| Page | |||
| PART I | |||
| Item 1. | |||
| Item 1A. | |||
| Item 1B. | |||
| Item 2. | |||
| Item 3. | |||
| Item 4. | |||
| PART II | |||
| Item 5. | |||
| Item 6. | |||
| Item 7. | |||
| Item 8. | |||
| Item 9. | |||
| Item 9A. | |||
| Item 9B. | |||
| PART III | |||
| Item 10. | |||
| Item 11. | |||
| Item 12. | |||
| Item 13. | |||
| Item 14. | |||
| PART IV | |||
| Item 15. | |||
| Item 16. | |||
FORWARD-LOOKING STATEMENTS
We make statements in this report that are considered to be forward-looking statements within the meaning given such term under Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements contain forward-looking information relating to the financial condition, results of operations, plans, objectives, future performance and business of our Company. These statements (often using words such as “believes”, “expects”, “intends”, “plans”, “appear”, “should” and similar words) involve risks and uncertainties that could cause actual results to differ materially from those we project. Included among such statements are those relating to opening clinics, availability of personnel and the reimbursement environment. The forward-looking statements are based on our current views and assumptions, and actual results could differ materially from those anticipated in such forward-looking statements as a result of certain risks, uncertainties, and factors, which include, but are not limited to:
the multiple effects of the impact of public health crises and epidemics/pandemics, such as the novel strain of COVID-19 (coronavirus)and its variants, for which the total financial magnitude cannot be currently estimated;
changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certification and/or enrollment status, including Medicare reimbursement reductions.status;
revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction;
compliance with federal and state laws and regulations relating to the privacy of individually identifiable patient information, and associated fines and penalties for failure to comply;
competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and other intangible assets;
the impact of COVID-19 related vaccination and/or testing mandates at the federal, state and/or local level, which could have an adverse impact on staffing, revenue, costs and the results of operations:
changes in reimbursement rates or payment methods fromas the result of government enacted national healthcare reform;
business and regulatory conditions including federal and state regulations;
governmental and other third party payors including government agencies,payor inspections, reviews, investigations and changesaudits, which may result in the deductiblessanctions or reputational harm and co-pays owed by patients;increased costs;
revenue and earnings expectations;
legal actions, which could subject us to increased operating costs and uninsured liabilities;
general economic conditions;
availability and cost of qualified physical therapists;
personnel productivity and retaining key personnel;
competitive economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and other intangible assets;
acquisitions, purchase of non-controlling interests (minority interests) and the successful integration of the operations of the acquired businesses;businesses;
impact on the business and cash reserves resulting from retirement or resignation of key partners and resulting purchase of their non-controlling interest (minority interests);
maintaining our information technology systems with adequate safeguards to protect against cyber-attacks;
a security breach of our or our third party vendors’ information technology systems may subject us to potential legal action and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 of the Health Information Technology for Economic and Clinical Health Act;
maintaining clients for which we perform management and other services, as a breach or termination of those contractual arrangements by such clients could cause operating results to be less than expected;
maintaining adequate internal controls;controls;
maintaining necessary insurance coverage;
availability, terms, and use of capital; and
weather and other seasonal factors.
Many factors are beyond our control. Given these uncertainties, you should not place undue reliance on our forward-looking statements. Please see the other sections of this report and our other periodic reports filed with the Securities and Exchange Commission (the “SEC”) for more information on these factors. Our forward-looking statements represent our estimates and assumptions only as of the date of this report. Except as required by law, we are under no obligation to update any forward-looking statement, regardless of the reason the statement may no longer be accurate.
PART I
| ITEM 1. | BUSINESS. |
GENERAL
U.S. Physical Therapy, Inc. and subsidiaries (“we”, “us”, “our” or the “Company”), operates its business through two reportable business segments. Our reportable segments include the physical therapy operations segment and the industrial injury prevention services segment. Our Company, through itsThrough our subsidiaries, operateswe operate outpatient physical therapy clinics that provide pre-and post-operative care for a variety of orthopedic-related disorders and sports-related injuries, treatment for neurological-related injuries and rehabilitation of injured workers. We primarily operate through subsidiary clinic partnerships in which we generally own a 1% general partnership interest and a 10% to 99% limited partnership interest and the managing therapist(s) of the clinics owns the remaining limited partnership interest in the majority of the clinics (hereinafter referred to as “Clinic Partnerships”). To a lesser extent, we operate some clinics through wholly-owned subsidiaries under profit sharing arrangements with therapists (hereinafter referred to as “Wholly-Owned Facilities”). We also have a majority interest in a company businesses which is aare leading providers of industrial injury prevention services. Services provided in this business include onsite injury prevention and rehabilitation, performance optimization, post-offer employment testing, functional capacity evaluations and ergonomic assessments. The majority of these services are contracted with and paid for directly by employers, including a number of Fortune 500 companies. Other clients include large insurers and their contractors. These services are performed through Industrial Sports Medicine Professionals, consisting of both physical therapists and specialized certified athletic trainers (ATCs).
We were re-incorporated in 39 states. The average ageApril 1992 under the laws of the 554 clinicsState of Nevada and have operating subsidiaries organized in operation at December 31, 2020 was 11.03 years. Our highest concentration of clinics arevarious states in the following states:form of limited partnerships, limited liability companies and wholly-owned corporations. This description of our business should be read in conjunction with our financial statements and the related notes contained in Item 8 in this Annual Report on Form 10-K. Our principal executive offices are located at 1300 West Sam Houston Parkway South, Suite 300, Houston, Texas Tennessee, Michigan, Virginia, Florida, Oregon, Maryland, Georgia, Pennsylvania, Arizona, Idaho and Missouri. In addition to our 554 clinics, at December 31, 2020, we also managed 38 physical therapy practices for unrelated physician groups and hospitals, and operated the industrial injury prevention business, as described below.77042. Our telephone number is (713) 297-7000. Our website is www.usph.com.
Acquisitions of Businesses and Acquired Interests
During the last three years we completed the following acquisitions:acquisitions of seven clinic practices and three industrial injury prevention services businesses as detailed below.
| Acquisition | Date | % Interest Acquired | Number of Clinics | Date | % Interest Acquired | Number of Clinics | ||||||
| December 2021 Acquisition | December 31, 2021 | 75% | 3 | |||||||||
| November 2021 Acquisition | November 30, 2021 | 70% | * | |||||||||
| September 2021 Acquisition | September 30, 2021 | 100% | * | |||||||||
| June 2021 Acquisition | June 30, 2021 | 65% | 8 | |||||||||
| March 2021 Acquisition | March 31, 2021 | 70% | 6 | |||||||||
| November 2020 Acquisition | November 30, 2020 | 75% | 3 | November 30, 2020 | 75% | 3 | ||||||
| September 2020 Acquisition | September 30, 2020 | 70% | * | September 30, 2020 | 70% | ** | ||||||
| February 2020 Acquisition | February 27, 2020 | 65% ** | 4 | February 27, 2020 | 65% *** | 4 | ||||||
| September 2019 Acquisition | September 30, 2019 | 67% | 11 | September 30, 2019 | 67% | 11 | ||||||
| August 2018 Acquisition | August 31, 2018 | 70% | 4 | |||||||||
| April 2019 Acquisition | April 11, 2019 | 100% | * | |||||||||
| * | Industrial injury prevention services business |
| ** | The business includes six management |
| *** | The four clinics are in four separate partnerships. The Company's interest in the four partnerships range from 10.0% to 83.8%, with an overall 65.0% based on the initial purchase transaction. |
We primarily operate through subsidiary clinic partnerships in which we generally own a 1% general partnership interest and a 10% to 99% limited partnership interest and the above acquisitions, in March 2017, we acquired a 55%managing therapist(s) of the clinics owns the remaining limited partnership interest in the initial industrial injury prevention business. On April 30, 2018,majority of the clinics (hereinafter referred to as “Clinic Partnerships”). To a lesser extent, we acquired a 65% interest in another business in the industrial injury prevention sector and in connectionoperate some clinics through wholly-owned subsidiaries under profit sharing arrangements with the closing we combined the two businesses. After the combination, we owned a 59.45% interest in the combined business, Briotix Health, Limited Partnership (“Briotix Health”). On April 11, 2019, we acquired a third company that is a provider of industrial injury prevention services. This acquired company specializes in delivering injury prevention and care, post offer employment testing, functional capacity evaluations and return-to-work services. It performs these services across a network in 45 states including onsite at eleven client locations. After the acquisition, the business was then combined with Briotix Health increasing our ownership position in Briotixtherapists (hereinafter referred to approximately 76.0%as “Wholly-Owned Facilities”).
We continue to seek to attract for employment physical therapists who have established relationships with physicians and other referral sources by offering these therapists a competitive salary and incentives based on the profitability of the clinic that they manage. For multi-site clinic practices in which a controlling interest is acquired by us, the prior owners typically continue on as employees to manage the clinic operations, retaining a non-controlling ownership interest in the clinics and receiving a competitive salary for managing the clinic operations. In addition, we have developed satellite clinic facilities as part of existing Clinic Partnershipsand Wholly-Owned Facilities, with the result that a substantial number of Clinic Partnerships and Wholly-Owned Facilities operate more than one clinic location. During 2021,2022, we intend to continue to acquire multi-clinic practices and to continue to develop outpatient physical therapy clinics as satellites in existing partnerships, along with increasing our patient volume through marketing and new programs.
Therapists at our clinics initially perform a comprehensive evaluation of each patient, which is then followed by a treatment plan specific to the injury as prescribed by the patient’s physician. The treatment plan may include a number of procedures, including therapeutic exercise, manual therapy techniques, ultrasound, electrical stimulation, hot packs, iontophoresis, education on management of daily life skills and home exercise programs. A clinic’s business primarily comes from referrals by local physicians. The principal sources of payment for the clinics’ services are managed care programs, commercial health insurance, Medicare/Medicaid and workers’ compensation insurance.
During the year ended December 31, 2021, we sold two clinics. The aggregate sales price was $0.1 million. During the year ended December 31, 2020, we sold 14 previously closed clinics. The aggregate sales price was $1.1 million, of which $0.7 million was paid in conjunction with our financial statementscash and $0.4 million in a note receivable payable in two equal installments of principal and any accrued interest. The first payment was received in June 2021 and the related notes containednext payment is due on June 15, 2022.
At December 31, 2021, we operated 591 clinics in Item 839 states. Our highest concentration of clinics are in this Annual Reportthe following states: Texas, Tennessee, Michigan, Virginia, Florida, Oregon, Maryland, Georgia, Pennsylvania, Arizona, Idaho, Missouri and South Carolina. In addition to our 591 clinics, on Form 10-K. Our principal executive offices are located at 1300 West Sam Houston Parkway South, Suite 300, Houston, Texas 77042. Our telephone number is (713) 297-7000. Our website is www.usph.com.December 31, 2021, we also managed 35 physical therapy practices for unrelated physician groups and hospitals.
Most of our clinics are operated as Clinic Partnerships in which we own the general partnership interest and a majority of the limited partnership interests. The managing healthcare practitioner of the clinics usually owns a portion of the limited partnership interests. Generally, the therapist partners have no interest in the net losses of Clinic Partnerships, except to the extent of their capital accounts. Since we also develop satellite clinic facilities of existing clinics, most Clinic Partnerships consist of more than one clinic location. As of December 31, 2020,2021, through wholly-owned subsidiaries, we owned a 1% general partnership interest in all the Clinic Partnerships. Our limited partnership interests range from 10% to 99% in the Clinic Partnerships. For the vast majority of the Clinic Partnerships, the managing healthcare practitioner is a physical therapist who owns the remaining limited partnership interest in the Clinic Partnership.
For our Clinic Partnership agreements related to those in which we acquired a majority interest, generally, the prior management continues to own a 10% to 50% interest.
Typically, each therapist partner or director, including those employed by Clinic Partnerships in which we acquired a majority interest, enters into an employment agreement for a term of up to five years with their Clinic Partnership. Each agreement typically provides for a covenant not to compete during the period of his or her employment and for up to two years thereafter. Under each employment agreement, the therapist partner receives a base salary and may receive a bonus based on the net revenues or profits generated by their Clinic Partnership or specific clinic. In the case of Clinic Partnerships, the therapist partner receives earnings distributions based upon their ownership interest. Upon termination of employment, we typically have the right but not the obligation, to purchase the therapist’s partnership interest in de novo Clinic Partnerships. Partnerships; for those Clinic Partnerships we created in connection with an acquisition, our partner also has the right to cause us to purchase their interest upon termination of their employment.
In connection with most of our acquired clinics, in the event that a limited minority partner’s employment ceases and certain requirements are met as detailed in the respective limited partnership agreements, we have a call right (the “Call Right”) and the selling entity or individual has a put right (the “Put Right”) with respect to the partner’s limited partnership interests. The Put Right and the Call Right do not expire, even upon an individual partner’s death, and contain no mandatory redemption feature. The purchase price of the partner’s limited partnership interest upon exercise of the Put Right or the Call Right is calculated at a predetermined multiple of earnings performance as detailed in the respective agreements.
Each Clinic Partnership maintains an independent local identity, while at the same time enjoying the benefits of national purchasing, negotiated third-party payor contracts, centralized support services and management practices. Under a management agreement, one of our subsidiaries provides a variety of support services to each clinic, including supervision of site selection, construction, clinic design and equipment selection, establishment of accounting systems and billing procedures and training of office support personnel, processing of accounts payable, operational direction, auditing of regulatory compliance, payroll, benefits administration, accounting services, legal services, quality assurance and marketing support.
Our typical clinic occupies 1,000 to 7,000 square feet of leased space in an office building or shopping center. There are 1417 clinics occupying space in the range of over 7,000 square feet to 13,500.square13,500 square feet. We attempt to lease ground level space for patient ease of access to our clinics.
Typical minimum staff at a clinic consists of a licensed physical therapist and an office manager. As patient visits grow, staffing may also include additional physical therapists, occupational therapists, therapy assistants, aides, exercise physiologists, athletic trainers and office personnel. Therapy services are performed under the supervision of a licensed therapist.
We provide services at our clinics on an outpatient basis. Patients are usually treated for approximately one hour per day, two to three times a week, typically for two to six weeks. We generally charge for treatment on a per procedure basis. Medicare patients are charged based on prescribed time increments and Medicare billing standards. In addition, our clinics will develop, when appropriate, individual maintenance and self-management exercise programs to be continued after treatment. We continually assess the potential for developing new services and expanding the methods of providing our existing services in the most efficient manner while providing high quality patient care.
Factors Influencing Demand For Physical Therapy Services provided in the industrial injury prevention services segment include onsite injury prevention and rehabilitation, performance optimization, post offer employment testing, functional capacity evaluations, and ergonomic assessments. The majority of these services are contracted with and paid for directly by employers, including a number of Fortune 500 companies. Other clients include large insurers and their contractors. We perform these services through Industrial Sports Medicine Professionals, consisting of both physical therapists and specialized certified athletic trainers (ATCs).
We believe that the following factors, among others, influence the growth of outpatient physical therapy services:
Economic Benefits of Therapy Services. Purchasers and providers of healthcare services, such as insurance companies, healthmaintenance organizations, businesses and industries, continuously seek cost savings for traditional healthcare services. We believe that our therapy services provide a cost-effective way to prevent short-term disabilities from becoming chronic conditions, to help avoid invasive procedures, to speed recovery from surgery and musculoskeletal injuries and eliminate or minimize the need for opioids.
Earlier Hospital Discharge. Changes in health insurance reimbursement, both public and private, have encouraged the earlier discharge of patients to reduce costs. We believe that early hospital discharge practices foster greater demand for outpatient physical therapy services.
Aging Population. In general, the elderly population has a greater incidence of disability compared to the population as a whole. As this segment of the population continues to grow, we believe that demand for rehabilitation services will expand.
Increase in Obesity. Two of every three American men are considered to be overweight or obese and the rate continues to grow. The strain on a person’s body can be significant. Physical therapy services help the obese become more active and fit by teaching them how to move in ways that are pain free.
We focus our marketing efforts primarily on physicians, including orthopedic surgeons, neurosurgeons, physiatrists, internal medicine physicians, podiatrists, occupational medicine physicians and general practitioners. In marketing to the physician community, we emphasize our commitment to quality patient care and regular communication with physicians regarding patient progress. We employ personnel to assist clinic directors in developing and implementing marketing plans for the physician community and to assist in establishing relationships with health maintenance organizations, preferred provider organizations, case managers and insurance companies.
Industrial Injury Prevention Services
Services provided in the industrial injury prevention services segment include onsite injury prevention and rehabilitation, performance optimization, post offer employment testing, functional capacity evaluations, and ergonomic assessments. The majority of these services are contracted with and paid for directly by employers, including a number of Fortune 500 companies. Other clients include large insurers and their contractors. Our Company performs these services through Industrial Sports Medicine Professionals, consisting of both physical therapists and ATCs.
In March 2017, we acquired a 55% interest in an initial industrial injury prevention services business. On April 30, 2018, we acquired a 65% interest in another business in the industrial injury prevention sector. On April 30, 2018, we combined the two businesses. After the combination, we owned a 59.45% interest in the combined business, Briotix Health, Limited Partnership (“Briotix Health”).
On April 11, 2019, we acquired 100% of a third company that is a provider of industrial injury prevention services. The acquired company specializes in delivering injury prevention and care, post offer employment testing, functional capacity evaluations and return-to-work services. It performs these services across a network in 45 states including onsite at eleven client locations. The business was then combined with Briotix Health increasing our ownership position in the partnership to approximately 76.0%.
On September 30, 2021, we acquired a company that specializes in return-to-work and ergonomic services, among other offerings and contributed those assets to industrial injury prevention services subsidiary. Subsequent to this acquisition and the purchase of the redeemable non-controlling interest of one of the limited partners, our ownership in Briotix Health is approximately 85%.
On November 30, 2021, we acquired an approximate 70.0% interest in a leading provider of industrial injury prevention services. The founders and owners retained the remaining interest. The initial purchase price for the approximate 70% equity interest, not inclusive of a $2.0 million contingent payment in conjunction with the acquisition if specified future operational objectives are met, was approximately $63.2 million.
SOURCES OF REVENUE FOR PHYSICAL THERAPY OPERATIONS
Physical Therapy Operations
Payor sources for physical therapy operations are primarily managed care programs, commercial health insurance, Medicare/Medicaid and workers’ compensation insurance. Commercial health insurance, Medicare and managed care programs generally provide coverage to patients utilizing our clinics after payment by the patients of normal deductibles and co-insurance payments. Workers’ compensation laws generally require employers to provide, directly or indirectly through insurance, costs of medical rehabilitation for their employees from work-related injuries and disabilities and, in some jurisdictions, mandatory vocational rehabilitation, usually without any deductibles, co-payments or cost sharing. Treatments for patients who are parties to personal injury cases are generally paid from the proceeds of settlements with insurance companies or from favorable judgments. If an unfavorable judgment is received, collection efforts are generally not pursued against the patient and the patient’s account is written-off against established reserves. Bad debt reserves relating to all receivable types are regularly reviewed and adjusted as appropriate.
