information technology, administrative and
financial services to these practices in exchange for a management fee. One practice is an optometric practice with an optical retail store located in
the Chicago market. The other practice is primarily an ophthalmology practice with multiple locations in Atlanta, Georgia.
We were originally organized as a Delaware limited
liability company in March 1995, under the name, NovaMed Eyecare Management, LLC. In connection with a capital infusion from venture capital investors
in November 1996, NovaMed Holdings Inc., an Illinois corporation, was formed to serve as a holding company, responsible for overall strategic planning,
with NovaMed Eyecare Management, LLC as our principal operating subsidiary. In May 1999, NovaMed Holdings Inc. reincorporated as a Delaware corporation
and changed its name to NovaMed Eyecare, Inc. In August 1999, we consummated our initial public offering of common stock. In March 2004, we changed our
name to NovaMed, Inc. We also changed the name of our principal operating subsidiary to NovaMed Management Services, LLC.
Information Available
Our corporate headquarters are located at 980 North
Michigan Avenue, Suite 1620, Chicago, Illinois 60611, and our website is www.novamed.com. We file annual, quarterly, and current reports, proxy
statements, and other documents with the Securities and Exchange Commission (the “SEC”) under the Securities Exchange Act of 1934 (the
“Exchange Act”). The public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 450 Fifth
Street, NW, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding
issuers, including us, that file electronically with the SEC. The public can obtain any documents that we file with the SEC at
http://www.sec.gov.
We also make available free of charge on or through
our Internet website (http://www.novamed.com) our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and,
if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after we
electronically file such materials with, or furnish them to, the SEC.
Industry
Overview
Ambulatory
Surgery Center Industry
The term “ambulatory surgery” refers to
procedures performed on a nonhospitalized patient who is able to return home the same day. Since the inception of outpatient surgery centers in the
early 1970s, the ASC industry has grown consistently, with 3,957 ASCs in business in the United States as of February 2004 according to Verispan,
L.L.C., an independent health care market research and information firm. Improved surgical techniques and technologies, including improved anesthesia
techniques, have contributed to the expansion of surgical procedures that can be performed in an ASC. According to Verispan, L.L.C., an estimated 8.3
million surgeries were projected to be performed in the U.S. at ASCs in 2004, up an estimated 6% from 2003. The two most commonly performed surgical
procedures in ASCs are ophthalmology and gastroenterology, with each representing approximately 25% of all ASC surgeries performed in 2004. Eye surgery
is performed in approximately 33% of all ASCs.
We believe that the convenience and efficiencies
offered by an ASC setting have also contributed to the growth in ASC procedures. We believe that many physicians prefer an ASC to a hospital because of
greater scheduling flexibility, faster turnaround time between cases and more efficient nurse staffing. Patients prefer the experience of a surgical
facility dedicated to their specialized surgery that is free from disruptions or scheduling conflicts that often arise in hospitals due to emergency
procedures or more complex surgical procedures that run longer than expected. Moreover, we believe third party payors recognize the cost-effective
benefits of ASCs.
Cataract Surgery. Cataract surgery
is currently the most commonly performed procedure in our ASCs and is also one of the most widely performed surgical procedure in the U.S., with an
estimated 2.7 million cataract surgeries in 2004, an increase of approximately 2.5% over 2003. Cataract procedures are expected to continue to increase
for many years, driven primarily by the aging of the population and the introduction of improved technologies and surgical techniques. With the vast
majority of cataract surgery patients being over the age of 65, the Medicare program has been the primary source of reimbursement for cataract surgery
providers. Market Scope, LLC, an independent health care publication, estimates that cataract procedures will grow 3% in 2005 over
2004.
4
Vision Correction
Surgery. According to the National Eye Institute, an estimated 150 million people in the U.S. use eyeglasses or contact lenses to
correct refractive errors. Refractive errors are optical defects that result in light not being properly focused on the eye’s retina. If the
cornea’s curvature is not correct, the cornea cannot properly focus the light passing through it onto the retina, and the person will see a
blurred image. The three most common refractive errors are:
• |
|
myopia, commonly referred to as nearsightedness, which is caused
by a steepening of the cornea, resulting in the blurring of distant objects |
• |
|
hyperopia, commonly referred to as farsightedness, which is
caused by a flattening of the cornea, resulting in the blurring of close objects |
• |
|
astigmatism, in which images are not focused on any point due to
the varying curvature of the eye along different axes, which results in a distorted view of images |
New surgical technologies and techniques have been
developed over the years to correct some of these common refractive errors that result from the improper curvature of the cornea. Laser In-Situ
Keratomileusis, or LASIK, was introduced in 1996, leading to a dramatic increase in the popularity of laser vision correction surgery. The introduction
of LASIK offered significant benefits to ophthalmologists over preceding refractive surgical techniques such as Radial Keratotomy, or RK, and the first
vision correction surgery that used laser technology, Photorefractive Keratectomy, or PRK. Relative to the earlier refractive surgical techniques, the
LASIK procedure provides significant reductions in patient pain or discomfort, patient recovery times ranging from a few hours after the procedure to
two weeks, and reduced complication rates. Although the number of vision correction procedures performed in the U.S. grew rapidly between 1996 and
2000, the number of annual procedures declined between 2000 and 2003. This trend has reversed, however, and in 2004 according to Market Scope, LLC
ophthalmologists performed an estimated 1,271,000 laser vision correction surgery procedures in the U.S., representing an increase of approximately 15%
from 2003.
