Item 1 - Business
(a) General Development of Business
OptimumCare Corporation operates in two health care business segments. The first, contract management of hospital based behavioral health programs (the “Contract Management Segment”), is the original business of the Company and still represents approximately half of its business. The Company has entered a second business segment, temporary healthcare staffing (the “Temporary Healthcare Staffing Segment”), through acquisition of four temporary health care staffing companies in the last eighteen months.
Contract Management Segment
OptimumCare Corporation (the “Company”) was incorporated in California on November 25, 1986 and was reincorporated in Delaware on June 29, 1987. In mid-1987, the Company commenced the development and marketing of health care facility-based programs (“Programs”) to be managed by the Company primarily for the treatment of depression and certain other mental health disorders (“PsychPrograms”). After the Company obtains a contract for the establishment of one or more Programs at a host health care facility, the Company recruits and trains the staff needed to operate the Programs. Typically, the host health care facility provides a specified number of beds for the Program, as well as all other support services required for the operation of the Program, including nursing, dietary, housekeeping, billing and other administrative functions. The Company recruits and trains the staff to operate the Program. The Company’s staffing of a Program will usually include a medical director, a program director, a psychologist, a chief therapist and one or more counselors or social workers.
Contracts are individually negotiated with each host health care facility and include approximately 20 beds for the Company’s inpatient contract, and 40 to 50 chairs for the Company’s partial hospitalization and outpatient contracts. Generally, the Company and the host health care facility negotiate a management fee based on the scope of services provided by the Company, number of beds or chairs, rates charged and reimbursements received by the facility. The health care facility charges the patient on a daily basis in accordance with a fee schedule of prescribed rates, except where the insurer provides for payment which is limited to a maximum number of days per patient. The Company receives a fixed monthly fee that is negotiated in advance of the contract initiation. Such fees range from an average of $22,500 per month for consulting type contracts to $65-85,000 per month for inpatient and partial hospitalization program management contracts. In some cases, reimbursement of direct costs are also received. Certain contracts contain provisions which deny portions or all of the management fee should patient days be ultimately appealed and denied by the patient payer.
As of March 1, 2004, the Company had four contracts with three hospitals: one inpatient contract, two partial hospitalization contracts, and one management and marketing contract.
On February 12, 2004 the Company acquired 100% of the stock of Friendship Community Mental Health Center, Inc., (“Friendship”) an Arizona corporation. Friendship operates a freestanding community mental health center in Phoenix, Arizona. Friendship is licensed by Medicare to provide outpatient behavioral health services, and currently operates a 40 seat Program five days a week.
Temporary Healthcare Staffing Segment
The Company has acquired three (3) temporary healthcare staffing companies during the past eighteen months, and has continued to pursue other acquisition opportunities in this segment. During 2003, the Company acquired two health care staffing businesses and suspended operations at one of these acquired businesses (See Note 11 to Financial Statements). The Company intends to continue to selectively consider further acquisitions in the healthcare staffing area. The Company regularly evaluates all staffing operations on performance criteria such as achieving revenue and profitability goals.
The Company’s Temporary Healthcare Staffing Segment consists of two wholly owned subsidiaries, Associated Staffing Resources Inc. (“ASR”) and Heartline Inc. (“Heartline”). Both subsidiaries negotiate with clients on a site and job specific basis to provide skilled temporary workers at an hourly rate. ASR negotiates contracts with hospitals to provide staffing (primarily social workers and marriage and family counselors). The marriage and family counselors and social workers are employees of ASR. Heartline negotiates to provide registered nurses and other nursing related professionals to hospitals and clinics. Although both companies provide temporary staffers, they both have long-standing relationships with their existing client base and excellent reputations. While this is important, it is industry practice for hospitals experiencing staffing shortages to call on a number of staffing companies to fill the position. Generally, the first staffing company to call back with a qualified employee will fill the position. The predecessor company to ASR was in business in excess of 20 years as was Heartline when it was acquired in September 2003. Revenues from the Temporary Healthcare Staffing Segment approximate 58% of the Company’s consolidated 2003 revenues. Both ASR and Heartline are demonstrating internal growth of existing business. The staffing subsidiaries provide a solution to hospitals for short term staffing needs created by increases in patient care requirements or unavailability of permanent hospital staffers. A chronic staffing shortage is expected to worsen due to a decline in the number of nursing and social work professionals and increased demand, in some cases dictated by regulatory requirements. The success of the staffing subsidiaries is dependent on their ability to attract and retain qualified nurses and social workers.
