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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2002
[ ] 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
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PEDIATRIX MEDICAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
FLORIDA 65-0271219
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1301 CONCORD TERRACE, SUNRISE, FLORIDA 33323
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(Address of principal executive offices) (Zip Code)
(954) 384-0175
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(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
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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. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Securities Exchange Act Rule 12b-2). Yes [X] No [ ]
The aggregate market value of shares of Common Stock of the registrant
held by non-affiliates of the registrant on June 28, 2002, was approximately
$527,064,000 based on a $25.00 closing price per share as reported on the New
York Stock Exchange composite transactions list on such date.
The number of shares of Common Stock of the registrant outstanding on
March 20, 2003, was 23,768,342.
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 2003 annual
meeting of shareholders, 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.........................................................................21
Item 4. Submission of Matters to a Vote of Security Holders.......................................21
PART II .....................................................................................................22
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.................22
Item 6. Selected Financial Data...................................................................23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations...........................................................................25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................35
Item 8. Financial Statements and Supplementary Data...............................................36
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure...........................................................................58
PART III .....................................................................................................58
Item 10. Directors and Executive Officers of the Registrant........................................58
Item 11. Executive Compensation....................................................................58
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters...................................................................................58
Item 13. Certain Relationships and Related Transactions............................................59
Item 14. Controls and Procedures...................................................................59
PART IV .....................................................................................................60
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................60
Signatures .....................................................................................................64
Certifications .....................................................................................................65
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PART I
ITEM 1. BUSINESS
In this Annual Report on Form 10-K, 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.
BUSINESS OVERVIEW
Pediatrix is the nation's largest physician group focused on
maternal-fetal-newborn medicine. Pediatrix and its affiliated professional
companies employ 622 physicians, including more than 500 neonatologists who
staff and manage the clinical care at more than 200 hospital-based neonatal
intensive care units ("NICUs") across the country, caring for babies born
prematurely or with medical complications. In several of our markets, we also
employ maternal-fetal physician specialists, or perinatologists, who care for
expectant mothers with complicated pregnancies. In addition, we employ other
pediatric subspecialists, including pediatric intensivists who staff
hospital-based pediatric intensive care units, pediatric hospitalists and
pediatric cardiologists.
Our principal mission is the clinical care of premature newborns, babies
born with complications and patients with high-risk pregnancies. We staff and
manage the clinical activities within specific units in hospitals, primarily
NICUs, and we are an important component of the comprehensive labor and delivery
and pediatric services that the hospitals provide to their communities. We
employ physicians and advanced practitioners, who provide patient care, and we
also provide professional and administrative support that includes contracting
with third-party payors, billing and collections, risk management services,
physician recruiting and credentialing and clinical outcomes data management.
Our model for hospital-based coverage provides 24-hour physician
availability through either an on-site or on-call physician presence. We believe
that our 24-hour coverage has enhanced our hospital relationships, making it
possible for our physicians to provide patient care throughout the hospital,
including the emergency room, nursery and other areas of the obstetrics and
pediatrics departments where access to specialized care may be critical.
Our maternal-fetal medicine ("MFM") practices include a combination of
outpatient and inpatient care. We employ perinatal physicians and other clinical
professionals, as needed, including nurse mid-wives, ultrasonographers and
genetic counselors. We also employ and manage administrative support staff and
furnish the required medical equipment at our outpatient offices. All of our MFM
practices are based in markets where our physicians also practice neonatal
medicine. This allows us to improve patient care by using an integrated
continuum of care model that directs treatment to the mother and developing
fetus during the pregnancy, and to the baby upon delivery. As a result of these
collaborations, we have entered into contractual arrangements with hospitals and
third-party payors in certain markets that encompass the entire high risk
maternal-fetal-newborn experience.
We monitor clinical outcomes, employ best demonstrated processes, and
conduct clinical research to find new methods of care that result in better
outcomes at a reduced overall cost. We make extensive physician continuing
medical education resources available to our physicians to ensure that they have
knowledge of current treatment methodologies.
We focus on best demonstrated processes, data collection and reporting to
administrators and referring physicians. Our physicians work with the entire
medical staff in hospitals to promote each hospital's strategic goals.
Obstetrics is an important source of admissions for a hospital. We believe that
our physicians' ability to manage patient outcomes has a direct impact on a
hospital's reputation among referring physicians within its communities.
We generate value to our physicians by providing needed resources -
clinical and administrative - that allow them to focus on patient care. For
example, our Research Data System captures clinical information from daily
progress notes in a centralized database that is used for outcomes reporting,
retrospective clinical analysis, clinical quality initiatives and as a basis for
prospective clinical trials.
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In essence, our model removes many of the burdens that are associated with
the management of a physician group practice and allows physicians to
concentrate on patient care, adding value to patients, payors, hospital
administrators and referring physicians through better clinical care.