Optical Products and Services Industry
The eye care market consists of a large, diverse
group of services and products. The eye care services market includes routine eye examinations as well as diagnostic and surgical procedures that
address complex eye and vision conditions. The most common conditions addressed by eye care professionals are nearsightedness, farsightedness and
astigmatism as described above. Other frequently treated conditions include cataracts, glaucoma, macular degeneration and diabetic retinopathy. Eye and
vision conditions are typically treated with surgery, pharmaceuticals, prescription glasses, contact lenses or some combination of these treatments.
Additional services offered by eye care professionals include research services for eye care devices or pharmaceuticals being developed or tested in
clinical trials. The optical products market consists of the manufacture, distribution and sale of optical goods including corrective lenses,
eyeglasses, frames, contact lenses and other optical products and accessories.
While the number of patient options for vision
correction has increased with improved surgical vision correction technologies and techniques, the market for basic optical goods including corrective
lenses, eyeglass frames, contact lenses and other optical products and accessories, remains a significant market. Eyeglass frames are typically sold
through retail optical outlets located in optometrist and ophthalmologist clinics, as well as through retail stores.
Our Business Model
We are focused primarily on acquiring, developing
and operating ASCs within new and existing markets. We believe that our experience in operating ASCs, when coupled with our management services
experience in working with physicians, will provide physicians with an efficient operating environment to maximize quality patient
care.
Surgical Facilities
As of March 22, 2005, we own and operate 26 ASCs,
each of which is a state-licensed and Medicare-certified ASC. Physicians perform a variety of surgical procedures in our ASCs, including ophthalmology,
orthopedics, pain management, gastrointestinal, wound care and plastics. Eighty-nine percent of the surgical procedures performed
5
in our facilities in 2004 were ophthalmic
procedures, with orthopedics and pain management comprising 5% and 4%, respectively.
We generally own and operate our surgical facilities
through joint ownership arrangements in which we own a majority interest in the facility and minority equity interests are held by physicians living in
the ASC’s local community. We currently own minority interests in two of our facilities, but in each case we have an option to purchase additional
equity interests to allow us to own a majority interest at some point in the future. Each facility is generally owned and operated through a separate
limited liability company, with one of our wholly owned subsidiaries generally serving as the manager of the entity. In certain instances, we may own
the facility through a limited partnership with one of our wholly owned subsidiaries serving as the general partner.
In addition to owning and operating ASCs, we also
are parties to laser services agreements pursuant to which we provide excimer lasers and various services to ophthalmologists for their use in
performing laser vision correction surgery. Our excimer lasers are either located in our ASCs or provided to physicians for use in their medical
practices through these laser services agreements.
We have a nonexclusive supply agreement with Alcon
Laboratories, Inc. pursuant to which we can procure and utilize excimer lasers and other equipment manufactured by Alcon. The agreement sets forth
procurement and pricing terms for Alcon’s most technologically advanced laser, the LADARVision System, along with the LADARWave unit used for
CustomCornea procedures. During the term of this agreement, which expires December 31, 2006, we will pay Alcon monthly based on the number of
procedures performed on each laser, with minimum annual procedure requirements for each LADARVision System procured under the agreement. As of March
22, 2005, we have eight LADARVision Systems covered by the agreement. Alcon may terminate the agreement if we fail, after reasonable cure periods, to
comply with the material terms of the agreement. We may terminate the agreement if the U.S. Food and Drug Administration (FDA), withdraws or materially
restricts its approval of the use of any laser covered by the agreement or if patent issues or changes render the lasers unusable.
Product Sales
We own and operate an optical laboratory business
that specializes in surfacing, finishing and distributing corrective lenses and eyeglass lenses. Our laboratories have in excess of 250 active
customers, including ophthalmologists, optometrists, opticians and optical retail chains. Our optical products purchasing organization allows eye care
professionals to purchase optical products through us from more than 100 suppliers. We process consolidated monthly billing for over 1,500 customers
that utilize our purchasing organization. Customers of these businesses include our former affiliated doctors who are a party to multi-year optical
supply agreements with us pursuant to which our group purchasing organization and optical laboratories are the primary providers of optical products
and supplies to these doctors. Generally, these supply agreements will expire between March 2007 and May 2009, and the product sales revenue generated
from these customers in 2004 constituted less than three percent of our total product sales revenue.