As of March 1, 2004, ASR had approximately 60 active hospitals under contract to provide temporary staffing services, located primarily in the Los Angeles, California area. In addition, ASR has contracts with several hospitals in Northern California, primarily the Bay Area. As of March 1, 2004, Heartline had approximately 75 active hospitals under contract to provide temporary staffing services, located primarily in the Los Angeles, California area.
(b) Financial Information About Industry Segments
The Company’s Contract Management Segment develops, markets and operates contract Programs for behavioral health facilities. The Temporary Healthcare Staffing Segment subsidiaries negotiate with hospitals and other healthcare providers on a site and job specific basis to provide skilled temporary workers at an hourly rate. The following tables sets forth selected financial information about industry segments:
| Contract Programs |
Staffing Services |
Corporate |
Total |
|||||||||||||
Revenues |
||||||||||||||||
2003 |
$ | 2,675,239 | $ | 3,715,765 | $ | 5,171 | $ | 6,396,175 | ||||||||
2002 |
$ | 4,129,113 | $ | 1,237,167 | $ | 26,512 | $ | 5,392,792 | ||||||||
Net Income
(Loss) From Continuing Operations |
||||||||||||||||
2003 |
$ | 732,074 | $ | (272,677 | ) | $ | (1,352,652 | ) | $ | (549,281 | ) | |||||
2002 |
$ | 1,098,141 | $ | 34,728 | $ | (1,565,143 | ) | $ | (432,274 | ) | ||||||
Total Assets |
||||||||||||||||
2003 |
$ | 187,100 | $ | 634,667 | $ | 1,271,786 | $ | 2,093,553 | ||||||||
2002 |
$ | 340,119 | $ | 564,605 | $ | 1,849,398 | $ | 2,754,122 | ||||||||
(c) Narrative Description of the Business
Products
Contract Management Segment
OptimumCare’s Psych Programs (“Inpatient Program”) . The Inpatient Program is a medically-supervised psychiatric care program for short term intensive evaluation and treatment of patients with diagnoses ranging from acute depression to serious and chronic behavioral health problems, such as schizophrenia. Patients receive treatment 24 hours per day, which includes individual psychotherapy, medication regimen, group therapy, and discharge planning and placement, under the supervision of a psychiatrist in conjunction with a multi disciplinary team (registered nurses, licensed vocational nurses, social workers, activity therapists, medical physicians, and mental health workers). The Company estimates that the average length of stay for a patient in an Inpatient Program is approximately 3-10 days.
OptimumCare’s Partial Hospitalization Programs (“Partial Hospitalization”). Partial Hospitalization is a treatment approach that provides an alternative to inpatient treatment. It provides a daily program for a maximum of 20 hours per week, prescribed by psychiatrist. It is for voluntary patients with serious behavioral health disorders who require intensive and multi disciplinary treatment, which cannot be provided in a less intensive outpatient setting. As an alternative to inpatient treatment, it provides a more flexible, less costly and less restrictive form of treatment. Treatment consists of group therapy, activity therapy, medication monitoring, and individual therapy related to the specific needs of each client. The Program staff acts as a liaison in assisting the client in accessing resources within the community. The Company estimates that the average length of stay for a patient in a partial hospitalization program is approximately 3 weeks to 3 months.
OptimumCare’s Outpatient Services. Outpatient Services is a component of a partial hospitalization program intended for patients with long-term, chronic conditions. Treatment must, at a minimum, be designed to reduce or control the patient’s psychiatric symptoms so as to prevent relapse requiring a higher level of care. For patients with long-term, chronic conditions, control of symptoms and maintenance of a functional level to avoid further deterioration or hospitalization is an acceptable expectation of improvement. Outpatient Services is a voluntary program. Patients attend up to a maximum of 10 hours a week, as prescribed by a psychiatrist, under the direct supervision of the multi disciplinary team. Treatment includes individual and group therapy with a range of activities geared toward the individual needs of each patient. Length of stay varies, depending on the needs of the individual. Outpatient Services provides a third level in the continuum of care that enables patients to enter an OptimumCare program at an appropriate level, then advance as their treatment progresses to a point where they feel confident, productive and able to experience life fully with minimal intervention.
