| Summary of Significant Accounting Policies | 2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements of the Company include all of its wholly-owned subsidiaries, including Corporation, EmCare and AMR and their respective subsidiaries and affiliated physician groups. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions relating to the reporting of results of operations, financial condition and related disclosure of contingent assets and liabilities at the date of the financial statements including, but not limited to, estimates and assumptions for accounts receivable, insurance related reserves and acquired intangible assets. Actual results may differ from those estimates under different assumptions or conditions.
Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly liquid investments with a maturity of three months or less at acquisition, and are recorded at market value.
Insurance Collateral
Insurance collateral is comprised of investments in U.S. Treasuries and marketable equity and debt securities held by the Company’s captive insurance subsidiary that supports the Company’s insurance program and reserves, as well as cash deposits with third parties. Certain of these investments, if sold or otherwise liquidated, would have to be replaced by other suitable financial assurances and are, therefore, considered restricted. These investments are designated as available-for-sale and reported at fair value with the related temporary unrealized gains and losses reported as a separate component of accumulated other comprehensive income (loss), net of deferred income tax. Declines in the fair value of a marketable investment security which are determined to be other-than-temporary are recognized in the statements of operations, thus establishing a new cost basis for such investment. Investment income earned on these investments is reported as interest income from restricted assets in the statements of operations.
Realized gains and losses are determined based on an average cost basis.
Insurance collateral also includes a receivable from insurers of $0.6 million and $1. 5 million as of December 31, 2015 and 2014, respectively, for liabilities in excess of the Company’s self-insured retention.
Trade and Other Accounts Receivable, net
The Company estimates its allowances based on payor reimbursement schedules, historical collections and write-off experience and other economic data. Patient-related accounts receivable are recorded net of estimated allowances for contractual discounts and uncompensated care in the period in which services are performed. Account balances, principally related to receivables recorded for self-pay patients, are charged off against the uncompensated care allowance, when it is probable the receivable will not be recovered. As a result of the estimates used in recording the allowances, the nature of healthcare collections, which may involve lengthy delays, there is a reasonable possibility that recorded estimates will change materially in the short-term.
The following table presents accounts receivable, net and accounts receivable allowances by segment (in thousands):
December 31,
December 31,
2015
2014
Accounts receivable, net
EVHC
$
$
EmCare
AMR
Total
$
$
Accounts receivable allowances
EmCare
Allowance for contractual discounts
$
$
Allowance for uncompensated care
Total
$
$
AMR
Allowance for contractual discounts
$
$
Allowance for uncompensated care
Total
$
$
Accounts receivable allowances at EmCare are estimated based on cash collection and write-off experience at a facility level contract and facility specific payor mix. These allowances are reviewed and adjusted monthly through revenue provisions. The Company compares actual cash collected on a date of service basis to the revenue recorded for that period and records any adjustment necessary for an overage or deficit in these allowances based on actual collections and future estimated collections.
AMR contractual allowances are determined primarily on payor reimbursement schedules that are included and regularly updated in the billing systems, and by historical collection experience. The billing systems calculate the difference between payor specific gross billings and contractually agreed to, or governmentally driven, reimbursement rates. The allowance for uncompensated care at AMR is related principally to receivables recorded for self-pay patients. AMR’s allowances on self-pay accounts receivable are estimated based on historical write-off experience and future estimated collections.
Parts and Supplies Inventory
Parts and supplies inventory is valued at cost, determined on a first ‑in, first ‑out basis. Durable medical supplies, including oximeters and other miscellaneous items, are capitalized as inventory and expensed as used.
Property, Plant and Equipment, net
Property, plant and equipment are recorded at cost except for property, plant and equipment acquired through business acquisitions, which is initially recorded at fair value. Maintenance and repairs that do not extend the useful life of the property are charged to expense as incurred. Gains and losses from dispositions of property, plant and equipment are recorded in the period incurred. Depreciation of property, plant and equipment is provided substantially on a straight ‑line basis over their estimated useful lives, which are as follows:
Buildings
35
to
years
Leasehold improvements
Shorter of expected life or life of lease
Vehicles
5
to
years
Computer hardware and software
3
to
years
Other
3
to
years
Goodwill and Other Indefinite Lived Intangibles
Goodwill and other indefinite lived intangibles, including radio frequencies, licenses and certain trade names, are not amortized, but instead tested for impairment at least annually. The Company performs its annual impairment test in the third quarter for goodwill and other indefinite lived intangibles or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Such indicators include a sustained significant decline in the Company’s market capitalization or a significant decline in its expected future cash flows due to changes in company ‑specific factors or the broader business climate. The evaluation of such factors requires considerable judgment. Any adverse change in these factors could have a significant impact on the recoverability of goodwill and have a material impact on the Company’s consolidated financial statements.
