McKenna Long & Aldridge LLP
Suite 5300
303 Peachtree Street
Atlanta, Georgia 30308
January 31, 2006
Via EDGAR
Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549
Attention: Mr. Jim Rosenberg
Ms. Lisa Vanjoske
Ms. Tabatha Akins
Re: Gentiva Health Services, Inc.
Form 10-K for the fiscal year ended January 2, 2005
File No. 001-15669
Ladies and Gentlemen:
On behalf of Gentiva Health Services, Inc., we are responding to the letter dated January 17, 2006 (the "Comment Letter") from Jim B. Rosenberg, Division of Corporation Finance of the Securities and Exchange Commission (the "Commission").
Set forth below are the responses to the comments of the Commission staff (the "Staff") provided to us by Gentiva. For ease of reference, each comment contained in the Comment Letter appears directly above the corresponding response. Please note that references to "we," "our," "us," "Gentiva," and the "Company" refer to Gentiva Health Services, Inc.
January 2, 2005 Form 10-K, filed March 17, 2005
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, page 17
Critical Accounting Policies and Estimates, pages 32 - 34
Comment 1. We note your proposed disclosure in response to our prior comment two. Based on your response, it would appear that changes in each of your critical accounting estimates have not been material for each period presented. Your discussion of revenues, allowance for doubtful accounts, cost of claims incurred but not reported, and obligations under insurance programs does not clarify that fact. Please revise your proposed disclosure to include this statement, so that this information is wholly transparent to an investor.
Response:
We have revised our proposed disclosures to include statements in each of our critical accounting estimates that reflect whether there has been a material change for the periods presented. In our discussion of revenues, allowance for doubtful accounts, cost of claims incurred but not reported, and obligations under insurance programs, we have clarified in each of these sections that a material revision in the related estimate has not occurred for the periods presented. We will also make the proper disclosures prospectively when material changes occur in the future.
Revenue Recognition, page 32
Comment 2. We note your revised disclosure in response to part a) of our prior comment three. We believe that it would be useful for an investor to have the accounts receivable aging for the two most recent fiscal years. Please revise your proposed disclosure accordingly.
Response:
We have revised our proposed disclosure to include the accounts receivable aging for the two most recent fiscal years. Appendix B attached hereto reflects the accounts receivable aging table as of January 2, 2005 and January 1, 2006. The table has been completed with respect to the fiscal year ended January 2, 2005 and, when included in our Annual Report on Form 10-K, will include the information as of the end of both fiscal years.
* * * *
Appendix A attached to this letter contains the proposed additional modifications to the Critical Accounting Policies and Estimates described in this letter. The proposed Critical Accounting Policies and Estimates will be included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2006. At your request and for your convenience, we would be happy to provide you by fax a redlined version denoting the proposed changes from the version filed with our letter of December 20, 2005. In addition, as you would expect, the actual Critical Accounting Policies and Estimates included in our Annual Report on Form 10-K for the fiscal year ended January 1, 2006 may include additional information as a result of year-end events and the process of preparing our audited financial statements.
Should you have further comments or require further information, or if any questions should arise in connection with this submission, please call me at (404) 527-4990 or Stacy Ingram at (404) 527-4647.
Sincerely,
/s/ Thomas Wardell
Thomas Wardell
cc: John R. Potapchuk, Gentiva Health Services, Inc.
Stephen B. Paige, Gentiva Health Services, Inc.
APPENDIX A
PROPOSED CRITICAL ACCOUNTING POLICIES AND ESTIMATES
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most critical estimates relate to revenue recognition, the collectibility of accounts receivable and related reserves, the cost of claims incurred but not reported and obligations under insurance programs, which include workers' compensation, professional liability, property and general liability, and employee health and welfare insurance programs. A description of the critical accounting policies and a discussion of the significant estimates and judgments associated with such policies are described below.
Revenue Recognition
Revenues recognized by the Company are subject to a number of elements which impact both the overall amount of revenue realized as well as the timing of the collection of the related accounts receivable. In each category described below, the impact of the estimate, if applicable, undertaken by the Company with respect to these elements is reflected in net revenues in the consolidated statements of income. See further discussion of the elements below under the heading "Causes and Impact of Change on Revenue."