Contract Managment Staffing . The PsychProgram and Partial Hospitalization Programs are staffed by the Company with a medical director, a program manager, and in some cases, a psychologist, a chief therapist, and at least one therapist or social worker. The key staff members are the medical director and the program manager. The medical director is a licensed
psychiatrist who is a staff member of the host health care facility and is engaged as an independent contractor charged with the responsibility for overseeing the administration of the Program from a medical/regulatory compliance viewpoint. In addition to the medical director who is responsible for administering the clinical aspects of the contract, the Company often engages co-medical directors in each community in which a Program is located. These co-medical directors are licensed psychiatrists or psychologists. They provide administrative assistance to a Program and represent it at various professional activities in the local community. The co-medical directors are compensated at a fixed monthly rate, depending on the amount of time they commit to supporting the Company’s Programs. The Company’s employees and contractors at each program are subject to approval and pre-employment screening by the host health care facility. The Company has not experienced any difficulty in locating qualified medical directors from the hospital staff to affiliate with the Company’s Programs. The program manager is a full time employee of the Company and usually has completed either a bachelor’s or master’s degree program in psychology or social work. Program managers are officed at their respective Program’s facility.
Contract Operations . The Company provides a host health care facility with staff recruitment, a two-week pre-opening in-service nurse and hospital employee training program, program management, continuing education, community education, ongoing public relations and program quality assurance. The Company provides these training programs to the host health care facility as part of its contract management services. Typically, nursing, dietary, X-ray, laboratory, housekeeping, admissions and billing are the responsibility of the host health care facility.
The following is a list of current contracts:
| TYPE OF | CONTRACT | |||
| PROGRAM |
EXPIRATION DATE |
|||
CONTRACT #1
|
INPATIENT START DATE: |
NOVEMBER 2004(1) | ||
| 11/91 | ||||
CONTRACT #2
|
PARTIAL START DATE: |
OCTOBER 2004 | ||
| 10/92 | ||||
CONTRACT #3
|
PARTIAL START DATE: |
JUNE 30, 2004 | ||
| 9/95 | ||||
CONTRACT #4
|
MANAGEMENT AND MARKETING CONSULTING START DATE: |
JUNE 15, 2004 | ||
| 6/02 |
(1) Automatically extended for successive one year periods, unless terminated with 120 days notice. (2) Automatically extended for successive one year periods, unless terminated with 90 days notice.
Payment for Services (Contract Management) . Patients are screened by the host healthcare facility prior to admission. Screening procedures include verification of the existence and extent of insurance coverage. It is the host health care facility’s responsibility to bill and collect the fees charged to the patient for all program services. The Company in turn bills the host health facility for services provided at the specified contract rate. Generally, the Company bills the host health care facility within five days after the close of the month in which the
services were rendered. Except in the cases where the contracts provide for specific hold backs for ultimately denied days, the majority of the contracts do not specifically provide that the Company shall bear any risk of non-payment by the host healthcare facility. However, industry practice dictates that the Company acknowledge that a certain percentage of the fees will be uncollected by the host health care facility. Thus, accommodations are expected to be made on a case-by-case basis with each host health care facility (except where there is an express contractual provision which governs this issue) to offset some portion of Program patients’ bad debts experienced by the host health care facility.
Temporary Healthcare Staffing Services
Both ASR and Heartline allow hospitals to procure the expertise of qualified healthcare professionals on a temporary basis without incurring the burden of seeking, training and employing such individuals. Almost every healthcare facility has short term staffing needs caused by scheduling conflicts, employee absences, and chronic shortages of labor. This is particularly true of nursing professionals, many of whom like the freedom and flexibility allowed by working “temp”.
ASR and Heartline temporary staffing service workers are qualified healthcare professionals (primarily marriage and family counselors and social workers for ASR, and nursing professionals (RN’s, LVN’s, and some CNA’s) for Heartline). Both Heartline and ASR recruit individuals by limited advertising in certain trade journals. However, most of the employees are referred to the Company through other employees and professionals in the healthcare industry. Potential employees are carefully screened based on their prior experience. ASR and Heartline both accept only highly trained candidates since employees need to be able to respond in various environments, in a very independent manner.
ASR currently has approximately 60 active hospitals that contract for its services. Heartline currently has approximately 75 active hospitals under contract to provide temporary staffing services Contracts specify the rate per hour charged for services commensurate with the level of training of the employee. Contracts are typically for one year and are not mutually exclusive between the hospital and Heartline or ASR. The hospital supervisor engaged by Heartline and ASR approves the hours worked by employees through time sheets, which serve as the source documents for billing the hospital and paying the employee wages. Both Heartline and ASR have small administrative staffs and utilize a computer software application to perform these billing and payroll tasks.