The following table shows our payor mix for the years ended ($ in thousands):
| December 31, 2021 | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||||
| Payor | Net Patient Revenue | Percentage | Net Patient Revenue | Percentage | Net Patient Revenue | Percentage | ||||||||||||||||||
Managed Care Programs/ Commercial Health Insurance | $ | 209,129 | 47.7 | % | $ | 177,877 | 47.7 | % | $ | 204,051 | 47.1 | % | ||||||||||||
| Medicare/Medicaid | 155,122 | 35.4 | % | 118,030 | 31.6 | % | 132,611 | 30.6 | % | |||||||||||||||
| Workers' Compensation Insurance | 44,549 | 10.2 | % | 48,628 | 13.0 | % | 63,542 | 14.7 | % | |||||||||||||||
| Other | 29,530 | 6.7 | % | 28,805 | 7.7 | % | 33,141 | 7.6 | % | |||||||||||||||
| Total | $ | 438,330 | 100.0 | % | $ | 373,340 | 100.0 | % | $ | 433,345 | 100.0 | % | ||||||||||||
| December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||||||||||
| Payor | Net Patient Revenue | Percentage | Net Patient Revenue | Percentage | Net Patient Revenue | Percentage | ||||||||||||||||||
| Managed Care Programs | $ | 104,513 | 28.0 | % | $ | 124,516 | 28.7 | % | $ | 134,748 | 32.3 | % | ||||||||||||
| Commercial Health | ||||||||||||||||||||||||
| Insurance | 73,364 | 19.7 | % | 79,535 | 18.4 | % | 72,786 | 17.4 | % | |||||||||||||||
| Medicare/Medicaid | 118,030 | 31.6 | % | 132,611 | 30.6 | % | 117,554 | 28.1 | % | |||||||||||||||
| Workers' Compensation | ||||||||||||||||||||||||
| Insurance | 48,628 | 13.0 | % | 63,542 | 14.7 | % | 59,942 | 14.4 | % | |||||||||||||||
| Other | 28,805 | 7.7 | % | 33,141 | 7.6 | % | 32,673 | 7.8 | % | |||||||||||||||
| Total | $ | 373,340 | 100.0 | % | $ | 433,345 | 100.0 | % | $ | 417,703 | 100.0 | % | ||||||||||||
Our physical therapy business depends to a significant extent on our relationships with commercial health insurers, health maintenance organizations, preferred provider organizations and workers’ compensation insurers. In some geographical areas, our clinics must be approved as providers by key health maintenance organizations and preferred provider plans to obtain payments. Failure to obtain or maintain these approvals would adversely affect financial results.
During the year ended December 31, 2020,2021, approximately 35.3%37.3% of our visits and 31.6%35.4% of our net patient revenues wererevenue was from patients with Medicare or Medicaid program coverage. To receive Medicare reimbursement, a facility (Medicare Certified Rehabilitation Agency) or the individual therapist (Physical/Occupational Therapist in Private Practice) must meet applicable participation conditions set by the Department of Health and Human Services (“HHS”) relating to the type of facility, equipment, recordkeeping, personnel and standards of medical care, and also must comply with all state and local laws. HHS, through Centers for Medicare & Medicaid Services (“CMS”) and designated agencies, periodically inspects or surveys clinics/providers for approval and/or compliance. We anticipate thatFailure of our newly developed and acquired clinics will become certifiedsubsidiaries to obtain or maintain certifications as Medicare providers or will be enrolledfailure to enroll as a group of physical/occupationoccupational therapists in a private practice. Failure to obtain or maintain this certification wouldpractice could adversely affect financial results.
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (‘‘MPFS’’(“MPFS”). For services provided in 2018,2017 through 2019, a 0.5% increase was applied to the fee schedule payment rates; for services provided in 2019, a 0.25% increase was applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. For services provided in 2020 through 2025, a 0.0% percent update is expected to be applied each year to the fee schedule payment rates, before applying the mandatory budget neutrality adjustment. However, in
In the 2020 MPFS Final Rule, CMS proposed an increase torevised coding, documentation guidelines, and increased the code values for office/outpatient evaluation and management (E/M) codes and cuts to other codes to maintain budget neutrality of the MPFS. This changeMPFS beginning in code valuations was to become effective January 1, 2021 under2021. Under the 2021 MPFS Final Rule, CMS increased the values for the E/M office visit codes and cuts to other specialty codes to maintain budget neutrality. As a result, CMS projected a 9% decrease in fee schedule payment rates for therapy services set to take effect in 2021. However, Congress intervened with passage of the Consolidated Appropriations Act, 2021, and reimbursement for the codes applicable to physical/occupational therapy services wereprovided by our clinics received an estimated 3.5% decrease in the aggregate in payment from Medicare in calendar year 2021 as compared to 2020.
In the 2022 MPFS Final Rule published on November 2, 2021, there was to be reducedan approximately 3.75% reduction to Medicare payments for physical/occupational therapy services. This was due to the expiration of the additional funding to the conversion factor provided by approximately 9%Congress in the aggregate. The 9% reduction in payment was addressed by2021 under the Consolidated Appropriations Act, 2021. However, this reduction was addressed in the Protecting Medicare and American Farmers from Sequester Cuts Act (“2021 (“Act”) signed into law on December 27, 2020.10, 2021. Based on various provisions in the 2021 Act, wethe Company now estimateestimates that the Medicare rate reduction for the full year of 20212022 will be approximately 3.5% in aggregate.0.75%.
The Budget Control Act of 2011 increased the federal debt ceiling in connection with deficit reductions over the next ten years and requires automatic reductions in federal spending by approximately $1.2 trillion. Payments to Medicare providers are subject to these automatic spending reductions, subject to a 2% cap. On April 1, 2013, a 2% reduction to Medicare payments was implemented. The Bipartisan Budget Act of 2015, enacted on November 2, 2015, extended the 2% reductions to Medicare payments through fiscal year 2025. The Bipartisan Budget Act of 2018, enacted on February 9, 2018, extends the 2% reductions to Medicare payments through fiscal year 2027. The Coronavirus Aid, Relief, and Economic Security (CARES)CARES Act suspended the 2% payment reduction to Medicare payments for dates of service from May 1, 2020 through December 31, 2020. The Consolidated Appropriations Act, 2021 further suspended the 2% payment reduction until March 31, 2021. On April 14, 2021, additional legislation was enacted that waived the 2% payment reduction for the remainder of calendar 2021. The 2021 Act, which was signed into law on December 10, 2021, included a three-month extension of the 2% sequester relief applied to all Medicare payments through March 31, 2022, followed by three months of 1% sequester relief through June 30, 2022. Sequester relief is scheduled to then end on June 30, 2022.
Under the Middle Class Tax Relief and Job Creation Act of 2012 (‘‘MCTRA’’), since October 1, 2012, patients who met or exceeded $3,700 in therapy expenditures during a calendar year have been subject to a manual medical review to determine whether applicable payment criteria are satisfied. The $3,700 threshold is applied to Physical Therapy and Speech Language Pathology Services; a separate $3,700 threshold is applied to the Occupational Therapy. The Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”) directed CMS to modify the manual medical review process such that those reviews will no longer apply to all claims exceeding the $3,700 threshold and instead will be determined on a targeted basis based on a variety of factors that CMS considers appropriateappropriate. The Bipartisan Budget Act of 2018 extends the targeted medical review indefinitely but reduces the threshold to $3,000 through December 31, 2027. For 2028, the threshold amount will be increased by the percentage increase in the Medicare Economic Index (“MEI”) for 2028 and in subsequent years the threshold amount will increase based on the corresponding percentage increase in the MEI for such subsequent year.
CMS adopted a multiple procedure payment reduction (‘‘MPPR’’) for therapy services in the final update to the MPFS for calendar year 2011. The MPPR applied to all outpatient therapy services paid under Medicare Part B — occupational therapy, physical therapy and speech-language pathology. Under the policy, the Medicare program pays 100% of the practice expense component of the Relative Value Unit (‘‘RVU’’) for the therapy procedure with the highest practice expense RVU, then reduces the payment for the practice expense component for the second and subsequent therapy procedures or units of service furnished during the same day for the same patient, regardless of whether those therapy services are furnished in separate sessions. SinceIn 2013, the practice expense component for the second and subsequent therapy service furnished during the same day for the same patient was reduced by 50%. In addition, the MCTRA directed CMS to implement a claims-based data collection program to gather additional data on patient function during the course
6
Medicare claims for outpatient therapy services furnished by therapytherapist assistants on or after January 1, 2020 must include a modifier indicating the service was furnished by a therapytherapist assistant. Outpatient therapy services furnished on or after January 1, 2022 in whole or part by a therapytherapist assistant will beare paid at an amount equal to 85% of the payment amount otherwise applicable for the service.
Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. We believe that we are in compliance, in all material respects, with all applicable laws and regulations and are not aware of any pending or threatened investigations involving allegations of potential wrongdoing that would have a material effect on the our financial statements as of December 31, 2020.2021. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program. For the year ended December 31, 2021 and 2020, respectively, net patient revenuesrevenue from Medicare were approximately $134.4 million and $101.6 million.million, respectively.
Industrial Injury Prevention Services
Services provided in this business include onsite injury prevention and rehabilitation, performance optimization, post-offer employment testing, functional capacity evaluations and ergonomic assessments. The majority of these services are contracted with and paid for directly by employers, including a number of Fortune 500 companies. Other clients include large insurers and their contractors. These services are performed through Industrial Sports Medicine Professionals, consisting of both physical therapists and ATCs.
REGULATION AND HEALTHCARE REFORM
Numerous federal, state and local regulations regulate healthcare services and those who provide them. Some states into which we may expand have laws requiring facilities employing health professionals and providing health-related services to be licensed and, in some cases, to obtain a certificate of need (that is, demonstrating to a state regulatory authority the need for, and financial feasibility of, new facilities or the commencement of new healthcare services). Only one of the states in which we currently operate requires a certificate of need for the operation of our physical therapy business functions. Our therapists and/or clinics, however, are required to be licensed, as determined by the state in which they provide services. Failure to obtain or maintain any required certificates, approvals or licenses could have a material adverse effect on our business, financial condition and results of operations.
Regulations Controlling Fraud and Abuse. Various federal and state laws regulate financial relationships involving providers of healthcare services. These laws include Section 1128B(b) of the Social Security Act (42 U.S. C. § 1320a-7b[b]) (the “Fraud and Abuse Law”), under which civil and criminal penalties can be imposed upon persons who, among other things, offer, solicit, pay or receive remuneration in return for (i) the referral of patients for the rendering of any item or service for which payment may be made, in whole or in part, by a Federal health care program (including Medicare and Medicaid); or (ii) purchasing, leasing, ordering, or arranging for or recommending purchasing, leasing, ordering any good, facility, service, or item for which payment may be made, in whole or in part, by a Federal health care program (including Medicare and Medicaid). We believe that our business procedures and business arrangements are in compliance with these provisions. However, the provisions are broadly written and the full extent of their specific application to specific facts and arrangements to which we are a party is uncertain and difficult to predict. In addition, several states have enacted state laws similar to the Fraud and Abuse Law, which may be more restrictive than the federal Fraud and Abuse Law.
The Office of the Inspector General (“OIG”) of HHS has issued regulations describing compensation financial arrangements that fall within a “Safe Harbor” and, therefore, are not viewed as illegal remuneration under the Fraud and Abuse Law. Failure to fall within a Safe Harbor does not mean that the Fraud and Abuse Law has been violated; however, the OIG has indicated that failure to fall within a Safe Harbor may subject an arrangement to increased scrutiny under a “facts and circumstances” test.
The OIG also has issued special fraud alerts and special advisory bulletins to remind the provider community of the importance and application of certain aspects of the Fraud and Abuse Law. One of the OIG special fraud alerts related to the rental of space in physician offices by persons or entities to which the physicians refer patients. The OIG’s stated concern in these arrangements is that rental payments may be disguised kickbacks to the physician-landlords to induce referrals. We rent clinic space for some of our clinics from referring physicians and have taken the steps that we believe are necessary to ensure that all leases comply to the extent possible and applicable, with the space rental Safe Harbor to the Fraud and Abuse Law.
One of the OIG’s special advisory bulletins addressed certain complex contractual arrangements for the provision of items and services. This special advisory bulletin identified several characteristics commonly exhibited by suspect arrangements, the existence of one or more of which could indicate a prohibited arrangement to the OIG. Generally, the indicia of a suspect contractual joint venture as identified by the special advisory bulletin and an associated OIG advisory opinion include the following:
New Line of BusinessBusiness..Aprovider in one line of business (“Owner”) expands into a new line of business that can be provided to theOwner’s existing patients, with another party who currently provides the same or similar item or service as the new business (“Manager/Supplier”).
Captive Referral Base.The arrangement predominantly or exclusively serves the Owner’s existing patient base (or patients under thecontrol or influence of the Owner).
Little or No Bona Fide Business Risk. The Owner’s primary contribution to the venture is referrals; it makes little or no financial orother investment in the business, delegating the entire operation to the Manager/Supplier, while retaining profits generated from its captive referral base.
Status of the Manager/Supplier. The Manager/Supplier is a would-be competitor of the Owner’s new line of business and wouldnormally compete for the captive referrals. It has the capacity to provide virtually identical services in its own right and bill insurers and patients for them in its own name.
Scope of Services Provided by the Manager/Supplier. The Manager/Supplier provides all, or many, of the new business’ key services.
Remuneration. The practical effect of the arrangement, viewed in its entirety, is to provide the Owner the opportunity to bill insurersand patients for business otherwise provided by the Manager/Supplier. The remuneration from the venture to the Owner (i.e., the profits of the venture) takes into account the value and volume of business the Owner generates.
Exclusivity. The arrangement bars the Owner from providing items or services to any patients other than those coming from Ownerand/or bars the Manager/Supplier from providing services in its own right to the Owner’s patients.
Due to the nature of our business operations, many of our management service arrangements exhibit one or more of these characteristics. However, we believe we have taken steps regarding the structure of such arrangements as necessary to sufficiently distinguish them from these suspect ventures, and to comply with the requirements of the Fraud and Abuse Law. However, if the OIG believes we have entered into a prohibited contractual joint venture, it could have an adverse effect on our business, financial condition and results of operations.
Although the business of managing physician-owned and hospital-owned physical therapy facilities is regulated by the Fraud and Abuse Law, the manner in which we contract with such facilities often falls outside the complete scope of available Safe Harbors. We believe our arrangements comply with the Fraud and Abuse Law, even though federal courts provide limited guidance as to the application of the Fraud and Abuse Law to these arrangements. If our management contracts are held to violate the Fraud and Abuse Law, it could have an adverse effect on our business, financial condition and results of operations.
Stark Law. Provisions of the Omnibus Budget Reconciliation Act of 1993 (42 U.S.C. § 1395nn) (the “Stark Law”) prohibitreferrals by a physician of “designated health services” which are payable, in whole or in part, by Medicare or Medicaid, to an entity in which the physician or the physician’s immediate family member has an investment interest or other financial relationship, subject to several exceptions. Unlike the Fraud and Abuse Law, the Stark Law is a strict liability statute. Proof of intent to violate the Stark Law is not required. Physical therapy and occupational therapy services are among the “designated health services”. Further, the Stark Law has application to our management contracts with individual physicians and physician groups, as well as, any other financial relationship between us and referring physicians, including medical advisor arrangements and any financial transaction resulting from a clinic acquisition. The Stark Law also prohibits billing for services rendered pursuant to a prohibited referral. Several states have enacted laws similar to the Stark Law. These state laws may cover all (not just Medicare and Medicaid) patients. As with the Fraud and Abuse Law, we consider the Stark Law in planning our clinics, establishing contractual and other arrangements with physicians, marketing and other activities, and believe that our operations are in compliance with the Stark Law. If we violate the Stark Law or any similar state laws, our financial results and operations could be adversely affected. Penalties for violations include denial of payment for the services, significant civil monetary penalties, and exclusion from the Medicare and Medicaid programs.
HIPAA. In an effort to further combat healthcare fraud and protect patient confidentially, Congress included several anti-fraudmeasures in the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). HIPAA created a source of funding for fraud control to coordinate federal, state and local healthcare law enforcement programs, conduct investigations, provide guidance to the healthcare industry concerning fraudulent healthcare practices, and establish a national data bank to receive and report final adverse actions. HIPAA also criminalized certain forms of health fraud against all public and private payors. Additionally, HIPAA mandates the adoption of standards regarding the exchange of healthcare information in an effort to ensure the privacy and electronic security of patient information and standards relating to the privacy of health information. Sanctions for failing to comply with HIPAA include criminal penalties and civil sanctions. In February of 2009, the American Recovery and Reinvestment Act of 2009 (“ARRA”) was signed into law. Title XIII of ARRA, the Health Information Technology for Economic and Clinical Health Act (“HITECH”), provided for substantial Medicare and Medicaid incentives for providers to adopt electronic health records (“EHRs”) and grants for the development of health information exchange (“HIE”). Recognizing that HIE and EHR systems will not be implemented unless the public can be assured that the privacy and security of patient information in such systems is protected, HITECH also significantly expanded the scope of the privacy and security requirements under HIPAA. Most notable are the mandatory breach notification requirements and a heightened enforcement scheme that includes increased penalties, and which now apply to business associates as well as to covered entities. In addition to HIPAA, a number of states have adopted laws and/or regulations applicable in the use and disclosure of individually identifiable health information that can be more stringent than comparable provisions under HIPAA.
We believe that our operations comply with applicable standards for privacy and security of protected healthcare information. We cannot predict what negative effect, if any, HIPAA/HITECH or any applicable state law or regulation will have on our business.
Other Regulatory Factors. Political, economic and regulatory influences are fundamentally changing the healthcare industry inthe United States. Congress, state legislatures and the private sector continue to review and assess alternative healthcare delivery and payment systems. Potential alternative approaches could include mandated basic healthcare benefits, controls on healthcare spending through limitations on the growth of private health insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, and price controls. Legislative debate is expected to continue in the future and market forces are expected to demand only modest increases or reduced costs. For instance, managed care entities are demanding lower reimbursement rates from healthcare providers and, in some cases, are requiring or encouraging providers to accept capitated payments that may not allow providers to cover their full costs or realize traditional levels of profitability. We cannot reasonably predict what impact the adoption of federal or state healthcare reform measures or future private sector reform may have on our business.
COMPETITION
The healthcare industry, including the physical therapy business and the industrial injury prevention services business are highly competitive. The physical therapy business as well as the industrial injury prevention services business are both highly fragmented with no company having a significant market share nationally. We believe that we are one of the largest national outpatient physical therapy services providers.