DEMAND FOR OUR SERVICES
The demand for our services - physicians caring for patients - is
determined in part by local market dynamics for health services and in part by
national market dynamics for physicians. We have built our leading presence in
neonatal and maternal-fetal medicine by advancing a comprehensive care model
that addresses the needs of our various constituents, including patients and
third-party payors, hospital administrators, referring physicians and our
employed physicians who practice as part of our national group. There are
approximately 4 million births in the U.S. annually, and we estimate that
between 10 to 15 percent of all births require neonatal intensive care unit
admissions. Babies admitted to NICUs are typically born prematurely, or have an
illness or condition that requires the care of a neonatal physician
subspecialist. Today, neonatal physicians generally practice in a traditional
group practice setting, contracting with hospitals within a community to provide
specified coverage in the NICU. Neonatologists are board-certified pediatricians
who obtain additional training in neonatal medicine. Premature and low
birthweight infants are at increased risk for medical complications and may
require neonatal intensive care services. Approximately 11 percent of babies
born in the U.S. are born "prematurely", before the 37th week of pregnancy.
Approximately 8 percent of all babies are born weighing less than 2,500 grams,
or five pounds, eight ounces, according to the U.S. Center for Health
Statistics.
There is no known cause for babies born prematurely. While research is
being conducted by numerous institutions to identify the potential cause of
premature birth, some common factors that may contribute to prematurity of birth
are lack of prenatal care, complications during pregnancy, smoking or poor
nutritional habits during pregnancy. Because most neonatal admissions are the
result of premature labor and delivery or other unanticipated complications,
they are not planned events.
Across the United States, NICUs are concentrated primarily among hospitals
with a higher volume of births. NICUs are important to hospitals since
obstetrics departments generate 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.
Pediatrix physicians work with our hospital partners to market
comprehensive labor and delivery services to referring physicians, principally
obstetricians, and also to general and family practice physicians within a
particular community and its surrounding areas.
These referring physicians feel most comfortable delivering babies at
hospitals that provide a full-service labor and delivery setting, which today
includes a NICU staffed by board-certified/board-eligible neonatal physicians.
Like most physician subspecialties, neonatal medicine was started at
academic centers. During the past three decades, neonatal physician services
have migrated from academic centers to community hospitals in reaction to demand
from obstetricians seeking additional resources to provide patient care in the
labor and delivery area.
Hospital administrators responded to the demands of community-based
obstetricians, an important source of hospital admissions, by building neonatal
intensive care units and entering into contracts with independent physician
group practices to staff and manage those units. Pediatrix is modeled around
that traditional group practice structure, but because of our size we have
non-clinical professional management that has proven abilities to achieve
significant operating efficiencies in interacting with the hospitals, managing
information systems and technologies and complying with government regulations.
In many of our markets, our neonatologists practice with physicians who are
MFM subspecialists, or perinatologists, to provide integrated care for women
with complicated pregnancies whose babies are often admitted to the NICU upon
delivery. Perinatologists are board-certified obstetricians who obtain
additional training in high-risk pregnancies to become eligible for perinatal
board certification. Since many maternal-fetal cases result in an admission to a
NICU, early involvement by the neonatologist helps to improve outcomes for both
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mother and child. In addition, we believe that improved perinatal care has a
positive impact on neonatal outcomes. Our data on neonatal outcomes demonstrates
that, in general, the longer the baby remains in the womb, the greater
likelihood of decreased mortality and morbidity. Perinatologists are focused on
extending the pregnancy to improve the viability of the fetus. We believe that
our integrated care model, which includes maternal-fetal medicine, has improved
the clinical outcomes of our patients and strengthened our relationships with
patients, hospitals and payors.
PHYSICIAN SERVICES OVERVIEW
Within the healthcare services sector, the physician services sector
remains largely fragmented. Today, administrative pressures on physicians make
it increasingly difficult for them to simultaneously manage patient care, stay
current on the latest procedures, and efficiently administer non-clinical
activities.
The healthcare services sector is also under considerable cost containment
pressures from a number of sources, principally third-party payors, including
commercial and government payors.
Hospitals have entered into contractual relationships with physician groups
and organizations to provide specialized care, including neonatal patient care
in hospital-based units. Management of these units presents significant
operational challenges for hospitals, including complex billing procedures,
variable admissions rates, and difficulties in recruiting and retaining
qualified physicians. Hospitals outsource with physician subspecialists in an
effort to improve outcomes, contain costs, improve utilization management and
reduce administrative burdens. Physician organizations assume responsibilities
to provide professional management of staff, including recruiting, staffing and
scheduling of physicians. Traditionally, hospitals have staffed these vital
units through affiliations with small, local physician groups or with
independent practitioners. Hospitals are increasingly seeking to contract with
physician groups that have the clinical quality initiatives, information and
reimbursement systems and management expertise that are required in the current
health care environment.