In addition, our marketing products and services
business provides eye care professionals with a range of products and services including brochures, videos, advertising and website design, education
and training programs, and consulting services.
We also have a long-term service agreement with an
optometric practice located in Illinois. The optometric practice also has a retail optical outlet that sells eyeglasses and other products to patients.
We provide all of the services, facilities and equipment necessary to operate this optometric practice under a 25-year service agreement. The services
include:
• |
|
billing, collection and cash management services |
• |
|
procuring and maintaining all office space, equipment and
supplies |
• |
|
subject to federal and state law, recruiting, employing,
supervising and training all non-professional personnel |
• |
|
assisting in recruiting additional doctors |
6
• |
|
all administrative and support services |
• |
|
information technology services |
Other
We have a 40-year service agreement in place with an
ophthalmology practice with multiple locations in Atlanta, Georgia. We provide all of the services, facilities and equipment necessary to operate this
medical practice, including services identical in nature to those described above with respect to our Illinois affiliated optometric practice. We also
have less than two years remaining on an administrative services agreement with a former affiliated practice under which we provide limited
administrative and financial services to the practice.
Our Growth Strategy
Surgical Facilities
We are focused on acquiring, developing and
operating ASCs. Historically, our emphasis has been on providing primarily eye surgical services. Over the past year, however, we have expanded into
other specialties such as orthopedics, pain management, gastrointestinal, wound care and plastics. This expansion into other specialties has been
through both the acquisition of new facilities and the addition of specialties to our existing centers. While ophthalmology is still our largest
specialty and a key part of our growth strategy, we also continuously evaluate and pursue opportunities in other specialties. The key elements of our
growth strategy are:
• |
|
Acquiring equity interests in ASCs in partnership with
physicians; |
• |
|
Developing newly constructed ASCs through joint ownership
arrangements with physicians; and |
• |
|
Increasing the revenue and profitability of our existing
ASCs. |
Acquiring Majority Interests in
ASCs
We have a development staff that is responsible for
identifying, evaluating and negotiating the acquisition of majority interests in ASCs in new or existing markets. In certain instances, we may also
consider acquiring a minority, rather than a majority, equity interest. The acquisition of a well-established ASC is an attractive means of entry into
a new market, particularly in states that require a certificate of need, or CON, for development. In analyzing potential transactions, the evaluation
of our prospective physician-partners is a critical factor. We recognize that the success of our ASCs is tied directly to the success of our
physician-partners and their practices. We believe our management services experience greatly enhances our physician evaluation
process.
We also assess the target facility’s potential
for future growth. We identify opportunities to add new physicians or surgical procedures, or to improve managed care participation. We also examine
the opportunities to reduce expenses through improved staff efficiency, better physician scheduling and reduced supply costs. Our development staff and
operations personnel work closely to formulate a growth strategy for each newly acquired facility to maximize our return on
investment.
We currently intend to finance our future
acquisitions of equity interests in ASCs using cash generated from our operations and amounts borrowed under our credit facility. In October 2004, we
amended our credit facility by increasing our maximum commitment available under the facility from $30 million to $50 million and extending the
expiration date by two years to June 30, 2008.
Developing Newly Constructed
ASCs
Our development staff is also responsible for
identifying potential opportunities to build new ASCs with physician-partners. These projects involve partnering with one or more physicians in a local
community that is either underserved from a facility standpoint, or involve physicians who don’t have the resources, productivity or expertise to
construct a facility on their own and need a corporate partner to help finance, structure and oversee the project. Generally, development of a new ASC
can be an attractive alternative in states that do not require a CON to build
7
|
|
a new center. In late 2004, we opened an ASC specializing in
pain management procedures that we developed with two new physician-partners. With this new pain management ASC, we have developed two ASCs using this
approach as of March 22, 2005. |
Increasing Revenue and Profitability of our
Existing ASCs
The revenue generated by our ASCs is driven by the
surgical procedures performed by physicians. Revenue growth in our existing ASCs will be derived from an increase in surgical procedures performed at
each facility, whether this increase is from the existing physicians or new physicians utilizing the facility. All of our ASCs currently have the
capacity to handle additional procedures. Given this capacity, we attempt to introduce the benefits of our facilities to new physicians who may be
using other less efficient and convenient facilities. We believe the efficiency and convenience of an ASC, and the opportunity to work in facilities
affiliated with a national ASC operator with significant management expertise, are appealing to physicians and their patients and provides a more
attractive setting than hospitals. We also work with our physicians in identifying new procedures, technologies or equipment to integrate into our
facilities and expanding the scope of surgical services available in a cost-effective manner. Moreover, with a substantial portion of our ASC revenue
derived from government and private third party payors, we are continuously evaluating and attempting to increase the levels of our managed care panel
participation.
With our existing centers that currently provide
predominantly eye-related surgical services, we are also exploring efficient ways to add new surgical specialties. We are often required to get state
licensure approval to add other specialties to our existing centers. The likelihood of our success in receiving these approvals will vary by
state.