Competitive factors affecting our business include quality of care, cost, treatment outcomes, convenience of location, and relationships with, and ability to meet the needs of, referral and payor sources. Our clinics compete, directly or indirectly, with many types of healthcare providers including the physical therapy departments of hospitals, private therapy clinics, physician-owned therapy clinics, and chiropractors. We may face more intense competition if consolidation of the therapy industry continues.
We believe that our strategy of providing key therapists in a community with an opportunity to participate in ownership or clinic profitability provides us with a competitive advantage by helping to ensure the commitment of local management to the success of the clinic.
We also believe that our competitive position is enhanced by our strategy of locating our clinics, when possible, on the ground floor of buildings and shopping centers with nearby parking, thereby making the clinics more easily accessible to patients. We offer convenient hours. We also attempt to make the decor in our clinics less institutional and more aesthetically pleasing than traditional hospital clinics.
ENFORCEMENT ENVIRONMENT
In recent years, federal and state governments have launched several initiatives aimed at uncovering behavior that violates the federal civil and criminal laws regarding false claims and fraudulent billing and coding practices. Such laws require providers to adhere to complex reimbursement requirements regarding proper billing and coding in order to be compensated for their services by government payors. Our compliance program requires adherence to applicable law and promotes reimbursement education and training; however, a determination that our clinics’ billing and coding practices are false or fraudulent could have a material adverse effect on us.
As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits and investigations to verify our compliance with these programs and applicable laws and regulations. In addition, our prior Corporate Integrity Agreement, which expired in February 2021, required annual audits to be performed by an independent review organization on a small sample of our clinics, the results of which were reported to the federal government. See “-Compliance Program – Program—Corporate Integrity Agreement” for more on the Corporate Integrity Agreement (“CIA”). Managed care payors may also reserve the right to conduct audits. An adverse inspection, review, audit or investigation could result in: refunding amounts we have been paid; fines penalties and/or revocation of billing privileges for the affected clinics; the imposition of a new Corporate Integrity Agreement; exclusion from participation in the Medicare or Medicaid programs or one or more managed care payor network;networks; or damage to our reputation.
We and our clinics are subject to federal and state laws prohibiting entities and individuals from knowingly and willfully making claims to Medicare, Medicaid and other governmental programs and third party payors that contain false or fraudulent information. The federal False Claims Act encourages private individuals to file suits on behalf of the government against healthcare providers such as us. As such suits are generally filed under seal with a court to allow the government adequate time to investigate and determine whether it will intervene in the action, the implicated healthcare providers often are unaware of the suit until the government has made its determination and the seal is lifted. Violations or alleged violations of such laws, and any related lawsuits, could result in (i) exclusion from participation in Medicare, Medicaid and other federal healthcare programs, or (ii) significant financial or criminal sanctions, resulting in the possibility of substantial financial penalties for small billing errors that are replicated in a large number of claims, as each individual claim could be deemed a separate violation. In addition, many states also have enacted similar statutes, which may include criminal penalties, substantial fines, and treble damages.
COMPLIANCE PROGRAM
Our Compliance Program. Our ongoing success depends upon our reputation for quality service and ethical business practices.We operate in a highly regulated environment with many federal, state and local laws and regulations. We take a proactive interest in understanding and complying with the laws and regulations that apply to our business.
Our Board of Directors (the “Board”) has adopted a Code of Business Conduct and Ethics and a set of Corporate Governance Guidelines to clarify the ethical standards under which the Board and management carry out their duties. In addition, the Board has created a Compliance Committee of the Board (“Compliance Committee”) whose purpose is to assist the Board in discharging their oversight responsibilities with respect to compliance with federal and state laws and regulations relating to healthcare.
We have issued a Compliance Manual and created compliance training materials, hand-outs and an on-line testing program. These tools were prepared to ensure that every employee of our Company and subsidiaries has a clear understanding of our mutual commitment to high standards of professionalism, honesty, fairness and compliance with the law in conducting business. These standards are administered by our Chief Compliance Officer (“CCO”), who has the responsibility for the day-to-day oversight, administration and development of our compliance program. The CCO, internal and external counsel, management and the Compliance Committee review our policies and procedures for our compliance program from time to time in an effort to improve operations and to ensure compliance with requirements of standards, laws and regulations and to reflect the on-going compliance focus areas which have been identified by management, counsel or the Compliance Committee. We also have established systems for reporting potential violations, educating our employees, monitoring and auditing compliance and handling enforcement and discipline.
Committees. Our Compliance Committee, appointed by the Board, consists of four independent directors. The Compliance Committee has general oversight of our Company’s compliance with the legal and regulatory requirements regarding healthcare operations. The Compliance Committee relies on the expertise and knowledge of management, the CCO and other compliance and legal personnel. The CCO regularly communicates with the Chairman of the Compliance Committee. The Compliance Committee meets at least four times a year or more frequently as necessary to carry out its responsibilities and reports regularly to the Board regarding its actions and recommendations.
We also have an Internal Compliance Committee, which is comprised of Company leaders in the areas of operations, clinical services, finance, human resources, legal, information technology and credentialing. The Internal Compliance Committee has the responsibility for evaluating and assessing Company areas of risk relating to compliance with federal and state healthcare laws, and generally to assist the CCO. The Internal Compliance Committee meets at least four times a year or more frequently as necessary to carry out its responsibilities. In addition, management has appointed a team to address our Company’s compliance with HIPAA. The HIPAA team consists of a security officer and employees from our legal, information systems, finance, operations, compliance, business services and human resources departments. The team prepares assessments and makes recommendations regarding operational changes and/or new systems, if needed, to comply with HIPAA.
Each clinic certified as a Medicare Rehabilitation Agency has a formally appointed governing body composed of a member of our management and the director/administrator of the clinic. The governing body retains legal responsibility for the overall conduct of the clinic. The members confer regularly and discuss, among other issues, clinic compliance with applicable laws and regulations. In addition, there are Professional Advisory Committees which serve as Infection Control Committees. These committees meet in the facilities and function as advisors.
We have in place a Risk Management Committee consisting of, among others, the CCO, the Vice President of Human Resources, and other legal, compliance and operations personnel. This committee reviews and monitors all employee and patient incident reports and provides clinic personnel with actions to be taken in response to the reports.
Reporting Violations. In order to facilitate our employees’ ability to report inconfidence, anonymously and without retaliationany perceived improper work-related activities, accounting irregularities and other violations of our compliance program, we have set up an independent national compliance hotline. The compliance hotline is available to receive confidential reports of wrongdoing Monday through Friday (excluding holidays), 24 hours a day. The compliance hotline is staffed by experienced third party professionals trained to utilize utmost care and discretion in handling sensitive issues and confidential information. The information received is documented and forwarded timely to the CCO, who, together with the Compliance Committee, has the power and resources to investigate and resolve matters of improper conduct.
Educating Our Employees. We utilize numerous methods to train our employees in compliance related issues, including an onlinelearning management system. All employees complete a comprehensive training program comprised of numerous modules relating to our business and proper practices when newly hired and annually thereafter. The directors/administrators also provide periodic “refresher” training for existing employees and one-on-one comprehensive training with new hires. The corporate compliance group responds to questions from clinic personnel and conducts frequent teleconference meetings, webinars and training sessions on a variety of compliance related topics.
When a clinic opens, we provide a package of compliance materials containing manuals and detailed instructions for meeting Medicare Conditions of Participation Standards and other compliance requirements. During follow up training with the director/administrator of the clinic, compliance department staff explain various details regarding requirements and compliance standards. Compliance staff will remain in contact with the director/administrator while the clinic is implementing compliance standards and will provide any assistance required. All new office managers receive training (including Medicare, regulatory and corporate compliance, insurance billing, charge entry and transaction posting and coding, daily, weekly and monthly accounting reports) from the training staff at the corporate office. The corporate compliance group will assist in continued compliance, including guidance to the clinic staff with regard to Medicare certifications, state survey requirements and responses to any inquiries from regulatory agencies.
Monitoring and Auditing Clinic Operational Compliance. We have in place audit programs and other procedures to monitor andaudit clinic operational compliance with applicable policies and procedures. We employ internal auditors who, as part of their job responsibilities, conduct periodic audits of each clinic. Most clinics are audited at least once every 24 months and additional focused audits are performed as deemed necessary. During these audits, particular attention is given to compliance with Medicare and internal policies, Federal and state laws and regulations, third party payor requirements, and patient chart documentation, billing, reporting, record keeping, collections and contract procedures. The audits are conducted on site or remotely and include interviews with the employees involved in management, operations, billing and accounts receivable.
Formal audit reports are prepared and reviewed with corporate management and the Compliance Committee. Each clinic director/administrator receives a letter instructing them of any corrective measures required. Each clinic director/administrator then works with the compliance team and operations to ensure such corrective measures are achieved.
Handling Enforcement and Discipline. It is our policy that any employee who fails to comply with compliance programrequirements or who negligently or deliberately fails to comply with known laws or regulations specifically addressed in our compliance program should be subject to disciplinary action up to and including discharge from employment. The Compliance Committee, compliance staff, human resources staff and management investigate violations of our compliance program and impose disciplinary action as considered appropriate.
Corporate Integrity Agreement. We also performed certain additional compliance related functions pursuant to CIA that weentered into with the OIG. The CIA, which became effective as of December 21, 2015, and expired in February 2021, outlined certain specific requirements relating to compliance oversight and program implementation, as well as periodic reporting. In addition, pursuant to the CIA, an independent review organization annually performed a Medicare billing and coding audit on a small group of randomly selected Company clinics. Our Compliance Program was modified so as to comply with the requirements of the CIA. The term of the CIA was five years and expired in February 2021.
EMPLOYEES
Our strategy is to acquire physical therapy practices, develop outpatient physical therapy clinics as satellites within existing partnerships, acquire industrial injury prevention services businesses, and to continue to support the growth of our existing businesses requires a talented workforce that can grow with us. As of December 31, 2020,2021, we employed approximately 4,6305,500 people nationwide, of which approximately 2,5503,000 were full-time employees.
It is crucial that we continue to attract and retain top talent. To attract and retain talented employees, we strive to make our corporate office and all of our practices and businesses a diverse and healthy workplace, with opportunities for our employees to receive continuing education, skill development, encouragement to grow and develop their career, all supported by competitive compensation, incentives, and benefits. Our clinical professionals are all licensed and a vast majority have advanced degrees. Our operational leadership teams have long-standing relationships with local and regional universities, professional affiliations, and other applicable sources that provide our practices with a talent pipeline.
We provide competitive compensation and benefits programs to help meet our employees'employees’ needs in the practices and communities in which they serve. These programs (which can vary by practice and employment classification) include incentive compensation plans, a 401(k) plan, healthcare and insurance benefits, health savings and flexible spending accounts, paid time off, family leave, education assistance, mental health and other employee assistance benefits.
We invest resources to develop the talent needed to support our business strategy. Resources include a multitude of training and development programs delivered internally and externally, online and instructor-led, and on-the-job learning formats.
We expect to continue adding personnel in the future as we focus on potential acquisition targets and organic growth opportunities.
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AVAILABLE INFORMATION
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are made available free of charge on our internet website at www.usph.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
| ITEM 1A. | RISK FACTORS. |
Our business, operations and financial condition are subject to various risks. Some of these risks are described below, and readers of this Annual Report on Form 10-K should take such risks into account in evaluating our Company or making any decision to invest in us. This section does not describe all risks applicable to our Company, our industry or our business, and it is intended only as a summary of material factors affecting our business.
Risks related to our business and operations
We are subject to risks associated with public health crises and epidemics/pandemics, such as the novel strain of coronavirus
(“COVID-19”).
Our operations expose us to risks associated with public health crises and epidemics/pandemics, such as COVID-19 that has spread globally. Since Februaryearly 2020, the continued spread has led to disruption and volatility in the global capital markets, which increases the cost of, and adversely impacts access to, capital and increases economic uncertainty. The pandemic has caused an economic slowdown of potentially extended duration, and it is possible that it could cause a global recession.
COVID-19 is having, and will continue to have, an adverse impact on our operations and supply chains, including a temporary loss of physical therapists and other employees who are infected or quarantined for a period of time, an increase in cancellations of physical therapy patient appointments and a decline in the scheduling of new or additional patient appointments. Due to these impacts and measures, we have experienced, and will continue to experience, significant and unpredictable impact on employees and reductions and cancellations of our patient visits.
Decreases in Medicare reimbursement rates and payment reductions applied to the second and subsequent therapy servicesrate may adversely affect our financial results.
The Medicare program reimburses outpatient rehabilitation providers based on the Medicare Physician Fee Schedule (‘‘MPFS’’(“MPFS”). For services providedOn an annual basis, our reimbursement under the MPFS is subject to changes, which could include reductions in 2018, a 0.5% increase was applied to the fee schedule payment rates; for services provided in 2019, a 0.25% increase was applied to the fee schedule payment rates before applying the mandatory budget neutrality adjustment. For services provided in 2020 through 2025, a 0.0% percent update is expected to be applied each year to the fee schedule payment rates, before applying the mandatory budget neutrality adjustment. However, in the 2020 MPFS Final Rule, CMS proposed an increase to the code values for office/outpatient evaluation and management (E/M) codes and cuts to other codes to maintain budget neutrality of the MPFS. Under the 2021 MPFS Final Rule,such reimbursement for the codes applicable to physical/occupational therapy services were to be reduced by approximately 9% in the aggregate. amounts. The 9% reduction in payment was addressed by the Consolidated Appropriations Act, 2021 (“Act”) signed into law on December 27, 2020. Based on various provisions in the Act, we now estimateCompany estimates that the Medicare rate reduction for the full year of 20212022 will be approximately 3.5%0.75%. See “Business—Sources of Revenue – Physical Therapy Services” in aggregate.Item 1 for more information. The Consolidated Appropriations Act of 2021, includes reductions in Medicare payment rates of approximately 3% in each of calendar years 2023 and 2024, which would be instituted unless regulatory or Congressional action results in modifications to such rates as occurred in 2021 and 2022.
Furthermore, Medicare claims for outpatient therapy services furnished by therapytherapist assistants on or after January 1, 2020, must include a modifier indicating the service was furnished by a therapytherapist assistant. Outpatient therapy services furnished on or after January 1, 2022 in whole or part by a therapytherapist assistant will beare paid at an amount equal to 85% of the payment amount otherwise applicable for the service.
Statutes, regulations, and payment rules governing the delivery of therapy services to Medicare beneficiaries are complex and subject to interpretation. We believe that we are in compliance, in all material respects, with all applicable laws and regulations governing the services we provide to Medicare patients and are not aware of any pending or threatened investigations involving allegations of potential wrongdoing that wouldcould have a material effect on the our financial statements as of December 31, 2020.2021. Compliance with such laws and regulations can be subject to future government review and interpretation, as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program. For yearthe years ended December 31, 2021, and 2020, respectively, net patient revenuesrevenue from Medicare were approximately $134.4 million and $101.6 million.million, respectively.
Given the history of frequent revisions to the Medicare program and its reimbursement rates and rules, we may not continue to receive reimbursement rates from Medicare that sufficiently compensate us for our services or, in some instances, cover our operating costs. Limits on reimbursement rates or the scope of services being reimbursed could have a material adverse effect on our revenue, financial condition, and results of operations. Additionally, any delay or default by the federal or state governments in making Medicare and/or Medicaid reimbursement payments could materially and, adversely, affect our business, financial condition and results of operations.
We expect the federal and state governments to continue their efforts to contain growth in Medicaid expenditures, which could adversely affect our revenue and profitability.
Medicaid spending has increased rapidly in recent years, becoming a significant component of state budgets. This, combined with slower state revenue growth, has led both the federal government and many states to institute measures aimed at controlling the growth of Medicaid spending, and in some instances reducing aggregate Medicaid spending. We expect these state and federal efforts to continue for the foreseeable future. Furthermore, not all of the states in which we operate, most notably Texas, have elected to expand Medicaid as part of federal healthcare reform legislation. There can be no assurance that the program, on the current terms or otherwise, will continue for any particular period of time beyond the foreseeable future. If Medicaid reimbursement rates are reduced or fail to increase as quickly as our costs, or if there are changes in the rules governing the Medicaid program that are disadvantageous to our businesses, our business and results of operations could be materially and adversely affected.
Revenue we receive from Medicare and Medicaid is subject to potential retroactive reduction.
Payments we receive from Medicare and Medicaid can be retroactively adjusted after examination during the claims settlement process or as a result of post-payment audits. Payors may disallow our requests for reimbursement, or recoup amounts previously reimbursed, based on determinations by the payors or their third-party audit contractors that certain costs are not reimbursable because either adequate or additional documentation was not provided or because certain services were not covered or deemed to not be medically necessary. Significant adjustments, recoupments or repayments of our Medicare or Medicaid revenue, and the costs associated with complying with investigative audits by regulatory and governmental authorities, could adversely affect our financial condition and results of operations.
Additionally, from time to time we become aware, either based on information provided by third parties and/or the results of internal audits, of payments from payor sources that were either wholly or partially in excess of the amount that we should have been paid for the service provided. Overpayments may result from a variety of factors, including insufficient documentation supporting the services rendered or medical necessity of the services or other failures to document the satisfaction of the necessary conditions of payment. We are required by law in most instances to refund the full amount of the overpayment after becoming aware of it, and failure to do so within requisite time limits imposed by the law could lead to significant fines and penalties being imposed on us. Furthermore, our initial billing of and payments for services that are unsupported by the requisite documentation and satisfaction of any other conditions of payment, regardless of our awareness of the failure at the time of the billing or payment, could expose us to significant fines and penalties. We, and/or certain of our operating companies, could also be subject to exclusion from participation in the Medicare or Medicaid programs in some circumstances as well, in addition to any monetary or other fines, penalties or sanctions that we may incur under applicable federal and/or state law. Our repayment of any such amounts, as well as any fines, penalties or other sanctions that we may incur, could be significant and could have a material and adverse effect on our results of operations and financial condition.
From time to time we are also involved in various external governmental investigations, audits and reviews. Reviews, audits and investigations of this sort can lead to government actions, which can result in the assessment of damages, civil or criminal fines or penalties, or other sanctions, including restrictions or changes in the way we conduct business, loss of licensure or exclusion from participation in government programs. Failure to comply with applicable laws, regulations and rules could have a material and adverse effect on our results of operations and financial condition. Furthermore, becoming subject to these governmental investigations, audits and reviews can also require us to incur significant legal and document production expenses as we cooperate with the government authorities, regardless of whether the particular investigation, audit or review leads to the identification of underlying issues.
As a result of increased post-payment reviews of claims we submit to Medicare for our services, we may incur additional costs and may be required to repay amounts already paid to us.
We are subject to regular post-payment inquiries, investigations and audits of the claims we submit to Medicare for payment for our services. These post-payment reviews have increased as a result of government cost-containment initiatives. These additional post-payment reviews may require us to incur additional costs to respond to requests for records and to pursue the reversal of payment denials, and ultimately may require us to refund amounts paid to us by Medicare that are determined to have been overpaid.