OUR STRATEGY
Physicians remain receptive to joining or affiliating with a larger
organization that provides value-added services and reduces administrative
burdens. We believe these trends continue to present opportunities for us. We
believe that hospitals will continue to outsource certain units, such as NICUs,
on a contract management basis.
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. A central aspect of our strategy is to attract
physicians to our national group by acquiring their practice and integrating it
into our existing practice structure. We also continue to market our services to
hospitals to obtain new contracts. The key elements of our strategy are as
follows:
FOCUS ON NEONATAL, PERINATAL AND PEDIATRIC PATIENT CARE. Since our
founding in 1979, we have focused primarily on neonatology and pediatric
subspecialties. As a result of this focus, we believe that we have
developed (i) significant expertise in the complexities of billing and
reimbursement for neonatal physician services, (ii) a competitive advantage
in recruiting and retaining neonatologists seeking to join a group practice
and (iii) a clinical approach that includes research, education and
clinical quality initiatives that help to advance the care provided to
patients. In 1998, we expanded our business into perinatology, or MFM. We
are continuing to focus our efforts in MFM and are dedicated to developing
the same level of expertise in MFM that we have developed in neonatology
over the course of more than two decades. We believe that our continued
focus will allow us to enhance our position as the nation's leading
provider of neonatal and maternal-fetal physician services.
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 pediatric intensive care unit ("PICU"), particularly in
the obstetrics and pediatrics departments where immediate accessibility to
specialized care may be 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.
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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 MFM physician group
practices. We completed our first acquisition of a neonatal physician
group practice in July 1995 and since then we have completed numerous
acquisitions of established physician group practices. We intend to continue
actively pursuing acquisitions, attracting neonatal and perinatal physician
group practices to our comprehensive model for patient care. 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 could harm our business and results of operations."
DEVELOP REGIONAL NETWORKS. We intend to develop regional and statewide
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, 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 statewide networks has generated clinical
efficiencies, including best demonstrated processes, and operating
efficiencies that have a pronounced positive effect on quality of care,
length of stay and the overall cost of care.
ASSIST 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 strengthen our relationships with payors and
hospitals. We are 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.
EXPAND INTO ADDITIONAL HEALTHCARE SERVICES. We intend to use our
expertise in maternal-fetal-newborn care, and managing hospital-based
physician subspecialists, to expand and diversify our services. For example,
we believe that our expertise running the "back-office" functions of
hospital-based physician subspecialties can be applied to other areas of the
hospital and other medical specialties. In addition, we believe there are
opportunities to expand beyond care of high-risk pregnancies and premature
and sick newborns. However, we may not be able to identify suitable
opportunities. See "Risk Factors - We may be unable to successfully
implement our strategy of diversifying our operations."
OUR PHYSICIAN SERVICES
We manage the physician services at NICUs and other hospital-based units.
Our services include the following:
UNIT MANAGEMENT. We staff each NICU, MFM practice and other subspecialty
area 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 physicians. 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
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 of physicians and advanced registered nurse
practitioners ("ARNPs") within the NICUs and other practices and units that
we manage. Our recruiting department maintains an extensive recruiting
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database of neonatologists, perinatologists and pediatricians nationwide. We
pre-screen all candidates and check 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 other units. 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. We assume responsibility for salaries, benefits and physician
malpractice insurance for the physicians who are employed by or under
contract with us. See "Contractual Relationships."
SUPPORT TO OTHER HOSPITAL DEPARTMENTS. As part of our comprehensive care
model, physicians provide support services in other areas of hospitals,
particularly in the obstetrics, nursery and pediatrics departments, where
immediate accessibility to specialized care may be 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
billing, reimbursement and collections 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 claims forms and software systems.
We begin this process by providing our physicians with a thorough training
curriculum that emphasizes detailed documentation 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, as well as
our regional business offices located across the U.S. and in Puerto Rico.
See "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
price of our shares."
RISK MANAGEMENT SERVICES. The practice of medicine entails an inherent
risk of claims of professional liability. We maintain professional liability
insurance on a claims-made basis in accordance with standard industry
practice. We are able to negotiate with malpractice insurance carriers on
behalf of our national group of practitioners. In addition to the advantages
of group purchasing for this coverage, we are able to relieve our
practitioners of the burden of securing malpractice insurance in a market of
increasing insurance premiums. In addition to managing medical risk with
insurance, we take proactive steps to provide education and access to best
demonstrated processes to our practitioners.
MARKETING AND DEVELOPMENT ACTIVITIES
Since 1996, Pediatrix has grown largely through acquisition activities that
have successfully attracted seasoned neonatal and maternal-fetal specialists to
our model for clinical care. Our business development group maintains
relationships with many independent physician group practices within our
subspecialties. 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.