Staffing and medical supply costs are generally an
ASC’s two largest expense categories. We analyze staffing schedules and work with physicians to schedule surgeries in a manner that maximizes
staff efficiency and optimizes staffing costs. We also have negotiated purchasing contracts with many of our largest vendors and we educate our
physicians on lower cost supply alternatives that still maintain high patient care standards.
Product Sales
We believe there are opportunities to grow our
optical products and services business by adding ophthalmologists and optometrists as customers, as well as offering a broader range of products and
services to our existing customer base.
Competition
Surgical Facilities
In acquiring and developing ASCs, we compete with
both corporations and physicians. There are several publicly held and private companies actively engaged in the acquisition, development and operation
of ASCs. Some of these companies may acquire and develop multi-specialty ASCs, practice-based ASCs focusing on varying specialties, or a combination of
the two. Moreover, some of these companies have the acquisition and development of ASCs as their core business, while other competitors are larger,
publicly held companies that have subsidiaries or divisions engaged in this business. Many of these competitors have greater resources than us. Our
primary competitors in acquiring, owning and operating ASCs are AmSurg Corp., United Surgical Partners International, Inc., HealthSouth Corporation,
HCA Inc. and Symbion, Inc.
Product Sales
Our two optical laboratories face a variety of
national, regional and local competitors. We compete in the optical laboratory market on the bases of quality of service, breadth of services,
reputation and price.
In the market for providing optical group purchasing
services, we primarily compete with national and regional buying groups, as well as large vendors. Competition in this market is based upon service,
price, and the strength of the purchasing organization, including the ability to negotiate discounts with suppliers.
8
Other
Our management services are provided to eye care
professionals through long-term affiliations. The market for these management services is fragmented, and we do not face any single, dominant U.S.
national competitor. Eye care professionals may seek a corporate partner to assist them in the growth and development of their practices, as well as
with the day-to-day management and administration of their businesses. Factors that may influence an eye care professional’s decision to retain a
corporate partner to provide management services are the corporate partner’s experience and scope and quality of services offered, the eye care
professional’s need for these services, and the price for such services.
Employees
As of March 22, 2005, we had approximately 457
employees, 300 of whom are full-time employees. We are not a party to any collective bargaining agreements and we consider our relations with our
employees to be good.
Many of our ASCs are located adjacent to a physician
practice. In a few instances, our ASCs may lease from the physician practice some or all of the individuals who provide services in the ASC on our
behalf. This is typically only done when the ASC may provide surgical services on a limited schedule. This leasing model allows us to staff these
centers in a more cost-effective manner.
Governmental Regulation
As a participant in the health care industry, our
operations are subject to extensive and increasing regulation by governmental entities at the federal, state and local levels. Many of these laws and
regulations are subject to varying interpretations, and we believe courts and regulatory authorities generally have provided little clarification.
Moreover, state and local laws and interpretations vary from jurisdiction to jurisdiction. As a result, we may not always be able to accurately predict
interpretations of applicable law.
We believe our business practices comply in all
material respects with applicable federal, state and local laws and regulations. If the legal compliance of any of our activities were challenged,
however, we might have to divert substantial time, attention and resources from running our business to defend against these challenges regardless of
their merit. If we do not successfully defend these challenges, we might face a variety of adverse consequences including losing our ASC licenses,
losing our eligibility to participate in Medicare, Medicaid or other federal or state health care programs, or losing other contracting privileges and,
in some instances, civil or criminal fines. Any of these consequences could have a material adverse effect on our business, financial condition and
results of operations.
The regulatory environment in which we operate may
change significantly in the future. Numerous legislative proposals have been introduced in the U.S. Congress and in various state legislatures over the
past several years that could cause major reforms of the U.S. health care system. In addition, several sets of regulations have been recently adopted
that may require substantial changes in the way health care providers operate over the coming years. In response to new or revised laws, regulations or
interpretations, we could be required to revise the structure of our legal arrangements, repurchase minority equity interests in our ASCs that are
owned by physicians, incur substantial legal fees, fines or other costs, or curtail our business activities, reducing the potential profit to us of
some of our legal arrangements, any of which could have a material adverse effect on our business, financial condition and results of
operations.
The following is a summary of some of the health
care regulatory issues affecting our operations and us.
Federal Law
Anti-Kickback
Statute. The federal anti-kickback statute prohibits the knowing and willful solicitation, receipt, offer or payment of any
direct or indirect remuneration in return for the referral of patients or the ordering or purchasing of items or services payable under Medicare,
Medicaid or other federal health care programs. Violations of this statute may result in criminal penalties, including imprisonment or criminal fines
of up to $25,000 per violation, civil penalties of up to $50,000 per violation plus up to three times the amount of the underlying remuneration, and
exclusion from federal or state programs including Medicare or Medicaid.
