Dialysis Corporation of America
1302 Concourse Drive, Suite 204
Linthicum, Maryland 21090
Telephone: (410) 694-0500
Telecopier: (410) 694-0596
August 9, 2005
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 (0-8527)
As per discussions among the accounting staff of the Securities and
Exchange Commission ("SEC"), including Oscar Young, Senior Staff Accountant
and Tabatha Akins, Staff Accountant, Moore Stephens, P.C., the auditors for
Dialysis Corporation of America ("DCA") and its parent, Medicore, Inc.
("Medicore"), in particular, Angelo J. Coppolino, Principal, Daniel R. Ouzts,
Chief Accounting Officer of Medicore and DCA and CFO of Medicore, Don Waite,
CFO of DCA, and Lawrence E. Jaffe, Esq., of Jaffe & Falk, LLC, counsel to DCA
and Medicore, three areas were discussed as to DCA's and Medicore's annual
report on Form 10-K for the year ended December 31, 2004 ("Form 10-K").
The following responses are keyed to the accounting staff's oral
comments of August 5, 2005.
Staff Comment No. 1. Initial staff comment letter dated June 22, 2005,
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Comment 3 re: "Accounts Receivable," bullet points three and four:
Response:
Third bullet point
The Accounts Receivable Aging Schedule as provided to the staff as
Schedule A to the Company's response letter dated June 29, 2005 has been
included in the proposed Amendment No. 1 to the Form 10-K ("Form 10-K/A1")
under Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Fourth bullet point
A statement that there are no approvals pending from third party payors
has been included in the Form 10-K/A1 in Note 1 to "Notes to Consolidated
Financial Statements" under the caption "Revenue Recognition."
Staff Comment No. 2. Out of network revenues; SAB Topic 13 (SAB 104)
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Response:
The lengthy period of time between rendering services and reaching final
settlement, compounded further by the complexities and ambiguities of
reimbursement regulations make it difficult to estimate the net patient
service revenue associated with health care programs [SOP 00-1 para. .02].
Health care entities need to estimate amounts that ultimately will be
realizable in order for revenues to be fairly stated in accordance with GAAP.
The basis for such estimates may range from relatively straightforward
calculations using information that is readily available to highly complex
judgments based on assumptions about future decisions [SOP 00-1 para. .06].
Management is responsible for the fair presentation of its financial
statements in conformity with GAAP. Despite the inherent uncertainties,
management is responsible for estimating the amounts recorded in the
financial statements and making the required disclosures in accordance with
GAAP, based on management's analysis of existing conditions. Estimates that
are significant to management's assertions about revenue include the
provision for third-party payor contractual adjustments and allowances [SOP
00-1 para. .09 and .10].
Accounting for revenues and costs of revenues in health care requires
estimates in many cases; those estimates sometimes change (topic 13; (4b).)
DCA believes that it has the appropriate internal controls and adequate books
and records for the timely identification of necessary changes in estimates
to be reflected in its financial statements.
Estimates of contractual adjustments, other adjustments, and the
allowance for uncollectibles are reported in the period during which the
services are provided, even though the actual amounts may become known at a
later date. Although final settlements are not made until a subsequent
period, they are usually subject to reasonable estimations and are reported
in the financial statements in the period in which services are rendered.
Differences between original estimates and subsequent revisions (including
final settlements) are included in the statement of operations in the period
in which the revisions are made and disclosed, if material. Those
differences are not treated as prior period adjustments unless they meet the
criteria for prior period adjustments as set forth in FASB Statement No. 16
Prior Period Adjustments. [Health Care Audit and Accounting Guide Chapter 5
(Receivables) para. 5.08 and SOP 00-1 para. .36 and .37].
DCA's estimates are reasonable since it reviews each patient related to
out-of-network claims, as stated in DCA's response of August 2, 2005, Comment
No. 3, out-of-network revenues; SAB Topic 13.
DCA's 29 years of experience in the dialysis business provides it with
sufficient basis to reasonably estimate revenues for out-of-network payors.
The DCA staff collects all available information on each individual claim as
a basis for estimating out-of-network revenues. This includes contacting the
patients' insurance
company and requesting out of network payor rates, deductible, and co-payment
information. If DCA is not given satisfactory information from the insurance
company, it then utilizes other sources such as a review of historical
payments from this particular insurance payor for other patients. If DCA has
no experience with the insurance company, its staff then looks to similar
plan types with other insurers for its estimates. While the margin of over or
under estimating may result in a slightly larger adjustment relative to these
claims, past history has established this method as providing reasonable
estimations for reporting such revenues in the period in which services are
rendered. Typically within a two to four month period DCA will receive a
payment for services rendered. At that point DCA will adjust estimated
revenues recognized to reflect the actual payor rate of the insurance
company. All future revenues for this patient are then recognized based on
DCA's experience with that insurance company's payment history. As indicated
under Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations, Critical Accounting Policies and Estimates,
Revenue Recognition" of the Form 10-K/A1 (page 48), DCA adheres to the
guidelines of SAB Topic 13 (SAB 104) in recognizing revenue for out-of-
network payors. Additionally, to reiterate para. 5.08 of the Health Care
Audit and Accounting Guide, any differences between original estimates and
subsequent revisions are included in the Statement of Operations in the
period in which the revisions are made and disclosed, even if material. The
guide basically requires you to arrive at such estimates whether they come
from relatively straight-forward calculations using information that is
readily available to highly complex judgments, based on assumptions about
future decisions (SOP 00-1 para. 06). DCA's historic experience and internal
controls provide a basis for both making reasonable estimates of revenues for
out-of-network payors and identifying on a timely basis any necessary changes
to estimates. For DCA not to estimate revenues for out-of-network providers
given that it has a reasonable basis for doing so would be contrary to the
provisions of SAB Topic 13 (SAB 104) and the above cited references.
