Dialysis Corporation of America
1302 Concourse Drive, Suite 204
Linthicum, MD 21090
Telephone: (410) 694-0500
Telecopier: (410) 694-0596
Jim B. Rosenberg
Senior Assistant Chief Accountant
Securities and Exchange Commission
450 Fifth Street
Washington, D.C. 02549
RE: Form 10-K for the fiscal year ended December 31, 2004
Dialysis Corporation of America (08527)
On June 3, 2004, Dialysis Corporation of America ("DCA") filed a
registration statement on Form S-4 (Registration No. 333-125515,
"Registration Statement") with the Securities and Exchange Commission
("Commission") relating to the merger with its parent, Medicore, Inc.
("Medicore") with DCA to be the surviving company. A Medicore proxy
statement and DCA information statement were included in the aforementioned
Registration Statement as well as financial statements for each of DCA and
Medicore and pro forma financial information. Mr. Zafar Hasan for Jeffrey
Reidler, Assistant Director of the Division of Corporation Finance
("Division") advised DCA on June 17, 2005, that the Commission was not
conducting a full review of the Form S-4, but will be monitoring for
resolution all issues in connection with a targeted accounting review of
DCA's and Medicore's annual reports on Form 10-K. Mr. Hasan noted the
monitoring of the Registration Statement for the signature of DCA's Chief
Accounting Officer, which signature will be included in pre-effective
amendment no.1 to the Registration Statement.
On June 22, 2005, the Division provided comments requiring both DCA and
Medicore to provide information to better understand the disclosure provided
in each company's Form 10-K.
Following are our responses chronologically presented and numbered in
accordance with each of the Division's comments.
Item 7. Management's Discussion and Analysis of Financial Condition and ...
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page 36
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Results of Operations, page 39
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1. Please provide to us the following about your accounting for revenue and
accounts receivable:
* The steps you take in collecting accounts receivable, including
patient co-payments;
Response: The initial billing for services rendered is generated and
submitted monthly, no later than the 4th business day of the month
following the month in which services were rendered. Upon receipt
of payment from a primary payor, which typically ranges from
15 to 60 days after initial billing, secondary bills are generated,
and submitted to the secondary payor. Upon receipt of payment from
the secondary payor, which typically ranges from 15 to 60 days
after submission of billing to such payor, a third bill may be
required to an additional payor.
Once a patients' insurer has been billed and it has paid its
coverage, a bill will be generated to the patient for any remaining
balance or co-payments. The initial billing to a patient will
occur at any of the stages delineated above, depending on
applicable insurance coverage. Accounts are reviewed monthly. If
payments are not received, the patient will be contacted. An
additional bill along with a collection letter will be sent to the
patient. Unless paid, this process will continue for two
additional months with each communication being progressively
stronger in content. Patient uncollectable accounts will be
submitted to be written off no earlier that 120 days after the date
of the first collection letter.
All receivables are followed-up monthly to insure timely and
accurate payments are received.
On rare occasions, collection agencies are employed when patients
are paid directly by insurers for DCA services and do not forward
the funds to DCA.
* Your policy with respect to determining when a receivable is
recorded as a bad debt and when a write off is recorded, including
any thresholds (amount and age);
Response: Revenue is recognized and receivables recorded in the period
services are rendered.
DCA uses sound business judgment to establish that a receivable is
uncollectible when claimed as worthless and that there is no
likelihood of recovery at any time in the future.
Based on the procedure delineated in the prior response, once it
has been determined that all appropriate parties have been billed
for all covered DCA services and DCA has exhausted and documented
all collection efforts, DCA's collection department will submit
those uncollectible receivables for final approval by the Director
of Accounting and the V.P. of Finance. Upon approval the
uncollectible receivables will be written off.
* State whether your billing system generates contractual adjustments
based on fee schedules for the patient's insurance plan for each
patient encounter or if an estimate of contractual allowances is
made; if an estimate is made, state what factors are considered in
determining the estimate.
Response: DCA's billing system predominantly makes contractual adjustments
based on fee schedules for the patient's insurance plan. On
limited occasions, a patient's insurance plan fee schedule cannot
readily be determined. In those instances, an estimate of the
contractual rates is made. These estimates are based on historical
data using the fee schedule of patients with similar insurance
plans. Once the actual fee schedule for the patient in question is
obtained, any adjustments to original contractual rates are
immediately made.
2. Please explain to us the following: (a) why your receivable balance at
December 31, 2004 increased substantially higher than your total sales for
2004 (b) why your allowance increased during 2004 and (c) why bad debt
expense decreased during 2003 as compared to 2002, and increased during 2004
as compared to 2003.
