FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 1995
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-13879
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SALICK HEALTH CARE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 95-4333272
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) identification number)
8201 Beverly Boulevard, Los Angeles, California 90048-4520
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(Address of principal executive offices) (Zip code)
(213) 966-3400
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(Registrant's telephone number, including area code)
No Change
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO _____
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:___________
5,657,115 shares of common stock, $.001 par value at December 31, 1995
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5,640,082 shares of callable puttable common stock,
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$.001 par value, at December 31, 1995
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Page 1 of 20 Pages
Exhibit Index on Page 19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS November 30,1995 August 31, 1995
---------------- ---------------
(UNAUDITED)
Current assets:
Cash $ 1,362,000 $ 642,000
Marketable securities 45,703,000 44,631,000
Accounts receivable, less allowance
for doubtful accounts of $2,917,000 and
$2,885,000 36,605,000 36,248,000
Inventories 1,628,000 1,305,000
Prepaid expenses 1,967,000 1,677,000
Other current assets 2,070,000 1,967,000
Refundable income taxes 2,545,000 2,545,000
Deferred income taxes 4,197,000 5,047,000
------------ ------------
Total current assets 96,077,000 94,062,000
Property and equipment, at cost, less
accumulated depreciation and amortization
of $34,759,000 and $32,841,000 102,592,000 101,651,000
Deposits 705,000 725,000
Deferred income taxes 397 000
Goodwill, net 5,514,000 5,494,000
Other assets 4,511,000 5,166,000
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$209,796,000 $207,098,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable to bank $ 24,332,000 $ 18,072,000
Accounts payable and accrued liabilities 34,230,000 41,063,000
Income taxes payable 1,388,000
Current portion of long-term
obligations 4,950,000 4,952,000
------------ ------------
Total current liabilities 64,900,000 64,087,000
Deferred income taxes 67,000
Capitalized lease obligations, less
current portion 5,046,000 5,235,000
Long-term debt, less current portion 5,376,000 5,910,000
Other liabilities 2,000,000 2,400,000
Minority interest (30,000) (29,000)
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Total liabilities 77,292,000 77,670,000
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2
SALICK HEALTH CARE, INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
November 30,1995 August 31, 1995
---------------- ---------------
(UNAUDITED)
Commitments and contingencies
Stockholders' equity
Preferred stock, $.001 par
value, 5,000,000 shares
authorized, none issued
Common stock, $.001 par value,
15,000,000 shares authorized,
5,657,115 shares issued and
outstanding 6,000 6,000
Callable puttable common stock,
$.001 par value, 7,500,000 shares
authorized, 5,640,082 and
5,634,082 shares issued and
outstanding 5,000 5,000
Additional paid in capital 79,810,000 79,738,000
Unrealized holding gains 277,000 44,000
Retained earnings 52,406,000 49,635,000
------------ ------------
Total stockholders' equity 132,504,000 129,428,000
------------ ------------
$209,796,000 $207,098,000
============ ============
See accompanying notes to consolidated financial statements.
3
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
November 30,
---------------------------
1995 1994
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Revenues:
Operating revenues, net $37,513,000 $36,176,000
Expenses:
Medical supplies and services 6,841,000 6,381,000
Salaries and related costs 15,221,000 14,570,000
Other administrative expenses 5,473,000 5,407,000
Contract and occupancy costs 3,984,000 3,703,000
Depreciation and amortization 2,166,000 2,040,000
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Total expenses 33,685,000 32,101,000
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Operating income 3,828,000 4,075,000
Net interest income 704,000 17,000
Net investment gains (losses) 86,000 (61,000)
Minority interest 325,000
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Income before income taxes
and cumulative effect of
change in accounting principle 4,618,000 4,356,000
Provision for income taxes 1,847,000 1,718,000
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Income before cumulative effect
of change in accounting principle 2,771,000 2,638,000
Cumulative effect on prior years (to
August 31, 1994) of expensing
pre-operating costs as incurred,
net of income taxes (3,588,000)
----------- -----------
Net income (loss) $ 2,771,000 $ (950,000)
=========== ===========
Earnings per share:
Primary:
Income before cumulative effect
of change in accounting principle $ 0.25 $ 0.30
Cumulative effect on prior years
(to August 31, 1994) of expensing
pre-operating costs as incurred (0.41)
----------- -----------
Net earnings (loss) per share $ 0.25 $ (0.11)
=========== ===========
Fully diluted:
Income before cumulative effect
of change in accounting principle $ 0.25 $ 0.28
Cumulative effect on prior years
(to August 31, 1994) of expensing
pre-operating costs as incurred (0.34)
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Net earnings (loss) per share $ 0.25 $ (0.06)
=========== ===========
4
CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
(UNAUDITED)
Three Months Ended
November 30,
---------------------------
1995 1994
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Weighted average number of
shares used in computing
earnings per share:
Primary 11,308,000 8,830,000
========== ============
Fully diluted 11,308,000 10,650,000
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See accompanying notes to consolidated financial statements.