Physicians practicing as part of Pediatrix also market their practices
within their community and surrounding referral areas. Patient volume is based
on referrals from other physicians, particularly obstetricians. Consequently,
our physicians concentrate their marketing efforts on establishing and
maintaining professional relationships with physicians based in those
communities where they practice.
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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
information system designed to reduce physicians' paperwork requirements while
consolidating clinical information used to support our education, research and
quality assurance programs, (ii) a coding algorithm to help our physicians in
selecting the appropriate billing codes for services provided, (iii) a website
(Natal U(TM)) that disseminates clinical research and education materials to
physicians and patients, (iv) electronic interchange with payors using
electronic benefits verification, claims submission and remittance advice, and
(v) a database used by the business development and recruiting departments in
recruiting physicians and identifying potential physician group acquisition
candidates, which is updated through telemarketing activities, personal
contacts, professional journals and mail solicitation. Ongoing systems
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."
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 other hospital-based units. The contracts typically have terms
of one to three years and renew automatically for additional terms of one to
three years unless earlier terminated. The contracts typically provide that
either party may terminate the agreement upon 90 days' written notice. We
typically bill patients and third-party payors for physicians' services on a
fee-for-service basis separately from other charges billed by the hospital to
the same payors. Certain 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 7%, 6% and 5% of
our net patient service revenue during 2000, 2001 and 2002, respectively. The
hospital contracts typically require that we and the physicians performing
services maintain minimum levels of professional and general liability
insurance. We negotiate those policies, contract and pay the premiums for such
insurance on behalf of the physicians. See "Professional Liability and
Insurance."
PAYOR RELATIONSHIPS. Substantially all of our contracts with third party
payors are discounted fee-for-service contracts. We have a minor number of small
capitated arrangements with certain payors. Under capitated arrangements, we are
paid a flat monthly fee based on the number of individuals covered by a
particular insurance plan. 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. Pediatrix Medical Group, Inc. ("PMG") has
entered into management agreements ("PA Management Agreements") with
professional corporations or associations ("PA Contractors") in most of the
states in which it operates. Each PA Contractor is owned by a licensed physician
affiliated with PMG through employment or other contractual relationships. In
accordance with applicable state laws, under the PA Management Agreements, the
PA Contractors delegate to PMG only the administrative, management and support
functions that the PA Contractors have agreed to provide to the hospital. PMG
does not perform any functions that would constitute the practice of medicine.
In consideration of services provided, each PA Contractor pays PMG either a
percentage of the PA Contractor's gross revenue, but never greater than the net
profits of such PA Contractor, or a flat fee. PMG has the discretion to
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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 are long-term in nature, and in most cases permanent,
subject only to termination by PMG, except in the case of gross negligence,
fraud or illegal acts 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."
PHYSICIAN RELATIONSHIPS. Our 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 and is eligible for an incentive bonus. Each physician is required to
hold a valid license to practice medicine in the appropriate state in which the
physician provides patient care 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 geographic area for a certain period
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 "tail insurance" coverage
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.
GOVERNMENT REGULATION
Our operations and relationships are subject to extensive and complex
governmental and regulatory requirements relating to the practice of medicine
and billing for services rendered to patients. 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 2002, 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, 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."
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
9
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 the privacy of patient health
information may increase our costs and limit our ability 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."
GOVERNMENT INVESTIGATIONS
On June 6, 2002, we received a written request from the Federal Trade
Commission ("FTC") to submit information on a voluntary basis in connection with
an investigation of issues of competition related to our May 2001 acquisition of
Magella Healthcare Corporation ("Magella") and our business practices generally.
On February 5, 2003, we received additional information requests from the FTC in
the form of a Subpoena and Civil Investigative Demand. Pursuant to these
requests, the FTC has requested documents and information relating to the
acquisition and our business practices in certain markets. We are cooperating
fully with the FTC. We cannot predict the outcome of the investigation and
whether it, or any similar future investigation or claim by the FTC or other
parties, will have a material adverse effect on our business, financial
condition, results of operations or the trading price of our shares. See "Risk
Factors - The Federal Trade Commission or other parties may assert that our 2001
acquisition of Magella or our business practices violate antitrust laws, which
could have an adverse effect on us."
In April 2002, we entered into a settlement agreement with the Colorado
Department of Health Care Policy and Financing resolving the State of Colorado's
Medicaid investigation of the Company. We had received requests in April 1999,
and in one case a subpoena, from state and federal investigators in Arizona,
Florida and Colorado for information related to our billing practices for
services reimbursed by the Medicaid programs in those states and by the TRICARE
program for military dependents. The Arizona and Florida Medicaid investigations
were closed in 2000 after we entered into settlement agreements with those
states. The TRICARE investigation is active and ongoing. These previously
disclosed investigations have prompted inquiries by Medicaid officials in other
states. We believe that additional audits, inquiries and investigations from
government agencies will continue to occur in the ordinary course of our
business. We cannot predict whether any such audits, inquiries or investigations
will have a material adverse effect on our business, financial condition,
results of operations or the trading price of our shares.