Goodwill and other indefinite lived intangible assets have been allocated to three reporting units. Two of the reporting units are aggregated into the EmCare operating segment and the other reporting unit is the AMR operating segment which the Company determined met the criteria to be classified as reporting units. As of December 31, 2015, $ 1,999.1 million and $ 1,272.8 million of goodwill had been allocated to EmCare and AMR, respectively.
The Company evaluates the carrying amounts of goodwill on an annual basis to determine if there is potential goodwill impairment.
For 2015 and 2013, the Company performed a qualitative assessment to determine whether it is more likely than not that the fair value of each reporting unit exceeds its carrying amount. Several qualitative factors were considered in the assessment, including, among others, overall financial performance, industry and market considerations and relevant company specific events. In contemplating all factors in their totality, the Company concluded that it is more likely than not that the fair value of each reporting unit exceeded its carrying amount. As such, no further analysis was required. For 2014, the Company performed a quantitative assessment. Fair value for each of the reporting units was determined using the estimated future cash flows, discounted at a rate commensurate with the risk involved or the market approach. In conducting the quantitative assessment in 2014, the Company determined that fair value of each reporting unit exceeded its carrying amount.
If the fair value of the reporting unit is less than the carrying value, an impairment loss is recorded to the extent that the fair value of the goodwill within the reporting unit is less than its carrying value. No impairment charges were recorded as of December 31, 2015, 2014, or 2013.
Impairment of Long ‑lived Assets and Other Definite Lived Intangibles
Long ‑lived assets and other definite lived intangibles, including contract values, physician referral network, certain trade names and covenants not to compete, are amortized on a straight-line basis over the estimated useful life, consistent with the Company’s expectation of estimated future cash flows. These assets are assessed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Important factors that could trigger impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the use of the acquired assets or the strategy for the overall business, and significant negative industry or economic trends. If indicators of impairment are present, management evaluates the carrying value of long ‑lived assets and other definite lived intangibles in relation to the projection of future undiscounted cash flows of the underlying business. Projected cash flows are based on historical results adjusted to reflect management’s best estimate of future market and operating conditions, which may differ from actual cash flows. There were no indicators of impairment in 2015 , 2014 , or 2013 .
Claims Liability and Professional Liability Reserves
The Company is self ‑insured up to certain limits for costs associated with workers compensation claims, automobile claims, professional liability claims and general business liabilities. Reserves are established for estimates of the loss that will ultimately be incurred on claims that have been reported but not paid and claims that have been incurred but not reported. These reserves are established based on consultation with independent actuaries. The actuarial valuations consider a number of factors, including historical claim payment patterns and changes in case reserves, the assumed rate of increase in healthcare costs and property damage repairs. Historical experience and recent stable trends in the historical experience are the most significant factors in the determination of these reserves. Management believes the use of actuarial methods to account for these reserves provides a consistent and effective way to measure these subjective accruals. However, given the magnitude of the claims involved and the length of time until the ultimate cost is known, the use of any estimation technique in this area is inherently sensitive. Accordingly, recorded reserves could differ from ultimate costs related to these claims due to changes in accident reporting, claims payment and settlement practices or claims reserve practices, as well as differences between assumed and future cost increases. Prior year insurance provision increases of $7.2 million and $7.5 million were recorded during the years ended December 31, 2015 and 2014, respectively. Accrued unpaid claims and expenses that are expected to be paid within the next 12 months are classified as current liabilities. All other accrued unpaid claims and expenses are classified as non ‑current liabilities.
Derivatives and Hedging Activities
All derivative instruments are recorded on the balance sheet at fair value. The Company uses derivative instruments to manage risks associated with interest rate and fuel price volatility. All hedging instruments that qualify for hedge accounting are designated and effective as hedges, in accordance with GAAP. If the underlying hedged transaction ceases to exist, all changes in fair value of the related derivatives that have not been settled are recognized in current earnings. Instruments that do not qualify for hedge accounting and the ineffective portion of hedges are marked to market with changes recognized in current earnings. The Company does not hold or issue derivative financial instruments for trading purposes and is not a party to leveraged derivatives (see Note 12).