Regulatory Matters
General. The Company’s business is affected by federal, state and local laws and regulations concerning, among other matters, mental health facilities and reimbursement for such services. These regulations impact the development and operation of mental health programs managed by the Company for its client hospitals. Licensing, certification, reimbursement and other applicable state and local government regulations vary by jurisdiction and are subject to periodic revision. The Company is not able to predict the content or impact of future changes in laws or regulations affecting the mental health sectors. Regulations that affect the Company relate to controlling the growth of health care facilities, requiring licensure of the host health care facility, requiring certification of the program at the host facility and controlling reimbursement for health care services. Licensure of facilities and certification of programs are state requirements, while certification for Medicare is a federal requirement. Compliance with the licensure and certification requirements is monitored by annual on-site inspections by representatives of the licensing agencies. Loss of licensure or Medicare certification by a host facility could result in termination of a contract with the Company.
Licensing and Certification. Hospital facilities are subject to various federal, state and local regulations, including facilities use, licensure and inspection requirements, and licensing or certification requirements of federal, state and local health agencies. Many states also have certificate of need laws intended to avoid the proliferation of unnecessary or under-utilized health care services and facilities. The mental health programs which the Company manages are also subject to licensure and certification requirements. The Company assists its client hospitals in obtaining required approvals for new programs. Some approval processes may lengthen the time required for programs to commence operations. In granting and renewing a facility’s licenses, governmental agencies generally consider, among other factors, community needs, the physical condition of the facility, the qualifications of administrative and professional staff, the quality of professional and other services, and the continuing compliance of such facility with the laws and regulations applicable to its operations. The Company believes that the mental health programs it manages and the facilities of the client hospitals used in the operation of such programs comply in all material respects with applicable licensing and certification requirements.
Medicare and Medicaid . Many of the hospitals with which the Company contracts have a large number of Medicare and Medicaid patients. It is unknown whether in the future other contracts or programs will be dependent on a disproportionate amount of Medicare/Medicaid patients. However, the Company has negotiated with these hospitals whereby it is paid a flat monthly fee with a hold back for days ultimately denied which exceed a specified threshold. Thus, except in its operation of the recently acquired community mental health center in Arizona, the Company is not directly dependent on Medicare or Medicaid for payment under its current contracts. The healthcare facilities rely upon payment from Medicare. The healthcare facilities are reimbursed their costs on an interim basis by Medicare fiscal intermediaries and the health care facilities submit annual cost reimbursement reports to the fiscal intermediaries for audit and payment reconciliation. The healthcare facilities seek reimbursement of the Company’s management fees from these fiscal intermediaries as part of their overall payments from Medicare. Revision of legislation related to Medicare/Medicaid reimbursement, if enacted, could have a negative effect on the revenues of the hospitals with which the Company contracts. Generally, the Company’s agreements with hospitals require the Company and the hospital to renegotiate rates in the event of a significant legislative change which affects the compensation received by the hospital. It is uncertain at this time to what extent the Company’s revenues may be impacted by changes to Medicare/Medicaid policies.
The Medicaid program is a joint federal-state cooperative arrangement established for the purpose of enabling states to furnish medical assistance on behalf of aged, blind, or disabled individuals, or members of families with dependent children, whose income and resources are insufficient to meet the costs of necessary medical services. The federal and state governments share the costs. The Secretary of Health and Human Services has primary federal responsibility for administering the Medicaid program that has been delegated to CMS. States are not required to participate in the Medicaid program. States that choose to participate, however, must administer their Medicaid programs in accordance with federal law, the implementing regulations and policies of the Secretary, and their approved state plans. The federal Medicaid statute establishes minimum standards for state plans but states have significant latitude, within these standards, to determine the mix of services and structure of their state Medicaid programs.
Federal law contains certain provisions designed to ensure that services rendered by hospitals to Medicare and Medicaid patients are medically necessary and meet professionally recognized standards. These provisions include a requirement that admissions of Medicare and Medicaid patients to hospitals must be reviewed in a timely manner to determine the medical necessity of the admissions. In addition, these provisions state that a hospital may be required by
the federal government to reimburse the government for the cost of Medicare-reimbursed services that are determined by a peer review organization to have been medically unnecessary. As part of its on-going regulatory and regulatory compliance program initiatives, the Company and its client hospitals have developed and implemented quality assurance programs and procedures for utilization review and retrospective patient care evaluation intended to meet these requirements.
