price or
conversion price, as the case may be. Accordingly, the exercise or conversion of
these options and convertible notes and subsequent sale of our common stock
could reduce the market price for our common stock and result in dilution to our
then shareholders.
IF WE ENTER INTO A SIGNIFICANT NUMBER OF SHARED-RISK CAPITATED ARRANGEMENTS WITH
CERTAIN PAYORS, SUCH ARRANGEMENTS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
The evolving managed care environment has created substantial cost
containment pressures for the health care industry. Our contracts with payors
and managed care organizations traditionally have been fee-for-service
arrangements. At December 31, 2001, we had relatively few "capitated" and "case
rate" arrangements with certain payors. Under capitated payment arrangements, we
receive a flat fee monthly based on the number of individuals covered by that
particular insurance plan regardless of the number of patients or types of
treatment we provide, and under a case rate payment arrangement, we receive a
fixed dollar amount per patient. If we enter into similar arrangements in the
future our financial condition and results of operations may be adversely
affected if we are unable to manage our risks under these arrangements.
OUR CURRENTLY OUTSTANDING PREFERRED STOCK PURCHASE RIGHTS AND OUR ABILITY TO
ISSUE SHARES OF PREFERRED STOCK COULD DETER TAKEOVER ATTEMPTS.
We have adopted a preferred share purchase rights plan. Under this
plan, each outstanding share of Pediatrix common stock includes a preferred
stock purchase right that entitles the registered holder, subject to the terms
of our rights agreement, to purchase from Pediatrix a one-thousandth of a share
of our series A junior participating preferred stock at an exercise price of
$150 per right for each share of common stock held by the holder. In addition,
if a person or group of persons acquires beneficial ownership of 15% or more of
the outstanding shares of Pediatrix common stock, each right will permit its
holder to purchase $300 worth of Pediatrix common stock for $150. The rights are
attached to all certificates representing outstanding shares of Pediatrix common
stock, and no separate rights certificates have been distributed. Some
provisions contained in the rights agreement may have the effect of discouraging
a third party from making an acquisition proposal for Pediatrix and may thereby
inhibit a change in control. For example, such provisions may deter tender
offers for shares of common stock which offers may be attractive to
shareholders, or deter purchases of large blocks of common stock, thereby
limiting the opportunity for shareholders to receive a premium for their shares
of common stock or exchangeable shares over the then-prevailing market prices.
In addition, our amended and restated articles of incorporation
authorize our board of directors to issue up to 1,000,000 shares of undesignated
preferred stock and to determine the powers, preferences and rights of these
shares, without shareholder approval. This preferred stock could be issued with
voting, liquidation, dividend and other rights superior to those of the holders
of common stock. The issuance of preferred stock under some circumstances could
have the effect of delaying, deferring or preventing a change in control.
PROVISIONS OF OUR BYLAWS COULD DETER TAKEOVER ATTEMPTS WHICH MAY RESULT IN A
LOWER MARKET PRICE FOR OUR COMMON STOCK.
Provisions in our amended and restated bylaws, including those relating
to calling shareholder meetings, taking action by written consent and other
matters, could render it more difficult or discourage an attempt to obtain
control of Pediatrix through a proxy contest or consent solicitation. These
provisions could limit the price that some investors might be willing to pay in
the future for our shares of common stock.
19
FORWARD LOOKING STATEMENTS MAY PROVE INACCURATE.
Certain information included or incorporated by reference in this
Annual Report may be deemed to be "forward looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. All statements, other
than statements of historical facts, that address activities, events or
developments that Pediatrix intends, expects, projects, believes or anticipates
will or may occur in the future are forward looking statements. Such statements
are characterized by terminology such as "believe", "hope", "may", "anticipate",
"should", "intend", "plan", "will", "expect", "estimate", "project",
"positioned", "strategy" and similar expressions. These statements are based on
assumptions and assessments made by Pediatrix's management in light of their
experience and their perception of historical trends, current conditions,
expected future developments and other factors they believe to be appropriate.