5
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
November 30,
---------------------------
1995 1994
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Cash flow provided (used) by operations:
Net income (loss) $ 2,771,000 $ (950,000)
Add items not requiring cash:
Depreciation and amortization 2,166,000 2,040,000
Amortization of debt issue costs 16,000
Vested shares issued under
management incentive plan 6,000
Deferred income taxes (117,000)
Minority interest in net loss,
net of distributions (1,000) (447,000)
Cumulative effect on prior years (to
August 31, 1994) of expensing
pre-operating costs as incurred 5,981,000
Changes in assets and liabilities:
Accounts receivable (357,000) (1,331,000)
Inventories (323,000) (74,000)
Prepaid expenses (290,000) (670,000)
Other current assets (103,000) (83,000)
Deposits and other assets 618,000 (102,000)
Accounts payable and accrued liabilities (7,240,000) (439,000)
Income taxes payable 1,388,000 (357,000)
Deferred income taxes 386,000
----------- ------------
Net cash flow provided (used) by
operations (985,000) 3,473,000
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Cash flow provided (used) by
investing activities:
Increase in marketable securities (839,000) (395,000)
Additions to property and equipment (2,940,000) (6,131,000)
Payment for purchase of acquisitions (53,000) (106,000)
----------- -----------
Net cash flow used by investing
activities (3,832,000) (6,632,000)
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Cash flow provided (used) by
financing activities:
Reduction of capitalized lease
obligations (282,000) (178,000)
Decrease of long-term debt (513,000) (396,000)
Notes payable to bank 6,260,000 3,346,000
Issuance of common stock 72,000 151,000
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Net cash flow provided by financing
activities 5,537,000 2,923,000
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6
SALICK HEALTH CARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
Three Months Ended
November 30,
---------------------------
1995 1994
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Increase (decrease) in cash $ 720,000 $ (236,000)
Cash, beginning of period 642,000 1,692,000
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Cash, end of period $1,362,000 $ 1,456,000
========== ===========
Schedule of non-cash investing and
financing activities:
Conversion of 7.25% convertible
subordinated debentures due
January 31, 2001 into common stock $ 570,000
===========
Capital lease obligations incurred
for property and equipment $ 70,000
==========
Unrealized holding gains (losses) $ 233,000 $ (700,000)
========== ===========
See accompanying notes to consolidated financial statements.
7
SALICK HEALTH CARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - In the opinion of management, the information furnished reflects all
adjustments, consisting only of normal recurring adjustments, which are
necessary for a fair statement of the interim financial information.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these condensed
financial statements be read in conjunction with the financial statements
and notes thereto included in the Company's August 31, 1995 audited
financial statements. The results of operations for the three month period
ended November 30, 1995 are not necessarily indicative of the operating
results for the full year.
Note 2 - In fiscal 1995, the Company changed its method of accounting from
deferral to expensing pre-operating costs as incurred. In prior years,
pre-operating costs had been deferred and amortized over a three year
period upon commencement of facility operations. In fiscal 1995 fourth
quarter, giving effect to the first quarter, the Company recorded the
cumulative effect of the change in accounting principle of $3,588,000, net
of income taxes of $2,393,000. In the accompanying financial statements,
the fiscal 1995 period has been restated to reflect the current and
cumulative effects of the change in accounting principle.
This change in accounting for pre-operating costs was adopted as management
believes this method of accounting better reflects the Company's current
methods of operations and it conforms to the method followed by Zeneca
Group, PLC, the beneficial owner of more than 50% of the Company's common
equity.