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Response: (a) In the first half of 2003, the State of Georgia's Medicaid
program had implemented a new computer system and contractor
that created billing and collection delays for all service
providers in that state. As a result, DCA experienced
untimely collection in Georgia from mid-2003 until the end of
2004. This impacted DCA's six dialysis clinics located in
Georgia. As of the second quarter, 2005, DCA has begun to
receive the delayed Georgia Medicaid payments of 2003 and 2004
claims, and there has been improved processing of current
service claims by Georgia Medicaid.
Additionally, development of new dialysis centers temporarily
increases the aging of receivables. It can take up to six
months for a newly operating facility to experience the same
receivable turnover as an existing operation. DCA opened five
new dialysis centers during fiscal 2004.
(b) The provision for doubtful accounts is determined under a
variety of criteria, primarily the aging of the receivables,
historical collection trends, and payor mix. This is generally
a reflection of DCA's collection experience. Although
management believed that the delays relating to the claims (as
discussed in subparagraph (a) above) would be resolved and
payments made (as currently is the case), it determined to
take a conservative approach and include these receivables in
the provision for doubtful accounts. As a result, DCA added
$413,000 to doubtful accounts due to the issues with Georgia
Medicaid.
(c) Bad debt expense in 2003 reflected a Medicare bad debt
recovery of $341,000 as compared to a $52,000 recovery during
2002. Medicare bad debt recovery amounts are determined based
upon the cost reports generated annually for each of DCA's
centers. Before consideration of Medicare bad debt
recoveries, the provision for doubtful accounts as a % of
medical service revenue amounted to 3% for 2004, 2% for 2003,
and 3% for 2002.
3. Please provide to us the following information about your accounts
receivable:
* For each period presented, tell us and quantify the amount of
changes in estimates of prior contractual adjustments that you
recorded during the current period. For example, for 2004, this
amount would represent the amount of the difference between
estimates of contractual adjustments for services provided in 2003
and the amount of the new estimates or settlement amount that was
recorded during 2004.
Response: Contractual adjustments related to 2002 recorded in 2003 were
approximately $59,000 (1.4% of December 31, 2002 accounts
receivable), and contractual adjustments related to 2003 recorded
in 2004 were approximately $508,000 (8.9% of December 31, 2003
accounts receivable). Out of network providers represented the
largest portion of estimate changes. Out of network providers do
not generally provide fee schedules and coinsurance information.
Historical trends and data provide information on which to base
contractual estimates.
* Explain and quantify the reasonably possible effects that a change
in estimate of unsettled amounts from 3rd party payors as of the
latest balance sheet date could have on financial position and
operations.
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Response: With more historical data and newly gained experience with
additional centers in new markets, it is anticipated that a change
in estimates would impact our accounts receivable no more than 5%.
This would not significantly influence the financial position or
operations of DCA.
* Disaggregate self-payors from the commercial insurers and private
payors in your comparative tubular format for payor mix
concentrations and include the related aging of accounts
receivable. The aging schedule may be based on management's own
reporting criteria (i.e., unbilled, less than 30 days, 30 to 60
days etc.) or some other reasonable presentation. At a minimum
indicate the past due amounts and a breakdown by payor
classification (i.e., Medicare, Medicaid, managed care and other,
and self-pay). We would expect self-pay to be separately
classified from any other grouping. If your billing system does
not have the capacity to provide an aging schedule of your
receivables, explain to us that fact and clarify how this affects
your ability to estimate your allowance for bad debts.
Response: Accounts Receivable Table attached as Schedule A.
* If you have amounts that are pending approval from third party
payors (i.e., Medicaid pending), please provide the balances of
such amounts, where they have been classified in your aging
buckets, and what payor classification they have been grouped with.
If amounts are classified outside of self-pay, tell us why this
classification is appropriate, and provide the historical
percentage of amounts that get reclassified into self-pay.
Response: Currently, there are no approvals pending for third party payors.
* The days sales outstanding for each period presented.
Response: The days sales outstanding is for 70 and 58 for December 31, 2004
and December 31, 2003, respectively.
Notes to Consolidated Financial Statements, page F-8
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4. Please tell us the nature, terms and amounts of the put and call options
on the assets of the Georgia facility and tell us how you have accounted for
them. In addition, please explain to us whether the options are subject to
the requirements of SFAS 133 and how your accounting and disclosures comply
with SFAS 133. If you believe that the options are not subject to SFAS 133,
please cite the specific literature (by pronouncements and paragraph) that
supports your accounting.