Provider Based Facilities . Medicare is part of a federal health program which is administered by the U.S. Department of Health and Human Services which has established Centers for Medicare and Medicaid Services (“CMS”) formerly known as Health Care Financing Administration (“HCFA”) to promulgate rules and regulations governing Medicare and the benefits associated therewith. In April 2000, the U.S. Department of Health and Human Services (“HHS”) adopted new rules requiring a CMS determination that a facility has provider-based status before a provider can bill Medicare for the services rendered at the facility. On August 1, 2002, CMS issued amendments to the provider based regulations, which in addition to requirements applicable to all provider based facilities, provide specific requirements for provider based status of “off-campus” locations and additional specific requirements applicable to “off-campus” locations operational under a management contract. All of the programs currently managed by the Company are treated as “provider based” programs by CMS. This designation is important since partial hospitalization services are covered only when furnished by a “provider,” i.e., a hospital. In general, entities will be considered provider-based if they are operated under the same license and common ownership and control, under the main provider’s direct day-to-day supervision, clinically and financially integrated with the main provider, held out to the public as part of the main provider, and located near the main provider and serve the same patient population. The Company believes that the programs it currently manages will continue to be treated as “provider- based.” To the extent the partial hospitalization programs are not located in a site which is deemed by CMS to be “provider-based,” there would not be Medicare coverage for the services furnished at the site under Medicare’s partial hospitalization benefit.
Prospective Payment System . During August 2000, the Company implemented a prospective payment system for all outpatient hospital services. The amount paid by Medicare is a per diem fee adjusted by a geographic wage index, less a “coinsurance” of twenty percent (20%) of the charges which is ordinarily to be paid by the patient. The coinsurance must be charged to the patient by the provider unless the patient is indigent. If the patient is indigent, or if the patient does not pay the provider the billed coinsurance amounts after reasonable collection efforts, the Medicare program will in some instances pay these amounts as allowable Medicare bad debts. Interim payments under the prospective payment system are currently being phased in over a three year period. A portion of the per diem fee is actually computed on a cost to charge formula. Aggregate reimbursements to most of the healthcare facilities with which the Company contracts have not materially changed from those previously received prior to the implementation of the prospective payment system.
To the extent that healthcare facilities which contract with the Company for management services suffer material losses in Medicare payments, there is a greater risk to the Company of non-payment, and a risk that the healthcare facilities will terminate or not renew their contracts with the Company. Thus, even though the Company does not submit claims to Medicare, it may be adversely affected by reductions in Medicare payments or other Medicare policies.
Certificate of Need Laws . Certificate of need (“CON”) laws in some states require approval for capital expenditures in excess of certain threshold amounts, expansion of bed capacity or facilities, acquisition of medical equipment or institution of new services. If a CON must be obtained, it may take up to 12 months to do so, and in some instances longer, depending
upon the state involved and whether the application is contested by a competitor or the state agency. CON’s usually are issued for a specified maximum expenditure and require implementation of the proposed improvement within a specified period of time. Certain states, including California, Texas, Utah, Colorado and Arizona, have enacted legislation repealing CON requirements for the construction of new health care facilities, the expansion of existing facilities and the institution of new services. Some states have enacted or have under legislative consideration “sunset” provisions which require the review, modification or deletion of these statutes when no longer needed. The Company is unable to predict whether such legislative proposals will be enacted but believes that the elimination of CON requirements positively impacts its business.
JCAHO Accreditation . The Joint Commission on the Accreditation of Healthcare Organizations (“JCAHO”), at a facility’s request, participates in the periodic surveys conducted by state and local health agencies to ensure continuous compliance with all licensing requirements by health care facilities. JCAHO accreditation satisfies certain of the certification requirements for participation in the Medicare and Medicaid programs. A facility found to comply substantially with JCAHO standards receives accreditation. A patient’s choice of a treatment facility may be affected by JCAHO accreditation considerations because most third-party payers limit coverage to services provided by an accredited facility. All of the hospitals currently under contract with the Company have received JCAHO accreditation.