9
The federal anti-kickback statute contains a number
of exceptions. In order to address the problems created by the broad language of the statute, Congress directed the Department of Health and Human
Services, or DHHS, to develop regulatory exceptions, known as safe harbors, to the federal anti-kickback statute’s prohibitions. When possible, we
have attempted to structure our business operations within a safe harbor. However, some aspects of our business either do not meet the prescribed safe
harbor standards, or relate to practices for which no safe harbor standards exist. Because there is no legal requirement that relationships fit within
a safe harbor, a business arrangement that does not comply with the relevant safe harbor, or for which a safe harbor does not exist, does not
necessarily violate the anti-kickback statute, and is not necessarily illegal per se.
Included among the safe harbors to the anti-kickback
statute are certain safe harbors for investment interests in general, and for investment interests in ASCs, specifically. As of March 22, 2005, we
co-own 22 of our ASCs with one or more physicians, and we will likely co-own with physicians most of the ASCs that we will acquire in the future. We
will also likely be selling interests in our existing wholly-owned ASCs to physicians in the near- to intermediate-term. It is unlikely that our
co-ownership will meet all of the parameters of the general investment interest safe harbors or the ASC investment interest safe harbors. As discussed
above, however, an arrangement that does not fit squarely within a safe harbor is not per se unlawful under the anti-kickback statute. It is our intent
to structure all such co-ownership arrangements in a manner that complies with as many of the safe harbor components as possible, that meets the
objectives of the anti-kickback statute, and that follows the other available regulatory guidance regarding ASC co-ownership arrangements to the
greatest extent possible.
The applicable regulatory authorities have provided
limited guidance regarding ASC ownership arrangements that are permissible under the anti-kickback statute. Based on the guidance that is available, we
believe that our joint ownership arrangements comply with the anti-kickback law based on, among other things, the following factors: all of the jointly
owned ASCs are Medicare certified; patients referred to an ASC by an investor are informed of the referring physician’s investment interest in the
ASC; the terms on which an investment interest in the ASC is offered to an investor are not related to the previous or expected volume of referrals or
services by, or other business with, the investor; neither any of the investors (including us) nor the ASC entity will loan money to any investors or
guarantee debt of any investors incurred to purchase the investment interest; the return on investment in the ASC is directly proportional to the
investors’ investment interests; the ASCs treat federal health program beneficiaries in a non-discriminatory manner; and Medicare-recognized
surgical procedures account for a significant portion of the investor-physicians’ medical practice income.
Self-Referral
Law. Subject to limited exceptions, the federal self-referral law, known as the “Stark Law,” prohibits physicians
and optometrists from referring their Medicare or Medicaid patients for the provision of “designated health services” to any entity with
which they or their immediate family members have a financial relationship. “Financial relationships” include both compensation and ownership
relationships. “Designated health services” include clinical laboratory services, radiology and ultrasound services, durable medical
equipment and supplies, and prosthetics, orthotics and prosthetic devices, as well as seven other categories of services.
Generally speaking, the Stark law does not prohibit
referrals to ASCs from physicians with ownership or investment interests in those ASCs. Medicare regulations provide two exceptions that protect
referrals to ASCs by physicians who have ownership or compensation relationships with those ASCs. The first exception expressly exempts items and
services which are identified as designated health services for which payment is included in the ASC composite rate. Referrals made for these items and
services by physicians with a financial relationship do not violate the Stark Law when furnished in the ASC setting. Thus, when an intraocular lens, or
IOL, used in cataract surgery, or another service or item that would otherwise qualify as a “designated health service,” is included in an
ASC composite payment rate, the IOL (or other such item or service) will not be considered to be a “designated health service.” The second
exception provides that prosthetics, prosthetic devices, and durable medical equipment implanted in a Medicare-certified ASC by the referring physician
or a member of the referring physician’s group practice also are specially excepted, even when the Medicare payment for these items is separate
from — i.e., not bundled into — the ASC payment.
Violating the Stark Law may result in denial of
payment for the designated health services performed, civil fines of up to $15,000 for each service provided pursuant to a prohibited referral, a fine
of up to $100,000 for participation in a circumvention scheme, and exclusion from the Medicare, Medicaid and other federal health care
10
programs. The Stark Law is a strict liability
statute. Any referral made where a financial relationship exists that fails to meet an exception constitutes a violation of the law.
Civil False Claims
Act. The Federal Civil False Claims Act prohibits knowingly presenting or causing to be presented any false or fraudulent
claim for payment by the government, or using any false or fraudulent record in order to have a false or fraudulent claim paid. Violations of the law
may result in repayment of three times the damages suffered by the government and penalties from $5,000 to $10,000 per false claim. Collateral
consequences of a violation of the False Claims Act include administrative penalties and possible exclusion from participation in Medicare, Medicaid
and other federal health care programs.
