Item 1.
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Business (all dollar amounts in thousands except share, per share and revenue per equivalent admission amounts)
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Overview
SunLink Health Systems, Inc.,
through subsidiaries, owns businesses provide healthcare services in certain markets in the United States. Unless the context indicates otherwise, all references to SunLink, we, our, ours,
us and the Company refer to SunLink Health Systems, Inc. and our consolidated subsidiaries. References to our specific operations refer to operations conducted through our subsidiaries and references to we,
our, ours, and us in such context refer to the operations of our subsidiaries. Our business is composed of two business segments, the Healthcare Services segment and the Pharmacy segment. Our Healthcare Services
segment subsidiaries own and operate an
84-
bed community hospital and a
66-
bed nursing home in Mississippi, a
100-
bed nursing
home in Georgia, an IT service company based in Georgia, and healthcare facilities, which are leased to third parties. Our Pharmacy segment subsidiary operates a pharmacy business in Louisiana with four service lines.
SunLinks executive offices are located at 900 Circle 75 Parkway, Suite 1120, Atlanta, Georgia 30339, and our telephone number is
(770) 933-7000.
Our website address is www.sunlinkhealth.com. Information contained on our website does not constitute part of this report. Any materials we file with the Securities and Exchange Commission
(SEC) may be read at the SECs Public Reference Room at 100 F Street, NE, Room 1580 Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330.
Certain materials we file with the SEC may also be read and copied at or through our website or at the Internet
website maintained by the SEC at www.sec.gov.
Business Strategy
The business strategy of SunLink is to focus its efforts on expanding and improving operations of and growing its existing Healthcare Services
and Pharmacy businesses. The Company is investing in upgrades and improvements to certain of its Healthcare Services and Pharmacy businesses, while seeking to sell certain of its subsidiaries underperforming assets.
The Company has used a portion of the cash proceeds from recent dispositions of assets to pay down debt and certain other liabilities, and to
repurchase common shares in a tender offer completed in February 2017. The Company may also use existing cash, as well as any net proceeds from future dispositions, if any, to improve its existing businesses, make acquisitions of Healthcare Services
and Pharmacy businesses, prepay debts, return capital to shareholders including through potential public or private purchases of shares, and for other general corporate purposes. There is no assurance that any further dispositions, will be
authorized by the Companys Board of Directors or, if authorized, that any such transactions will be completed or, if completed, will result in net cash proceeds to the Company on a before or after tax basis.
The Company considers the disposition of business segments, facilities and operations based on a variety of factors in addition to
under-performance, including asset values, return on investments and competition from existing and potential competitors, capital improvement needs, the prevailing reimbursement environment under various Federal and state programs (e.g., Medicare
and Medicaid) and by private payors, corporate strategy, and other corporate objectives. The Company believes certain facilities in its Healthcare Services segment as well as its Pharmacy segment continue to under-perform, and the Company has
engaged advisors to assist it in evaluating the possible sale of its Pharmacy business lines.
5
OPERATIONS
Healthcare Services
The Healthcare Services segment is
composed of:
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A subsidiary which owns and operates Trace Regional Hospital and Floy Dyer Nursing Home (Trace Hospital), an
84-licensed-bed
acute care hospital, located in Houston, Mississippi, which includes an
18-bed
geriatric psychiatry unit
(GPU) and a
66-bed
nursing home. This facility focuses primarily on healthcare services.
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A subsidiary which owns and operates Parkside Ellijay, a
100-
bed nursing home and rehabilitation facility (with an adult day care program scheduled to open January 1, 2018)
located in Ellijay, Georgia. In addition to its nursing home facility, Parkside Ellijay also occupies a hospital building of which the emergency department space adjacent to the nursing home and rehabilitation facilities are leased to an
unaffiliated healthcare provider.
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A subsidiary which owns a medical office building and approximately two (2) acres of unimproved land in Dahlonega, Georgia. The medical office building is leased to a third party.
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A subsidiary which owns a medical office building and approximately four (4) acres of land in Clanton, Alabama. A portion of the medical office is currently rented to a third party.