Any forward looking statements are not guarantees of future performance and are
subject to risks and uncertainties that could cause actual results, developments
and business decisions to differ materially from those contemplated by such
forward looking statements. We disclaim any duty to update any forward looking
statements. Some of the factors that may cause actual results, developments and
business decisions to differ materially from those contemplated by such
forward-looking statements include the risk factors discussed above.
ITEM 2. PROPERTIES
We lease our corporate office located in Sunrise, Florida
(approximately 80,000 square feet). During 2001, we leased space in other
facilities in various states for our business and medical offices, storage
space, and temporary housing of medical staff, with aggregate annual rents of
approximately $5,100,000. See Note 9 to our Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various inquiries, investigations and proceedings by
governmental agencies relating to Medicaid, Medicare and Tricare reimbursement
and other issues. In April 1999, we received requests from investigators in
Arizona, Colorado and Florida for information relating to our billing practices
for services reimbursed by the Medicaid programs in these states and the Tricare
program for military dependents. We settled the Arizona and Florida
investigations in 2000. However, the Colorado Medicaid and Tricare
investigations, which involve criminal, civil and administrative components, are
active and ongoing, and these matters, along with the Arizona and Florida
matters, have prompted inquiries by Medicaid officials in other states. We
cannot predict whether the Colorado investigation or any other inquiries will
have a material adverse effect on our business, financial condition or results
of operations or on the trading prices of our shares. We believe that additional
billing audits, inquiries and investigations from government agencies will
continue to occur in the ordinary course of our business and in the health care
services industry in general from time to time. See "Government Regulation" and
"Risk Factors--From time to time we are subject to billing investigations by
federal and state government authorities which could have an adverse effect on
our business and results of operations and the trading prices of our shares"
above.
During the ordinary course of business, we have also become a party to
pending and threatened legal actions and proceedings, most of which involve
claims of medical malpractice and are generally covered by insurance. We
believe, based upon our review of these pending matters, that the outcome of
such legal actions and proceedings, individually or in the aggregate, will not
have a material adverse effect on our financial condition, results of operations
or liquidity, notwithstanding any possible lack of insurance recovery. If
liability results from medical malpractice claims, there can be no assurance
that our medical malpractice insurance coverage will be adequate to cover
liabilities arising out of such proceedings. See "Risk Factors--We may be
subject to malpractice and other lawsuits, some of which we may not be fully
insured against" above.
On December 14, 2001, we announced that we had reached an agreement in
principle to settle the securities class action litigation filed against us and
certain of our officers in the United States District Court for the Southern
District of Florida for a cash payment of $12.0 million. On February 7, 2002, we
20
and certain of our officers executed a definitive agreement relating to the
settlement, and on February 28, 2002, the settlement was approved by a
preliminary order of the District Court. The settlement remains subject to final
approval of the District Court, and a hearing is scheduled to be held on May 3,
2002 to seek such final approval. We expect that our insurance coverage will
adequately cover the financial terms of the settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fiscal
quarter ended December 31, 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Pediatrix common stock is traded on the New York Stock Exchange (the
"NYSE") under the symbol "PDX". The following table sets forth, for the periods
indicated, the high and low sales prices for the common stock as reported on the
NYSE.
High Low
---- ---
2000
----
First Quarter $ 12.00 $ 6.75
Second Quarter 11.88 6.44
Third Quarter 16.50 11.25
Fourth Quarter 25.69 12.88
2001
----
First Quarter 25.82 18.98
Second Quarter 33.20 21.30
Third Quarter 41.15 30.56
Fourth Quarter 43.17 24.00
As of March 20, 2002, there were approximately 125 holders of record of
the 25,483,095 outstanding shares of Pediatrix common stock. The closing sales
price for Pediatrix common stock on March 20, 2002 was $38.42 per share.