In addition, these elements can be impacted by the risk factors described in "Risks Related to the Company's Business and Industry" and "Risks Related to Healthcare Regulation," which appear in Part I of the Company's Annual Report on Form 10-K.
Fee-for-Service Agreements
Under fee-for-service agreements with patients and commercial and certain government payers, net revenues are recorded based on net realizable amounts to be received in the period in which the services and products are provided or delivered. Fee-for-service contracts with commercial payers are traditionally one year in term and renewable automatically on an annual basis, unless terminated by either party.
Under fee-for-service agreements with certain managed care customers, the Company also estimates the revenue related to claims incurred but not reported in situations in which the Company is responsible for care management and patient services are performed by a non-affiliated provider. The estimate of revenue for claims incurred but not reported involves applying a factor based on historical patterns of service utilization and payment trends to the services authorized at each of the Company's regional coordination centers. The Company evaluates the assumptions and judgments used in determining this factor on a quarterly basis utilizing the trailing twelve months of claims payments, and changes in estimated unbilled receivables for claims incurred but not reported are determined based on such evaluation.
Changes in the estimate are recorded as net revenues in the Company's consolidated statements of income. There have not been any material revisions in this estimate for the periods presented in this filing.
Capitated Arrangements
The Company has capitated arrangements with certain managed care customers. Under the capitated arrangements, net revenues are recognized based on a predetermined monthly contractual rate for each member of the managed care plan regardless of the volume of services covered by the capitation arrangements. Net revenues generated under capitated arrangements were approximately [__] percent, 12 percent, and 16 percent of total net revenues for fiscal 2005, 2004 and 2003, respectively.
Medicare
Prospective Payment System Reimbursements
Under PPS for Medicare reimbursement, the Company estimates net revenues to be recorded based on a reimbursement rate which varies based on the severity of the patient's condition, service needs and certain other factors. Medicare billings under PPS are initially recognized as deferred revenue and are subsequently amortized into revenue over an average patient treatment period. The process for recognizing revenue to be recorded under the Medicare program is based on certain assumptions and judgments, including the average length of time of each treatment as compared to a standard 60 day episode, the appropriateness of the clinical assessment of each patient at the time of certification and the level of adjustments to the fixed reimbursement rate relating to patients who receive a limited number of visits, have significant changes in condition or are subject to certain other factors during the episode. Revenue is subject to adjustment during this period if there are significant changes in the patient's condition during the treatment period or if the patient is discharged but readmitted to another agency within the same 60 day episodic period. Deferred revenue of approximately $[__] million and $5.5 million relating to the Medicare PPS program was included in other accrued expenses in the consolidated balance sheets as of January 1, 2006 and January 2, 2005, respectively.
There have not been any material revisions in estimates of Medicare reimbursements under PPS for the periods presented in this filing. During fiscal 2004, however, the Company recorded a revenue adjustment of $1.0 million to reflect an estimated repayment to Medicare in connection with the services rendered to certain patients since the inception of PPS on October 1, 2000. In connection with the estimated repayment, CMS has determined that home care providers should have received lower reimbursements for certain services rendered to beneficiaries discharged from inpatient hospitals within fourteen days immediately preceding admission to home healthcare. As of January 1, 2006, Medicare has not finalized the amounts to be repaid for these items. Although management believes that established reserves, which are included in Medicare liabilities in the accompanying consolidated balance sheets, are sufficient, it is possible that the finalization of repayments to Medicare relating to these items could result in adjustments to the consolidated financial statements that exceed established reserves.