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A subsidiary which owns approximately twelve (12) acres of unimproved land in Fulton, Missouri.
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A subsidiary, Envision Health Resources (Envision), which provides information technology (IT) to outside customers and to SunLink subsidiaries.
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Operating Statistics
The
following table sets forth certain operating statistics for SunLinks Healthcare Services facilities, Trace Hospital and Parkside Ellijay, included in continuing operations for the periods indicated.
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Fiscal Years Ended June 30,
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2017
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2016
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2015
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Facilities owned or leased at end of period
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2
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2
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2
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Licensed hospital beds (at end of period)
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84
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134
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134
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Hospital beds in service (at end of period)
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54
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54
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94
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Nursing home beds in service (at end of period)
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166
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166
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166
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Hospital and nursing home admissions
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573
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828
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1,626
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Hospital and nursing home patient days
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59,796
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61,926
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64,952
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Sources of Revenue
Sources of Healthcare Services Revenue
The following table sets forth the percentage of net revenues from various payors sources in
SunLinks Healthcare Services segment for the periods indicated. The table includes Trace Hospital, Parkside Ellijay, rental income from medical office buildings and Envision services.
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Fiscal Years Ended June 30,
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2017
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2016
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2015
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Source
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Medicare
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38.1
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%
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37.7
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%
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41.8
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%
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Medicaid
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41.5
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%
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38.4
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%
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32.5
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%
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Manage Care, Private and Other Sources
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20.4
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%
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23.9
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%
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25.7
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%
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100.0
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%
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100.0
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%
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100.0
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%
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6
Our Trace Hospital and Parkside Ellijay receive payments for patient care from Federal Medicare
programs, State Medicaid programs, private insurance carriers, health maintenance organizations, preferred provider organizations, TriCare, and from employers and patients directly. Medicare is a federal program that provides certain hospital and
medical insurance benefits to persons age 65 and over, some disabled persons and persons with
end-stage
renal disease. Medicaid is a federal-state program, administered by the states, that provides hospital
and nursing home benefits to qualifying individuals who are unable to afford care. Trace Hospital and Parkside Ellijay are certified as healthcare services providers for persons covered by Medicare and Medicaid programs. TriCare is a federal program
for the healthcare of certain U.S. military personnel and their dependants. See Item 7 Managements Discussion and Analysis of Financial Condition and Results of Operations.
Patients generally are not responsible for any difference between established charges and amounts reimbursed for such services under Medicare,
Medicaid and some private insurer plans, health maintenance organization (HMO) plans and preferred provider organizations (PPO) plans, but are responsible to the extent of any exclusions, deductibles or
co-insurance
features of their coverage. The amount of such exclusions, deductibles and
co-insurance
has been increasing in recent years. Collection of amounts due from
individuals typically is more difficult than from governmental or third-party payors. Further, amounts received under the Medicare and Medicaid programs generally are significantly less than the established charges of most facilities, including our
own, for the services provided. Likewise, HMOs and PPOs generally seek and obtain discounts from the established charges. See Item 1. BusinessGovernment Reimbursement ProgramsHospitalsMedicare/Medicaid
Reimbursement.
Changes in the mix of the patient and resident population among reimbursement categories can significantly affect
the profitability of our Healthcare Services operations. We cannot assure you that reimbursement payments under governmental and private third-party payor programs, including private Medicare supplemental insurance coverage, will remain at levels
comparable to present levels or will be sufficient to cover the costs allocable to patients eligible for reimbursement pursuant to these programs. Medicare reimbursement for services performed in nursing centers is subject to fixed payments under
the Medicare prospective payment systems. In accordance with Medicare laws, CMS makes annual adjustments to Medicare payment rates in many prospective payment systems under what is commonly known as a market basket update. Each year, the
Medicare Payment Advisory Commission (Med PAC), a commission chartered by Congress to advise it on Medicare payment issues, makes payment policy recommendations to Congress for a variety of Medicare payment systems. Congress is not
obligated to adopt Med PAC recommendations, and, based upon outcomes in previous years, there can be no assurance that Congress will adopt Med Pacs recommendations in a given year. Medicaid reimbursement rates in many states in which we
operate nursing centers also are based upon fixed payment systems. Generally, these rates are adjusted annually for inflation. However, these adjustments may not reflect the actual increase in the costs of providing healthcare services. In addition,
Medicaid reimbursement can be impacted negatively by state budgetary pressures, which may lead to reduced reimbursement or delays in receiving payments. Moreover, we cannot assure you that the nursing centers operated by us, or the provision of
goods and services offered by us, will meet the requirements for participation in such programs.