We did not declare or pay any cash dividends on our common stock in
2000 or 2001, nor do we currently intend to declare or pay any cash dividends in
the future, but instead we intend to retain all earnings for the operation and
expansion of our business. The payment of any future dividends will be at the
discretion of the Board of Directors and will depend upon, among other things,
future earnings, results of operations, capital requirements, our general
financial condition, general business conditions and contractual restrictions on
payment of dividends, if any, as well as such other factors as the Board of
Directors may deem relevant. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
below.
21
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data set forth as of and for each
of the five years in the period ended December 31, 2001, have been derived from
the Consolidated Financial Statements, which statements have been audited. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," and the Consolidated
Financial Statements and the notes thereto included elsewhere herein.
Years Ended December 31,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(in thousands, except per share and other operating data)
CONSOLIDATED INCOME
STATEMENT DATA:
Net patient service revenue(1)(2) $ 128,850 $ 185,422 $ 227,042 $ 243,075 $ 354,595
--------- --------- --------- --------- ---------
Operating expenses:
Practice salaries and benefits 69,087 98,504 126,972 148,476 197,581
Practice supplies and other
operating expenses 2,993 5,679 9,341 11,022 14,297
General and administrative expenses 19,171 23,615 33,655 44,895 62,841
Depreciation and amortization 4,522 8,673 12,068 13,810 21,437
--------- --------- --------- --------- ---------
Total operating expenses 95,773 136,471 182,036 218,203 296,156
--------- --------- --------- --------- ---------
Income from operations 33,077 48,951 45,006 24,872 58,439
Investment income 2,102 564 296 358 309
Interest expense (324) (1,013) (2,697) (3,771) (2,538)
--------- --------- --------- --------- ---------
Income before income taxes 34,855 48,502 42,605 21,459 56,210
Income tax provision 13,942 19,403 17,567 10,473 25,782
--------- --------- --------- --------- ---------
Net income $ 20,913 $ 29,099 $ 25,038 $ 10,986 $ 30,428
========= ========= ========= ========= =========
PER SHARE DATA:
Net income per common share:
Basic $ 1.39 $ 1.91 $ 1.61 $ 0.70 $ 1.44
========= ========= ========= ========= =========
Diluted $ 1.33 $ 1.82 $ 1.58 $ 0.68 $ 1.36
========= ========= ========= ========= =========
Weighted average shares used in
computing net income per common share:
Basic 15,021 15,248 15,513 15,760 21,159
========= ========= ========= ========= =========
Diluted 15,743 15,987 15,860 16,053 22,478
========= ========= ========= ========= =========
22
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
Years Ended December 31,
-------------------------------------------------------------------------
1997 1998 1999 2000 2001
--------- --------- --------- --------- ---------
(in thousands, except per share and other operating data)
OTHER OPERATING DATA:
Number of physicians at end of period 260 350 434 452 588
Number of births 200,616 268,923 337,480 381,602 450,205
NICU admissions 21,203 27,911 33,942 39,272 48,186
NICU patient days 325,199 450,225 548,064 637,957 804,293
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents $ 18,562 $ 650 $ 825 $ 3,075 $ 27,557
Working capital (deficit)(3) 53,908 14,915 (16,352) 2,108 34,381
Total assets 203,719 270,658 334,790 324,734 573,099
Total liabilities 40,010 63,265 105,903 82,834 94,247
Borrowings under line of credit -- 7,850 48,393 23,500 --
Long-term debt and capital lease
obligations, including current
maturities 2,750 2,550 2,350 -- 3,206
Shareholders' equity 163,709 201,051 228,887 241,900 478,852
(1) The Company adds new physician practices as a result of acquisitions
and internal marketing activities. The increase in net patient service
revenue related to acquisitions (including our acquisition of Magella)
and internal marketing activities was approximately $50.0 million,
$49.5 million, $13.9 million and $86.6 million for the years ended
December 31, 1998, 1999, 2000, and 2001, respectively. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" below.