For a further description of this and other laws and regulations involving governmental reimbursements, see “Business—Sources of Revenue” and “—Regulation and Healthcare Reform” in Item 1.
An economic downturn, state budget pressures, sustained unemployment and continued deficit spending by the federal government may result in a reduction in reimbursement and covered services.
An economic downturn, including the consequences of a pandemic, such as COVID-19, could have a detrimental effect on our revenues. Historically, state budget pressures have translated into reductions in state spending. Given that Medicaid outlays are a significant component of state budgets, we can expect continuing cost containment pressures on Medicaid outlays for our services in the states in which we operate. In addition, an economic downturn, coupled with sustained unemployment, may also impact the number of enrollees in managed care programs as well as the profitability of managed care companies, which could result in reduced reimbursement rates.
The existing federal deficit, as well as deficit spending by federal and state governments as the result of adverse developments in the economy or other reasons, can lead to continuing pressure to reduce governmental expenditures for other purposes, including government-funded programs in which we participate, such as Medicare and Medicaid. Such actions in turn may adversely affect our results of operations.
We depend upon reimbursement by third-party payors.
Substantially all of our revenues are derived from private and governmental third-party payors. In 2020,2021, approximately 68.4%62.8% of our revenues were derived collectively from managed care plans, commercial health insurers, workers’ compensation payors, and other private pay revenue sources while approximately 31.6%37.2% of our revenues were derived from Medicare and Medicaid. Initiatives undertaken by industry and government to contain healthcare costs affect the profitability of our clinics. These payors attempt to control healthcare costs by contracting with healthcare providers to obtain services on a discounted basis. We believe that this trend will continue and may limit reimbursement for healthcare services. If insurers or managed care companies from whom we receive substantial payments were to reduce the amounts they pay for services, our profit margins may decline, or we may lose patients if we choose not to renew our contracts with these insurers at lower rates. In addition, in certain geographical areas, our clinics must be approved as providers by key health maintenance organizations and preferred provider plans. Failure to obtain or maintain these approvals would adversely affect our financial results.
In recent years, through legislative and regulatory actions, the federal government has made substantial changes to various payment systems under the Medicare program. See “Business—Sources of Revenue”Revenue – Physical Therapy Services” in Item 1 for more information including changes to Medicare reimbursement. Additional reforms or other changes to these payment systems may be proposed or adopted, either by the U.S. Congress or by CMS, including bundled payments, outcomes-based payment methodologies and a shift away from traditional fee-for-service reimbursement. If revised regulations are adopted, the availability, methods and rates of Medicare reimbursements for services of the type furnished at our facilities could change. Some of these changes and proposed changes could adversely affect our business strategy, operations and financial results.
Impact on the business and cash reserves resulting from retirement or resignation of key partners and resulting purchase of their non-controlling interests (minority interests).
As described in Note 5, the redeemable non-controlling interests in our partnerships are held by our partners. Upon the occurrence of certain events, such as retirement or other termination of employment, partners from acquired partnerships may have the right to exercise a “put” to cause us to purchase their redeemable non-controlling interests. Depending on the amount and timing of the exercise of any “put” rights, the funds required could have an adverse impact on our capital structure.
Healthcare reform legislation may affect our business.
In recent years, many legislative proposals have been introduced or proposed in Congress and in some state legislatures that would affect major changes in the healthcare system, either nationally or at the state level. At the federal level, Congress has continued to propose or consider healthcare budgets that substantially reduce payments under the Medicare programs. See “Business—Sources of Revenue” in Item 1 for more information. The ultimate content, timing or effect of any healthcare reform legislation and the impact of potential legislation on us is uncertain and difficult, if not impossible, to predict. That impact may be material to our business, financial condition or results of operations.
Our operations are subject to extensive regulation.
The healthcare industry is subject to extensive federal, state and local laws and regulations relating to:
facility and professional licensure/permits, including certificates of need;
conduct of operations, including financial relationships among healthcare providers, Medicare fraud and abuse, and physician self-referral;
addition of facilities and services; and
| • | coding, billing and payment for services. |
In recent years, there have been heightened coordinated civil and criminal enforcement efforts by both federal and state government agencies relating to the healthcare industry. We believe we are in substantial compliance with all laws, but differing interpretations or enforcement of these laws and regulations could subject our current practices to allegations of impropriety or illegality or could require us to make changes in our methods of operations, facilities, equipment, personnel, services and capital expenditure programs and increase our operating expenses. If we fail to comply with these extensive laws and government regulations, we could become ineligible to receive government program reimbursement, suffer civil or criminal penalties or be required to make significant changes to our operations. In addition, we could be forced to expend considerable resources responding to an investigation or other enforcement action under these laws or regulations. For a more complete description of certain of these laws and regulations, see “Business—Regulation and Healthcare Reform” and “Business—Compliance Program” in Item 1.
Both federal and state regulatory agencies inspect, survey and audit our facilities to review our compliance with these laws and regulations. While our facilities intend to comply with the existing licensing, Medicare certification requirements and accreditation standards, there can be no assurance that these regulatory authorities will determine that all applicable requirements are fully met at any given time. A determination by any of these regulatory authorities that a facility is not in compliance with these requirements could lead to the imposition of requirements that the facility takes corrective action, assessment of fines and penalties, or loss of licensure or Medicare certification of accreditation. These consequences could have an adverse effect on us.
Our operations are subject to investigations, legal actions and proceedings that could result in an adverse impact on our business and financial position.
Healthcare providers are subject to investigations, legal actions and proceedings, as well as lawsuits under the qui tam provisions of the federal False Claims Act, based on claims that the provider failed to comply with applicable laws and regulations that govern coding and the submission of claims for services provided to Medicare patients, among other things. These matters can involve significant costs, monetary damages and penalties. We have been subject to these proceedings in the past, and future proceedings could result in an adverse impact on our business and financial results.
We face inspections, reviews, audits and investigations under federal and state government programs and contracts. These audits could have adverse findings that may negatively affect our business.
As a result of our participation in the Medicare and Medicaid programs, we are subject to various governmental inspections, reviews, audits and investigations to verify our compliance with these programs and applicable laws and regulations. Managed care payors may also reserve the right to conduct audits. An adverse inspection, review, audit or investigation could result in:
refunding amounts we have been paid pursuant to the Medicare or Medicaid programs or from managed care payors;
state or federal agencies imposing fines, penalties and other sanctions on us;
temporary suspension of payment for new patients to the facility or agency;
decertification or exclusion from participation in the Medicare or Medicaid programs or one or more managed care payor networks;
the imposition of a new Corporate Integrity Agreement;
damage to our reputation;
the revocation of a facility’s or agency’s license; and
loss of certain rights under, or termination of, our contracts with managed care payors.
If adverse inspections, reviews, audits or investigations occur and any of the results noted above occur, it could have a material adverse effect on our business and operating results.
Our facilities are subject to extensive federal and state laws and regulations relating to the privacy of individually identifiable information.
HIPAA required the HHS to adopt standards to protect the privacy and security of individually identifiable health-related information. The department released final regulations containing privacy standards in 2000 and published revisions to the final regulations in 2002. The privacy regulations extensively regulate the use and disclosure of individually identifiable health-related information. The regulations also provide patients with significant rights related to understanding and controlling how their health information is used or disclosed. The security regulations require healthcare providers to implement administrative, physical and technical practices to protect the security of individually identifiable health information that is maintained or transmitted electronically. HITECH, which was signed into law in 2009, enhanced the privacy, security and enforcement provisions of HIPAA by, among other things establishing security breach notification requirements, allowing enforcement of HIPAA by state attorneys general, and increasing penalties for HIPAA violations. Violations of HIPAA or HITECH could result in civil or criminal penalties.
In addition to HIPAA, there are numerous federal and state laws and regulations addressing patient and consumer privacy concerns, including unauthorized access or theft of personal information. State statutes and regulations vary from state to state. Lawsuits, including class actions and action by state attorneys general, directed at companies that have experienced a privacy or security breach also can occur.
We have established policies and procedures in an effort to ensure compliance with these privacy related requirements. However, if there is a breach, we may be subject to various penalties and damages and may be required to incur costs to mitigate the impact of the breach on affected individuals.
In conducting our business, we are required to comply with applicable laws regarding fee-splitting and the corporate practice of medicine.
Some states prohibit the “corporate practice of therapy” that restricts business corporations from providing physical therapy services through the direct employment of therapist physicians or from exercising control over medical decisions by therapists. The laws relating to corporate practice vary from state to state and are not fully developed in each state in which we have facilities. Typically, however, professional corporations owned and controlled by licensed professionals are exempt from corporate practice restrictions and may employ therapists to furnish professional services. Those professional corporations may be managed by business corporations, such as the Company.
Some states also prohibit entities from engaging in certain financial arrangements, such as fee-splitting, with physicians or therapists. The laws relating to fee-splitting also vary from state to state and are not fully developed. Generally, these laws restrict business arrangements that involve a physician or therapist sharing medical fees with a referral source, but in some states, these laws have been interpreted to extend to management agreements between physicians or therapists and business entities under some circumstances.
We believe that our current and planned activities do not constitute fee-splitting or the unlawful corporate practice of medicine as contemplated by these state laws. However, there can be no assurance that future interpretations of such laws will not require structural and organizational modification of our existing relationships with the practices. If a court or regulatory body determines that we have violated these laws or if new laws are introduced that would render our arrangements illegal, we could be subject to civil or criminal penalties, our contracts could be found legally invalid and unenforceable (in whole or in part), or we could be required to restructure our contractual arrangements with our affiliated physicians and other licensed providers.
We may be adversely affected by a security breach, such as a cyber-attack, which may cause a violation of HIPAA or HITECH and subject us to potential legal and reputational harm.
In the normal course of business, our information technology systems hold sensitive patient information including patient demographic data and other protected health information, which is subject to HIPAA and HITECH. We also contract with third-party vendors to maintain and store our patient’spatients’ individually identifiable health information. Numerous state and federal laws and regulations address privacy and information security concerns resulting from our access to our patient’s and employee’s personal information.
Our information technology systems and those of our vendors that process, maintain, and transmit such data are subject to computer viruses, cyber-attacks, or breaches. We adhere to policies and procedures designed to ensure compliance with HIPAA and other privacy and information security laws and require our third-party vendors to do so as well. If, however, we or our third-party vendors experience a breach, loss, or other compromise of unsecured protected health information or other personal information, such an event could result in significant civil and criminal penalties, lawsuits, reputational harm, and increased costs to us, any of which could have a material adverse effect on our financial condition and results of operations.
Furthermore, while our information technology systems, and those of our third-party vendors, are maintained with safeguards protecting against cyber-attacks. A cyber-attack that bypasses our information technology security systems, or those of our third-party vendors, could result in a material adverse effect on our business, financial condition, results of operations, or cash flows. In addition, our future results could be adversely affected due to the theft, destruction, loss, misappropriation, or release of protected health information, other confidential data or proprietary business information, operational or business delays resulting from the disruption of information technology systems and subsequent mitigation activities, or regulatory action taken as a result of such incident. We provide our employees training and regular reminders on important measures they can take to prevent breaches. We routinely identify attempts to gain unauthorized access to our systems. However, given the rapidly evolving nature and proliferation of cyber threats, there can be no assurance our training and network security measures or other controls will detect, prevent, or remediate security or data breaches in a timely manner or otherwise prevent unauthorized access to, damage to, or interruption of our systems and operations. Accordingly, we may be vulnerable to losses associated with the improper functioning, security breach, or unavailability of our information systems as well as any systems used in acquired operations.
We depend upon the cultivation and maintenance of relationships with the physicians in our markets.
Our success is dependent upon referrals from physicians in the communities our clinics serve and our ability to maintain good relations with these physicians and other referral sources. Physicians referring patients to our clinics are free to refer their patients to other therapy providers or to their own physician owned therapy practice. If we are unable to successfully cultivate and maintain strong relationships with physicians and other referral sources, our business may decrease and our net operating revenues may decline.
We depend upon our ability to recruit and retain experienced physical therapists.
Our revenue generation is dependent upon referrals from physicians in the communities our clinics serve, and our ability to maintain good relations with these physicians. Our therapists are the front line for generating these referrals and we are dependent on their talents and skills to successfully cultivate and maintain strong relationships with these physicians. If we cannot recruit and retain our base of experienced and clinically skilled therapists, our business may decrease and our net operating revenues may decline. Periodically, we have clinics in isolated communities that are temporarily unable to operate due to the unavailability of a therapist who satisfies our standards.
We may also experience increases in our labor costs, primarily due to higher wages and greater benefits required to attract and retain qualified healthcare personnel, and such increases may adversely affect our profitability. Furthermore, while we attempt to manage overall labor costs in the most efficient way, our efforts to manage them may have limited effectiveness and may lead to increased turnover and other challenges.
Failure to maintain effective internal control over our financial reporting could have an adverse effect on our ability to report our financial results on a timely and accurate basis.
We are required to produce our consolidated financial statements in accordance with the requirements of accounting principles generally accepted in the United States of America. Effective internal control over financial reporting is necessary for us to provide reliable financial reports, to help mitigate the risk of fraud and to operate successfully. We are required by federal securities laws to document and test our internal control procedures in order to satisfy the requirements of the Sarbanes-Oxley Act of 2002, which requires annual management assessments of the effectiveness of our internal control over financial reporting.
Testing and maintaining our internal control over financial reporting can be expensive and divert our management’s attention from other matters that are important to our business. We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with applicable law, or our independent registered public accounting firm may not be able to issue an unqualified attestation report if we conclude that our internal control over financial reporting is not effective. If we fail to maintain effective internal control over financial reporting, or our independent registered public accounting firm is unable to provide us with an unqualified attestation report on our internal control, we could be required to take costly and time-consuming corrective measures, be required to restate the affected historical financial statements, be subjected to investigations and/or sanctions by federal and state securities regulators, and be subjected to civil lawsuits by security holders. Any of the foregoing could also cause investors to lose confidence in our reported financial information and in us and would likely result in a decline in the market price of our stock and in our ability to raise additional financing if needed in the future.
Our revenues may fluctuate due to weather.
We have a significant number of clinics in states that normally experience snow and ice during the winter months. Also, a significant number of our clinics are located in states along the Gulf Coast and Atlantic Coast which are subject to periodic winter storms, hurricanes and other severe storm systems. Periods of severe weather may cause physical damage to our facilities or prevent our staff or patients from traveling to our clinics, which may cause a decrease in our net operating revenues.
We operate in a highly competitive industry.
We encounter competition from local, regional or national entities, some of which have superior resources or other competitive advantages. Intense competition may adversely affect our business, financial condition or results of operations. For a more complete description of this competitive environment, see “Business—Competition” in Item 1. An adverse effect on our business, financial condition or results of operations may require us to write down goodwill.
We may incur closure costs and losses.
The competitive, economic or reimbursement conditions in our markets in which we operate may require us to reorganize or to close certain clinics. In the event a clinic is reorganized or closed, we may incur losses and closure costs. The closure costs and losses may include, but are not limited to, lease obligations, severance, and write-down or write-off of goodwill and other intangible assets.
Future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.
As part of our growth strategy, we intend to continue pursuing acquisitions of outpatient physical therapy clinics and industrial injury prevention services businesses. Acquisitions may involve significant cash expenditures, potential debt incurrence and operational losses, dilutive issuances of equity securities and expenses that could have an adverse effect on our financial condition and results of operations. Acquisitions involve numerous risks, including:
the difficulty and expense of integrating acquired personnel into our business;
the diversion of management’s time from existing operations;
the potential loss of key employees of acquired companies;
the difficulty of assignment and/or procurement of managed care contractual arrangements; and
the assumption of the liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for failure to comply with healthcare regulations.
Risks related to our common stock
Issuance of shares in connection with financing transactions or under stock incentive plans will dilute current stockholders.
Pursuant to our stock incentive plans, our Compensation Committee of the Board, consisting solely of independent directors, is authorized to grant stock awards to our employees, directors and consultants. Shareholders will incur dilution upon the exercise of any outstanding stock awards or the grant of any restricted stock. In addition, if we raise additional funds by issuing additional common stock, or securities convertible into or exchangeable or exercisable for common stock, further dilution to our existing stockholders will result, and new investors could have rights superior to existing stockholders.
The number of shares of our common stock eligible for future sale could adversely affect the market price of our stock.
At December 31, 2020,2021, we had reserved approximately 233,000172,600 shares for future equity grants. We may issue additional restricted securities or register additional shares of common stock under the Securities Act of 1933, as amended (the “Securities Act”), in the future. The issuance of a significant number of shares of common stock upon the exercise of stock options or the availability for sale, or sale, of a substantial number of the shares of common stock eligible for future sale under effective registration statements, under Rule 144 or otherwise, could adversely affect the market price of the common stock.
Provisions in our articles of incorporation and bylaws could delay or prevent a change in control of our company, even if that change would be beneficial to our stockholders.
Certain provisions of our articles of incorporation and bylaws may delay, discourage, prevent or render more difficult an attempt to obtain control of our company, whether through a tender offer, business combination, proxy contest or otherwise. These provisions include the charter authorization of “blank check” preferred stock and a restriction on the ability of stockholders to call a special meeting.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None
| ITEM 2. | PROPERTIES. |
We lease the properties used for our clinics under non-cancelable operating leases with terms ranging from one to five years, with the exception of the property for one clinic which we own. We intend to lease the premises for any new clinic locations except in rare instances where leasing is not a cost-effective alternative. Our typical clinic occupies 1,000 to 7,000 square feet. There are 1417 clinics occupying space in the range of over 7,000 square feet to 13,500 square feet.
We also lease our executive offices located in Houston, Texas, under a non-cancelable operating lease expiring in February 2028. We currently lease approximately 44,000 square feet of space (including allocations for common areas) at our executive offices.
| ITEM 3. | LEGAL PROCEEDINGS. |
We are a party to various legal actions, proceedings, and claims (some of which are not insured), and regulatory and other governmental audits and investigations in the ordinary course of our business. We cannot predict the ultimate outcome of pending litigation, proceedings, and regulatory and other governmental audits and investigations. These matters could potentially subject us to sanctions, damages, recoupments, fines, and other penalties. The Department of Justice, CMS, or other federal and state enforcement and regulatory agencies may conduct additional investigations related to our businesses in the future that may, either individually or in the aggregate, have a material adverse effect on our business, financial position, results of operations, and liquidity.
Healthcare providers are subject to lawsuits under the qui tam provisions of the federal False Claims Act. Qui tam lawsuits typically remain under seal for some time while the government decides whether or not to intervene on behalf of a private qui tam plaintiff (known as a relator) and take the lead in the litigation. These lawsuits can involve significant monetary damages and penalties and award bounties to private plaintiffs who successfully bring the suits. We are and have been a defendant in these cases in the past, and may be named as a defendant in similar cases from time to time in the future.