Utilization of Local Healthcare
Services Management Teams
Each of our Healthcare Services businesses is managed by a subsidiary officer who is supported by other
professional personnel, including, but not limited to, a state-licensed nursing home administrator, a director of nursing, nursing assistants, licensed practical nurses, staff development coordinators, activities directors, social services
directors, clinical liaisons, admissions coordinator, IT staff, nod a business office manager. The directors of nursing are state-licensed nurses who supervise our nursing staffs that include, but are not limited to, registered nurses, licensed
practical nurses, and nursing assistants. Staff size and composition vary depending on the size and occupancy of each nursing center, the types of services provided and the acuity level of the patients and residents. The nursing centers contract
with physicians who provide medical director services and serve on performance improvement committees. We provide our nursing center subsidiaries with centralized administrative services in certain areas including information systems, reimbursement
guidance, and
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maintenance support, as well as legal, finance, accounting, purchasing, human resources management, and facilities management support. The centralization of these services improves operating
efficiencies, promotes the standardization of certain processes and permits the healthcare staff of our nursing centers to focus on the delivery of quality care.
Quality Assurance
Quality of care is monitored and enhanced by our clinical operations personnel, as well as family satisfaction surveys. The Improving Medicare
Post-Acute Care Transformation Act of 2014 (the IMPACT Act), passed on October 6, 2014, requires standardized assessment data for quality improvement, payment, and discharge planning purposes across the spectrum of post acute-care
providers (PACs), including skilled nursing facilities.
Trace Hospital and Parkside Ellijay implement quality assurance
procedures to monitor the level and quality of care provided their patients. Each has a medical director who supervises and is responsible for the quality of medical care provided and a medical advisory committee comprised of physicians who review
the professional credentials of physicians applying for medical staff privileges at the facility. The medical advisory committee also reviews the quality of the logistical, medical and technological support provided to the physicians. Trace Hospital
and Parkside Ellijay periodically conduct surveys of their patients, either during their stay or subsequently, to identify potential areas of improvement. Trace Hospital and Parkside Ellijay are each accredited by the JCAHO.
Healthcare Services Competition
Among
the factors which we believe influence patient and customer selection in our healthcare markets are:
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The appearance and functionality of the Healthcare facilities;
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The quality and demeanor of professional staff and physicians; and
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The participation of our facility in plans which pay all or a portion of the patients bill.
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Such factors are influenced heavily by the quality and scope of services, strength of referral networks, location and the price of services.
Trace Hospital and Parkside Ellijay compete with similar senior care facilities primarily on the basis of quality of care, reputation,
location, and physical appearance and, in the case of private payment residents, the charges for our services. Our Healthcare services facilities also compete on a local and regional basis with other facilities providing similar services, including
hospitals, extended care centers, assisted living facilities, home health agencies, and similar institutions. Some competitors may operate newer facilities and may provide services, including skilled nursing services that we may not offer at our
nursing centers. Our competitors include government-owned, religious organization-owned, secular nonprofit and
for-profit
institutions. Many of these competitors have greater financial and other resources than
we do. Although there is limited, if any, price competition with respect to Medicare and Medicaid residents (since revenues received for services provided to these residents are generally based on
pre-established
rates), there is substantial price competition for private payment residents. Historically our nursing centers have been located adjacent to acute care hospitals owned and operated by one of
our subsidiaries. Currently, however, Parkside Ellijay operates in environment where we no longer own an adjacent hospital and such former hospital has ceased operations, although an unaffiliated healthcare provider has
re-opened
an emergency department adjacent to Parkside Ellijay.