(2) Net patient service revenue for the year ended December 31, 2000,
included a charge of $6.5 million, which was recorded during the
quarter ended June 30, 2000, to increase the allowance for contractual
adjustments and uncollectible accounts. This charge was attributable to
management's assessment of accounts receivable, which was revised to
reflect the changes occurring in the Company's collection rates. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" below.
(3) At December 31, 1999 and 2000, the balance outstanding on the Company's
line of credit was classified as a current liability.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion highlights the principal factors affecting our
financial condition and results of operations as well as our liquidity and
capital resources for the periods described. This discussion should be read in
conjunction with the Consolidated Financial Statements and related notes thereto
appearing elsewhere in this Form 10-K. The operating results for the periods
presented were not significantly affected by inflation.
GENERAL
Pediatrix is the nation's leading provider of neonatal physician
services to hospital-based NICUs. In addition, we are the nation's leading
provider of perinatal physician services. We were founded in 1979 by Drs. Roger
Medel and Gregory Melnick. Since obtaining our first hospital contract in 1980,
we have grown by increasing revenues at existing units ("same unit growth") and
by adding new units. We also provide physician services to hospital-based PICUs
and pediatrics departments in hospitals.
On May 15, 2001, we acquired Magella Healthcare Corporation ("Magella")
in a merger transaction (the "Merger"). The total purchase price for Magella was
$173.6 million, which we paid in shares of our common stock. In connection with
the Merger, we recorded assets totaling approximately $232.8 million, including
approximately $206.5 million in goodwill, and assumed liabilities of
approximately $59.2 million. As a result of the merger, Magella became a wholly
owned subsidiary of Pediatrix and the former stockholders of Magella became
shareholders of Pediatrix. The Merger has been accounted for by Pediatrix as an
acquisition of Magella under the purchase method of accounting for business
combinations. This discussion and the Consolidated Financial Statements included
elsewhere in this report reflect our operations and financial results of the
Company, which from May 15, 2001, includes the business and operations of
Magella.
In addition to the Merger, we completed six acquisitions and added
seven NICUs through our internal marketing activities during 2001. We have
developed integrated regional networks, including both neonatology and
perinatology, in the Austin, Dallas-Fort Worth, Denver-Colorado Springs, Des
Moines, Kansas City, Las Vegas, Phoenix-Tucson, Reno, San Antonio, San Jose,
Seattle-Tacoma and Southern California metropolitan areas and intend to develop
additional regional and statewide networks. We believe that these networks,
augmented by ongoing marketing and acquisition efforts, will strengthen our
position with managed care organizations and other third party payors.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires estimates and
assumptions that affect the reporting of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities. Certain of
our accounting policies are critical to understanding our financial statements
because their application places significant demands on management's judgment,
with financial reporting results relying on estimates of matters that are
inherently uncertain.
We believe that the critical accounting policies described in the
following paragraphs affect the most significant estimates and assumptions used
in the preparation of our consolidated financial statements. For all these
policies, we caution that future events rarely develop exactly as estimated, and
the best estimates routinely require adjustment.
REVENUE RECOGNITION
We recognize patient service revenue at the time services are provided
by our affiliated physicians. Patient service revenue is presented net of an
estimated provision for contractual adjustments
24
and uncollectibles. Management estimates allowances for contractual adjustments
and uncollectibles on accounts receivable based on historical and other factors,
including an evaluation of expected adjustments and delinquency rates, past
adjustment and collection experience in relation to amounts billed, current
economic conditions, and other relevant information. Contractual adjustments
result from the difference between the physician rates for services performed
and reimbursements by government-sponsored health care programs and insurance
companies for such services. The evaluation of these factors involves complex,
subjective judgments. Changes in these factors may significantly impact our
Consolidated Financial Statements. See Notes 2 and 3 to our Consolidated
Financial Statements for additional information regarding adjustments to these
allowances.