OTHER LEGAL PROCEEDINGS
On May 3, 2002, the United States District Court for the Southern District
of Florida entered an Order and Final Judgment approving the settlement of the
class action litigation filed against us and certain of our officers in February
1999 relating to alleged violations of securities laws. Under the terms of the
settlement, the plaintiffs' claim was dismissed with prejudice in exchange for a
cash payment of $12.0 million, which was covered by insurance policies.
During the ordinary course of business, we have become a party to pending
and threatened legal actions and proceedings, most of which involve claims of
medical malpractice. Although these actions and proceedings are generally
expected to be covered by insurance, there can be no assurance that our medical
malpractice insurance coverage will be adequate to cover all potential
liabilities. We believe, based upon our review of these pending matters, that
the outcome of such legal actions and proceedings will not have a material
adverse effect on our business, financial condition, results of operations or
the trading price of our shares. See "Item 3. Legal Proceedings."
PROFESSIONAL LIABILITY AND INSURANCE
The practice of medicine entails an inherent risk of claims of 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."
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In order to maintain hospital privileges, the physicians who are employed
by or under contract with us are required to maintain 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,
2003, and we are currently reviewing our coverage options, which may 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 conditions in the 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 serve as a catalyst for neonatal and
perinatal care to shift 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 perinatal, neonatal and
pediatric intensive care physician services to patients. Competition in our
business is generally based upon reputation and experience, and our physicians'
ability to provide cost-effective, quality care. See "Risk Factors - Our
industry is already competitive and increased competition could adversely affect
our revenues."
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 622 practicing physicians employed by or under contract
with us as of December 31, 2002, Pediatrix employed or contracted with 402 other
clinical professionals and 1,267 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, Illinois, Iowa, Kansas, Kentucky, Maryland,
Missouri, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio,
Oklahoma, Pennsylvania, Puerto Rico, South Carolina, Tennessee, Texas, Utah,
Virginia, Washington and West Virginia. During 2002, approximately 62% of our
net patient service revenue was generated by operations in our five largest
states. See "Risk Factors - We may be adversely affected by unfavorable
regulatory or other changes or conditions in geographic areas where our
operations are concentrated."
INFORMATION AVAILABLE ON OUR WEBSITE
Our Annual Reports on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available
through our Internet website www.pediatrix.com, as soon as reasonably
practicable after we electronically file such material with, or furnish it to,
the Securities and Exchange Commission ("SEC"). Our Internet website and the
information contained therein or connected thereto are not incorporated into
this Annual Report on Form 10-K.
11
RISK FACTORS
THE FEDERAL TRADE COMMISSION OR OTHER PARTIES MAY ASSERT THAT OUR 2001
ACQUISITION OF MAGELLA OR OUR BUSINESS PRACTICES VIOLATE ANTITRUST LAWS, WHICH
COULD HAVE AN ADVERSE EFFECT ON US.
The health care industry is highly regulated for antitrust purposes. We
believe that our industry will continue to be subject to increasing regulation
and enforcement action. In recent years, the Federal Trade Commission (the
"FTC"), the Department of Justice, and state Attorneys General have taken
increasing steps to review and, in some cases, take enforcement action against,
acquisitions and business conduct in the health care industry. On June 6, 2002,
we received a written request from the FTC to submit information on a voluntary
basis in connection with an investigation of issues of competition related to
our May 2001 acquisition of Magella and our business practices generally. On
February 5, 2003, we received additional information requests from the FTC in
the form of a Subpoena and Civil Investigative Demand. Pursuant to these
requests, the FTC has requested documents and information relating to the
acquisition and our business practices in certain markets. We intend to continue
to cooperate fully with the information requests but at this time cannot predict
the outcome of the investigation and whether it, or any similar future
investigation or claim by other parties, will have a material adverse effect on
our business, financial condition, results of operations or the trading price of
our shares.
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 PRICE 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 TRICARE investigation is active and ongoing, and this matter, along with
the Arizona, Colorado and Florida matters, has prompted inquiries by Medicaid
officials in other states. We cannot predict whether the TRICARE 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.
WE MAY BE ADVERSELY AFFECTED BY UNFAVORABLE REGULATORY OR OTHER CHANGES OR
CONDITIONS IN GEOGRAPHIC AREAS WHERE OUR OPERATIONS ARE CONCENTRATED.
During 2000, 2001 and 2002, approximately 55%, 59% and 62%, respectively,
of our net patient service revenue was generated by operations in our five
largest states. Over those same periods, our operations in Texas accounted for
approximately 18%, 29% and 33% of our net patient service revenue. Adverse
changes or conditions affecting these markets, such as health care reforms,
changes in laws and regulations, reduced Medicaid reimbursements, reductions in
the supply of trained physicians and government investigations, may have an
adverse effect on our operations. We continue to seek to diversify the
geographic scope of our operations, primarily through acquisitions of physician
group practices. We may not be able to implement successfully or realize the
expected benefits of any of these initiatives. Our failure to so diversify our
operations geographically could have a material adverse effect on our business,
financial condition, results of operations or the trading price of our shares.