Note 3 - On December 27, 1995, a Columbia/HCA Healthcare Corporation subsidiary,
the owner of one of the Company's Cancer Center affiliated hospitals,
Westlake Medical Center, announced that it was closing Westlake Medical
Center. Under the terms of the agreement with Columbia/HCA, a subsidiary of
the Company has the right to purchase Westlake Medical Center provided it
gives notice to Columbia/HCA of its desire to purchase the hospital within
forty five (45) days. If such right is exercised, the purchase price of the
hospital would be based on the determination of three appraisers taking
into account, among others, the fact that the hospital will be limited to
the treatment of patients in the areas of cancer, kidney disease, organ
transplantation, AIDS and related illnesses. If such right is not
exercised, the Columbia/HCA subsidiary is required, at the Company's
option, to purchase at fair market value the Company subsidiary's assets
located at Westlake Medical Center and those used in the Cancer Center's
operations.
8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FIRST FISCAL QUARTER ENDED NOVEMBER 30, 1995 COMPARED TO FIRST FISCAL QUARTER
ENDED NOVEMBER 30, 1994
Operating revenues increased 3.7% in the first quarter of fiscal 1996 to
$37,513,000 from $36,176,000 for fiscal 1995. Operating income was $3,828,000
in the first quarter of fiscal 1996 versus $4,075,000 in fiscal 1995. Operating
margins were 10.2% and 11.3% in the three month periods ended November 30, 1995
and 1994, respectively. Income before income taxes and the cumulative effect of
the change in accounting principle (described in Note 2 to the Company's
consolidated financial statements) increased 6% to $4,618,000 from $4,356,000 in
fiscal 1995. Net income increased to $2,771,000 from a loss of $950,000 for the
prior fiscal year. First quarter primary and fully diluted earnings per share
were $0.25, compared to losses per share of $0.11 and $0.06, respectively, in
the prior year quarter. Weighted average shares outstanding used in computing
earnings per share increased 28% and 6% over first quarter fiscal 1995 primary
and fully diluted weighted average shares outstanding, respectively, due to
exercise of approximately 570,000 stock options in connection with the Company's
April 13, 1995 merger with a subsidiary of Zeneca Limited and conversion of the
Company's subordinated convertible debentures in January 1995. The quarter's
results reflect an increase in the volume of managed care and particularly
capitated payments for the Company's services and programs and changes,
primarily reductions in reimbursement, resulting in an increase in the Company's
contractual allowance expense. Revenues and operating income were also affected
by expansion of the Company's services and programs, additional costs in
connection with the opening and operations of the Company's Alta Bates and Mount
Sinai Comprehensive Cancer Centers, the expansion of programs and the addition
of key personnel to support the Company's growth strategy. Revenues rose by
reason of an increase in patient volumes and services at Company facilities and
the Company's disease state managed care program, SalickNet.
The Company's change in accounting principle from deferring to expensing pre-
operating costs when incurred, as described in Note 2 to the consolidated
financial statements adversely affected both fiscal 1995 and 1996 the first
quarters' operating income, net income and earnings per share. The Company
adopted this new method of accounting for pre-operating costs in fiscal 1995 as
management believes this method of accounting better reflects the Company's
current methods of operations and it conforms to the method followed by Zeneca
Group, PLC, the beneficial owner of more than 50% of the Company's common
equity. In addition, the cumulative effect of the change in accounting principle
resulted in a non-recurring, non-cash charge of $3,588,000 net of income taxes
of $2,393,000, as of the beginning of fiscal year 1995.
Net interest income increased to $704,000 in the first quarter of fiscal 1996
as compared to $17,000 for the first quarter 1995, which is due principally to
decreased interest expense resulting from the conversion of
9
the Company's 7 1/4% debentures which was completed in January 1995. Net
investment gains of $86,000 in the current fiscal year versus net investment
losses of $61,000 in the prior period result from generally improved stock
market performance in the current quarter. In the prior year period,
substantially all portfolio capital gains had been realized.