On August 19, 2019, we received notice of a qui tam lawsuit (“the Complaint”) filed by a relator on behalf of the United States, titled U.S. ex rel. Bonnie Elsdon, v. U.S. Physical Therapy, Inc., U.S. Physical Therapy, Ltd., Rehab Partners #2, Inc., The Hale Hand Center, Limited Partnership (the “Hale Partnership”), and Suzanne Hale. This whistleblower lawsuit was filed in the U.S. District Court for the Southern District of Texas, seeking damages and civil penalties under the federal False Claim Act. This lawsuit was originally filed under seal by a former employee of The Hale Hand Center, Limited Partnership (“Hale Partnership”), a majority-owned subsidiary of the Company, on May 25, 2018. The U.S Government declined to intervene in the case and unsealed the Complaint on July 17, 2019. The plaintiff - relator served the Complaint on us and the other named defendants on August 19, 2019.
The Complaint allegesalleged that the Hale Partnership engaged in conduct to purposely “upcode” its billings for services provided to Medicare patients. The plaintiff - relator points to three dates of service and provides examples of what it alleges are inflated billings by the Hale Partnership; the relator then claimsalso claimed that similar false claims must have occurred on other days and at other Company-owned partnerships.
On October 3, 2019, we filed Motions to Dismiss based on numerous grounds on behalf of each of the named defendants. On October 29, 2019, the plaintiff-relator dismissed three of the named defendants, Rehab Partners #2, Inc., U.S. Physical Therapy, Ltd., and Suzanne Hale. The Motions to Dismiss as to the remaining two defendants has been fully briefed and is pending before the Court for a ruling.were denied on November 30, 2020.
In January 2022, to avoid the legal fees and fully investigated thediscovery costs in defending this matter and believe that the allegationsuncertainty of protracted litigation, the Company entered into a settlement agreement with the plaintiff-relator. In the settlement agreement, the plaintiff-relator released all defendants from liability for all conduct alleged in the Complaint, haveand the Company admitted no merit. We intend to vigorously defend this action, but at this time we are unable to predictliability or wrongdoing. In connection with the timing and outcomesettlement, the Office of the matter.United States Attorney for the Southern District of Texas agreed to a dismissal of the claims against the Hale Partnership and the Company. Under the terms of the settlement, the Company agreed to make payments to the government, the plaintiff-relator and her counsel. Such payments, in the aggregate, amounted to $2.75 million of which $2.6 million was recorded as an expense in 2021.
| ITEM 4. | MINE SAFETY DISCLOSURES. |
Not Applicable.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
Our common stock has traded on the New York Stock Exchange (“NYSE”) since August 14, 2012 under the symbol “USPH.” Prior to that, our common stock was traded on the Nasdaq Global Select Market under the symbol “USPH”. As of March 1, 2021,2022, there were 7988 holders of record of our outstanding common stock.
DIVIDENDS
On February 23, 2021,22, 2022, our Board of Directors declared a dividend of $0.35$0.41 per share which will be paid on April 9, 20218, 2022 to shareholders of record as of March 12, 2021.14, 2022. During 2021, we paid a quarterly dividend of $0.35 for the first and second quarters and $0.38 per share for each of the third and fourth quarters, totaling $1.46 per share for the year, which amounted to total aggregate cash payments of dividends to holders of our common stock in 2021 of approximately $18.8 million. During 2020, we paid a cash dividend for the first quarter of 2020 of $0.32 per share on all shares of common stock issued and outstanding as of April 17, 2020 which amounted to $4.1 million. In March 2020, our Board of Directors announced the suspension of any further dividends in 2020. During 2019, we paid a quarterly dividend of $0.27 for the first and second quarters and $0.30 per share for the third and fourth quarters, totaling $1.14 per share for the year, which amounted to total aggregate cash payments of dividends to holders of our common stock in 2019 of approximately $14.5 million. During 2018, we paid a regular quarterly dividend of $0.23 per share, totaling $0.92 per share, which amounted to total aggregate cash payments of dividends to holders of our common stock in 2018 of approximately $11.7 million. We are currently restricted from paying dividends on our common stock in excess of $50,000,000 in any fiscal year on our common stock under the Credit Agreement (as defined in ‘‘Item“Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Operations—Liquidity and Capital Resources’’Resources”).
FIVE YEAR PERFORMANCE GRAPH
The performance graph and related description shall not be deemed incorporated by reference into any filing under the Securities Act or under the Exchange Act, except to the extent that we specifically incorporate this information by reference. In addition, the performance graph and the related description shall not be deemed “soliciting material” or “filed” with the SEC or subject to
Regulation 14A or 14C.
On August 14, 2012, our common stock began trading on NYSE. The following performance graph compares the cumulative total stockholder return of our common stock to The NYSE Composite Index and the NYSE Health Care Index for the period from December 31, 20152016 through December 31, 2020.2021. The graph assumes that $100 was invested in our common stock and the common stock of each of the companies listed on The NYSE Composite Index and The NYSE Health Care Index on December 31, 20152016 and that any dividends were reinvested.
Comparison of Five Years Cumulative Total Return for the Year Ended December 31, 20202021
| 12/15 | 12/16 | 12/17 | 12/18 | 12/19 | 12/20 | 12/16 | 12/17 | 12/18 | 12/19 | 12/20 | 12/21 | |||||||
| U. S. Physical Therapy, Inc. | 100 | 131 | 135 | 191 | 213 | 224 | ||||||||||||
| U.S Physical Therapy. Incs. | 100 | 103 | 146 | 156 | 171 | 136 | ||||||||||||
| NYSE Composite | 100 | 109 | 126 | 112 | 137 | 143 | 100 | 116 | 103 | 123 | 131 | 155 | ||||||
| NYSE Healthcare Index | 100 | 97 | 115 | 122 | 146 | 162 | 100 | 119 | 127 | 151 | 168 | 203 | ||||||
| ITEM 6. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
EXECUTIVE SUMMARY
Our Business.We
Our reportable segments include the physical therapy operations segment and the industrial injury prevention services segment. Through our subsidiaries, we operate outpatient physical therapy clinics that provide pre- andpre-and post-operative care and treatment for a varietyof orthopedic-related disorders and sports-related injuries, neurologically-relatedtreatment for neurological-related injuries and rehabilitation of injured workers. At December 31, 2020, we operated 554 clinicsWe also have majority interests in 39 states. The average agecompanies which are leading providers of our clinics at December 31, 2020 was 11.03 years. In addition to our ownership and operation of outpatient physical therapy clinics, we also manage physical therapy facilities for third parties, such as physicians and hospitals, with 38 such third-party facilities under management as of December 31, 2020.
During the last three years we acquired a third company that is a providercompleted the acquisitions of seven multi-clinic practices and three industrial injury prevention services. This acquired company specializes in delivering injury prevention and care, post offer employment testing, functional capacity evaluations and return-to-work services. It performs these services across a network in 45 states including onsite at eleven client locations. After the acquisition, the business was then combined with Briotix Health increasing our ownership position in the partnership to approximately 76.0%.businesses as detailed below:
| Acquisition | Date | % Interest Acquired | Number of Clinics | ||||
| December 2021 Acquisition | December 31, 2021 | 75% | 3 | ||||
| November 2021 Acquisition | November 30, 2021 | 70% | * | ||||
| September 2021 Acquisition | September 30, 2021 | 100% | * | ||||
| June 2021 Acquisition | June 30, 2021 | 65% | 8 | ||||
| March 2021 Acquisition | March 31, 2021 | 70% | 6 | ||||
| November 2020 Acquisition | November 30, 2020 | 75% | 3 | ||||
| September 2020 Acquisition | September 30, 2020 | 70% | ** | ||||
| February 2020 Acquisition | February 27, 2020 | 65% *** | 4 | ||||
| September 2019 Acquisition | September 30, 2019 | 67% | 11 | ||||
| April 2019 Acquisition | April 11, 2019 | 100% | * |
| Acquisition | Date | % Interest Acquired | Number of Clinics | |||
| November 2020 Acquisition | November 30, 2020 | 75% | 3 | |||
| September 2020 Acquisition | September 30, 2020 | 70% | * | |||
| February 2020 Acquisition | February 27, 2020 | 65% ** | 4 | |||
| September 2019 Acquisition | September 30, 2019 | 67% | 11 | |||
| August 2018 Acquisition | August 31, 2018 | 70% | 4 |
| * | Industrial injury prevention business |
| ** | The business includes six management and services contracts which have been in place for a number of years. As of the date acquired, the contracts had a remaining term of |
| *** | The four clinics are in four separate partnerships. The Company's interest in the four |
During the multi-clinic acquisitionyear ended December 31, 2021, we sold two clinics. The aggregate sales price was $0.1 million. During the year ended December 31, 2020, we sold 14 previously closed clinics. The aggregate sales price was $1.1 million, of which $0.7 million was paid in 2018 referencedcash and $0.4 million in a note receivable, payable in two equal installments of principal and any accrued interest. The first payment was received in June 2021 and the table above, we acquired five separate clinic practices through severalnext payment is due on June 15, 2022.
22
We intend to continue to pursue additional acquisition opportunities, develop new clinics and open satellite clinics.
Impact of COVID-19
As previously disclosed in a series of filings with the SEC and further described in detail in our Quarterly Reports on Form 10-Q for the first three quarters of 2020 and our Annual Report on Form 10-K for the year ended MarchDecember 31, 2020, June 30, 2020 and September 30, 2020 filed with the SEC on May 21, 2020, August 7, 2020, and November 6, 2020, respectively, our results have beenwere negatively impacted by the effects of the COVID-19 pandemic. Management has taken a number of steps to reduce costs, make up for operating losses incurredpandemic in March and April, and increase profits. We continue to experience somewhat lower physical therapy patient volumes; however revenues improved significantly in2020. For the 2020 fourth quarter,2021 period as compared to the 2020 secondperiod, the increase in revenues and third quarters. Our average physical therapy patient volumes per day per clinic were 26.2, 18.9, 25.8expenses are primarily due to our business returning to and 27.7 respectively, in the first to fourth quarters of 2020. Our industrial injury prevention business has been less affected by the pandemic.
We have put preparedness plans in place at our facilities to maintain continuity of operations, while also taking steps to keep employees and patients safe. In line with recommendations to reduce large gatherings and increase social distancing, we have, where practical, transitionedcontinue to allow a large number of office-based employees to a remote work environment.remotely. We are monitoring the situation and will adjust work environments accordingly.
In March 2020 in response to the COVID-19 pandemic, the federal government approved the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law.. The CARES Act provides numerous tax provisions and other stimulus measures, including temporary changes regarding the prior and future utilization of net operating losses, temporary changes to the prior and future limitations on interest deductions, temporary suspension of certain payment requirements for the employer portion of Social Security taxes, technical corrections from prior tax legislation for tax depreciation of certain qualified improvement property, and the creation of certain payroll tax credits associated with the retention of employees.
We have received a number of benefits under the CARES Act including, but not limited to:
The CARES Act allowed for qualified healthcare providers to receive advanced payments under the existing Medicare Accelerated and Advance Payments Program (“MAAPP funds”) during the COVID-19 pandemic. Under this program, healthcare providers could choose to receive advanced payments for future Medicare services provided. We applied for and received approval to receive MAAP funds from Centers for Medicare & Medicaid Services (“CMS”) in April 2020. We recorded the $14.1 million in advance payments received as a liability. During the quarter ended March 31, 2021, we repaid the MAAPP funds of $14.1 million rather than applying them to future services performed. |
We elected to defer depositing the employer’s share of Social Security taxes for payments due from March 27, 2020, through December 31, 2020, interest-free and penalty-free. In December 2021, we paid $4.1 million related to these deferred payments. As of December 31, 2020,2021, $4.2 million related to these deferred payments is included in accrued liabilities and $4.1 million is included in long term liabilities.
The CARES Act provided additional waivers, reimbursement, grants and other funds to assist health care providers during the COVID-19 pandemic, including $100.0 billion in appropriations for the Public Health and Social Services Emergency Fund, also referred to as the Provider Relief Fund, to be used for preventing, preparing, and responding to the coronavirus, and for reimbursing eligible health care providers for lost revenues and health care related expenses that are attributable to COVID-19. ThroughFor the years ended December 31, 2021, and December 31, 2020, ourthe Company’s consolidated subsidiaries receivedrecorded income of approximately $4.6 million and $13.5 million, respectively, of payments under the CARES Act (“Relief Funds”). In accordance with GAAP,Under the Company’s accounting policy, these payments have beenwere recorded as Other income – Relief Funds. For the year ended December 31, 2020, we have recognized approximately $13.5 million, as Other income – Relief Funds on the accompanying consolidated statements of income. These funds are not required to be repaid upon attestation and provided that we complycompliance with certain terms and conditions, regarding the use of such funds, which could change materially based on evolving grant compliance provisions and guidance provided by the U.S. Department of Health and Human Services. Currently, wethe Company can attest to and comply with the terms and conditions. We will continue to monitor the evolving guidelines and may record adjustments as additional information is released.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those that have a significant impact on our results of operations and financial position involving significant estimates requiring our judgment. Our critical accounting policies are:
Revenue Recognition.
Revenues are recognized in the period in which services are rendered. Net patient revenuesrevenue consists of revenues for physical therapy and occupational therapy clinics that provide pre-and post-operative care and treatment for orthopedic related disorders, sports-related injuries, preventative care, rehabilitation of injured workers and neurological-related injuries. Net patient revenuesrevenue (patient revenues less estimated contractual adjustments) areis recognized at the estimated net realizable amounts from third-party payors, patients and others in exchange for services rendered when obligations under the terms of the contract are satisfied. There is an implied contract between us and the patient upon each patient visit. Generally, this occurs as we provide physical and occupational therapy services, as each service provided is distinct and future services rendered are not dependent on previously rendered services. We have agreements with third-party payors that provide for payments to us at amounts different from our established rates. The allowance for estimated contractual adjustments is based on terms of payor contracts and historical collection and write-off experience.
Management contract revenues,revenue, which areis included in other revenuesrevenue in the consolidated statements of net income, areis derived from contractual arrangements whereby we manage a clinic owned by a third party. We do not have any ownership interest in these clinics. Typically, revenues are determined based on the number of visits conducted at the clinic and recognized at the point in time when services are performed. Costs, typically salaries for our employees, are recorded when incurred.
Revenues from the industrial injury prevention services business, which are also included in other revenues in the consolidated statements of net income, are derived from onsite services we provide to clients’ employees including injury prevention, rehabilitation, ergonomic assessments and performance optimization. Revenue from the industrial injury prevention services business is recognized when obligations under the terms of the contract are satisfied. Revenues are recognized at an amount equal to the consideration we expect to receive in exchange for providing injury prevention services to itsour clients. The revenue is determined and recognized based on the number of hours and respective rate for services provided in a given period.
Additionally, other revenues includerevenue includes services we provide on-site at locations such as schools and industrial worksites for physical or occupational therapy services, athletic trainers and gym membership fees. Contract terms and rates are agreed to in advance between us and the third parties. Services are typically performed over the contract period and revenue is recorded at the point of service. If the services are paid in advance, revenue is recorded as a contract liability over the period of the agreement and recognized at the point in time when the services are performed.
We implemented the new standardsASC 606 beginning January 1, 2018, using a modified retrospective transition method. The principal change relates to how the new standard requires healthcare providers to estimate the amount of variable consideration to be included in the transaction price up to an amount which is probable that a significant reversal will not occur. The most common forms of variable consideration we experience are amounts for services provided that are ultimately not realizable from a customer. There were no changes to revenues or other revenues upon implementation. Under the new standards, our estimate for unrealizable amounts will continue to be recognized as a reduction to revenue. The bad debt expense historically reported will not materially change.
For ASC 606, there is an implied contract between us and the patient upon each patient visit. Separate contractual arrangements exist between us and third partythird-party payors (e.g. insurers, managed care programs, government programs, and workers' compensation programs which establish the amounts the third parties pay on behalf of the patients for covered services rendered. While these agreements are not considered contracts with the customer, they are used for determining the transaction price for services provided to the patients covered by the third partythird-party payors. The payor contracts do not indicate performance obligations for us but indicate reimbursement rates for patients who are covered by those payors when the services are provided. At that time, we are obligated to provide services for the reimbursement rates stipulated in the payor contracts. The execution of the contract alone does not indicate a performance obligation. For self-paying customers, the performance obligation exists when we provide the services at established rates. The difference between our established rate and the anticipated reimbursement rate is accounted for as an offset to revenue – revenue—contractual allowance.
We determine allowances for credit losses based on the specific agings of receivables and payor classifications at each clinic. The provision for credit losses is included in clinic operating costs in the statements of net income. Patient accounts receivable, which are stated at the historical carrying amount net of contractual allowances, write-offs and allowance for credit losses, includes only those amounts we estimate to be collectible.
The following table details the revenue related to the various categories (in thousands).:
| Year Ended | ||||||||||||
| December 31, 2021 | December 31, 2020 | December 31, 2019 | ||||||||||
| Net patient revenue | $ | 438,330 | $ | 373,340 | $ | 433,345 | ||||||
| Other revenue | 2,939 | 2,020 | 2,486 | |||||||||
| Physical therapy operations | 441,269 | 375,360 | 435,831 | |||||||||
| Management contract revenue | 9,853 | 8,410 | 8,676 | |||||||||
| Industrial injury prevention services revenue | 43,900 | 39,199 | 37,462 | |||||||||
| $ | 495,022 | $ | 422,969 | $ | 481,969 | |||||||
| Year Ended | ||||||||||||
| December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||
| Net patient revenues | $ | 373,340 | $ | 433,345 | $ | 417,703 | ||||||
| Management contract revenues | 8,410 | 8,676 | 8,339 | |||||||||
| Other revenues | 2,020 | 2,486 | 2,403 | |||||||||
| Physical therapy operations | $ | 383,770 | $ | 444,507 | $ | 428,445 | ||||||
| Industrial injury prevention services revenues | 39,199 | 37,462 | 25,466 | |||||||||
| $ | 422,969 | $ | 481,969 | $ | 453,911 | |||||||
Contractual Allowances. Contractual allowances result from the differences between the rates charged for services performed andexpected reimbursements by both insurance companies and government sponsored healthcare programs for such services. Medicare regulations and the various third party payors and managed care contracts are often complex and may include multiple reimbursement mechanisms payable for the services provided in our clinics. We estimate contractual allowances based on our interpretation of the applicable regulations, payor contracts and historical calculations. Each month we estimate our contractual allowance for each clinic based on payor contracts and the historical collection experience of the clinic and apply an appropriate contractual allowance reserve percentage to the gross accounts receivable balances for each payor of the clinic. Based on our historical experience, calculating the contractual allowance reserve percentage at the payor level is sufficient to allow us to provide the necessary detail and accuracy with our collectability estimates. However, the services authorized and provided and related reimbursement are subject to interpretation that could result in payments that differ from our estimates. Payor terms are periodically revised necessitating continual review and assessment of the estimates made by management. Our billing systems may not capture the exact change in our contractual allowance reserve estimate from period to period. Therefore, in order to assess the accuracy of our revenues and hence our contractual allowance reserves, our management regularly compares our cash collections to corresponding net revenues measured both in the aggregate and on a clinic-by-clinic basis. In the aggregate, the historical difference between net revenues and corresponding cash collections in any given fiscal year has generally reflected a difference within approximately 1.0% to 1.5% of net revenues. Additionally, analysis of subsequent period’s contractual write-offs on a payor basis reflects a difference within approximately 1.0% to 1.5% between the actual aggregate contractual reserve percentage as compared to the estimated contractual allowance reserve percentage associated with the same period end balance. As a result, we believe that a reasonable likely change in the contractual allowance reserve estimate would not be more than 1% to 1.5% of gross billings in accounts receivable at December 31, 2020.2021. For purposes of demonstrating the sensitivity of this estimate on our Company’s financial condition, a 1% to 1.5% increase or decrease in our aggregate contractual allowance reserve percentage would decrease or increase, respectively, net patient revenue by approximately $1.2$1.3 million to $1.8$1.9 million for the year ended December 31, 2020.2021. Management believes the changes in the estimate of the contractual allowance reserve for the periods ended December 31, 2021, 2020 2019 and 20182019 have not been material to the statement of income.