Patient Referral Laws. Various state and federal laws regulate the relationships between health care providers and referral sources, including federal and state fraud and abuse laws prohibiting individuals and entities from knowingly and willfully offering, paying, soliciting or receiving remuneration in order to induce referrals for the furnishing of health care services or items. These federal laws generally apply only to referrals for items or services reimbursed under the Medicare or Medicaid programs or any state health care program. The objective of these laws is generally to ensure that the purpose of a referral is quality of needed care and not monetary gain by the referring party. Violations of such laws can result in felony criminal penalties, civil sanctions and exclusion from participation in the Medicare and Medicaid programs.
Under a significant number of its management contracts, the Company receives a variable fee related in part to average daily patient census or number of admissions or discharges in a given period for the mental health program. In addition, the Company has entered into agreements with physicians to serve as medical directors at the mental health programs and facilities managed by the Company, which generally provide for payments to such persons by the Company as compensation for their administrative services. These medical directors also generally provide professional services at such programs and facilities. In 1991, regulations were issued under federal fraud and abuse laws creating certain “safe harbors” for relationships between health care providers and referral sources. Any relationship that satisfies the terms of the safe harbor is considered permitted. Failure to satisfy a safe harbor, however, does not mean that the relationship is prohibited. Although the contracts and relationships between the Company and its client hospitals and medical directors are not within the safe harbors, the Company believes that such contracts and relationships comply with applicable laws. There can be no assurance, however, that the Company’s activities, while not challenged thus far, will not be challenged by regulatory authorities in the future.
Stark II . The Omnibus Budget Reconciliation Act of 1993 contains provisions (“Stark II”) prohibiting physicians from referring Medicare and Medicaid patients to an entity with which the physician has a “financial relationship” for the furnishing of a list of “designated health services” including physical therapy, occupational therapy, home health services, and others. If a financial relationship exists, the entity is generally prohibited from claiming payment
for such services under the Medicare or Medicaid programs. Compensation arrangements are generally exempted from the Stark provisions if, among other things, the compensation to be paid is set in advance, does not exceed fair market value and is not determined in a manner that takes into account the volume or value of any referrals or other business generated between the parties.
Improper Billing . Other provisions in the Social Security Act authorize other penalties, including exclusion from participation in Medicare and Medicaid, for various billing-related offenses. HHS can also initiate permissive exclusion actions for such improper billing practices as submitting claims “substantially in excess” of the provider’s usual costs or charges, failure to disclose ownership and officers, or failure to disclose subcontractors and suppliers. Executive Order 12549 prohibits any corporation or facility from participating in federal contracts if it or its principals have been disbarred, suspended or are ineligible, or have been voluntarily excluded, from participating in federal contracts. A principal has been defined as an officer, director, owner, partner, key employee or other person with primary management or supervisory responsibilities.
HIPAA . Additionally “HIPAA” granted expanded enforcement authority to HHS and the U.S. Department of Justice (“DOJ”), and provided enhanced resources to support the activities and responsibilities of the Office of Inspector General (“OIG”) of HHS and DOJ by authorizing large increases in funding for investigating fraud and abuse violations relating to health care delivery and payment. On January 24, 1997, the OIG issued guidelines for the Fraud and Abuse Control Program as mandated by the Act, and on February 19, 1997 issued an interim final rule establishing procedures for seeking advisory opinions on the application on the anti-kickback statute and certain other fraud and abuse laws. The 1997 Balanced Budget Act also includes numerous health fraud provisions, including: new exclusion authority for the transfer of ownership or control interest in an entity to an immediate family or household member in anticipation of, or following, a conviction, assessment, or exclusion; increased mandatory exclusion periods for multiple health fraud convictions, including permanent exclusion for those convicted of three health care-related crimes; authority of the Secretary to refuse to enter into Medicare agreements with convicted felons; new civil money penalties for contracting with an excluded provider or violating the Medicare and Medicaid antikickback statute; new surety bond and information disclosure requirements for certain providers and suppliers; and an expansion of the mandatory and permissive exclusions added by HIPAA to any federal health care program (other than the Federal Employees Health Benefits Program).
Government Owned Facilities . Some of the hospitals with which ASR and Heartline contract are government owned and require various levels of government approval. There is no indication that this issue presents a risk to ASR or Heartline’s ability to seek or obtain these types of contracts.