Settlement Issues under Interim Payment System
Prior to October 1, 2000, reimbursement of Medicare home care nursing services was based on reasonable, allowable costs incurred in providing services to eligible beneficiaries subject to both per visit and per beneficiary limits in accordance with the Interim Payment System established through the Balanced Budget Act of 1997. These costs were reported in annual cost reports which were filed with CMS and were subject to audit by the fiscal intermediary engaged by CMS. The fiscal intermediary has not finalized its audit of the fiscal 2000 cost reports. Furthermore, settled cost reports relating to certain years prior to fiscal 2000 could be subject to reopening of the audit process by the fiscal intermediary. Although management believes that established reserves related to the open fiscal 2000 cost report year are sufficient, it is possible that adjustments resulting from such audits could exceed established reserves and could have a material effect on the Company's financial condition and results of operations. These reserves are reflected in Medicare liabilities in the accompanying consolidated balance sheets. The Company periodically reviews its established audit reserves for appropriateness and records any adjustments or settlements as net revenues in the Company's consolidated statement of income. There have not been any material revisions in established reserves for the periods presented in this filing.
Settlement liabilities are recorded at the time of any probable and reasonably estimable event and any positive settlements are recorded as revenue in the Company's consolidated statements of income in the period in which such gain contingencies are realized. As discussed further under the heading "Government Matters - PRRB Appeal" in Note [__] to the consolidated financial statements included in this report, the Company received an aggregate of $10.4 million during fiscal 2004 in settlement of the Company's appeal filed with the PRRB related to the reopening of all of its 1997 and 1998 cost reports.
Causes and Impact of Change on Revenue
For each of the sources of revenue, the principal elements in addition to those described above which can cause change in the amount of revenue to be realized are (i) an inability to obtain appropriate billing documentation; (ii) an inability to obtain authorizations acceptable to the payer; (iii) utilization of services at levels other than authorized; and (iv) other reasons unrelated to credit risk. In addition, revenue can be impacted by the risk factors described in "Risks Related to the Company's Business and Industry" and "Risks Related to Healthcare Regulation," which appear in Part I of the Company's Annual Report on Form 10-K.
Revenue adjustments resulting from differences between estimated and actual reimbursement amounts are recorded as adjustments to net revenues or recorded against allowance for doubtful accounts, depending on the nature of the adjustment. These are determined by Company management and reviewed from time to time, but no less often than quarterly. Each of the elements described here and under each of the various sources of revenue can effect change in the estimates, and it is not possible to predict the degree of change that might be effected by a variation in one or more of the elements described. While it is not possible to predict the degree of change of each element, we believe that changes in these elements could cause a change in estimate which could have a material impact on the consolidated financial statements. There have not been any material revisions in these estimates for the periods presented in this filing.
Billing and Receivables Processing
The Company's billing systems record revenues at net expected reimbursement based on established or contracted fee schedules. The systems provide for an initial contractual allowance adjustment from "usual and customary" charges, which is typical for the payers in the healthcare field. The Company records an initial contractual allowance at the time of billing and reduces the Company's revenue to expected reimbursement levels. Changes in contractual allowances, if any, are recorded each month. Changes in contractual allowances have not been material for the periods presented in this filing.
Accounts receivable attributable to major payer sources of reimbursement are as follows:
(Dollars in thousands)
January 1, 2006 | January 2, 2005 | ||||
Medicare | $ | % | $ 23,848 | 17% | |
Medicaid and Local Government |
|
| 20,391 | 15 | |
Commercial Insurance and Other |
|
| 88,910 | 64 | |
Self-Pay |
|
| 5,893 | 4 | |
Gross Accounts Receivable |
| % | 139,042 | 100% | |
Less: Allowance for doubtful accounts |
| (7,040) | |||
Net Accounts Receivable | $ | $ 132,002 | |||
The Company's estimate of "Collectibility of Accounts Receivable" further outlines other matters considered with respect to the allowance for doubtful accounts.