EmCare Contractual Arrangements
EmCare structures its contractual arrangements for emergency department management services in various ways. In most states, a wholly owned subsidiary of EmCare (“EmCare Subsidiary”) contracts with hospitals to provide emergency department management services. The EmCare Subsidiary enters into an agreement with a professional association or professional corporation (“PA”), whereby the EmCare Subsidiary provides the PA with management services and the PA agrees to provide physician services for the hospital contract. The PA employs physicians directly or subcontracts with another entity for the physician services. In certain states, the PA contracts directly with the hospital, but provides physician services and obtains management services in the same manner as described above. In consideration for these services, the EmCare Subsidiary receives a monthly fee that may be adjusted from time to time to reflect industry practice, business conditions, and actual expenses for administrative costs and uncollectible accounts. In most states, these fees approximate the excess of the PA’s revenues over its expenses. In all arrangements, decisions regarding patient care are made exclusively by the physicians.
Each PA is wholly ‑owned by a physician who enters into a Stock Transfer and Option Agreement with EmCare. This agreement gives EmCare the right to replace the physician owner with another physician in accordance with the terms of the agreement.
EmCare has determined that these management contracts meet the requirements for consolidation in accordance with GAAP. Accordingly, these financial statements include the accounts of EmCare and its subsidiaries and the PAs. The financial statements of the PAs are consolidated with EmCare and its subsidiaries because EmCare has ultimate control over the assets and business operations of the PAs as described above. Notwithstanding the lack of technical majority ownership, consolidation of the PAs is necessary to present fairly the financial position and results of operations of EmCare because of the existence of a control relationship by means other than record ownership of the PAs’ voting stock. Control of a PA by EmCare is perpetual and other than temporary because EmCare may replace the physician owner of the PA at any time and thereby continue EmCare’s relationship with the PA.
Financial Instruments and Concentration of Credit Risk
The Company’s cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, insurance collateral, long ‑term debt and other long ‑term liabilities constitute financial instruments. Based on management’s estimates, the carrying value of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and the senior secured credit facility approximates fair value as of December 31, 2015 and 2014. Concentration of credit risks in accounts receivable is limited, due to the large number of customers comprising the Company’s customer base throughout the United States. A significant component of the Company’s revenue is derived from Medicare and Medicaid. Given that these are government programs, the credit risk for these customers is considered low. The Company performs ongoing credit evaluations of its other customers, but does not require collateral to support customer accounts receivable. The Company establishes an allowance for uncompensated care based on the credit risk applicable to particular customers, historical trends and other relevant information. For the years ended December 31, 2015 and 2014, the Company derived approximately 35% and 33% , respectively, of its net revenue from Medicare and Medicaid, 62% and 64% , respectively, from insurance providers and contracted payors, and 3% and 3% , respectively, directly from patients.
The Company estimates the fair value of its fixed rate senior notes based on an analysis in which the Company evaluates market conditions, related securities, various public and private offerings, and other publicly available information (Level 2, as defined below). The estimated fair value of the senior notes as of December 31, 2015, was approximately $735.0 million with a carrying amount of $750.0 million.
Revenue Recognition
Fee for service revenue is recognized at the time of service and is recorded net of provisions for contractual discounts and estimated uncompensated care. Fee for service revenue represents billings for services provided to patients, for which the Company receives payment from the patient or their third party payor. Provisions for contractual discounts are related to differences between gross charges and specific payor, including governmental, reimbursement schedules. The Company records fee-for-service revenue, net of the contractual discounts based on the information entered into the Company’s billing systems from received medical charts. An estimate for unprocessed medical charts for a given service period is made monthly and adjusted in future periods based on actual medical charts processed. Information entered into the billing systems is subject to change, e.g. change in payor status, and may impact recorded fee-for-service revenue, net of the contractual discounts. Such changes are recognized in the period the change is known.
Revenue from home health services, net of revenue adjustments and provisions for contractual discounts, is earned and billed either on an episode of care basis (“episodic-based revenue”), on a per visit basis, or on a daily basis depending upon the payment terms and conditions established with each payor for services provided. Revenue recognized on a non-episodic basis is recorded in a similar manner to the Company’s fee-for-service revenue.
Home health service revenue under the Medicare prospective payment system is based on a 60 -day episode payment rate that is subject to adjustment based on certain variables including, but not limited to: (a) a low utilization payment adjustment if the number of visits was fewer than five; (b) a partial payment if the patient transferred to another provider or the Company received a patient from another provider before completing the episode; (c) an outlier payment if the patient’s care was unusually costly (capped at 10% of total reimbursement per provider number); (d) a payment adjustment based upon the level of therapy services required; (e) acceleration if an episode concludes satisfactorily before the end of the 60 -day episode period. Adjustments are made to reflect differences between estimated and actual payment amounts, the inability to obtain appropriate billing documentation or authorizations and other reasons unrelated to credit risk. These adjustments are estimated based on historical experience and are recorded in the period in which services are rendered as an estimated revenue adjustment and a corresponding reduction to patient accounts receivable.