Operating results have been and will continue to be adversely affected by
reductions in reimbursement rates mandated by Congress, including those pursuant
to the Omnibus Budget Reconciliation Acts (OBRA) of 1990-1993 which impact
health care providers for many services provided to Medicare beneficiaries. The
principal reductions applicable to the Company are a continuation of the 5.8%
reduction in reimbursement of outpatient cost-based programs through federal
fiscal year 1998; a continuation of the 10% reduction in hospital outpatient
capital reimbursement through federal fiscal year 1998; and a change in the
manner of reimbursement for Erythropoietin for dialysis patients, effective
January 1, 1991 which was further reduced beginning on January 1, 1994. The
Company has implemented strategies, including programs to increase both Medicare
and non-Medicare patient volume and the implementation of cost control programs,
that have mitigated the effect of these changes. See "Impact of Inflation and
Changing Regulation."
Total expenses relative to operating revenues for the first quarter of fiscal
1996 increased 1.1% before interest income and investment income, as compared to
the prior year quarter. Medical supplies and services expense increased by
$460,000 during the period, a 0.6% increase as a percentage of operating
revenues, reflecting increased claims payments resulting from the Company's
disease state managed care program, increasing complexity in cancer and dialysis
treatment modalities and supplier price escalations. Salaries and related costs
including additional professional, corporate, and administrative and other
personnel necessitated by expansion and growth, primarily in Cancer Center
operations, payments under the Management Incentive Compensation Plan approved
by the stockholders in August 1991, and increases in compensation and payroll
taxes, increased $651,000 in the period, a 0.3% increase as a percentage of
operating revenues. As compared to the prior year quarter, other administrative
expenses for fiscal 1996 decreased 0.4% relative to operating revenues,
primarily due to the incremental effect of increased operations. Contract and
occupancy costs increased 0.4% during the period, as a percentage of operating
revenues, principally resulting from higher contractual obligations at maturing
Cancer Centers. Depreciation and amortization increased by $126,000 during
fiscal 1996 due to depreciation of additional clinic equipment placed in service
during the quarter.
Income taxes were calculated at a 40% effective rate in fiscal 1996 versus
39.4% in fiscal 1995.
LIQUIDITY AND CAPITAL COMMITMENTS
Presently existing and internally generated funds and credit facilities are
expected to be sufficient to satisfy the Company's requirements for working
capital and capital expenditures relating to its present operations in fiscal
1996. The accelerated development, establishment or acquisition of
10
a significant number of additional Cancer Centers and/or dialysis centers or
other acquisitions or operations may require borrowing or equity financing by
the Company. Working capital at November 30, 1995 was $31,177,000. The increase
in working capital during the current fiscal quarter as compared to fiscal 1995
year end is principally due to income from operations. The increase in accounts
receivable at November 30, 1995 as compared to August 31, 1995 is due to the
previously mentioned increased revenues which resulted from growth in patient
volumes and services provided at the Company's cancer centers and dialysis
facilities.
The Company's principal sources of liquidity consist of cash on hand,
interest-bearing investments, internal cash flow and a revolving bank line of
credit of $80,000,000. At November 30, 1995, $24,332,000 had been borrowed
under the revolving bank line of credit. The line of credit agreement provides
various options for interest rates. Unless the Company elects an optional
interest rate, borrowings under the line of credit are subject to the bank's
prime rate of interest.
At November 30, 1995, the Company held in its portfolio cash, government and
investment grade debt securities and equity securities. These investments
represent 100% of the total portfolio at fair value and reflect the Company's
policy to invest its funds in government and investment grade securities. In
accordance with Statement of Financial Accounting Standards No. 115, Accounting
for Certain Investments in Debt and Equity Securities ("SFAS 115"), the Company
has increased the carrying value of its portfolio to fair value of $45,703,000
from cost of $45,426,000. As of November 30, 1995, the Company's five largest
investments in municipal and corporate debt securities, all of which were
investment grade aggregated $5,691,000 at fair value, with cost of $5,825,000.
The single largest investment approximated $1,329,000 with fair value of
$1,263,000.
Capital expenditures and the distributions to former common stockholders
pursuant to the merger for the remainder fiscal year 1996 are presently
estimated to be approximately $54,000,000. As to other needs, certain equipment
and/or facilities may be acquired through leases or purchase-finance agreements.