Accounts Receivable
Collection Policy
The process for estimating the ultimate collection of receivables involves significant assumptions and judgments. The Company believes that its collection and reserve processes, along with the monitoring of its billing processes, help to reduce the risk associated with material revisions to reserve estimates resulting from adverse changes in reimbursement experience, revenue adjustments and billing functions. Collection processes are performed in accordance with the Fair Debt Collections Practices Act and include reviewing aging and cash posting reports, contacting the payers to determine why payment has not been made, resubmission of claims when appropriate and filing appeals with payers for claims that have been denied. Collection procedures generally include follow up contact with the payer at least every 30 days from invoice date, and a review of collection activity at 90 days to determine continuation of internal collection activities or potential referral to collection agencies. The Company's bad debt policy includes escalation procedures and guidelines for write-off of an account, as well as the authorization required, once it is determined that the open account has been worked by the
Company's internal collectors and/or collection agencies in accordance with the Company's standard procedures and resolution of the open account through receipt of payment is determined to be remote. The Company reviews each account individually and does not have either a threshold dollar amount or aging period that it uses to trigger a balance write-off, although the Company does have a small balance write-off policy for non-governmental accounts with debit balances under $10.
The Company's policy is to bill for patient co-payments and make good faith efforts to collect such amounts. At the end of each reporting period, the Company estimates the amount of outstanding patient co-payments that will not be collected and the amount of outstanding co-payments that may be waived due to financial hardship based on a review of historical trends. This estimate is made as part of the Company's evaluation of the adequacy of its allowance for doubtful accounts. There have not been any material revisions in this estimate for the periods presented in this filing.
Accounts Receivable Reserve Methodology
The Company has implemented a standardized approach to estimate and review the collectibility of its receivables based on accounts receivable aging trends. The Company analyzes historical collection trends, reimbursement experience, and revenue adjustment trends, by major payer groups including Medicare, Cigna and other payer groups organized by similar type and experience, as an integral part of the estimation process related to determining the valuation allowance for accounts receivable. In addition, the Company assesses the current state of its billing functions on a quarterly basis in order to identify any known collection or reimbursement issues to determine the impact, if any, on its reserve estimates, which involve judgment. Revisions in reserve estimates are recorded as an adjustment to the provision for doubtful accounts which is reflected in selling, general and administrative expenses in the consolidated statements of income. There have not been any material changes in the estimates for the periods presented in this filing. The allowance for doubtful accounts at January 1, 2006, January 2, 2005 and December 28, 2003 was $[__] million, $7.0 million and $7.9 million, respectively. Additional information regarding the Company's allowance for doubtful accounts can be found in Schedule II - Valuation and Qualifying Accounts on page [__] of the Company's 2005 Annual Report on Form 10-K.
Cost of Claims Incurred But Not Reported
Under capitated arrangements with managed care customers, the Company estimates the cost of claims incurred but not reported based on applying actuarial assumptions, historical patterns of utilization to authorized levels of service, current enrollment statistics and other information. Under fee-for-service arrangements with managed care customers, the Company also estimates the cost of claims incurred but not reported and the estimated revenue relating thereto in situations in which the Company is responsible for care management and patient services are performed by a non-affiliated provider.
The estimate of cost of claims incurred but not reported involves applying a factor based on historical patterns of service utilization and payment trends to the services authorized at each of the Company's regional coordination centers. The Company evaluates the assumptions and
judgments used in determining this factor on a quarterly basis utilizing the trailing twelve months of claims payments, and changes in estimated liabilities for cost of claims incurred but not reported are determined based on such evaluation.
Each of the elements described above can effect change in the estimates, and it is not possible to predict the degree of change that might be effected by a variation in one or more of the elements described. Because of the elements described above, these estimates may change in the future and could have a material impact on the Company's consolidated financial statements.
The cost of claims incurred for fiscal year 2005, fiscal year 2004 and fiscal year 2003 were $[__] million, $269.6 million and $285.9 million, respectively. Differences in costs between fiscal years relate primarily to changes in business activity in the Company's CareCentrix operations during the reported periods. Cost of claims incurred but not reported, including any changes in estimate relating thereto, are reflected in cost of services sold in the Company's consolidated statements of income. There have not been any material revisions in estimates of prior year costs related to cost of claims incurred for the periods presented in this filing.
Obligations Under Insurance Programs
The Company is obligated for certain costs under various insurance programs, including workers' compensation, professional liability, property and general liability, and employee health and welfare.