In addition to revenue recognized on completed episodes, a portion of revenue is recognized on episodes in progress. Episodes in progress are 60 -day episodes of care that are active during the reporting period, but were not completed as of the end of the period. Revenue is estimated on a monthly basis based upon historical trends. The primary factors underlying this estimate are the number of episodes in progress at the end of the reporting period, expected Medicare revenue per episode and the calculation of the number of days episodes were active in the period based on the 60 -day estimate from the episode start date.
Non-Medicare episodic-based revenue is recognized in a similar manner as the Medicare episodic-based revenue; however, rates paid by other insurance carriers can vary based upon the negotiated terms.
Revenue from contract staffing assignments, net of sales adjustments and discounts, are recognized when earned, based on the hours worked by the Company’s contract professionals. Conversion and direct hire fees are recognized when the employment candidate accepts permanent employment and all obligations are satisfied. The Company includes reimbursed expenses in revenue, net of contractual discounts, and the associated amount of reimbursement expense in compensation and benefits.
Revenue generated under fire protection service contracts is recognized over the life of the contract. Subscription fees, which are generally received in advance, are deferred and recognized on a straight-line basis over the term of the subscription agreement, which is generally one year.
Subsidy and fee revenue primarily represent hospital subsidies and fees at EmCare and fees for stand by, special event and community subsidies at AMR.
Provisions for estimated uncompensated care, or bad debts, are related principally to the number of self pay patients treated in the period. Provisions for contractual discounts and estimated uncompensated care by segment, as a percentage of gross revenue and as a percentage of gross revenue less provision for contractual discounts are shown below.
Year Ended December 31,
2015
2014
2013
EmCare
Gross revenue
%
%
%
Provision for contractual discounts
Revenue net of contractual discounts
Provision for uncompensated care as a percentage of gross revenue
Provision for uncompensated care as a percentage of gross revenue less contractual discounts
%
%
%
AMR
Gross revenue
%
%
%
Provision for contractual discounts
Revenue net of contractual discounts
Provision for uncompensated care as a percentage of gross revenue
Provision for uncompensated care as a percentage of gross revenue less contractual discounts
%
%
%
Total
Gross revenue
%
%
%
Provision for contractual discounts
Revenue net of contractual discounts
Provision for uncompensated care as a percentage of gross revenue
Provision for uncompensated care as a percentage of gross revenue less contractual discounts
%
%
%
Net revenue for the years ended December 31, 2015, 2014 and 2013 consisted of the following (in thousands):
Year Ended December 31,
2015
2014
2013
Revenue, net of contractual discounts, excluding subsidies and fees:
Medicare
$
$
$
Medicaid
Commercial insurance and managed care (excluding Medicare and Medicaid managed care)
Self-pay
Sub-total
Subsidies and fees
Revenue, net of contractual discounts
Provision for uncompensated care
Net revenue
$
$
$
Healthcare reimbursement is complex and may involve lengthy delays. Third-party payors are continuing their efforts to control expenditures for healthcare, including proposals to revise reimbursement policies. The Company has from time to time experienced delays in reimbursement from third-party payors. In addition, third-party payors may disallow, in whole or in part, claims for payment based on determinations that certain amounts are not reimbursable under plan coverage, determinations of medical necessity, or the need for additional information. Laws and regulations governing the Medicare and Medicaid programs are very complex and subject to interpretation. Revenue is recognized on an estimated basis in the period which related services are rendered. As a result, there is a reasonable possibility that recorded estimates will change materially in the short-term. Such amounts, including adjustments between provisions for contractual discounts and uncompensated care, are adjusted in future periods, as adjustments become known. These adjustments in the aggregate increased the contractual discount and uncompensated care provisions (and correspondingly decreased net revenue) by approximately $14.7 million, $12.5 million and $1.0 million for the years ended December 31, 2015, 2014 and 2013, respectively.
The Company provides services to patients who have no insurance or other third ‑party payor coverage. In certain circumstances, federal law requires providers to render services to any patient who requires care regardless of their ability to pay. Services to these patients are not considered to be charity care and provisions for uncompensated care for these services are estimated accordingly.