PROFESSIONAL LIABILITY COVERAGE
We maintain professional liability coverage, which indemnifies us and
our health care professionals on a claims-made basis with a portion of self
insurance retention. We record a liability for self-insured deductibles and an
estimate of liabilities for claims incurred but not reported based on an
actuarial valuation which is based on historical loss patterns. An inherent
assumption in such estimates is that historical loss patterns can be used to
predict future patterns with reasonable accuracy. Because many factors can
affect past and future loss patterns, the effect of changes in such factors on
our estimates must be carefully evaluated. The evaluation of these factors
involves complex, subjective judgments. Insurance liabilities are necessarily
based on estimates, and actual results may vary significantly from such
estimates. Liabilities for claims incurred but not reported are not discounted.
GOODWILL
We record acquired assets and liabilities at their respective fair
values under the purchase method of accounting, recording to goodwill the excess
of cost over the fair value of the net assets acquired. Goodwill related to
acquisitions completed prior to July 1, 2001 was amortized through the year
ended December 31, 2001 on a straight-line basis over 25 years.
We evaluate long-lived assets, including goodwill and identifiable
intangibles, at least annually and record an impairment whenever events or
changes in circumstances indicate that the carrying value of the assets may not
be fully recoverable. The recoverability of such assets, which consist primarily
of goodwill, is measured by a comparison of the carrying value of the assets to
the future undiscounted cash flows before interest charges to be generated by
the assets. For goodwill, we consider various factors relating to each acquired
business, including hospital and physician contract changes, local market
developments, changes in third-party payments, national health care trends, and
other publicly-available information. If these factors indicate that goodwill is
impaired, the impairment to be recognized is measured as the excess of the
carrying value over the fair value. Long-lived assets, including goodwill and
identifiable intangibles, to be disposed of are reported at the lower of the
carrying value or fair value less disposal costs. We do not believe there are
any indicators that would require an adjustment to such assets or their
estimated periods of recovery at December 31, 2001 pursuant to the current
accounting standards. However, the evaluation of these factors involves complex,
subjective judgments, and actual results may vary significantly from such
estimates. See "Accounting Matters" below and Note 2 to our Consolidated
Financial Statements.
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of the financial statements. For example, our financial
statements are presented on a consolidated basis with our affiliated
professional associations, corporations and partnerships (the "PA Contractors")
because we or one of our subsidiaries have entered into management agreements
with our PA Contractors meeting the criteria set forth in the Emerging Issues
Task Force Issue 97-2 for a "controlling financial interest". Our management
agreements are further described in Note 2 to our Consolidated Financial
Statements. Such policies often require difficult judgments on complex matters
that are often subject to multiple sources of authoritative guidance and such
matters are among topics currently under reexamination by accounting standards
setters and regulators. Although no specific conclusions reached by these
standard setters appear likely to cause a material change in our accounting
policies, outcomes cannot be predicted with
25
confidence. Also see Note 2 to our Consolidated Financial Statements, which
discusses accounting policies that have been selected by management.
PAYOR MIX
We bill payors for services provided by physicians based upon rates for
the specific services provided. The rates are substantially the same for all
patients in a particular geographic area regardless of the party responsible for
paying the bill. We determine our net patient service revenue based upon the
difference between our gross fees for services and our ultimate collections from
payors, which differ from the gross fees due to (i) Medicaid reimbursements at
government-established rates, (ii) managed care payments at contracted rates,
(iii) various reimbursement plans and negotiated reimbursements from other third
parties, and (iv) discounted and uncollectible accounts of private pay patients.