The Company may be subject to workers' compensation claims and lawsuits alleging negligence or other similar legal claims. The Company maintains various insurance programs to cover this risk with insurance policies subject to substantial deductibles and retention amounts. The Company recognizes its obligations associated with these programs in the period the claim is incurred. The cost of both reported claims and claims incurred but not reported, up to specified deductible limits, have generally been estimated based on historical data, industry statistics, the Company's own home health specific historical claims experience, current enrollment statistics and other information. The Company's estimates of its obligations and the resulting reserves are reviewed and updated from time to time but at least quarterly. The elements which impact this critical estimate include the number, type and severity of claims and the policy deductible limits; therefore, the estimate is sensitive and changes in the estimate could have a material impact on the Company's consolidated financial statements.
Workers' compensation and professional and general liability costs were $[__] million, $14.9 million and $17.5 million for the fiscal years ended January 1, 2006, January 2, 2005 and December 28, 2003, respectively. Differences in costs between fiscal years relate primarily to the number and severity of claims incurred in each reported period. Workers' compensation and professional liability claims, including any changes in estimate relating thereto, are recorded primarily in cost of services sold in the Company's consolidated statements of income. There have not been any material revisions in estimates of prior year costs for the periods presented in this filing.
The Company maintains insurance coverage on individual claims. The Company is responsible for the cost of individual workers' compensation claims and individual professional liability claims up to $500,000 per incident which occurred prior to March 15, 2002, and $1,000,000 per incident thereafter. The Company also maintains excess liability coverage relating to professional liability and casualty claims which provides insurance coverage for individual claims of up to $25,000,000 in excess of the underlying coverage limits. Payments under the Company's workers' compensation program are guaranteed by letters of credit and segregated restricted cash balances. The Company believes that its present insurance coverage and reserves are sufficient to cover currently estimated exposures, but there can be no assurance that the Company will not incur liabilities in excess of recorded reserves or in excess of its insurance limits.
The Company provides employee health and welfare benefits under a self insured program and maintains stop loss coverage for individual claims in excess of $175,000. For fiscal years ended January 1, 2006, January 2, 2005 and December 28, 2003, employee health and welfare costs were $[__] million, $19.3 million and $18.0 million, respectively. Differences in costs between fiscal years relate primarily to the number and severity of individual claims incurred in each reported period. Changes in estimates of the Company's employee health and welfare claims are recorded in cost of services sold for caregiver associates and in selling, general and administrative costs for administrative associates in the Company's consolidated statements of income. There have not been any material revisions in estimates of prior year costs for the periods presented in this filing.
APPENDIX B
ACCOUNTS RECEIVABLE AGING BY MAJOR PAYER SOURCES
(in thousands)
January 1, 2006 | ||||||||||
Total | 0 - 90 days | 91 - 180 days | 181 - 270 days | Over 270 days | ||||||
| Medicare | $ | $ | $ | $ | $ | |||||
| Medicaid and Local Government | $ | $ | $ | $ | $ | |||||
| Commercial Insurance and Other | $ | $ | $ | $ | $ | |||||
| Self-Pay | $ | $ | $ | $ | $ | |||||
| Gross Accounts Receivable | $ | $ | $ | $ | $ | |||||
January 2, 2005 | ||||||||||
Total | 0 - 90 days | 91 - 180 days | 181 - 270 days | Over 270 days | ||||||
| Medicare | $ | 23,848 | $ | 21,239 | $ | 1,950 | $ | 415 | $ | 243 |
| Medicaid and Local Government | $ | 20,391 | $ | 18,936 | $ | 987 | $ | 386 | $ | 82 |
| Commercial Insurance and Other | $ | 88,910 | $ | 78,930 | $ | 6,177 | $ | 2,013 | $ | 1,790 |
| Self-Pay | $ | 5,893 | $ | 1,947 | $ | 1,482 | $ | 1,029 | $ | 1,436 |
| Gross Accounts Receivable | $ | 139,042 | $ | 121,051 | $ | 10,597 | $ | 3,843 | $ | 3,551 |