12
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.
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 2002, 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
13
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. 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.
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 for
their services. 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 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 indebtedness and issuing
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
into our existing operations involves numerous additional short and long-term
risks, including:
14
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 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.
WE MAY BE UNABLE TO SUCCESSFULLY IMPLEMENT OUR STRATEGY OF DIVERSIFYING OUR
OPERATIONS.
We are beginning to explore potential strategic initiatives to diversify
our operations. Such initiatives would likely be either clinically related to
our current core business or in areas within healthcare that would allow us to
leverage our current business expertise. We may not be able to identify
appropriate diversification opportunities. If we are able to identify potential
diversification opportunities, we may not be able to implement successfully or
realize the expected benefits of such opportunities.
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
15
anti-kickback laws and regulations prohibit certain offers, payments or receipts
of remuneration in return for (i) referring Medicaid or other
government-sponsored health care program patients or patient care opportunities
or (ii) 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 a physician from ordering certain services reimbursable
by Medicare or Medicaid from any entity with which the physician has a financial
relationship. 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 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, or HIPAA. As part of our medical
record keeping, third party billing, research and other services, we collect and
maintain patient-identifiable health information. 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 business, financial condition,
results of operations or the trading price of our shares.
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 of medical malpractice
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
16
of potential liability is negligence or alleged negligence by physicians
employed or contracted by 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. We maintain professional
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. Our current
professional liability insurance policy expires May 1, 2003, and we are
currently reviewing our coverage options, which may 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.
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 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,
financial condition, results of operations or the trading price of our shares.
WE MAY WRITE-OFF INTANGIBLE ASSETS, SUCH AS GOODWILL.
Our intangible assets, which consist primarily of goodwill, are subject to
annual impairment testing. Under current accounting standards, goodwill is
tested for impairment at an operating segment level, known as a reporting unit,
on an annual basis using a two-step test. The first step compares the fair value
of a reporting unit with its carrying amount, including goodwill. If the
carrying amount of a reporting unit exceeds its fair value, a second step is
performed to determine the amount of any impairment loss. As circumstances after
an acquisition can change, our reporting units may be subject to impairment
losses. If we record an impairment loss related to our goodwill, 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.
17
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 vary
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 7%, 6% and 5% of our net patient service
revenue during 2000, 2001 and 2002, respectively. Our contractual arrangements
with hospitals generally are for periods of one to three 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 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
18
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 our 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.
As of December 31, 2002, there were 25,313,371 shares of our common stock
outstanding, all of which are freely tradable without restriction, except that
45,769 shares, which are owned by certain of our officers, directors and
affiliates, may be sold publicly at any time subject to the volume and other
restrictions under Rule 144 of the Securities Act of 1933.
As of December 31, 2002, there were also:
o 5,363,664 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 4,240,869 shares of common stock were issued
and outstanding and options for an aggregate of 2,304,027 shares of
common stock were exercisable;
o 228,363 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 373,169 shares of our common stock reserved for issuance under our
employee stock purchase plans; and
o 30,449 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 upon the exercise of stock options or
under our employee stock purchase plans will be freely tradable, subject to the
volume trading limitations under Rule 144 of the Securities Act of 1933 in
respect of shares acquired by our affiliates. Our stock options 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
will usually exercise or convert them at a time when the market price of our
common stock is greater than their exercise price. Accordingly, the exercise of
these options 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, 2002, we had relatively few "capitated" and "case
rate" arrangements with payors. Under capitated payment arrangements, we receive
a flat monthly fee 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.
19
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.
FORWARD-LOOKING STATEMENTS MAY PROVE INACCURATE.
Certain information included or incorporated by reference in this Annual
Report on Form 10-K 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.
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 or expressed
by such forward-looking statements. Forward-looking statements speak only as of
the date the statements were made. We assume no 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 but may not be limited to the risk
factors discussed above.
ITEM 2. PROPERTIES
We lease our corporate office located in Sunrise, Florida (approximately
80,000 square feet). During 2002, 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
$6,097,000. See Note 9 to our Consolidated Financial Statements.
20
ITEM 3. LEGAL PROCEEDINGS
On June 6, 2002, we received a written request from the Federal Trade
Commission ("FTC") to submit information on a voluntary basis in connection with
an investigation of issues of competition related to our May 2001 acquisition of
Magella and our business practices generally. On February 5, 2003, we received
additional information requests from the FTC in the form of a Subpoena and Civil
Investigative Demand. Pursuant to these requests, the FTC has requested
documents and information relating to the acquisition and our business practices
in certain markets. We are cooperating fully with the FTC, but at this time
cannot predict the outcome of the investigation and whether it will have a
material adverse effect on our business, financial condition, results of
operations or the trading price of our shares.