Practice of Medicine . The laws of various states in which the Company may choose to operate, including California, generally prevent corporations from engaging in the practice of medicine. These laws (e.g., Section 2052 of the California Business and Professions Code), as well as applicable case law, were enacted to protect the public from the rendering of unnecessary medical or other services for treatment of the ill. Although the Company has not obtained a legal opinion, it believes that the establishment and operation of Programs will not cause it to be engaged in the “practice of medicine” as that term is used in such laws and regulations. These laws and regulations are subject to interpretation and, accordingly, the issue is not free from doubt. Since the Company has not sought or obtained any rulings, there can be no assurance that state authorities or courts will not determine that the Company is engaged in the unauthorized practice of medicine. If such a determination is made and is not overturned, the Company would have to terminate its operations in that state.
The Company’s medical directors are engaged to provide administrative services, including but not limited to planning the clinical program, supervising the clinical staff, establishing standards of professional care, and advising the Company and staff on questions of policy. The co-medical directors assist the medical directors in performing their duties. Although the Company has not obtained a legal opinion, it believes that the proposed agreements between the Company and its medical and co-medical directors do not violate any fee-sharing prohibitions. The federal prohibition, as it relates to the Medicare program, is found at 42 U.S.C. 1320a-7b. Such prohibitions are found in Section 650 of the California Business and Professional Code and Section 445 of the California Health and Safety Code, as well as comparable statutes in other states. However, future judicial, legislative or administrative interpretations of these arrangements could prohibit the Company from hiring professionals which could have a materially adverse effect on the Company.
Future Legislation . The Company anticipates that additional legislation may be adopted focusing on controlling health care costs and improving access to medical services for persons who are uninsured. Such legislation may also affect the amount that health care providers can charge for services. The Company believes that it is well positioned to respond to these changes and that it is likely that the Company will experience a lesser impact than other companies in the health care industry based on the fact that the Company has already focused its efforts on shortening patient stays and has historically provided a greater percentage of its services to Medicaid patients than have many of its competitors. Given the recent political mandate for health care reform, it appears likely that health care cost containment will occur. However, legislation has begun to recognize the need for placing mental health illness on par with other physical ailments. For example, federal legislation effective in 1998, (the Kennedy-Kassebaum bill), mandates parity with other reimbursable medical services for those who receive behavioral health care. This law raised the lifetime cap from the current $50,000 level to $1 million. The Company is practiced in administrating “managed care type” programs and is familiar with the pressures of improving productivity and reducing costs.
Marketing
The Company’s marketing efforts for the Contract Management Segment are primarily directed toward increasing the number of management contracts by either the takeover of existing programs operated by others or the establishment of new Partial Hospitalization or Psych Programs in geographically desirable areas. The Company believes that its ability to secure new contracts is based on its reputation as a quality provider coupled with its history of low length of patient stays resulting in less uncompensated care. The Company is continuing to make efforts to expand the number of its operational contract programs and has contracted with a consulting firm managed by one of the Company’s previous directors to pursue an aggressive marketing program.
Sales calls are primarily directed at health care facilities which may be experiencing a low or declining patient census and facilities in geographically desirable areas. After a contract is obtained, the Company prepares a detailed marketing development strategy aimed at attracting patients to the Programs.
The Program director for each Psych Program at the host health care facility develops a local plan, in conjunction with the Program community liaison. The strategy is to increase public awareness of the Program. All Programs share the goal that is consistent with the Company’s overall plan. The host hospital’s administrative and medical staffs are also encouraged to participate in community relations activities.
The Company emphasizes direct contact with psychiatrists, psychologists and other licensed professionals because these individuals motivate potential patients to seek inpatient treatment for their mental health. Licensed Community Care Residential Facilities are also targeted because the residents often require inpatient psychiatric treatment. The Company’s approach emphasizes the care giver at these residential facilities to become involved in one-on-one communication with the professionals who will provide patient referrals. These professionals and care givers are invited to the Company sponsored community relations activities, speaker programs and continuing education seminars.
Marketing efforts of ASR and Heartline for the Temporary Healthcare Staffing Segment is detected at hospitals through advertising in various trade journals and publications primarily in the Los Angeles, California area. However, most of the contracted hospitals are referred to the Company by other healthcare professionals.
Patents and Trademarks
The Company holds a federal service mark, Registration #1628745, for its trade name “OptimumCare.” The Company has marketed its programs under the names “OptimumCare PsychProgram” and “OptimumCare Treatment Program.”
Seasonality
The Company acknowledges that contract management patient volume appears to be susceptible to some seasonal variation. Census tends to substantially decrease near certain holidays, particularly during the fourth quarter, where individuals are more reluctant to hospitalize family members. However, all of the Company’s contracts are based on fixed monthly management fees, which eliminate seasonal risk.