Health Insurance Portability and Accountability
Act. In August of 1996, Congress enacted the Health Insurance Portability and Accountability Act of 1996 (HIPAA). Included
within HIPAA’s health care reform provisions are its “administrative simplification” provisions, which require that health care
transactions be conducted in a standardized format, and that the privacy and security of certain individually identifiable health information be
protected. Final rules for most of the administrative simplification subject areas have been published.
Final rules covering “Standards for Electronic
Transactions and Code Sets” were published on August 17, 2000, and set forth the standardized billing codes and formats that we must use when
conducting certain health care transactions and activities. The effective date of these final rules was October 16, 2000. Compliance with these rules
was required by October 16, 2002, but by filing an extension plan by October 16, 2002, we extended this compliance date to October 16, 2003 for our
ASCs. Our ASCs are utilizing standard transactions and approved code sets, all in compliance with HIPAA.
On December 28, 2000, as modified on May 31, 2002
and August 14, 2002, the DHHS published final rules addressing “Standards for Privacy of Individually Identifiable Health Information” under
HIPAA’s administrative simplification provisions. Compliance with these rules was required by April 14, 2003. These rules create substantial
compliance issues for all “covered entities” — which include health care providers, health plans, and health care clearinghouses —
that engage in regulated transactions and activities. Operations of our ASCs are covered by the final rules. We believe our ASCs are in substantial
compliance with these final rules.
Final rules addressing the “Security
Standards” under HIPAA’s administrative simplification provisions were published on February 20, 2003. Our ASCs and affiliated providers must
comply with these regulations by April 21, 2005. We have developed an implementation plan regarding our compliance with the security regulations and
are presently developing additional policies and procedures and monitoring mechanisms necessary to achieve compliance by the April 2005
deadline.
On January 23, 2004, DHHS published the final rule
on “Standard Unique Health Identifiers for Health Care Providers.” Under this final rule, all HIPAA covered entities — which includes
our ASCs — must apply for a National Provider Identifier (NPI) in order to be able to transmit any health information in electronic form.
Application may be made beginning on, but not earlier than, May 23, 2005.
Violations of HIPAA’s administrative
simplification provisions can result in civil penalties of up to $25,000 per person per year for each violation or criminal penalties of up to $250,000
and/or up to 10 years in prison per violation.
State Law
Facility Licensure and Certificate of
Need. We are required to obtain and maintain licenses from the state departments of health in states where we open, acquire
and operate ASCs. We believe that we have obtained and that we maintain the necessary licenses in states where licenses are required. With respect to
future expansion, we cannot assure you that we will be able to obtain the required licenses without unreasonable expense or delay. In addition, we
cannot assure you that we will be able to maintain licenses for all of our operating ASCs. We believe our ASCs are in compliance with all applicable
state licensure requirements, but we cannot guaranty that the state departments of health will continue to view our facilities as being in
compliance.
Some states require a Certificate of Need, or CON,
prior to the construction or modification of an ASC or the purchase of specified medical equipment in excess of a dollar amount set by the state. We
believe that we have
11
obtained the necessary CONs in states where a
CON is required. However, we believe courts and state regulatory authorities generally have provided little clarification as to some of the regulations
governing the need for CONs. It is possible that a state regulatory authority could challenge our determination. With respect to our future development
of new ASCs or expansion of existing ASCs, we cannot assure you that we will be able to acquire a CON in all states where a CON is
required.
Anti-Kickback Laws. In
addition to the federal anti-kickback law, a number of states have enacted laws that prohibit payment for referrals and other types of kickback
arrangements. Some of these state laws apply to all patients regardless of their source of payment, while others limit their scope to patients whose
care is paid for by particular payors.
Self-Referral Laws. In
addition to the Federal Stark Law, a number of states have enacted laws that require disclosure of or prohibit referrals by health care providers to
entities in which the providers have an investment interest or with which the providers have a compensation relationship. In some states, these
restrictions apply regardless of the patient’s source of payment.
State Privacy
Laws. Numerous states have enacted privacy laws that have similar objectives to the Federal HIPAA privacy regulations. These
laws, which vary from state to state, require that certain protective measures be taken in connection with the disclosure of a patient’s
identifying information.
Corporate Practice of
Medicine. A number of states have enacted laws that prohibit, or have common law that prohibits, the corporate practice of
medicine. These laws are designed to prevent interference in the medical decision-making process by anyone who is not a licensed physician. Application
of the corporate practice of medicine prohibition varies from state to state. Although we neither employ physicians nor provide professional medical
services, we continue to provide services to physicians in connection with their performance of surgical procedures through laser services agreements
and through our remaining management services agreements. To the extent any act or service to be performed by us is construed by a court or enforcement
agency to constitute the practice of medicine, we cannot be sure that a particular state court or enforcement agency may not construe our arrangements
as violating that jurisdiction’s corporate practice of medicine doctrine. In such an event, we may be required to redesign or reformulate our
relationships with these eye care professionals and there is a possibility that some provisions of our agreements may not be
enforceable.