In April 2002, we entered into a settlement agreement with the Colorado
Department of Health Care Policy and Financing resolving the State of Colorado's
Medicaid investigation of the Company. We had received requests in April 1999,
and in one case a subpoena, from state and federal investigators in Arizona,
Florida and Colorado for information related to our billing practices for
services reimbursed by the Medicaid programs in those states and by the TRICARE
program for military dependents. The Arizona and Florida Medicaid investigations
were closed in 2000 after we entered into settlement agreements with those
states. The TRICARE investigation is active and ongoing and this matter, along
with the Florida, Arizona and Colorado matters, has prompted inquiries by
Medicaid officials in other states. We believe that additional audits, inquiries
and investigations from government agencies will continue to occur in the
ordinary course of our business. We cannot predict whether any such audits,
inquiries or investigations will have a material adverse effect on our business,
financial condition, results of operations or the trading price of our shares.
On May 3, 2002, the United States District Court for the Southern District
of Florida entered an Order and Final Judgment approving the settlement of the
class action litigation filed against us and certain of our officers in February
1999 relating to alleged violations of securities laws. Under the terms of the
settlement, the plaintiffs' claim was dismissed with prejudice in exchange for a
cash payment of $12.0 million, which was covered by insurance policies.
During the ordinary course of business, we have become a party to pending
and threatened legal actions and proceedings, most of which involve claims of
medical malpractice. Although these actions and proceedings are generally
expected to be covered by insurance, there can be no assurance that our medical
malpractice insurance coverage will be adequate to cover liabilities arising out
of medical malpractice claims where the outcomes of such claims are unfavorable
to us. We believe, based upon our review of these pending matters, that the
outcome of such legal actions and proceedings will not have a material adverse
effect on our business, financial condition, results of operations or the
trading price of our shares.
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, 2002.
21
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
----------- -----------
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
2002
First Quarter $ 42.44 $ 33.00
Second Quarter 48.60 22.74
Third Quarter 34.75 21.70
Fourth Quarter 42.00 31.25
As of March 20, 2003, there were approximately 106 holders of record of the
23,768,342 outstanding shares of Pediatrix common stock. This share figure
reflects the repurchase of approximately 1.6 million shares of Pediatrix common
stock during the first quarter of 2003 under the Company's previously announced
share repurchase program. The closing sales price for Pediatrix common stock on
March 20, 2003 was $28.85 per share.
We did not declare or pay any cash dividends on our common stock in 2001 or
2002, 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."
22
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, 2002, 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,
-------------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
CONSOLIDATED INCOME
STATEMENT DATA:
Net patient service revenue(1)(2) $ 185,422 $ 227,042 $ 243,075 $ 354,595 $ 465,481
--------- --------- --------- --------- ---------
Operating expenses:
Practice salaries and benefits 98,504 126,972 148,476 197,581 263,165
Practice supplies and other
operating expenses 5,679 9,341 11,022 14,297 15,791
General and administrative expenses 23,615 33,655 44,895 62,841 68,315
Depreciation and amortization 8,673 12,068 13,810 21,437 6,135
--------- --------- --------- --------- ---------
Total operating expenses 136,471 182,036 218,203 296,156 353,406
--------- --------- --------- --------- ---------
Income from operations 48,951 45,006 24,872 58,439 112,075
Investment income 564 296 358 309 818
Interest expense (1,013) (2,697) (3,771) (2,538) (1,156)
--------- --------- --------- --------- ---------
Income before income taxes 48,502 42,605 21,459 56,210 111,737
Income tax provision 19,403 17,567 10,473 25,782 42,961
--------- --------- --------- --------- ---------
Net income $ 29,099 $ 25,038 $ 10,986 $ 30,428 $ 68,776
========= ========= ========= ========= =========
PER SHARE DATA:
Net income per common share:
Basic $ 1.91 $ 1.61 $ 0.70 $ 1.44 $ 2.68
========= ========= ========= ========= =========
Diluted $ 1.82 $ 1.58 $ 0.68 $ 1.36 $ 2.58
========= ========= ========= ========= =========
Weighted average shares used in
computing net income per common share:
Basic 15,248 15,513 15,760 21,159 25,622
========= ========= ========= ========= =========
Diluted 15,987 15,860 16,053 22,478 26,629
========= ========= ========= ========= =========
23
ITEM 6. SELECTED FINANCIAL DATA, CONTINUED
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
1998 1999 2000 2001 2002
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER OPERATING DATA)
OTHER OPERATING DATA:
Number of physicians at end of period 350 434 452 588 622
Number of births 268,923 337,480 381,602 450,205 501,832
NICU admissions 27,911 33,942 39,272 48,186 55,121
NICU patient days 450,225 548,064 637,957 804,293 983,733
CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents $ 650 $ 825 $ 3,075 $ 27,557 $ 73,195
Working capital (deficit)(3) 14,915 (16,352) 2,108 34,381 79,555
Total assets 270,658 334,790 324,734 573,099 648,679
Total liabilities 63,265 105,903 82,834 94,247 100,681
Borrowings under line of credit 7,850 48,393 23,500 -- --
Long-term debt and capital lease
obligations, including current
maturities 2,550 2,350 -- 3,206 2,489
Shareholders' equity 201,051 228,887 241,900 478,852 547,998
(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, $86.6 million and $69.8 million for the years ended December 31,
1998, 1999, 2000, 2001 and 2002, respectively.