IMPACT OF INFLATION AND CHANGING REGULATION
The largest single component of the Company's revenue continues to be
reimbursement at rates which are set or regulated by federal or individual state
authorities. These reimbursement rates are also subject to periodic adjustment
for certain factors, including changes in legislation and regulations, those
imposed pursuant to the federal and individual state budgets, inflation, area
wage indices and costs incurred in rendering the services. The reimbursement
rates may in the future, as they have in the past, also be affected by cost
containment and other legislation, competition, third party payor changes or
other governmental administrative controls or limitations. Changes in the
Medicare and Medicaid system and reimbursement have been proposed by both
Republican and Democrat members of Congress. While the Company expects changes
in reimbursement to occur, this may be limited to extensions of previously
implemented reductions scheduled
11
to expire or may include additional changes. The ultimate impact of any such
changes on the Company's business cannot be predicted, in part due to budgetary
constraints and the rapidly evolving changes in the health care system
generally. The Company has developed and/or implemented plans to deal with this
situation and notes that in the past as reimbursement reductions or changes have
occurred, the Company has previously been able to improve operations by an
increased market share and greater efficiency.
Under federal Medicare law, most hospital inpatients covered by Medicare are
classified into diagnostic related groups ("DRGs") based on such factors as
primary admitting diagnosis and surgical procedure. Payment to hospitals for
the care of a patient covered under the DRG system is generally set at a
predetermined amount based on the DRG assigned the patient. The federal
government, as well as many states and third party payors, are investigating or
have adopted these or other modifications to their reimbursement formula in an
effort to contain costs. This type of program provides an incentive for
hospitals to plan and deliver their services more efficiently.
The Omnibus Budget Reconciliation Act of 1990 amended the definition of
"inpatient hospital services" to include all services for which payment may be
made under the DRG system that are provided by a hospital or an entity wholly-
owned or operated by the hospital to a patient during the three days immediately
preceding the date of the patient's admission (or one day for hospitals and
hospital units excluded from the DRG system under technical changes enacted in
October 1994), if such services are diagnostic services (including clinical
diagnostic laboratory tests) or are other services related to the admission, as
defined by the Secretary of Health and Human Services ("the Secretary"). Such
services are not reimbursable separately as hospital outpatient services under
Medicare Part B. These provisions have been in effect since 1991. On January
12, 1994, the Secretary issued interim final regulations implementing this
provision and on September 1, 1995, the Secretary announced she will revise the
regulations to recognize that only the one day immediately preceding the date of
the patient's admission would be considered to be not reimbursable separately as
hospital outpatient services for hospitals and hospital units excluded from the
DRG system.
In recent years there have been a number of statutory and regulatory changes
that affect Medicare reimbursement for services furnished to hospital
outpatients. Prior to October 1, 1987, Medicare generally had reimbursed
hospital outpatient services on the basis of the reasonable costs (as determined
pursuant to regulations) incurred by the hospital. On October 1, 1987, Medicare
began reimbursing hospitals for certain surgery services furnished to hospital
outpatients on the basis of the lower of reasonable costs or an amount based on
a blend of the hospital's reasonable costs and a prospectively set fee schedule
amount. On October 1, 1988, this blended payment system was extended to
radiology services furnished to hospital outpatient patients; the blended
payment system was extended further to certain other diagnostic services on
October 1, 1989. In addition, the amount of the blend that is based on the
hospital's reasonable costs has decreased; currently, the blend is based 42% on
hospital costs for surgery and radiology services, and 50% on hospital costs for
other diagnostic services. For surgery services reimbursed under the blend, the
fee schedule
12
portion of the blend is based on the amount of payment that ambulatory surgery
centers would receive for the procedure. For radiology and diagnostic services
reimbursed under the blend, the fee schedule portion of the blend is based on
the amount that physicians would receive if the procedure were furnished in a
physician's office under the Medicare physician fee schedule.
Under the Omnibus Budget Reconciliation Act of 1989, effective January 1,
1992, Medicare reimbursement for physician services began a five year transition
to the use of a physician fee schedule based on a "resource-based relative value
scale." That physician fee schedule, through the blended payment system
described above, has affected the amount of Medicare reimbursement for hospital
outpatient departments providing outpatient radiology, radiation therapy,
surgery and certain diagnostic services.