The following table sets forth information regarding our patient accounts receivable as of the dates indicated (in thousands):
| December 31, | December 31, | |||||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Gross patient accounts receivable | $ | 119,180 | $ | 124,035 | $ | 129,524 | $ | 119,180 | ||||||||
| Less contractual allowances | 75,266 | 75,109 | 80,484 | 75,266 | ||||||||||||
| Subtotal - accounts receivable | 43,914 | 48,926 | 49,040 | 43,914 | ||||||||||||
| Less allowance for credit losses | 2,008 | 2,698 | 2,768 | 2,008 | ||||||||||||
| Net patient accounts receivable | $ | 41,906 | $ | 46,228 | $ | 46,272 | $ | 41,906 | ||||||||
The following table presents our patient accounts receivable aging by payor class as of the dates indicated (in thousands):
| December 31, 2020 | December 31, 2019 | |||||||||||||||||||||||
| Payor | Current to 120 Days | 120+ Days | Total | Current to 120 Days | 120+ Days | Total | ||||||||||||||||||
| Managed Care/ Commercial Plans | $ | 13,053 | $ | 1,774 | $ | 14,827 | $ | 14,159 | $ | 1,783 | $ | 15,942 | ||||||||||||
| Medicare/Medicaid | 10,707 | 1,196 | 11,903 | 11,408 | 1,491 | 12,899 | ||||||||||||||||||
| Workers Compensation* | 6,576 | 926 | 7,502 | 6,593 | 1,121 | 7,714 | ||||||||||||||||||
| Self-pay | 4,086 | 3,146 | 7,232 | 4,365 | 3,040 | 7,405 | ||||||||||||||||||
| Other** | 1,108 | 1,342 | 2,450 | 808 | 1,460 | 2,268 | ||||||||||||||||||
| Totals | $ | 35,530 | $ | 8,384 | $ | 43,914 | $ | 37,333 | $ | 8,895 | $ | 46,228 | ||||||||||||
| December 31, 2021 | December 31, 2020 | |||||||||||||||||||||||
| Payor | Current to 120 Days | 120+ Days | Total | Current to 120 Days | 120+ Days | Total | ||||||||||||||||||
| Managed Care/ Commercial Plans | $ | 13,985 | $ | 2,381 | $ | 16,366 | $ | 13,053 | $ | 1,774 | $ | 14,827 | ||||||||||||
| Medicare/Medicaid | 13,442 | 1,636 | 15,078 | 10,707 | 1,196 | 11,903 | ||||||||||||||||||
| Workers Compensation* | 5,600 | 1,312 | 6,912 | 6,576 | 926 | 7,502 | ||||||||||||||||||
| Self-pay | 4,371 | 3,316 | 7,687 | 4,086 | 3,146 | 7,232 | ||||||||||||||||||
| Other** | 1,168 | 1,829 | 2,997 | 1,108 | 1,342 | 2,450 | ||||||||||||||||||
| Totals | $ | 38,566 | $ | 10,474 | $ | 49,040 | $ | 35,530 | $ | 8,384 | $ | 43,914 | ||||||||||||
| * | Workers compensation is paid by state administrators or their designated agents. |
| ** | Other includes primarily litigation claims and, to a lesser extent, vehicular insurance claims. |
Reimbursement for Medicare beneficiaries is based upon a fee schedule published by HHS. For a more complete description of our third partythird-party revenue sources, see “Business—Sources of Revenue” in Item 1.
Goodwill. The fair value of goodwill and other identifiable intangible assets with indefinite lives are evaluated for impairment atleast annually and upon the occurrence of certain events or conditions and are written down to fair value if considered impaired. These events or conditions include but are not limited to: a significant adverse change in the business environment, regulatory environment, or legal factors; a current period operating or cash flow loss combined with a history of such losses or a projection of continuing losses; or a sale or disposition of a significant portion of a reporting unit. The occurrence of one of these events or conditions could significantly impact an impairment assessment, necessitating an impairment charge. We evaluate indefinite-lived tradenames using the relief from royalty method in conjunction with itsour annual goodwill impairment test.
We operate a two segment business which is made up of various clinics within partnerships, and the other is an industrial injury prevention services business. The partnerships are components of regions and are aggregated to the operating segment level for the purpose of determining our reporting units when performing our annual goodwill impairment test. In 2021, 2020 2019 and 2018,2019, there were six regions. In addition to the six regions, in 20202021 and 2019,2020, the impairment analysis included a separate analysis for the industrial injury prevention services business, as a separate reporting unit.
As part of the impairment analysis, we are first required to assess qualitatively if we can conclude whether goodwill is more likely than not impaired. If goodwill is more likely than not impaired, we are then required to complete a quantitative analysis of whether a reporting unit’s fair value is less than its carrying amount. In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company considerswe consider relevant events or circumstances that affect the fair value or carrying amount of a reporting unit. The Company considersWe consider both the income and market approach in determining the fair value of its reporting units when performing a quantitative analysis.
An impairment loss generally would be recognized when the carrying amount of the net assets of a reporting unit, inclusive of goodwill and other identifiable intangible assets, exceeds the estimated fair value of the reporting unit. The evaluation of goodwill in 2021, 2020 2019 and 20182019 did not result in any goodwill amounts that were deemed impaired.
Redeemable Non-Controlling Interests Interest–—The non-controlling interests that are reflected as redeemable non-controlling interestsinterest inour consolidated financial statements consist of those owners, including us, that have certain redemption rights, whether currently exercisable or not, and which currently, or in the future, require that we purchase or the owner sell the non-controlling interest held by the owner, if certain conditions are met and the owners request the purchase (“Put Right”). We also have a call right (“Call Right”). The Put Right or Call Right may be triggered by the owner or us, respectively, at such time as both of the following events have occurred: 1) termination of the owner’s employment, regardless of the reason for such termination, and 2) the passage of specified number of years after the closing of the transaction, typically three to five years, as defined in the limited partnership agreement. The Put Rights and Call Rights are not automatic (even upon death) and require either the owner or us to exercise our rights when the conditions triggering the Put or Call Rights have been satisfied. The purchase price is derived at a predetermined formula based on a multiple of trailing twelve months earnings performance as defined in the respective limited partnership agreements.
On the date we acquire a controlling interest in a partnership and the limited partnership agreement for such partnerships contains redemption rights not under our control, the fair value of the non-controlling interest is recorded in the consolidated balance sheet under the caption – caption—Redeemable non-controlling interestsinterest. Then, in each reporting period thereafter until it is purchased by us, the redeemable non-controlling interest is adjusted to the greater of its then current redemption value or initial value, based on the predetermined formula defined in the respective limited partnership agreement. As a result, the value of the non-controlling interest is not adjusted below its initial value. We record any adjustment in the redemption value, net of tax, directly to retained earnings and not in the consolidated statements of income. Although the adjustments are not reflected in the consolidated statements of income, current accounting rules require that we reflect the adjustments, net of tax, in the earnings per share calculation. The amount of net income attributable to redeemable non-controlling interest owners is included in consolidated net income on the face of the consolidated statement of income statement.. We believe the redemption value (i.e. the carrying amount) and fair value are the same.
Effective December 31, 2017, we entered into amendments to our limited partnership agreements for our acquired partnerships replacing the mandatory redemption feature. No monetary consideration was paid to the partners to amend the agreements. The amended limited partnership agreements provide that, upon the triggering events, we have a Call Right and the selling entity or individual has a Put Right for the purchase and sale of the limited partnership interest held by the partner. Once triggered, the Put Right and the Call Right do not expire, even upon an individual partner’s death, and contain no mandatory redemption feature. The purchase price of the partner’s limited partnership interest upon the exercise of either the Put Right or the Call Right is calculated per the terms of the respective agreements. We accounted for the amendment of the limited partnership agreements as an extinguishment of the outstanding mandatorily redeemable non-controlling interests, which were classified as liabilities, through the issuance of new redeemable non-controlling interests classified in temporary equity. Pursuant to Accounting Standards Codification (“ASC”) 470-50-40-2, we removed the outstanding liabilities at their carrying amounts, recognized the new temporary equities at their fair value, and recorded no gain or loss on extinguishment as management believes the redemption value (i.e. the carrying amount) and fair value are the same. In summary, the redemption values of the mandatorily redeemable non-controlling interest (previously classified as liabilities) were reclassified as redeemable non-controlling interest (temporary equity) at fair value on the December 31, 2017, consolidated balance sheet.
Non-Controlling Interests – Interest—We recognize non-controlling interests, in which we have no obligation but the right to purchase thenon-controlling interests, as equity in the consolidated financial statements separate from the parent entity’s equity. The amount of net income attributable to non-controlling interests is included in consolidated net income on the face of the consolidated statements of income. Operating losses are allocated to non-controlling interests even when such allocation creates a deficit balance for the non-controlling interest partner. When we purchase a non-controlling interest and the purchase differs from the book value at the time of purchase, any excess or shortfall is recognized as an adjustment to additional paid-in capital.
SELECTED OPERATING AND FINANCIAL DATA
The following table and discussion relatesrelate to continuing operations unless otherwise noted. The defined terms with their respective description used in the following discussion are listed below:
| 2021 | Year ended December 31, 2021 |
| 2020 | Year ended December 31, 2020 |
| Clinics opened or acquired during the year ended December 31, 2021 | |
| 2020 Additions | Clinics opened or acquired during the year ended December 31, 2020 |
| Clinics Additions | Clinics opened or acquired during the year ended December 31, 2021 and 2020 |
| Mature Clinics | Clinics opened or acquired prior to January 1, 2020 and are still operating |
The following table presents selected operating and financial data, used by management as key indicators of our operating performance:
| For the Years Ended December 31, | For the Years Ended December 31, | |||||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Number of clinics, at the end of period | 554 | 583 | 591 | 554 | ||||||||||||
| Working Days | 256 | 255 | 254 | 256 | ||||||||||||
| Average visits per day per clinic | 24.6 | 27.6 | 29.1 | 24.6 | ||||||||||||
| Total patient visits | 3,533,371 | 4,091,967 | 4,219,576 | 3,533,371 | ||||||||||||
| Net patient revenue per visit | $ | 105.66 | $ | 105.90 | $ | 103.88 | $ | 105.66 | ||||||||
RESULTS OF OPERATIONS
| For the Year Ended | ||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Revenues: | ||||||||
| Net patient revenues | $ | 373,340 | $ | 433,345 | ||||
| Management contract revenue | 8,410 | 8,676 | ||||||
| Other patient revenues | 2,020 | 2,486 | ||||||
| Physical therapy operations | $ | 383,770 | $ | 444,507 | ||||
| Industrial injury prevention services | 39,199 | 37,462 | ||||||
| $ | 422,969 | $ | 481,969 | |||||
For 2020, our2021, the net income attributable to our shareholders in accordance with GAAP, was $40.8 million compared to $35.2 million as compared tofor 2020 and $40.0 million for the comparable period of 2019.year ended December 31, 2019 (“2019”). Inclusive of the charge or credit for revaluation of non-controlling interest, net of tax,taxes, used to compute diluted earnings per diluted share in accordance with GAAP, earningsthe amount was $31.1 million, or $2.41 per diluted share, wasfor 2021 as compared to $31.8 million, or $2.48 per diluted share, for 2020, and $31.3 million, or $2.45 per diluted share, for 2019. For both 20202021 and 2019,2020, in accordance with current accounting guidance, the revaluation of redeemable non-controlling interest, net of tax, is not included in net income but rather charged directly to retained earnings; however, the charge for this change is included in the earnings per basic and diluted share calculation. See table below (in thousands, except per share data).:
| Year Ended December 31, | For the Year Ended December 31, | |||||||||||||||
| 2020 | 2019 | 2021 | 2020 | |||||||||||||
| Computation of earnings per share - USPH shareholders: | ||||||||||||||||
| Net income attributable to USPH shareholders | $ | 35,194 | $ | 40,039 | $ | 40,831 | $ | 35,194 | ||||||||
| Credit (charges) to retained earnings: | ||||||||||||||||
| (Charges) credit to retained earnings: | ||||||||||||||||
| Revaluation of redeemable non-controlling interest | (4,632 | ) | (11,893 | ) | (13,011 | ) | (4,632 | ) | ||||||||
| Tax effect at statutory rate (federal and state) of 26.25% | 1,216 | 3,121 | ||||||||||||||
| Tax effect at statutory rate (federal and state) of 25.55% and 26.25%, respectively | 3,324 | 1,216 | ||||||||||||||
| $ | 31,144 | $ | 31,778 | |||||||||||||
| $ | 31,778 | $ | 31,267 | |||||||||||||
| Earnings per share (basic and diluted) | $ | 2.48 | $ | 2.45 | $ | 2.41 | $ | 2.48 | ||||||||
For 2020,2021, our Operating Results, (as defined below), includinginclusive of Relief Funds, (defined below)were $43.8 million, or $3.39 per diluted share, an increase of 13.8%, wasas compared to $38.4 million, or $2.99 per diluted share, as compared to $36.0 million, or $2.82 per diluted share in 2019.for 2020. For 2020,2021, our Operating Results, excluding Relief Funds was(as defined below), were $40.9 million, or $3.17 per diluted share, an increase of 33.5%, as compared to $30.6 million, or $2.39 per diluted share, as compared to $36.0 million, or $2.82 per diluted share in 2019.for 2020. Operating Results, a non-Generally Accepted Accounting PrinciplePrinciples (“GAAP”non-GAAP”) measure, equals net income attributable to ourdiluted shareholders per the consolidated statements of net income plus charges incurred for closure costs, less gain on the sale of partnership interests and clinics less allocated non-controlling interests, excludes expensesplus charges incurred for the transitionclinic closure costs and expenses related to our new Chief Financial Officer,executive officer transitions and settlement of a legal matter, all net of tax. The earningstaxes. Operating Results per diluted share from Operating Results also excludes the impact of the revaluation of redeemable non-controlling interest.interest and the associated tax impact. See table below for a detailed computation (in thousands, except per share data):
| For the Year Ended December 31, | ||||||||
| 2021 | 2020 | |||||||
| Computation of earnings per share - USPH shareholders: | ||||||||
| Net income attributable to USPH shareholders | $ | 40,831 | $ | 35,194 | ||||
| Credit (charges) to retained earnings: | ||||||||
| Revaluation of redeemable non-controlling interest | (13,011 | ) | (4,632 | ) | ||||
| Tax effect at statutory rate (federal and state) of 25.55% and 26.25%, respectively | 3,324 | 1,216 | ||||||
| $ | 31,144 | $ | 31,778 | |||||
| Earnings per share (basic and diluted) | $ | 2.41 | $ | 2.48 | ||||
| Adjustments: | ||||||||
| Closure costs | 30 | 3,931 | ||||||
| Expenses related to executive officers transition | 1,301 | 1,331 | ||||||
| Gain on sale of partnership interest and clinics | - | (1,091 | ) | |||||
| Relief Funds | (4,597 | ) | (13,500 | ) | ||||
| Settlement of a liability | 2,635 | - | ||||||
| Allocation to non-controlling interest | 676 | 3,116 | ||||||
| Revaluation of redeemable non-controlling interest | 13,011 | 4,632 | ||||||
| Tax effect at statutory rate (federal and state) of 25.55% and 26.25%, respectively | (3,336 | ) | 415 | |||||
| Operating Results (excluding Relief Funds) (a non-GAAP measure) | $ | 40,864 | $ | 30,612 | ||||
| Relief Funds | $ | 4,597 | $ | 13,500 | ||||
| Allocation to non-controlling interest | (715 | ) | (2,893 | ) | ||||
| Tax effect at statutory rate (federal and state) of 25.55% and 26.25%, respectively | (992 | ) | (2,784 | ) | ||||
| Operating Results (including Relief Funds) (a non-GAAP measure) | $ | 43,754 | $ | 38,435 | ||||
| Basic and diluted Operating Results per share (excluding Relief Funds) (a non-GAAP measure) | $ | 3.17 | $ | 2.39 | ||||
| Basic and diluted Operating Results per share (including Relief Funds) (a non-GAAP measure) | $ | 3.39 | $ | 2.99 | ||||
| Shares used in computation - basic and diluted | 12,898 | 12,835 | ||||||
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Computation of earnings per share - USPH shareholders: | ||||||||
| Net income attributable to USPH shareholders | $ | 35,194 | $ | 40,039 | ||||
| Credit (charges) to retained earnings: | ||||||||
| Revaluation of redeemable non-controlling interest | (4,632 | ) | (11,893 | ) | ||||
| Tax effect at statutory rate (federal and state) of 26.25% | 1,216 | 3,121 | ||||||
| $ | 31,778 | $ | 31,267 | |||||
| Earnings per share (basic and diluted) | $ | 2.48 | $ | 2.45 | ||||
| Adjustments: | ||||||||
| Expenses related to CFO transition | 1,331 | - | ||||||
| Closure costs | 3,931 | - | ||||||
| Gain on sale of partnership interest and clinics | (1,091 | ) | (5,514 | ) | ||||
| Relief Funds | (13,500 | ) | - | |||||
| Allocation to non-controlling interest | 3,116 | - | ||||||
| Revaluation of redeemable non-controlling interest | 4,632 | 11,893 | ||||||
| Tax effect at statutory rate (federal and state) of 26.25% | 415 | (1,674 | ) | |||||
| Operating Results (without Relief Funds) | $ | 30,612 | $ | 35,972 | ||||
| Relief Funds | 13,500 | - | ||||||
| Allocation to non-controlling interest | (2,893 | ) | - | |||||
| Tax effect at statutory rate (federal and state) of 26.25% | (2,784 | ) | - | |||||
| Operating Results (including Relief Funds) | $ | 38,435 | $ | 35,972 | ||||
| Basic and diluted Operating Results (without Relief Funds) per share | $ | 2.39 | $ | 2.82 | ||||
| Basic and diluted Operating Results (including Relief Funds) per share | $ | 2.99 | $ | 2.82 | ||||
| Shares used in computation - basic and diluted | 12,835 | 12,756 | ||||||
| Year Ended December 31, | ||||||||
| 2020 | 2019 | |||||||
| Net income attributable to USPH shareholders | $ | 35,194 | $ | 40,039 | ||||
| Adjustments: | ||||||||
| Depreciation and amortization | 10,533 | 10,095 | ||||||
| Closure costs - derecognition of goodwill | 1,859 | - | ||||||
| Relief Funds | (13,500 | ) | - | |||||
| Interest income | (142 | ) | (46 | ) | ||||
| Interest expense - debt and other | 1,634 | 2,079 | ||||||
| Provision for income taxes | 13,022 | 13,647 | ||||||
| Equity-based awards compensation expense | 7,917 | 6,985 | ||||||
| Adjusted EBITDA (without Relief Funds) | $ | 56,517 | $ | 72,799 | ||||
| Relief Funds | 13,500 | - | ||||||
| Adjusted EBITDA | $ | 70,017 | $ | 72,799 | ||||
The above tables reconciletable reconciles net income attributable to our shareholders calculated in accordance with GAAP to Adjusted EBITDA and Operating Results, a non-GAAP measuresmeasure defined above. We believe that Operating Results, which eliminates certain items described above that can be subject to volatility and unusual costs, is one of the principal measures to evaluate and monitor financial performance period over period. We also believe that Operating Results is useful information for investors to use in comparing the Company's period-to-period results as well as for comparing with other similar businesses. We believe Adjusted EBITDA is useful information for investors in comparing the Company’s period-to-period results as well as comparing with similar businesses which report adjusted EBITDA as defined by their company.