Our payor mix is comprised of government (principally Medicaid),
contracted managed care, other third parties and private pay patients. We
benefit from the fact that most of the medical services provided at the NICU or
PICU are classified as emergency services, a category typically classified as a
covered service by managed care payors. In addition, we benefit when patients
are covered by Medicaid, despite Medicaid's lower reimbursement rates as
compared with other payors, because typically these patients would not otherwise
be able to pay for services due to lack of insurance coverage. However, a
significant increase in the government, managed care or capitated components of
our payor mix at the expense of other third party payors, as we have experienced
in the last few years, could result in reduced reimbursement rates and, in the
absence of increased patient volume, could have a material adverse effect on our
financial condition and results of operations. See our description of the charge
recorded in 2000 under "Results of Operations - Year Ended December 31, 2000, as
Compared to Year Ended December 31, 1999" below. The following is a summary of
our payor mix, expressed as a percentage of net patient service revenue,
exclusive of administrative fees, for the periods indicated.
Years Ended December 31,
--------------------------------
1999 2000 2001
---- ---- ----
Government 21% 21% 23%
Contracted managed care 45% 48% 49%
Other third parties 33% 30% 27%
Private pay 1% 1% 1%
--- --- ---
100% 100% 100%
=== === ===
The payor mix shown above is not necessarily representative of the
amount of services provided to patients covered under these plans. For example,
services provided to patients covered under government programs represented
approximately 45% of our total gross patient service revenue but only 23% of our
net patient service revenue during 2001.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
information related to our operations expressed as a percentage of our net
patient service revenue (patient billings net of contractual adjustments and
uncollectibles, and including administrative fees):
26
Years Ended December 31,
----------------------------------------
1999 2000 2001
----- ----- ------
Net patient service revenue 100% 100% 100%
----- ----- -----
Operating expenses:
Practice salaries and benefits 55.9 61.1 55.7
Practice supplies and other operating
expenses 4.1 4.5 4.0
General and administrative expenses
14.9 18.5 17.7
Depreciation and amortization 5.3 5.7 6.1
----- ----- -----
Total operating expenses 80.2 89.8 83.5
----- ----- -----
Income from operations 19.8 10.2 16.5
Other income (expense), net (1.1) (1.4) (0.6)
----- ----- -----
Income before income taxes 18.7 8.8 15.9
Income tax provision 7.7 4.3 7.3
----- ----- -----
Net income 11.0% 4.5% 8.6%
===== ===== =====
YEAR ENDED DECEMBER 31, 2001 AS COMPARED TO YEAR ENDED DECEMBER 31, 2000
Our net patient service revenue increased $111.5 million, or 45.9%, to
$354.6 million for the year ended December 31, 2001, as compared with $243.1
million for the same period in 2000. Net patient service revenue for the year
ended December 31, 2000 included a charge of $6.5 million, which was recorded
during the quarter ended June 30, 2000, to increase the allowance for
contractual adjustments and uncollectible accounts.
Excluding the $6.5 million charge, net patient service revenue
increased by $105.0 million, or 42.1%, for the year ended December 31, 2001. Of
this $105.0 million increase, approximately $86.5 million, or 82.4%, was
attributable to new units at which we provide services as a result of
acquisitions, including units that were obtained in the Merger. Same unit
patient service revenue increased approximately $18.5 million, or 7.6%, for the
year ended December 31, 2001. The increase in same unit net patient service
revenue is primarily the result of (i) improved collection performance due to
process changes implemented in the last 18 months including the regionalization
of billing and collection functions; (ii) improved managed care contracting;
(iii) the flow through of price increases implemented after the completion of
the Merger; (iv) higher acuity level of patient services billed; and (v) volume
increases. Same units are those units at which we provided services for all of
2001 and 2000.
Practice salaries and benefits increased $49.1 million, or 33.1%, to
$197.6 million for the year ended December 31, 2001, as compared with $148.5
million for the same period in 2000. The increase was attributable to new
physicians and other clinical staff as a result of the Merger, and to support
new unit growth and volume growth at existing units.
Practice supplies and other operating expenses increased $3.3 million,
or 29.7%, to $14.3 million for the year ended December 31, 2001, as compared
with $11.0 million for the same period in 2000. Of this $3.3 million increase,
approximately $1.6 million was attributable to increased costs related to the
Merger. The remaining approximately $1.7 million was primarily attributable to:
(i) increases in rent for medical equipment and medical office space; and (ii)
an increase in medical supplies related to the growth in our national hearing
screen program.