Income Taxes
Deferred income taxes reflect the impact of temporary differences between the reported amounts of assets and liabilities for financial reporting purposes and such amounts as measured by tax laws and regulations. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. A valuation allowance is provided for deferred tax assets when management concludes it is more likely than not that some portion of the deferred tax assets will not be recognized. The respective tax authorities, in the normal course, audit previous tax filings. It is not possible at this time to predict the final outcome of these audits or establish a reasonable estimate of possible additional taxes owing, if any.
From time to time, the Company may engage in transactions where the tax consequences may be subject to uncertainty. A liability is recorded when a tax filing position does not meet the more likely than not threshold. For tax positions that meet the more likely than not threshold, the Company may record a liability depending on an assessment of how the tax position will ultimately be settled. Estimates are adjusted periodically for ongoing examinations by and settlements with various taxing authorities, as well as changes in tax laws, regulations and precedent. Interest and penalties, if any, are classified as a component of interest expense, net in the consolidated statements of operations.
Equity Based Compensation
The Company recognizes all share ‑based payments to employees based on its grant ‑date fair values and its estimates of forfeitures. The Company recognizes the fair value of outstanding options as a charge to operations over the vesting period. The cash benefits of tax deductions in excess of deferred taxes on recognized compensation expense are reported as a financing cash flow. The Company uses the straight ‑line method to recognize equity based compensation expense for its outstanding stock awards. Equity based compensation has been issued under the plans described in Note 16.
Fair Value Measurement
The Company classifies its financial instruments that are reported at fair value based on a hierarchal framework that ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is impacted by a number of factors, including the type of instrument and the characteristics specific to the instrument. Instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
Financial instruments measured and reported at fair value are classified and disclosed in one of the following categories:
Level 1—Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. The Company does not adjust the quoted price for these assets or liabilities, which include investments held in connection with the Company’s captive insurance program.
Level 2—Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reporting date, and fair value is determined through the use of models or other valuation methodologies. Balances in this category include corporate bonds and derivatives.
Level 3—Pricing inputs are unobservable as of the reporting date and reflect the Company’s own assumptions about the fair value of the asset or liability. Balances in this category include the Company’s estimate, using a combination of internal and external fair value analyses, of contingent consideration for acquisitions described in Note 5.
The following table summarizes the valuation of the Company’s financial instruments by the above fair value hierarchy levels as of December 31, 2015 and 2014 (in thousands):
December 31, 2015
Description
Level 1
Level 2
Level 3
Total
Assets:
Available-for-sale securities (insurance collateral)
$
$
$
—
$
Liabilities:
Contingent consideration
—
—
Fuel hedge
—
—
December 31, 2014
Description
Level 1
Level 2
Level 3
Total
Assets:
Available-for-sale securities (insurance collateral)
$
$
—
$
—
$
Liabilities:
Contingent consideration
—
—
Fuel hedge
—
—
Interest rate swap
—
—
The contingent consideration balance classified as a Level 3 liability has increased $0.1 million since December 31, 2014 as a result of recent acquisitions completed during the year ended December 31, 2015.
During the year ended December 31, 2015, the Company had transfers of $4.1 million out of Level 1 and into Level 2 due to limited quoted market prices at the measurement date for certain available-for-sale securities. During the year ended December 31, 2014, the Company had no transfers in and out of Level 1 and Level 2 fair value measurements.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and International Financial Reporting Standards. The guidance will be effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption for annual reporting periods beginning after December 15, 2016, permitted. The Company has not yet determined the effects, if any, that adoption of ASU 2014-09 may have on its consolidated financial position or results of operations or the method of adoption.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”) which requires management to evaluate, in connection with preparing financial statements for each annual and interim reporting period, whether there are conditions or events, considered in the aggregate, that raise substantial doubt about an entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable) and provide related disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. The adoption of ASU 2014-15 is not expected to impact the Company's consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Amendments to the Consolidation Analysis (“ASU 2015-02”), which amends existing accounting standards for consolidation under the variable interest entity and voting interest entity models. The new guidance changes the analysis for determining whether a fee paid to a decision maker or service provider is a variable interest. ASU 2015-02 is effective for interim and annual periods beginning after December 15, 2015. Early adoption is permitted. Entities may choose to adopt the standard using either a full retrospective approach or a modified retrospective approach. The Company has not yet determined the effects, if any, that adoption of ASU 2015-02 may have on its consolidated financial position or results of operations or the method of adoption.
In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”) which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the associated debt liability. ASU 2015-03 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. The Company expects to adopt this guidance when effective, and does not expect this guidance to have a significant impact on its financial statements.
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classificat |