Operating Results and Adjusted EBITDA areis not measuresa measure of financial performance under GAAP. Operating ResultsGAAP and, Adjusted EBITDAtherefore, should not be considered in isolation or as an alternative to, or substitute for, net income attributable to our shareholders presented in the consolidated financial statements.
Reported total revenue for 2021 increased $72.1 million, or 17.0% to $495.0 million as compared to $423.0 million for 2020. See table below for a detail of reported total revenue (in thousands):
| Year Ended | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| Revenue related to Mature Clinics | $ | 402,744 | $ | 358,103 | ||||
| Revenue related to 2021 Clinic Additions | 13,802 | - | ||||||
| Revenue related to 2020 Clinic Additions | 21,283 | 9,664 | ||||||
| Revenue from clinics sold or closed in 2021 | 455 | 1,242 | ||||||
| Revenue from clinics sold or closed in 2020 | 46 | 4,331 | ||||||
| Net patient revenue from physical therapy operations | 438,330 | 373,340 | ||||||
| Other revenue | 2,939 | 2,020 | ||||||
| Revenue from physical therapy operations | 441,269 | 375,360 | ||||||
| Management contract revenue | 9,853 | 8,410 | ||||||
| Industrial injury prevention services | 43,900 | 39,199 | ||||||
| Net Revenue | $ | 495,022 | $ | 422,969 | ||||
Net patient revenuesrevenue from physical therapy operations decreased approximately 13.8%
Net patient revenue from physical therapy operations increased $65.0 million, or $60.017.4%, to $438.3 million tofor 2021 from $373.3 million in 2020 from $433.3 million in 2019.2020. Included in net patient revenues aboverevenue from physical therapy operations are revenues related to clinics sold or closed of $0.5 million for 2021 and $5.5 million for 2020. During 2021, the Company sold its interest in 2020two clinics and 2019 of $4.4 million in 2020 and $28.6 million in 2019.closed three clinics. During 2020, the Company sold its interest in 14 clinics and closed 34 clinics. During 2019, the Company sold its interest in a partnership which include 30 clinics and closed 11 clinics. For comparison purposes, adjusted forexcluding revenue from the clinics sold or closed, net patient revenuesrevenue from physical therapy operations was approximately $369.0$437.8 million infor 2021 and $367.8 million for 2020, inclusivean increase of $9.7 million related to New Clinics and $404.8 million in 2019. Net patient revenues19.1%. Revenue related to Mature Clinics decreased by $45.5increased $44.6 million, in 2020or 12.5%, for 2021 compared to 2019. The reduction is largely attributable to the adverse effects of the COVID-19 pandemic. See table below for a detail of net patient revenues from physical therapy operations (in thousands):2020.
| For the Year Ended | ||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Related to Mature Clinics | $ | 359,294 | $ | 404,784 | ||||
| Related to New Clinics | 9,664 | - | ||||||
| From 2020 sold and closed clinics | 4,382 | 15,542 | ||||||
| From 2019 sold and closed clinics | - | 13,019 | ||||||
| $ | 373,340 | $ | 433,345 | |||||
Net patient revenues are based on established billing rates less allowances and discounts for patients covered by contractual programs and workers’ compensation. Net patient revenues reflect contractual and other adjustments, which we evaluate monthly, relating to patient discounts from certain payors. Payments received under these contractual programs and workers’ compensation are based on predetermined rates and are generally less than the established billing rates of the clinics.
Other Revenues
Other revenue increased by $1.0 million, from $48.6was $2.9 million in 2019 to $49.62021 and $2.0 million in 2020. Revenues from management contracts were $8.4$9.9 million for 2020in 2021 as compared to $8.7$8.4 million for 2019.in 2020. Revenue from our industrial injury prevention services business increased 4.6%12.0% to $43.9 million in 2021 compared to $39.2 million in 2020, comparedwith $2.2 million of the increase related to $37.5 million in 2019. Other revenues were $2.0 million in 2020 and $2.4 million in 2019. See table below for a detailthe acquisition of reported net revenues (in thousands):an industrial injury prevention services business on November 30, 2021.
| For the Year Ended | ||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Revenues: | ||||||||
| Net patient revenues | $ | 373,340 | $ | 433,345 | ||||
| Management contract revenue | 8,410 | 8,676 | ||||||
| Other patient revenues | 2,020 | 2,486 | ||||||
| Physical therapy operations | $ | 383,770 | $ | 444,507 | ||||
| Industrial injury prevention services | 39,199 | 37,462 | ||||||
| $ | 422,969 | $ | 481,969 | |||||
Operating Costscost
Total operating costs,cost, excluding closure costs, werea non-GAAP measure, was $377.8 million in 2021, as compared to $324.6 million in 2020, as compared to $369.5 million in 2019. Operating2020. Total operating cost, excluding closure costs, were 76.7%was 76.3% as a percentage of net revenuesrevenue in both2021 and 76.7% in 2020. On a cost per visit basis, total operating cost, excluding closure costs, was $79.70 per visit in 2021 as compared to $81.74 per visit in 2020, and 2019.a decrease of 2.5%. Included in operating costscost for 2021 was $30.6 million related to Clinic Additions, of which $19.6 million was associated with the 2020 Clinic Additions. Included in operating cost for 2020 was $8.4 million related to New Clinics.2020 Clinic Additions. Operating costs forcost related to Mature Clinics decreasedincreased by $31.3$31.7 million in 2020for 2021 compared to 2019.2020. Operating costscost related to management contracts decreasedincreased by $0.7 million. Operating costs$1.7 million in 2021 compared to 2020. In addition, operating cost related to the industrial injury prevention services business were $29.1increased by $4.1 million in both 2020 and 2019.for the comparable periods. See table below for a detail of operating costs,cost, excluding closure costs (a non-GAAP measure) (in thousands):
| For the Year Ended | ||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Physical Therapy Operations | ||||||||
| Related to Mature Clinics | $ | 274,781 | $ | 306,128 | ||||
| Related to New Clinics | 8,416 | - | ||||||
| Related to 2020 closed and sold clinics | 5,583 | 14,588 | ||||||
| Related to 2019 closed and sold clinics | 40 | 12,283 | ||||||
| Physical therapy management contracts | 6,654 | 7,389 | ||||||
| Total Physical Therapy Operations | $ | 295,474 | $ | 340,388 | ||||
| Industrial injury prevention services | 29,114 | 29,082 | ||||||
| Total operating costs, excluding closure costs | $ | 324,588 | $ | 369,470 | ||||
29
| Year Ended | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| Operating cost related to Mature Clinics | $ | 305,148 | $ | 273,476 | ||||
| Operating cost related to 2021 Clinic Additions | 11,080 | - | ||||||
| Operating cost related to 2020 Clinic Additions | 19,561 | 8,416 | ||||||
| Operating cost related to clinics sold or closed in 2021 | 484 | 1,345 | ||||||
| Operating cost related to clinics sold or closed in 2020 | 25 | 5,583 | ||||||
| Closure costs | 30 | 3,931 | ||||||
| Physical therapy operations | 336,328 | 292,751 | ||||||
| Physical therapy management contracts | 8,306 | 6,655 | ||||||
| Industrial injury prevention services | 33,206 | 29,113 | ||||||
| Total operating cost | $ | 377,840 | $ | 328,519 | ||||
| Less: Physical therapy operations - closure costs | (30 | ) | (3,931 | ) | ||||
| Total operating cost excluding closure costs (a non-GAAP measure) | $ | 377,810 | $ | 324,588 | ||||
Closure costs in the current period of2020 were $3.9 million, includewhich includes estimates of remaining lease obligations, derecognition of goodwill and other costs related to closed and sold clinics. Each component of clinic operating costs is discussed below:
Operating Costs—Cost—Salaries and Related Costs
Salaries and related costs decreasedincreased to $278.5 million for 2021 from $235.6 million forin 2020, from $274.2 million in 2019, a decreasean increase of $38.6$42.8 million, or 14.1%18.2%. Included in salaries and related costs for 20202021 was $5.5$7.3 million related to New Clinics.2021 Clinic Additions. Salaries and related costs for clinics sold or closed in 2021 and 2020 and 2019 were $3.0$0.3 million and $16.7$3.8 million in 20202021 and 2019,2020, respectively. Salaries and related costs for Mature Clinics decreased $31.2increased $26.5 million in 20202021 compared to 2019.2020. Salaries and related costs for management contracts decreased $0.4 million.increased $1.4 million for 2021 compared to 2020. Salaries and related costs for the industrial injury prevention services business increased $1.1 million.$2.8 million for the comparable periods. Salaries and related costs as a percentage of net revenues waswere 56.3% for 2021 and 55.7% for 2020. Salaries and related costs for physical therapy operations were $57.81 per visit in 2021 as compared to $58.10 per visit in 2020, and 56.9% for 2019.a decrease of 0.5%. See table below for a detail of salaries and related costs (in thousands):
| For the Year Ended | ||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Physical Therapy Operations | ||||||||
| Related to Mature Clinics | $ | 196,686 | $ | 227,859 | ||||
| Related to New Clinics | 5,495 | - | ||||||
| Related to 2020 closed and sold clinics | 3,089 | 9,494 | ||||||
| Related to 2019 closed and sold clinics | - | 7,248 | ||||||
| Related to Physical therapy management contracts | 5,921 | 6,337 | ||||||
| Total Physical Therapy Operations | $ | 211,191 | $ | 250,938 | ||||
| Related to Industrial injury prevention services | 24,437 | 23,295 | ||||||
| Total Salaries and related costs | $ | 235,628 | $ | 274,233 | ||||
| Year Ended | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| Physical therapy operations | ||||||||
| Salaries and related costs related to Mature Clinics | $ | 222,431 | $ | 195,962 | ||||
| Salaries and related costs related to 2021 Clinic Additions | 7,258 | - | ||||||
| Salaries and related costs related to 2020 Clinic Additions | 13,940 | 5,495 | ||||||
| Salaries and related costs related to clinics sold or closed in 2021 | 293 | 805 | ||||||
| Salaries and related costs related to clinics sold or closed in 2020 | 18 | 3,009 | ||||||
| Total Physical therapy operations | 243,940 | 205,271 | ||||||
| Physical therapy management contracts | 7,316 | 5,921 | ||||||
| Industrial injury prevention services | 27,213 | 24,437 | ||||||
| Total salaries and related costs | $ | 278,469 | $ | 235,629 | ||||
Operating Costs—Cost—Rent, Supplies, Contract Labor and Other
Rent, supplies, contract labor and other costs decreasedincreased to $94.0 million for 2021 from $84.3 million for 2020, from $90.4 million for 2019, a decreasean increase of $6.0$9.7 million, or 6.7%11.5%. Included in rent, supplies, contract labor and other costs for 2021 and 2020 was $2.8 million related to New Clinics.Clinic Additions was $9.0 million. Rent, supplies, contract labor and other costs for clinics related to partnership interests closed or sold in 2021 and 2020 and 2019 were $2.4$0.2 million and $9.8$2.8 million in 2020, and 2019, respectively, rent,respectively. Rent, supplies, contract labor and other costs related to Mature Clinics were the same for both periods 2020 and 2019.increased $4.4 million. Rent, supplies, contract labor and other costs as a percent of net revenues was 18.8%19.0% for 20192021 and 19.9% for 2020. Rent, supplies, contract labor and other costs for physical therapy operations were $20.63 per visit in 2021 as compared to $22.37 per visit in 2020, a decrease of 7.8%. See table below for a detail of rent, supplies, contract labor and other costs (in thousands):
| For the Year Ended | ||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Physical Therapy Operations | ||||||||
| Related to Mature Clinics | $ | 73,726 | $ | 73,766 | ||||
| Related to New Clinics | 2,846 | - | ||||||
| Related to 2020 closed and sold clinics | 2,437 | 4,896 | ||||||
| Related to 2019 closed and sold clinics | 41 | 4,908 | ||||||
| Related to Physical therapy management contracts | 734 | 1,052 | ||||||
| Total Physical Therapy Operations | $ | 79,784 | $ | 84,622 | ||||
| Related to Industrial injury prevention services | 4,552 | 5,757 | ||||||
| Total Rent and other costs | $ | 84,336 | $ | 90,379 | ||||
30
| Year Ended | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| Physical therapy operations | ||||||||
| Rent, supplies, contract labor and other costs related to Mature Clinics | $ | 77,770 | $ | 73,348 | ||||
| Rent, supplies, contract labor and other costs related to 2021 Clinic Additions | 3,653 | - | ||||||
| Rent, supplies, contract labor and other costs related to 2020 Clinic Additions | 5,436 | 2,846 | ||||||
| Rent, supplies, contract labor and other costs related to clinics sold or closed in 2021 | 187 | 528 | ||||||
| Rent, supplies, contract labor and other costs related to clinics sold or closed in 2020 | 8 | 2,328 | ||||||
| Total Physical therapy operations | 87,054 | 79,050 | ||||||
| Physical therapy management contracts | 989 | 734 | ||||||
| Industrial injury prevention services | 5,993 | 4,552 | ||||||
| Total rent, supplies, contract labor and other costs | $ | 94,036 | $ | 84,336 | ||||
Operating Costs—Cost—Provision for Credit Losses
The provision for credit losses for net patient receivables was $5.3 million for 2021 and $4.6 million for 2020 and $4.9 million for 2019.2020. As a percentage of net patient revenues, the provision for credit losses was 1.1% for 2020both 2021 and 1.0% for 2019.
The average accounts receivable days outstanding were 32 days at December 31, 20202021 and 33 days at December 31, 2019.2020. Net patient receivables in the amountamounts of $4.5$4.6 million and $4.8$4.5 million were written-off in 20202021 and 2019,2020, respectively.
Gross Profit
Gross profit, excluding closure costs, a non-GAAP measure, was $117.2 million for 2020 was $98.42021, an increase of $18.8 million, or 19.1% as compared to $112.5$98.4 million in 2019. Grossfor 2020. The gross profit excludingpercentage, less closure costs, was 23.7% of total revenue for 2021, an increase of 40 basis points, as acompared to 23.3% for 2020. The gross profit percentage of net revenue for the Company’s physical therapy clinicsoperations, excluding closure costs, was 23.1% in 202023.8% for 2021, an increase of 70 basis points as compared to 23.6% in 2019.23.1% for 2020. The gross profit percentage on management contracts increased to 20.9% in 2020revenue was 15.7% for 2021 as compared to 14.8% in the 2019.20.9% for 2020. The gross profit percentage for the industrial injury prevention services business was $10.1 million, or 25.7% as a percentage of industrial injury prevention revenues, in 202024.4% for 2021 as compared to $8.4 million, or 22.4% as a percentage of industrial injury prevention revenues, in the comparable 2019 period. The25.7% for 2020. See table below for details theon gross profit, excluding closure costs (a non-GAAP measure) (in thousands) and a reconciliation against Gross Profit (in thousands):
| For the Year Ended | ||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Gross profit, excluding closure costs: | ||||||||
| Physical therapy clinics | $ | 86,540 | $ | 102,833 | ||||
| Management contracts | 1,755 | 1,287 | ||||||
| Industrial injury prevention services | 10,086 | 8,379 | ||||||
| Gross profit, excluding closure costs | $ | 98,381 | $ | 112,499 | ||||
| Year Ended | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| Physical therapy operations | $ | 104,971 | $ | 86,540 | ||||
| Management contracts | 1,547 | 1,755 | ||||||
| Industrial injury prevention services | 10,694 | 10,086 | ||||||
| Physical therapy operations - closure costs | (30 | ) | (3,931 | ) | ||||
| Gross profit | $ | 117,182 | $ | 94,450 | ||||
| Physical therapy operations - closure costs | 30 | 3,931 | ||||||
| Gross profit, excluding closure costs (a non-GAAP measure) | $ | 117,212 | $ | 98,381 | ||||
Corporate Office Costs
Corporate office costs consisting primarily of salaries, benefits and equity based compensation of corporate office personnel and directors, rent, insurance costs, depreciation and amortization, travel, legal, compliance, professional, marketing and recruiting fees, were $46.5 million for 2021 compared to $42.0 million for 2020 and $45.0 million for 2019.2020. Corporate office costs were 9.4% of total revenue for 2021 as a percentage of net revenues werecompared to 9.9% for 2020. For 2020, corporate offices costs included temporary salary reductions and 9.3%furloughs related to the pandemic. Also, in 2019.both 2021 and 2020, corporate office costs included $1.3 million in equity compensation expense related to the accelerated vesting of restricted stock previously granted to two executive officers upon their retirement in July 2021 and November 2020. Excluding the equity compensation related to the accelerated vesting of restricted stock, corporate office costs was 9.1% of total revenue for 2021 and 9.6% for 2020.
Operating Income
Operating income for 20202021 was $52.4$70.6 million, an increase of $18.2 million, or 34.8%, as compared to $67.4$52.4 million for 2019.2020. Operating income as a percentage of nettotal revenue decreasedincreased 190 basis points from 14.0%12.4% for 2020 to 14.3% for 2021.