There is also the possibility of the establishment of a prospective payment
for certain Medicare-reimbursed hospital outpatient services. Congress had
requested that the Health Care Financing Administration ("HCFA"), which
administers Medicare, prepare recommendations concerning the establishment of
such a prospective payment system. HCFA submitted its recommendations to
Congress in March 1995 and included a proposal to phase in such a prospective
payment system, beginning first with outpatient surgery, radiology, and other
diagnostic services. The details of the proposed payment system, including the
amounts of payment that would be made for each procedure, have not been
finalized by HCFA. Adoption of HCFA's recommendation would require a change in
the Medicare law by Congress,and senior HCFA staff have stated that even if
Congress enacted such a change in 1995, the new system would not likely be
implemented until January 1997, at the earliest. Under HCFA's proposal,
services other than surgery, radiology, and other diagnostic services would not
be reimbursed under a new prospective payment system until further research is
completed. The Company cannot predict what will be the effect, if any, on
revenues or income which may result from the adoption by Congress of HCFA's
recommendations for a Medicare prospective payment for hospital outpatient
services.
HCFA in its March 1995 report to Congress made two other recommendations
concerning proposed changes in the Medicare law. First, HCFA proposed that the
Medicare law be changed to modify the way that the amount of beneficiary
coinsurance for outpatient services is computed. Second, HCFA proposed that
Medicare law be changed to correct what has been described as the "formula
driven overpayment" which HCFA states results in Medicare payments for hospital
outpatient surgery, radiology and other diagnostic services that are greater
than what was intended by Congress. In its report, HCFA suggested several ways
in which the Medicare law could be changed to address these issues, either with
or without the enactment of a prospective payment system for hospital outpatient
services. The alternatives suggested by HCFA generally would result in an
overall reduction in payments for hospital outpatient services furnished to
Medicare beneficiaries and, if enacted, could adversely affect the Company's
revenues and income. However, it is uncertain which alternative, if any,
Congress will enact, and it is impossible to determine what impact, if any, such
changes might have on the Company's revenues and income.
13
Effective October 1, 1991, Medicare payments for hospital outpatient services
made on a reasonable cost basis and the cost portion of outpatient services paid
on the basis of a blended amount, were reduced by 5.8%. Under the Omnibus
Reconciliation Act of 1993 ("OBRA 1993"), Congress extended this reduction
through federal fiscal year 1998. Effective October 1, 1991, Medicare has
reimbursed the capital costs allocated to outpatient departments on the basis of
90% of reasonable costs. Under OBRA 1993, Congress extended this 10% reduction
in hospital outpatient capital cost reimbursement through federal fiscal year
1998. Also under OBRA 1993, the amount which Medicare reimburses for clinical
laboratory services was reduced.
Effective November 1, 1990, the Medicare fiscal intermediary for the Company's
dialysis facilities changed the method of reimbursing medications provided to
Medicare dialysis patients from charge-based reimbursement to reimbursement
based on reasonable costs. This change has reduced the amount of reimbursement
to the Company for such medications and other regulatory changes potentially
could further reduce such reimbursement. In addition, effective January 1,
1991, the method of reimbursement for EPO furnished to dialysis patients was
changed from its former structure (80% of $40 per treatment dosage for up to
10,000 units and 80% of $70 per treatment dosage of 10,000 or more units) to
provide for payment of 80% of $11.00 per 1,000 units. This change in EPO
reimbursement has been partially offset by a $1.00 per treatment increase in the
composite rate reimbursement for outpatient dialysis services. In addition,
pursuant to OBRA 1993, reimbursement for EPO was further reduced beginning
January 1, 1994 to 80% of $10.00 per 1,000 units. The Secretary announced on
September 1, 1995 that she will not at this time adjust the current composite
rate. The overall impact of the EPO reimbursement change has adversely affected
the Company's revenues and earnings.
The effect of these changes may be mitigated by the Company's ability to
increase its patient volume both at the same sites and at additional centers, to
increase its non-Medicare patient volume and to continue implementation of cost
controls and cost reduction strategies. To address these changes, the Company
has expanded its program to increase patient volume, and instituted other
programs to achieve efficiencies in staffing, purchasing and scheduling.
Legislation in Florida limits charges for certain health care services
provided to non-Medicare/Medicaid patients. A substantial portion of this law
has been challenged, a portion declared unconstitutional and is being appealed
in the federal court system and will not be enforced until after such
resolution; however, the limitations on rates respecting radiation therapy
services provided at freestanding, not hospital-based facilities, presently
remains in effect. As substantially all of the Company's radiation therapy
services are hospital-based, the effect of the legislation has not had a
material effect on the Company's operations. Florida also has legislation
precluding or limiting referrals by physicians to facilities in which they have
an ownership, control or investment relationship (the Florida Patient/Self-
Referral Act). One of the Company's radiation facilities in South Florida
currently has three physician investors who own less than two percent (2%) in
total and who make no referrals to the facility. The Company
14
believes it is in full compliance with the law.