Envision competes with companies which
provide IT hosting, computer hardware, IT software, and IT consulting services to customers, either for fees or in connection with the sale of hardware or software. Envision does not sell hardware or software. Evasions competitors may have
larger staffs and greater resources and be
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subsidized by hardware or software vendors or related businesses. Price competition for IT services such as Envision provides is intense and some potential customers operate on legacy IT systems
which make it difficult to change to systems which Envision is able to support.
Managed Care
Our subsidiaries are affected by their ability to negotiate service contracts with purchasers of group healthcare services. HMOs and PPOs
attempt to direct and control the use of healthcare services through managed care programs. In addition, employers and traditional health insurers increasingly are seeking to contain costs through negotiations with facilities for managed care
programs and discounts from established charges. Generally facilities compete for service contracts with group healthcare service purchasers on the basis of market reputation, geographic location, quality and range of services, quality of medical
staff, convenience and price.
The importance of obtaining contracts with managed care organizations varies from market to market,
depending on the market strength of such organizations. Nevertheless, a significant portion of hospital patients in our hospital community are covered by managed care or other reimbursement programs, all of which generally pay less than established
charges for hospital services.
The healthcare industry as a whole faces the challenge of continuing to provide quality patient care while
managing rising costs, facing strong competition for patients, and adjusting to a continued general reduction of reimbursement rates by both private and government payors. Both private and government payors continually seek to reduce the nature and
scope of services which may be reimbursed. Healthcare reform at both the federal and state level generally has created pressure to reduce reimbursement rates. Changes in medical technology, existing and future legislation, regulations and
interpretations, and competitive contracting for provider services by private and government payors, have required and in the future may further require changes in our facilities, equipment, personnel, rates and/or services.
Efforts to Control Healthcare Costs
Rural facilities, including Trace Hospital and Parkside Ellijay continue to have significant unused capacity. Average occupancy rates continue
to be affected negatively by payor-required
pre-admission
authorization, utilization review, and payment mechanisms designed to maximize outpatient and alternative healthcare delivery services for less acutely
ill patients and to limit the cost of nursing homecare. Admissions constraints, payor pressures, and increased competition are likely to continue. Historically, facilities owned and operated by SunLinks subsidiaries have responded to such
trends by adding and expanding services, upgrading facilities and equipment, offering new programs (such as geriatric psychiatric units) and adding or expanding certain inpatient and ancillary services. In addition, our facilities have reduced
services and taken beds out of service in response to such trends. Currently we expect our facilities will continue to respond to such trends in a similar manner subject to the availability of capital resources and our evaluation of the continued
utility of such historical responses.
Health Care Reform
The Patient Protection and Affordable Care Act and the Health Care Education Reconciliation Act of 2010 (collectively, the Affordable
Care Act or ACA) were signed into law by former President Obama on March 23, 2010, and March 30, 2010, respectively. The ACA alters the United States health care system and is intended to decrease the number of uninsured
Americans and reduce overall health care costs. The ACA attempts to achieve these goals by, among other things, requiring most Americans to obtain health insurance or pay a tax penalty, expanding Medicare and Medicaid eligibility, reducing Medicare
and Medicaid payments including disproportionate share payments, expanding the Medicare programs use of value-based purchasing programs, tying hospital payments to the satisfaction of certain quality criteria, and bundling payments to
hospitals and other providers. The ACA also contains a number of measures that are intended to reduce fraud and abuse in the
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Medicare and Medicaid programs, such as requiring the use of recovery audit contractors in the Medicaid program and generally prohibiting physician-owned hospitals from adding new physician
owners or increasing the number of beds and operating rooms for which they are licensed. We believe the implementation or interpretation of rules and regulations or the provisions of the ACA may have and may continue to have an adverse effect on our
financial condition and results of our operations, especially since the one state in which we operate our hospital has decided not to set up state exchanges and not to expand Medicaid. During the current administration, various bills have been
proposed or introduced into Congress to repeal and/or replace the ACA. To date, no such bills have been passed by Congress and signed into law and there can be no assurance that any such bills will become law or, if so the terms thereof.