The accuracy of the DCA's procedures is evidenced by the fact that in
2003 the estimated net patient revenues from out-of-network payors totaled
approximately $5.9 million. The actual amounts collected totaled
approximately $6.3 million resulting in an additional approximately $400,000
reported in 2004 from out-of-network payors. This translates into an
adjustment of approximately 6.3% ($400,000 divided by $6,300,000). The effect
of all adjustments to the overall net patient revenue is approximately 1.7%
($508,000 divided by $30,000,000). The immateriality of the differences
between estimates and actual collections as a percentage of total net patient
revenues supports DCA's ability to accurately estimate its revenues based on
its internal controls and procedures. It also illustrates complete
compliance with the Health Care Audit and Accounting Guide together with the
pertinent Statements of Position relating to Health Care Revenue Recognition.
Furthermore, if the adjustments were material due to some unforeseen event,
such adjustment would be reported in the period of the revision with no prior
period adjustment required, only disclosed.
Such has been disclosed in "Critical Accounting Policies and Estimates"
under item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" of DCA's Form 10-K/A1, Page 36.
In view of the foregoing, DCA has a basis for reasonably estimating the
revenue from out-of-network and third-party payors and any adjustments due to
the difference between original estimates and final settlements are properly
accounted for in the proper period.
Staff Comment No. 3. Recognition of goodwill (factors that contributed to
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recognition); SFAS 141 paragraph 51(b).
Response:
DCA's response to the August 2, 2005 Comment No. 6 re: recognition of
goodwill referred to "current per patient valuations" which meant from DCA's
perspective an estimate of future business, not patient relationship
valuation. In discussions with the Staff on Friday, August 5th, Mr. Young
expressed the concept of "patient relationships" and the value allocation to
such.
Although DCA contracts with medical directors-physicians, it does so as
a requirement for Medicare. These contracts have no control over future
economic benefits of the asset being acquired, cannot be sold and do not meet
either the contractual-legal criterion or the separability criterion, of FAS
141; para. 39.
As for dialysis center patients, it is generally understood that
established "current per patient valuations" for dialysis centers is one way
that is commonly used in comparing dialysis center values with other similar
centers. As an example, if a dialysis center has an average of 100 patients
that it is serving and the center is sold for $5,000,000, the resulting value
of the center, on a per patient basis, would be $50,000.
At the same time however, there is no real value to a dialysis center's
relationship with any individual patient, or group of patients, as individual
patients may terminate service from the center at any time, typically due to
death, and it is the market itself that provides assurances of future
revenues to a given center. In the limited cases in which DCA has acquired
operating dialysis facilities, it has acquired centers where there is no
present competition, so DCA anticipates mostfuture patients coming to its
center. However, this is not a patient relationship valuation, but rather a
business evaluation. DCA has no rights to or control over any patients, and
if any other facility opens in the area, DCA could lose any or all of the
patients. The number of potential future patients, which DCA considers as
one of the factors in valuing a potential acquisition, is determined based
upon an estimate of certain demographics of the market that the target center
is servicing. These demographics are primarily age, race, prevalence of
diabetes, and prevalence of hypertension.
Moreover, DCA does not employ physicians and has no contractual
relationship with any patients. Under the federal Anti-Kickback Statutes,
DCA may not directly or indirectly, obtain any compensation, remuneration or
value for selling, transferring, or even referring patients to any other
facility or entity. Patients are free to be treated wherever they choose.
No referral payments are allowed. DCA and Medicore have disclosed this in
their respective Forms 10-K under Item 1, "Business, Government
Regulations," specifically under the captions "Fraud and Abuse" and "Anti-
Kickback Statutes."
A dialysis center's relationships with its patients which, as noted in
the preceding paragraph, are non-contractual relationships, are not capable
of being separated or divided and sold, transferred, licensed, rented, or
exchanged (either separately or as part of a group of assets) in exchange
transactions or otherwise, and thereby do not meet the separability criterion
of FAS 141, Paragraph A21.
In view of the foregoing, neither the physician relationship nor the
patient relationship meets the contractual-legal criterion or the
separability criterion of FAS 141.
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.