Florida adopted legislation effective in 1994 which is aimed at health care
coverage for presently uninsured residents and encouraging the formation of
purchasing alliances for health care services. This legislation is principally
aimed at small employer groups. As it is now configured, the Company cannot
predict its future effect upon the Company and its operations. However, the
Company, as part of its overall strategy is in the process of developing various
plans to be offered to employer groups, purchasing alliances, health maintenance
organizations, managed care and other payors. The first of these plans has been
successfully marketed in Florida with a major capitated (per member, per month)
agreement entered into with Physician's Corporation of America currently
covering 120,000 members in South Florida.
To the extent that legislation or regulations may be enacted in the future
which may include outpatient services furnished to Medicare beneficiaries in a
prospective payment system, the Company cannot predict whether or to what extent
such a change would adversely affect its revenues or earnings. In addition, in
1995 Congress began considering extensive changes to the Medicare and Medicaid
programs. Medicare changes under consideration include, among others, (1) a
change in the formula used to calculate hospital outpatient reimbursement under
the blended payment system which generally would result in reducing
reimbursement amounts; (2) an extension of the current 5.8% reduction in
hospital outpatient reasonable cost reimbursement through the year 2002; (3) a
reduction in reimbursement for hospital outpatient department capital-related
costs of 85% of such reasonable costs for federal fiscal years 1996-2002; (4)
the introduction of a prospective payment system for home health services,
effective October 1996; (5) reductions in payment for clinical laboratory
services; (6) the elimination of updates in payments for ambulatory surgical
center services from 1996-2002; (7) various other reductions in the amount of
payment for physician and hospital services; and (8) the introduction of
additional choices of health plans for Medicare beneficiaries in addition to the
current fee-for-service and Medicare HMO option. Proposed Medicaid changes
include the replacement of the existing federal/state program with block grants
to the states and reduced federal oversight over state plans. The enactment of
large cuts in the amount of Medicare and Medicaid reimbursement for providers
could have an adverse effect on the Company's revenues. At this point in time,
however, it is uncertain which, if any, of these or other changes to the
Medicare and Medicaid programs will be enacted into law, and the Company is
unable to predict how the enactment of any such changes might affect the Company
in the future.
The Company believes that health care regulations will continue to change and,
therefore, regularly monitors developments. The Company may modify its
agreements and operations from time to time as the business and regulatory
environments change. While the Company believes it will be able to structure
its agreements and operations in accordance with applicable law, there can be no
assurance that its arrangements will be as successful or not be successfully
challenged.
15
Labor costs represent the largest dollar component of the Company's total
expenses and necessary increases in the number of personnel, salaries, hourly
rates and insurance costs have resulted in higher dollar amounts of operating
expenses. Rental rates are subject to annual adjustments pursuant to escalation
clauses in the respective leases. In addition, suppliers have sought to pass
along their rising costs to the Company. A significant portion of these higher
costs, however, has been offset by the use of new procedures and equipment,
changes in staff scheduling, improvement in purchase price negotiations and
utilization of supplies, and by increases in treatment and services volume.
Changes in reimbursement rates for Medicare patients have a significant impact
on the results of operations. The rate of inflation has not had a significant
impact on the results of operations.
16
SALICK HEALTH CARE, INC.
PART II
OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
11 Computation of Net Earnings per Common Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K. During the quarter ended November 30, 1995 no
reports on Form 8-K were filed.
17
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
Salick Health Care, Inc.
------------------------------------
(Registrant)
/s/ Bernard Salick, M.D.
------------------------------------
Date: January 15, 1996 Bernard Salick, M.D.
Chairman and Chief Executive Officer
(Duly Authorized Officer)
/s/ Blair L. Hundahl
------------------------------------
Date: January 15, 1996 Blair L. Hundahl
Senior Vice President-Finance
18
SALICK HEALTH CARE, INC.
EXHIBIT INDEX
Exhibit
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11 Computation of Net Earnings per Common Share.
27 Financial Data Schedule
19