Response: The put option provides the owner of the Georgia facility to sell
all the assets of that facility to a subsidiary of DCA. The call
option provides the subsidiary of DCA with the right to purchase
the assets of the Georgia facility. Each of the put and call
options are exercisable through September 10, 2005, and are similar
in terms, except the put option is not exercisable unless the
Georgia facility has recorded pre-tax income of $100,000. Upon
exercise of either the put or call option, the owner would receive
a 20% interest in the DCA subsidiary obtaining the assets, and the
remainder of the purchase price will be paid in cash, determined on
a formula upon a multiple of EBITDA of the Georgia facility.
These options have not been accounted for since DCA believes that
such options are not subject to SFAS 133 because the options meet
the conditions of paragraph 10(e)(3) of
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SFAS 133 and are analogous to paragraph 11(c) which exempts from
the provisions of SFAS 133 "Contracts Issued by the Entity As
Contingent Consideration from a Business Combination."
Note 1 - Summary of Significant Accounting Policies, page F-8
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Estimates, page F-8
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5. Please explain to us how you account for vendor volume discounts, where
you present them on your statements of operations, and tell us how both
comply with EITF 02-16.
Response: Vendor volume discounts are recorded as earned based on the
agreement and terms stipulated by the vendor. They are recorded as
a reduction of costs of sales in accordance with paragraph 4 of
EITF 02-16. A portion may be capitalized as a reduction to
inventory to the extent purchases are held in inventory.
Accrued Expenses, page F-10
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6. Please explain to us what "due to insurance companies" represents and how
you account for it.
Response: This represents overpayments of DCA claims by various insurers.
These payments are recorded as liabilities until resolution. The
overpayments include the following payor errors:
Duplicate payments
Payments in excess of contractual agreements
Payments as primary when payor is secondary
Adjustments are made as DCA comes to terms with insurers for
offsetting certain overpayments against future claims due DCA, or
through a determination by DCA that such payment was not an
overpayment.
Item 9A, Controls and Procedures, page 45
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7. Please tell us the conclusion that your President and Chief Officer and
the Principal Financial Officer reached about the effectiveness of your
disclosure controls and procedures. In addition, please tell us how your
disclosures comply with Item 307 of Regulations S-K.
Response: DCA's disclosure complies with Item 307 of Regulation S-K by
providing the conclusion of DCA's President and Chief Executive and
Principal Financial Officer as to the effectiveness of DCA's
disclosure controls and procedures. Item 9A, Controls and
Procedures, subparagraph (a) relating to Evaluation of Disclosure
Controls and Procedures, shall be modified to read as follows:
"(a) Evaluation of Disclosure and Procedures.
As of the end of the period covered by this Annual Report on Form
10-K for the year ended December 31, 2004, we carried out an evaluation,
under the supervision and with the
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participation of our management, including our President and Chief
Executive Officer, and the Chief Financial Officer, of the effectiveness
of the design and operation of our disclosure controls and procedures
pursuant to Rule 13a-15 of the Securities Exchange Act of 1934 (the
"Exchange Act"), which disclosure controls and procedures are designed
to provide reasonable assurance that, among other things, information is
accumulated and communicated to our management, including our President
and Chief Executive Officer, and our Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure.
Based upon such evaluation, our President and Chief Executive Officer,
and our Chief Financial Officer have concluded that, as of the end of
such period, our disclosure controls and procedures are effective in
providing reasonable assurance that information required to be disclosed
by our company in the reports that it files under the Exchange Act is
recorded, processed, summarized and reported within required time
periods specified by the SEC's rules and forms." (modifications
reflected by blacklined portions)
DCA acknowledges that:
* The company is responsible for the adequacy and accuracy of the
disclosure in the filings;
* Staff comments or changes to disclosure in response to staff
comments do not foreclose the Commission from taking any action
with respect to the filings; and
* The company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
We would appreciate expedited review to the extent you are able to
provide such, since DCA and Medicore are attempting to hold their respective
annual meetings, particularly relating to approval of the merger and related
matters, as discussed in the Registration Statement. Your consideration to
these circumstances is greatly appreciated.
Very truly yours,
Dialysis Corporation of America
/S/ Don Waite
By:________________________________
Don Waite, Vice President of
Finance, and Principal Financial
Officer
cc: Jeffrey Reidler, Asst. Dir. of Corp. Finance
Zafar Hasan, Staff Attorney
Oscar M. Young, Senior Staff Acct.
Tabatha Akins, Staff Acct.
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