Fee-Splitting
Laws. The laws of some states prohibit providers from dividing with anyone, other than providers who are part of the same
group practice, any fee, commission, rebate or other form of compensation for any services not actually and personally rendered. Penalties for
violating these fee-splitting statutes or regulations may include revocation, suspension or probation of a provider’s license, or other
disciplinary action. In addition, courts have refused to enforce contracts found to violate state fee-splitting prohibitions. The precise language and
judicial interpretation of fee-splitting prohibitions varies from state to state. Courts in some states have interpreted fee-splitting statutes to
prohibit all percentage of gross revenue and percentage of net profit management fee arrangements. Other state statutes only prohibit fee splitting in
return for referrals. To the extent any of our contractual arrangements are construed by a court or enforcement agency to violate the
jurisdiction’s fee-splitting laws, we may be required to redesign or reformulate our arrangements and there is a possibility that some provisions
of our agreements may not be enforceable.
Excimer Laser Regulation
Medical devices, including the excimer lasers used
in our ASCs, are subject to regulation by the FDA. Medical devices may not be marketed for commercial sale in the U.S. until the FDA grants pre-market
approval for the device.
Failure to comply with applicable FDA requirements
could subject us or laser manufacturers to enforcement action, product seizures, recalls, withdrawal of approvals and civil and criminal penalties.
Further, failure to comply with regulatory requirements, or any adverse regulatory action, could result in a limitation on or prohibition of our use of
excimer lasers.
12
Government Regulation — Management Services
Our management services business and the operations
of our affiliated providers are also subject to extensive and continuing regulation by governmental entities at the federal, state and local levels.
The following is a summary of the health care regulatory issues affecting our management services business, both with respect to our affiliated
providers and us:
Federal Law
Anti-Kickback
Statute. As discussed above, there are safe harbor regulations to the federal anti-kickback statute. When possible, we have
attempted to structure our management services business and our relationships with our affiliated providers within a safe harbor. Some aspects of our
management services business, the business of our affiliated providers, and our relationships with our affiliated providers either do not meet the
prescribed safe harbor standards, or relate to practices for which no safe harbor standards exist. Because there is no legal requirement that
relationships fit within a safe harbor, a business arrangement that does not comply with the relevant safe harbor, or for which a safe harbor does not
exist, does not necessarily violate the anti-kickback statute.
Self-Referral Law. Our
affiliated providers provide limited categories of designated health services, specifically, diagnostic radiology services, including A-scans and
B-scans, and prosthetic devices, including eyeglasses and contact lenses furnished to patients following cataract surgery. We believe the provision of
these designated health services meets with an exception to the Stark Law. In addition, compensation arrangements between our affiliated providers and
their employers have historically been structured to comply with the Stark Law.
Civil False Claims
Act. The Federal Civil False Claims Act prohibits knowingly presenting or causing to be presented any false or fraudulent
claim for payment by the government, or using any false or fraudulent record in order to have a false or fraudulent claim paid.
Health Insurance Portability and Accountability
Act. The operations of our affiliated providers are covered by HIPAA. We have taken actions to assist our remaining
affiliated providers with their HIPAA compliance efforts.
State Law
State Privacy
Laws. State health information privacy laws may also apply to the activities of our affiliated providers. There is very
little guidance regarding the application of these state privacy laws. We cannot be sure that the privacy measures taken by our affiliated providers
will be construed as complying with these laws. In the event the privacy measures taken by these professionals are deemed not to comply with a
particular state’s health privacy laws, we may need to incur significant time, effort and expense to establish compliance.
Corporate Practice of Medicine
Laws. Although we neither employ doctors nor provide professional medical services, to the extent any portion of the
comprehensive management services that we provide under our service agreements with our affiliated providers is construed by a court or enforcement
agency to constitute the practice of medicine, our service agreements provide that our obligations to perform the act or service is waived. We cannot
be sure that a particular state court or enforcement agency may not construe our arrangements as violating that jurisdiction’s corporate practice
of medicine doctrine. In such an event, we may be required to redesign or reformulate our relationships with our affiliated providers and there is a
possibility that some provisions of our service agreements may not be enforceable.
Fee-Splitting Laws. We
believe our management fee arrangements with our affiliated providers differ from those invalidated as unlawful fee splits because they establish a
flat monthly fee that is subject to adjustment based on the degree to which actual practice revenues or expenses vary from budget. However, there is
some risk that our arrangements could be construed by a state court or enforcement agency to run afoul of state fee-splitting prohibitions.
Accordingly, all of our service agreements contain either a reformation provision or a mechanism establishing an alternative fee structure, or
both.
13
Discontinued Operations
In October 2001, we announced our intentions to
discontinue our management services business. In assessing our overall business, our Board of Directors determined that we should focus our business
strategy primarily on the acquisition, development and operation of surgical facilities. Our surgical facilities segment was historically more
efficient than our other business segments, requiring relatively lower operating costs and producing our highest operating margins. In reviewing our
management services business, our Board determined that, although the segment had been historically profitable, the returns did not justify the high
overhead and capital spending necessary to operate the business. Beginning in the third quarter of 2001, we reflected the management services business
as discontinued operations in our financial statements.