General and administrative expenses include all salaries and benefits
and supplies and other operating expenses not specifically related to the
day-to-day operations of our physician group practices. General and
administrative expenses increased $17.9 million, or 40.0%, to $62.8 million for
the year ended December 31, 2001, as compared to $44.9 million for the same
period in 2000. Of this $17.9 million increase, approximately $8.2 million, or
45.8%, was attributable to increased costs for services provided to the
practices acquired in the Merger. Approximately $9.7 million, or 54.2%, was
primarily due to an increase costs for: (i) salaries and benefits for billing
and collections personnel as we continued our
27
regionalization of billing and collection functions; (ii) legal fees related to
government investigations and our class action lawsuit; (iii) rent and other
operating expenses related to the expansion of our regional billing and
collection offices; and (iv) information services for the development and
support of clinical and operational systems.
Depreciation and amortization expense increased by approximately $7.6
million, or 55.2% to $21.4 million for the year ended December 31, 2001, as
compared with $13.8 million for the same period in 2000, primarily as a result
of depreciation on fixed asset additions and amortization of goodwill in
connection with the Merger and other acquisitions.
Income from operations increased approximately $33.5 million, or
135.0%, to approximately $58.4 million for the year ended December 31, 2001, as
compared with $24.9 million for the same period in 2000. Our operating margin
increased 6.3 percentage points to 16.5% for the year ended December 31, 2001,
as compared to 10.2% for the same period in 2000. Excluding the $6.5 million
charge to revenue in the 2000 period, income from operations increased $27.0
million and operating margin increased 3.9 percentage points.
We recorded net interest expense of approximately $2.2 million for the
year ended December 31, 2001, as compared with net interest expense of
approximately $3.4 million for the same period in 2000. The decrease in interest
expense in 2001 is primarily the result of a net reduction in the average
balance outstanding under our line of credit.
Our effective income tax rate was approximately 45.9% and 48.8% for the
years ended December 31, 2001 and 2000, respectively. The decrease in the tax
rate for the year ended December 31, 2001 is primarily due to the reduction of
non-deductible amounts associated with goodwill as a percentage of our pretax
income.
Net income increased to approximately $30.4 million for the year ended
December 31, 2001, as compared to $11.0 for the same period in 2000.
Diluted net income per common and common equivalent share was $1.36 on
weighted average shares of 22.5 million for the year ended December 31, 2001, as
compared to $.68 on the weighted average shares of 16.1 million for the year
ended December 31, 2000. The significant increase in the weighted average shares
outstanding is due to: (i) the shares issued in the Merger which were
outstanding from May 15, 2001; (ii) the dilutive effect of convertible notes and
stock options assumed in the Merger; and (iii) an increase in our stock price.
YEAR ENDED DECEMBER 31, 2000 AS COMPARED TO YEAR ENDED DECEMBER 31, 1999
Our net patient service revenue increased $16.1 million, or 7.1%, to
$243.1 million for the year ended December 31, 2000, as compared with $227.0
million for the same period in 1999. Net patient service revenue for the year
ended December 31, 2000 includes a charge of $6.5 million, which was recorded
during the quarter ended June 30, 2000, to increase the allowance for
contractual adjustments and uncollectible accounts. This charge is attributable
to management's assessment of accounts receivable, which was revised to reflect
the decline occurring in our collection rates. This decline in collection rates
is the result of:
o an increased use of non-critical care codes on which we
realize a lower collection rate as a percentage of billed
charges. Since the billing inquiries began in the second
quarter of 1999, the physicians employed by us have been
billing for non-critical care services at a higher rate than
prior to these inquiries. Based upon the fee schedules
established by government-sponsored health care programs and
contracted rates with managed care organizations, we receive a
lower percentage of the fee charged for these services than
for critical care services.