Other Income—Relief Funds
Relief Funds recognized in 2019other income were $4.6 million for 2021 and $13.5 million for 2020. See discussion related to 12.4% in 2020.Relief Funds for more information.
Other Income - Gain on Sale of Partnership Interest
Other Income - Relief Funds
Interest Expense – Expense—Debt and Other
Interest expense – expense—debt and other was $0.9 million for 2021 and $1.6 million for 2020 and $2.1 million for 2019.2020. At December 31, 2020, $16.02021, $114.0 million was outstanding under our Amended Credit Agreement (as defined below under “—Liquidity and Capital Resources”). See “—Liquidity and Capital Resources” below for a discussion of the terms of our Amended Credit Agreement.
Provision for Income Taxes
The provision for income tax was $15.3 million for 2021 and $13.0 million for 2020 and $13.6 million for 2019.2020. The provision for income tax as a percentage of income before taxes less net income attributable to non-controlling interest (effective tax rate) was 27.2% for 2021 and 27.0% for 2020 and 25.4% for 2019.2020. See table below ($ in thousands):
| Year Ended | ||||||||
| December 31, 2021 | December 31, 2020 | |||||||
| Income before taxes | $ | 73,196 | $ | 65,513 | ||||
| Less: net income attributable to non-controlling interest: | ||||||||
| Redeemable non-controlling interest - temporary equity | (11,358 | ) | (11,175 | ) | ||||
| Non-controlling interest - permanent equity | (5,735 | ) | (6,122 | ) | ||||
| $ | (17,093 | ) | $ | (17,297 | ) | |||
| Income before taxes less net income attributable to non-controlling interest | $ | 56,103 | $ | 48,216 | ||||
| Provision for income taxes | $ | 15,272 | $ | 13,022 | ||||
| Effective tax rate | 27.2 | % | 27.0 | % | ||||
| Year Ended | ||||||||
| December 31, 2020 | December 31, 2019 | |||||||
| Income before taxes | $ | 65,513 | $ | 70,906 | ||||
| Less: net income attributable to non-controlling interests: | ||||||||
| Non-controlling interests - permanent equity | (6,122 | ) | (6,561 | ) | ||||
| Redeemable non-controlling interests - temporary equity | (11,175 | ) | (10,659 | ) | ||||
| $ | (17,297 | ) | $ | (17,220 | ) | |||
| Income before taxes less net income attributable to non-controlling interests | $ | 48,216 | $ | 53,686 | ||||
| Provision for income taxes | $ | 13,022 | $ | 13,647 | ||||
| Effective tax rate | 27.0 | % | 25.4 | % | ||||
Net Income Attributable to Non-controlling InterestsInterest
Net income attributable to redeemable non-controlling interests (permanentinterest (temporary equity) was $6.1$11.4 million in 2020for 2021 and $6.6$11.2 million in 2019.for 2020. Net income attributable to redeemable non-controlling interests (temporaryinterest (permanent equity) was $11.2$5.7 million in 2020for 2021 and $10.6$6.1 million in 2019.for 2020.
LIQUIDITY AND CAPITAL RESOURCES
We believe that our business is generating sufficient cash flow from operating activities to allow us to meet our short-term and long-term cash requirements, other than those with respect to future significant acquisitions. At December 31, 2020,2021, we had $32.9$28.5 million in cash and cash equivalents compared to $23.5$32.9 million at December 31, 2019.2020. Although the start-up costs associated with opening new clinics and our planned capital expenditures are significant, we believe that our cash and cash equivalents and the availability under our Amended Credit Agreement are sufficient to fund the working capital needs of our operating subsidiaries, future clinic development and acquisitions and investments through at least December 2021.2022. Significant acquisitions would likely require financing under our Amended Credit Agreement.
Effective December 5, 2013, we entered into an Amended and Restated Credit Agreement with a commitment for a $125.0 million revolving credit facility. This agreement was amended in August 2015, January 2016, March 2017, November 2017, January 2021, and November 20172021 (hereafter is referred to as “Amended Credit Agreement”). In November 2021, we exercised the accordion feature in the Amended Credit Agreement to increase to limit on our facility from $125.0 million to $150.0 million, with an updated accordion feature providing for an additional capacity of $25.0 million, therefore increasing the availability up to $175.0 million.
The 2021 amendment to the Amended Credit Agreement allows for cash and noncash consideration for acquisitions permitted under the Amended Credit Agreement of up to $50,000,000 for any fiscal year, and allows for payments in cash dividends to shareholders in an aggregate amount not to exceed $50,000,000 in any fiscal year. The Amended Credit Agreement is unsecured and includes certain financial covenants which include a consolidated fixed charge coverage ratio and a consolidated leverage ratio, as defined in the agreement. The Amended Credit Agreement is unsecured and has loan covenants, including requirements that we comply with a consolidated fixed charge coverage ratio and consolidated leverage ratio. Proceeds from the Amended Credit Agreement may be used for working capital, acquisitions, purchases of our common stock, dividend payments to our common stockholders, capital expenditures and other corporate purposes. The pricing grid is based on our consolidated leverage ratio with the applicable spread over LIBOR ranging from 1.25% to 2.0% or the applicable spread over the Base Rate ranging from 0.1% to 1%. Fees under the Amended Credit Agreement include an unused commitment fee ranging from 0.25% to 0.3% depending on our consolidated leverage ratio and the amount of funds outstanding under the Amended Credit Agreement.
On December 31, 2020, $16.02021, $114.0 million was outstanding on the Amended Credit Agreement resulting in $109.0$61.0 million of availability. As of the date of this report, we were in compliance with all of the covenants thereunder.
Cash provided by operations was $99.9$76.4 million and net proceeds from our Amended Credit Agreement amounted to $30.0$98.0 million. The major uses of cash for investing and financing activities included: purchase of interests in businesses ($23.986.8 million), purchases of redeemable non-controlling interest, temporary equity ($20.428.5 million), purchases of fixed assets ($7.68.2 million), proceeds on sale of partnership interest ($0.80.3 million), distributions to non-controlling interests ($18.316.9 million), payments of cash dividends to our shareholders ($4.118.8 million), and payments on notes payable ($1.04.9 million).
On December 31, 2021, we acquired a 75% interest in a three-clinic physical therapy practice with the practice founder retaining 25%. The purchase price for the 75% interest was approximately $3.7 million, of which $3.5 million was paid in cash and $0.2 million in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest is payable on December 31, 2023.
On November 30, 2021, we acquired an approximate 70% interest in a leading provider of industrial injury prevention services. The previous owners retained the remaining interest. The initial purchase price for the 70% equity interest, not inclusive of the $2.0 million contingent payment in conjunction with the acquisition if specified future operational objectives are met, was approximately $63.2 million, of which $62.2 million was paid in cash, and $1.0 million is in the form of a note payable. The note accrues interest at 3.25% and the principal and interest is payable on November 30, 2023. The business generates approximately $27.0 million in annual revenue at a margin of approximately 20%. As part of the transaction, we also agreed to the potential future purchase of a separate company under the same ownership that provides physical therapy and rehabilitation services to hospitals and other ancillary providers in a distinct market area. The current owners have the right to put this transaction to us in approximately five years, with such right having a $3.5 million fair value at December 31, 2021, as reflected on the Company’s consolidated balance sheet in Other long-term liabilities. The value of this right will be adjusted in future periods, as appropriate, with any change in fair value reflected in the Company’s consolidated statement of income.
On September 30, 2021, we acquired a company that specializes in return-to-work and ergonomic services, among other offerings. The business generates more than $2.0 million in annual revenue. We acquired the company’s assets at a purchase price of approximately $3.3 million (which includes the obligation to pay an amount up to $0.6 million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives are met) and contributed those assets to our industrial injury prevention services subsidiary. The initial purchase price, not inclusive of the $0.6 million contingent payment, was approximately $2.7 million, of which $2.4 million was paid in cash, and $0.3 million is in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest is payable on September 30, 2023.
On June 30, 2021, we acquired a 65% interest in an eight-clinic physical therapy practice with the previous owners retaining 35%. The purchase price was approximately $10.3 million, of which $9.0 million was paid in cash, $1.0 million is payable based on the achievement of certain business criteria and $0.3 million is in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest is payable on June 30, 2023. Additionally, we have an obligation to pay an additional amount up to $0.8 million in contingent payment consideration in conjunction with the acquisition if specified future operational objectives are met. We recorded acquisition-date fair value of this contingent liability based on the likelihood of the contingent earn-out payment. The earn-out payment will subsequently be remeasured to fair value each reporting date.
On March 31, 2021, we acquired a 70% interest in a five-clinic physical therapy practice with the previous owners retaining 30%. When acquired, the practice was developing a sixth clinic which has been completed. The purchase price for the 70% interest was approximately $12.0 million, of which $11.7 million was paid in cash and $0.3 million in the form of a note payable. The note accrues interest at 3.25% per annum and the principal and interest is payable on March 31, 2023.
On November 30, 2020, we acquired a 75% interest in a three-clinic physical therapy practice.practice with the previous owners retaining 25%. The purchase price for the 75% interest was $8.9 million (net of cash acquired), of which $8.6 million was paid in cash and $0.3 million in the form of a seller note payable that is payable in two principal installments totaling $162,500 each. The first principal payment plus accrued interest will bewas paid onin November 2021 with the second installment to be paid in November 2022. The note accrues interest at 3.25% per annum.
On September 30, 2020, we acquired a 70% interest in an entity which holds six management contracts that have been in place for a number of years and had five years remaining on their term as of the acquisition date. The previous owners retained the remaining 30%. The purchase price for the 70% interest was approximately $4.2 million, with $3.7 million payable in cash and $0.5 million in notes payable. One of the notes payable of $0.2 million is payable, with any accrued interest at 5% per annum, onwas paid in September 30, 2021. The remaining2021 and the note of $0.3 million was paid in November 2020.
On February 27, 2020, we acquired interests in a four-clinic physical therapy practice. The four clinics are operated in four separate partnerships. The Company’s interests in the four partnerships range from 10.0% to 83.8%, with an overall 65.0% based on the initial purchase transaction. The aggregate purchase price was $11.9 million, of which $11.6 million was paid in cash and $0.3 million in the form of a seller note. The note accrues interest at 4.75% per annum and the principal and interest is payablewas paid in February 2022.
On September 30, 2019, we acquired a 67% interest in an eleven-clinic physical therapy practice.practice with the previous owners retaining 33%. The purchase price for the 67% interest was $12.4 million, of which $12.1 million was paid in cash and $0.3 million in the form of a seller note that is payable in two principal installments totaling $150,000 each. The first principal payment plus accrued interest was paid in September 2020 withand the second installment to bewas paid in September 2021. The note accrues interest at 5.0% per annum.
On April 11, 2019, we acquired a company that is a provider of industrial injury prevention services. The acquired company specializes in delivering injury prevention and care, post offer employment testing, functional capacity evaluations and return-to-work services. It performs these services across a network of 45 states including onsite at eleven client locations. The business was then combined with Briotix Health, the Company’s industrial injury prevention services operation, increasing the Company’s ownership position in the Briotix Health partnership to approximately 76.0%. The purchase price for the acquired company was $22.9 million ($23.6 million less cash acquired of $0.7 million), which consisted of $18.9 million in cash, (of which $0.5 million will be paid to certain shareholders), and a $4.0 million seller note. The note accrues interest at 5.5% and the principal and accrued interest is payable on April 9, 2021.
Historically, we have generated sufficient cash from operations to fund our development activities and to cover operational needs. We plan to continue developing new clinics and making additional acquisitions. We have from time to time purchased the non-controlling interests of limited partners in our Clinic Partnerships. We may purchase additional non-controlling interests in the future. Generally, any acquisition or purchase of non-controlling interests is expected to be accomplished using a combination of cash and financing. Any large acquisition would likely require financing.
We make reasonable and appropriate efforts to collect accounts receivable, including applicable deductible and co-payment amounts. Claims are submitted to payors daily, weekly or monthly in accordance with our policy or payor’s requirements. When possible, we submit our claims electronically. The collection process is time consuming and typically involves the submission of claims to multiple payors whose payment of claims may be dependent upon the payment of another payor. Claims under litigation and vehicular incidents can take a year or longer to collect. Medicare and other payor claims relating to new clinics awaiting CMS approval initially may not be submitted for six months or more. When all reasonable internal collection efforts have been exhausted, accounts are written off prior to sending them to outside collection firms. With managed care, commercial health plans and self-pay payor type receivables, the write-off generally occurs after the account receivable has been outstanding for 120 days or longer.
We have future obligations for debt repayments, employment agreements and future minimum rentals under operating leases. The obligations as of December 31, 20202021 are summarized as follows (in thousands):
| Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | |||||||||||||||||||||||||||||||||||||||||||
| Credit Agreement | $ | 16,000 | $ | 16,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 114,000 | $ | - | $ | - | $ | - | $ | 114,000 | $ | - | $ | - | ||||||||||||||||||||||||||||
| Notes Payable | 5,495 | 4,899 | 596 | - | - | - | - | 4,417 | 830 | 3,587 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Interest Payable | 114 | 107 | 7 | - | - | - | - | 292 | 74 | 218 | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Employee Agreements | 47,884 | 39,402 | 7,145 | 1,332 | 5 | - | - | 61,278 | 52,837 | 8,321 | 120 | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Operating Leases | 119,834 | 37,427 | 29,655 | 22,233 | 14,379 | 7,909 | 8,231 | 136,992 | 41,270 | 33,637 | 25,527 | 17,111 | 10,575 | 8,872 | ||||||||||||||||||||||||||||||||||||||||||
| $ | 189,327 | $ | 97,835 | $ | 37,403 | $ | 23,565 | $ | 14,384 | $ | 7,909 | $ | 8,231 | $ | 316,979 | $ | 95,011 | $ | 45,763 | $ | 25,647 | $ | 131,111 | $ | 10,575 | $ | 8,872 | |||||||||||||||||||||||||||||
We generally enter into various notes payable as a means of financing our acquisitions. Our present outstanding notes payable primarily relate to the acquisitions of a business or acquisitions of majority interests in businesses. At December 31, 2020,2021, our remaining outstanding balance on these notes aggregated $5.5$4.4 million.
The notes payable for the acquisition of businesses of $5.5$4.4 million are payable in 20212022 and 2022.2023. Notes are generally payable in equal annual installments of principal over two years plus any accrued and unpaid interest. See above table for a detail of future principal payments. Interest accrues at various interest rates ranging from 3.25% to 5.50%4.75% per annum, subject to adjustment.annum.
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The limited partnership agreements, as amended, provide that, upon the triggering events, we have a Call Right and the selling entity or individual has a Put Right for the purchase and sale of the limited partnership interest held by the partner. Once triggered, the Put Right and the Call Right do not expire, even upon an individual partner’s death, and contain no mandatory redemption feature. The purchase price of the partner’s limited partnership interest upon the exercise of either the Put Right or the Call Right is calculated per the terms of the respective agreements and classified as redeemable non-controlling interest (temporary equity) in our consolidated balance sheets. The fair value of the redeemable non-controlling interest at December 31, 20202021 was $132.3$154.4 million.
As of December 31, 2020,2021, we have accrued $5.7$6.6 million related to credit balances and overpayments due to patients and payors. This amount is expected to be paid in 2021.2022.
From September 2001 through December 31, 2008, our Board of Directors (“Board”) authorized us to purchase, in the open market or in privately negotiated transactions, up to 2,250,000 shares of our common stock. In March 2009, the Board authorized the repurchase of up to 10% or approximately 1,200,000 shares of our common stock (“March 2009 Authorization”). Our Amended Credit Agreement permits share repurchases of up to $15,000,000 in the aggregate, subject to compliance with covenants. We are required to retire shares purchased under the March 2009 Authorization.
There is no expiration date for the share repurchase program. As of December 31, 2020,2021, there are currently an additional estimated 124,740156,986 shares (based on the closing price of $120.25$95.55 on December 31, 2020)2021) that may be purchased from time to time in the open market or private transactions depending on price, availability and our cash position. We did not purchase any shares of our common stock during the yearyears ended December 31, 20202021 and 2019.2020.
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FACTORS AFFECTING FUTURE RESULTS
The risks related to our business and operations include:
the multiple effects of the impact of public health crises and epidemics/pandemics, such as the novel strain of COVID-19 (coronavirus)and its variants, for which the total financial magnitude cannot be currently estimated;
changes in Medicare rules and guidelines and reimbursement or failure of our clinics to maintain their Medicare certification and/or enrollment status, including the Medicare reimbursement reductionsstatus;
revenue we receive from Medicare and Medicaid being subject to potential retroactive reduction;
compliance with federal and state laws and regulations relating to the privacy of individually identifiable patient information, and associated fines and penalties for failure to comply;
competitive, economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and other intangible assets;
the impact of COVID-19 related vaccination and/or testing mandates at the federal, state and/or local level, which could have an adverse impact on staffing, revenue, costs and the results of operations:
changes in reimbursement rates or payment methods fromas the result of government enacted national healthcare reform;
business and regulatory conditions including federal and state regulations;
governmental and other third party payors including government agencies,payor inspections, reviews, investigations and changesaudits, which may result in the deductiblessanctions or reputational harm and co-pays owed by patients;increased costs;
revenue and earnings expectations;
legal actions, which could subject us to increased operating costs and uninsured liabilities;
general economic conditions;
availability and cost of qualified physical therapists;
personnel productivity and retaining key personnel;
competitive economic or reimbursement conditions in our markets which may require us to reorganize or close certain clinics and thereby incur losses and/or closure costs including the possible write-down or write-off of goodwill and other intangible assets;
acquisitions, purchase of non-controlling interests (minority interests) and the successful integration of the operations of the acquired businesses;businesses;
impact on the business and cash reserves resulting from retirement or resignation of key partners and resulting purchase of their non-controlling interest (minority interests);
maintaining our information technology systems with adequate safeguards to protect against cyber-attacks;
a security breach of our or our third party vendors’ information technology systems may subject us to potential legal action and reputational harm and may result in a violation of the Health Insurance Portability and Accountability Act of 1996 of the Health Information Technology for Economic and Clinical Health Act;
maintaining clients for which we perform management and other services, as a breach or termination of those contractual arrangements by such clients could cause operating results to be less than expected;
maintaining adequate internal controls;controls;
maintaining necessary insurance coverage;
availability, terms, and use of capital; and
weather and other seasonal factors.
See also Risk Factors in Item 1A of this Annual Report on Form 10-K.
We do not maintain any derivative instruments such as interest rate swap arrangements, hedging contracts, futures contracts or the like. Our only indebtedness as of December 31, 20202021 was the outstanding balance of seller notes from our acquisitions of $5.5$4.4 million and an outstanding balance on our Amended Credit Agreement of $16.0$114.0 million. The outstanding balance under our Amended Credit Agreement is subject to fluctuating interest rates. A 1% change in the interest rate would yield an additional $160,000$1.1 million of interest expense. See Note 9 to our consolidated financial statements included in Item 8.