Working Capital Items
The Company expects to experience an initial delay of up to 90 days in receipt of revenues after each Program is opened due to the normal processing time for the billing/payment cycle of the host health care facilities. The Temporary Staffing division experiences delays of between 30-90 days from date of service to receipt of payment.
Dependence on a Few Customers
In its Contract Management Segment, the Company presently has four Contracts operating with three hospitals. The Company has a significant amount of variable expenses associated with the production of its revenues, although certain fixed costs do exist. To that end, the loss of a contract customer has a significant adverse effect on the Company’s profit margin. In contrast, in its Temporary Healthcare Staffing Segment, the Staffing subsidiaries have a large number of small contracts with various hospitals but one customer (Veteran’s Administration/Homeless Center) represents eleven percent (11%) of total staffing revenues. This mitigates some of the risk associated with the Company’s dependence on a few contracts in its Contract Management Segment.
Competition
In its Contract Management Segment, the Company competes with other health care management companies for contracts with acute care hospitals. Also, the Company’s Programs will compete for patients with the programs of other hospitals and other health care facilities. The success of the Company’s Programs is also dependent on its ability to establish relationships with sources of patient referrals.
In this segment, the Company’s principal competitors include Horizon Health Services. In addition, some health maintenance organizations (“HMOs”) offer competing programs; however, the HMO-owned hospitals typically do not provide inpatient psychiatric services, or coverage for these services. Most HMOs also do not provide programs for partial hospitalization or substance abuse, but often provide coverage for these programs, usually at a reduced rate.
Other health care facilities offer comparable programs which compete with the Company’s Programs in each service area. The Company believes, however, that in general its community awareness efforts are primarily effective within a ten (10) mile radius around the host hospital and that patients outside such radius are not directly affected by such advertising unless their personal physician has admitting privileges and recommends the Company’s Program at that host hospital.
The Company believes that the principal competitive factors in obtaining contracts with health care facilities are experience, reputation for quality programs, the availability of program support services and price. The primary competitive factors in attracting referral sources and patients are reputation, record of success, quality of care and location and scope of services offered by a host health care facility. The Company implements active promotional programs and believes it is competitive in attracting referral sources and patients based on these factors.
Competition among temporary healthcare staffing companies is generally based on the quality of the personnel provided, availability to fill shifts, responsiveness and price. Hospitals and clinics require qualified personnel nurses to fill staff vacancies and to allow for flexibility and efficiency due to change in the number of patients being treated and their acuity. A hospital’s or clinic’s success is predicated, in part, on the ability to staff quality healthcare personnel. In the Temporary Healthcare Staffing Segment, the Company competes with other staffing companies for contracts with health care facilities. Principal competitors in the industry are Medical Staffing Network Holdings, Cross Country Inc., Delta-T, Intellistaff, and AMN Healthcare Services, Inc. These companies have significantly greater financial and other resources than the Company. However, much of the business is based on referrals, reputation and geographic area. As such, ASR believes that it has no significant competitor in the Los Angeles area. Heartline competes with a number of generally small nurse registry and staffing companies in the Los Angeles area.
Employees
As of March 1, 2004, the Company employed approximately 45 persons full-time and 57 persons part-time. Those figures do not include physicians and psychiatrists who are medical directors of the Company’s Programs and not Company employees.
Item 1A – Cautionary Statement Regarding Future Results, Forward-Looking Information And Certain Important Factors
The Company’s contract management business depends on a few customer contracts, the loss of which could negatively affect the Company’s operating results.
The Company currently has four contracts with three hospitals to provide behavioral healthcare services. These contracts provided approximately 42% of the Company’s consolidated revenue for the fiscal year ended December 31, 2003. In general, the terms of each contract are for one-year periods and are automatically renewable for additional one-year periods
unless terminated by either party. Loss of all of these contracts would, and loss of any one of these contracts could, have a material adverse effect on the Company.
The Company’s revenues and profitability may be negatively affected by cuts in government spending for healthcare programs.
A significant portion of the Company’s revenue is indirectly derived from federal, state and local governmental agencies, including state Medicaid programs, which provide reimbursements and other funding to the health care facilities that contract with the Company for behavioral healthcare services. Reimbursement rates vary from state to state, are subject to periodic negotiation and may limit the Company’s ability to maintain or increase the rates it charges to health care facilities for servi