(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.
(3) At December 31, 1999 and 2000, the balance outstanding on the Company's
line of credit was classified as a current liability.
24
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion highlights the principal factors that have
affected 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 Annual Report on 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") for a total purchase price of $173.6
million, which we paid in shares of our common stock, plus assumed liabilities
of approximately $59.2 million. The Merger has been accounted for by Pediatrix
as an acquisition 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, which
from May 15, 2001, includes the business and operations of Magella.
On June 6, 2002, we received a written request from the FTC to submit
information on a voluntary basis in connection with an investigation of issues
of competition related to the Merger and our business practices generally. On
February 5, 2003, we received additional information requests from the FTC in
the form of a Subpoena and Civil Investigative Demand. Pursuant to these
requests, the FTC has requested documents and information relating to the Merger
and our business practices in certain markets.
We completed six acquisitions and added three NICUs through our internal
marketing activities during 2002. 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, San Antonio, San Jose, Seattle-Tacoma and Southern California
metropolitan areas and intend to develop additional regional and statewide
networks.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires estimates
and assumptions that affect the reporting of assets, liabilities, revenues and
expenses, and the disclosure of contingent assets and liabilities. Note 2 to our
Consolidated Financial Statements provides a summary of our significant
accounting policies, which are all in accordance with generally accepted
accounting policies in the United States of America. 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. On an ongoing basis, we evaluate our
estimates and assumptions, including those discussed below.
Revenue Recoginition
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 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
25
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.
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 deductible. 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 including claim frequency and severity as well as health care
inflation, 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, including identifiable
intangible assets. 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. In accordance with the provisions of Statement of Financial
Accounting Standards, No. 142 ("FAS 142"), "Goodwill and Other Intangible
Assets," no goodwill amortization was recorded for the year ended December 31,
2002. See Note 2 to our Consolidated Financial Statements.
Under current accounting standards, goodwill is tested for impairment at an
operating segment level, known as a reporting unit, on at least an annual basis
using a two-step test. The first step compares the fair value of a reporting
unit with its carrying amount, including goodwill. If the carrying amount of a
reporting unit exceeds its fair value, a second step is performed to determine
the amount of any impairment loss. We use income and market-based valuation
approaches to determine the fair value of our reporting units. These approaches
focus on discounted cash flows and market multiples to derive the fair value of
a reporting unit. We also consider the economic outlook for the healthcare
services industry and various other factors during the testing process,
including hospital and physician contract changes, local market developments,
changes in third-party payments, and other publicly-available information.
Other Matters
Other significant accounting policies, not involving the same level of
measurement uncertainties as those discussed above, are nevertheless important
to an understanding of our Consolidated Financial Statements. For example, our
Consolidated 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 confidence.
GEOGRAPHIC COVERAGE AND PAYOR MIX
During 2000, 2001 and 2002, approximately 55%, 59% and 62%, respectively,
of our net patient service revenue was generated by operations in our five
largest states. Over those same periods, our operations in Texas accounted for
approximately 18%, 29% and 33% of our net patient service revenue. Adverse
changes or conditions affecting these markets, such as health care reforms,
26
changes in laws and regulations, reduced Medicaid reimbursements, reductions in
the supply of trained physicians and government investigations, may have an
adverse effect on our operations. We continue to seek to diversify the
geographic scope of our operations, primarily through acquisitions of physician
group practices.
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. Net patient service revenue differs from 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. 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,
--------------------------------------
2000 2001 2002
------------- ------------ -----------
Government 21% 23% 23%
Contracted managed care 48% 49% 55%
Other third parties 30% 27% 21%
Private pay patients 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 46% of our total gross patient service revenue but only 23% of our
net patient service revenue during 2002.
27
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):
-----------------------------------
YEARS ENDED DECEMBER 31,
-----------------------------------
2000 2001 2002
------ ------ ------
Net patient service revenue 100% 100% 100%
------ ------ ------
Operating expenses:
Practice salaries and benefits 61.1 55.7 56.5
Practice supplies and other operating