We completed our discontinued operations plan in
December 2003 when we consummated our last divestiture transaction. From December 2001 to December 2003, we negotiated and closed nineteen divestiture
transactions in which we: (a) terminated or assigned the service agreement with our affiliated practices; (b) terminated or transferred all employees
providing services at these practice locations; (c) closed most of our regional business offices; (d) sold practice-based assets including fixed
assets, equipment and accounts receivable; and (e) terminated or transferred certain corporate employees who provided services primarily to the
management services business. The only matters remaining in our discontinued operations reserves on our consolidated financial statements relate to any
ongoing commitments that we have with respect to these discontinued business operations. These commitments primarily include ongoing office lease
obligations (to the extent we have been unable thus far to negotiate subleases or early lease terminations).
We do not own any real property. We lease space for
our corporate offices in Chicago, our ASCs and our optical services operations. As part of our management services business, we also continue to lease
the clinics of our affiliated providers. In some cases, these facilities are leased from related parties. See “Item 13 — Certain
Relationships and Related Transactions.” Our corporate offices in the Chicago metropolitan area currently consist of 8,150 square feet in downtown
Chicago, and 5,923 square feet in Des Plaines, Illinois.
The terms and conditions of our real property leases
vary. The forms of lease range from “modified triple net” to “gross” leases, with terms generally ranging from month-to-month to
ten years, with certain leases having multiple five-year renewal terms at our option. Generally, our ASCs and eye care clinics are located in medical
complexes, office buildings or free-standing buildings. The square footage of these offices range from 500 square feet to approximately 15,000 square
feet, and the terms of these leases have expiration dates ranging from May 1, 2005 to May 2015. Depending on state licensing and certificate of need
issues, relocating or expanding the space in any of our ASCs may require state regulatory approval.
14
The following is a list of our ASCs as of March 22,
2005:
Location
|
|
|
|
Number of
Operating
Rooms
|
|
Our Ownership
Percentage
|
|
Specialty
|
|
Colorado
Springs, CO |
|
|
|
|
2 |
|
|
|
51 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Altamonte
Springs, FL |
|
|
|
|
1 |
|
|
|
70 |
% |
|
|
Orthopedic |
|
|
|
|
|
|
|
|
|
Fort Lauderdale,
FL |
|
|
|
|
1 |
|
|
|
25 |
%(2) |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Lake Worth,
FL |
|
|
|
|
2 |
|
|
|
60 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Atlanta,
GA |
|
|
|
|
2 |
|
|
|
100 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Columbus,
GA |
|
|
|
|
3 |
|
|
|
100 |
% |
|
|
Multispecialty |
|
|
|
|
|
|
|
|
|
Chicago,
IL |
|
|
|
|
1 |
|
|
|
79.5 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Maryville,
IL |
|
|
|
|
1 |
|
|
|
80 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Oak Lawn,
IL |
|
|
|
|
4 |
|
|
|
51 |
% |
|
|
Multispecialty |
|
|
|
|
|
|
|
|
|
River Forest,
IL |
|
|
|
|
2 |
|
|
|
75 |
%(1) |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Merrillville,
IN |
|
|
|
|
2 |
|
|
|
51 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
New Albany,
IN |
|
|
|
|
2 |
|
|
|
70 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
New Albany,
IN |
|
|
|
|
2 |
|
|
|
36 |
%(2) |
|
|
Pain Management |
|
|
|
|
|
|
|
|
|
Overland Park,
KS |
|
|
|
|
3 |
|
|
|
51 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Thibodaux,
LA |
|
|
|
|
1 |
|
|
|
70 |
% |
|
|
Multispecialty |
|
|
|
|
|
|
|
|
|
Berkley,
MI |
|
|
|
|
2 |
|
|
|
51 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Florissant,
MO |
|
|
|
|
1 |
|
|
|
100 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Kansas City,
MO |
|
|
|
|
2 |
|
|
|
100 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Kansas City,
MO |
|
|
|
|
2 |
|
|
|
51 |
% |
|
|
Multispecialty |
|
|
|
|
|
|
|
|
|
St. Joseph,
MO |
|
|
|
|
1 |
|
|
|
80 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Bedford,
NH |
|
|
|
|
1 |
|
|
|
51 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Nashua,
NH |
|
|
|
|
2 |
|
|
|
51 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Chattanooga,
TN |
|
|
|
|
1 |
|
|
|
62 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Tyler,
TX |
|
|
|
|
2 |
|
|
|
60 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Richmond,
VA |
|
|
|
|
1 |
|
|
|
80 |
% |
|
|
Ophthalmology |
|
|
|
|
|
|
|
|
|
Madison,
WI |
|