PHARMACY OPERATIONS
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The Pharmacy segment, which is composed of four operational areas:
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Retail pharmacy products and services which are conducted in rural markets at three locations in Louisiana;
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Institutional Pharmacy services consisting of the provision of specialty and
non-specialty
pharmaceutical and biological products to institutional clients or to patients in
institutional settings, such as nursing homes, specialty hospitals, hospice, and correctional facilities;
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Non-institutional
Pharmacy services consisting of providing pharmaceutical and biological products to clients or patients in
non-institutional
setting such as residential homes; and
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Durable medical equipment consisting primarily of the sale and rental of products for nursing homes and patient-administered home care.
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Pharmacy Competition
There are many
companies which provide one or more of the business which comprise or may compete with our Pharmacy operations. For example, home healthcare business companies, which may compete with our Pharmacy services, our durable medical equipment services
operations or both, range in size from small entrepreneurial companies to rapidly expanding companies with strategies for national operations, such as Amedisys, Inc., Apria Healthcare Group, Inc., Kindred Healthcare, Inc., and Walgreen Co. Pharmacy
companies range from local or regional pharmacies to large public companies, such as CVS Health Corporation (CVS Specialty), Express Scripts (Accredo Health Group, Inc.), Walgreen Co. and BioScript Inc. Institutional pharmacy companies likewise
range from local or regional pharmacies to large public companies including CVS Health Corporation (Omnicare, Inc.) and PharMerica Corporation.
GOVERNMENT REIMBURSEMENT PROGRAMS
Government
Reimbursement ProgramsHospitals
A significant portion of SunLinks Healthcare Services net revenues are dependent upon
reimbursement from Medicare and Medicaid. The Centers for Medicare and Medicaid Services or CMS is the federal agency which administers Medicare, Medicaid and the Childrens Health Insurance Program (CHIP). The federal
government generally reviews payment rates under its various programs annually, and changes in reimbursement rates under such programs, including Medicare and Medicaid, generally occur based on the fiscal year of the federal government which
currently begins on October 1 and ends on September 30 of each year.
Medicare Inpatient Reimbursement
The Medicare program currently pays hospitals under the provisions of a prospective payment system for most inpatient services. Under the
inpatient prospective payment system, a hospital receives a fixed amount for
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inpatient hospital services based on the established fixed payment amount per discharge for categories of hospital treatment, known as diagnosis related groups (DRGs). Each patient
admitted for care is assigned to a DRG based upon a primary admitting diagnosis. Every DRG is assigned a payment rate by the government based upon the estimated intensity of hospital resources necessary to treat the average patient with that
particular diagnosis. DRG payments do not consider a specific hospitals costs, but are national rates adjusted for area wage differentials and
case-mix
indices.
DRG rates are usually adjusted by an update factor each federal fiscal year (FFY). The percentage increases to DRG payment rates
for the last several years have been lower than the percentage increases in the related cost of goods and services provided by general hospitals. The index used to adjust the DRG payment rates is based on a price statistic, known as the CMS Market
Basket Index, reduced by congressionally mandated reduction factors and other factors imposed by CMS.
DRG rate increases were 0.9%, 0.95%
and 1.2% for FFY 2015, 2016, and 2017 respectively. The Balanced Budget Act of 1997 originally set the increase in DRG payment rates for future FFYs at rates that would be based on the market basket index, which in certain years have been, and in
the future may be, subject to reduction factors. If the update factor does not adequately reflect increases in the cost of providing inpatient services by our subsidiarys hospital, our financial condition or results of operations could be
negatively affected.
The ACA combined with the America Taxpayer Relief Act of 2012 (ATRA) and the Medicare Access and CHIP
Reauthorization Act of 2015 (MARA) made a number of changes to Medicare which include but are not limited to:
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Reduction of market basket updates in Medicare payment rates for providers, to incorporate an adjustment for expected productivity gains. The market basket was reduced by 0.25% for both FFY 2010 and 2011, 0.10% for FFY
2012, 0.10% in FFY 2013 and 0.30% in FFY 2014; and will be reduced by 0.20% in 2015 and 2016, and by 0.75% in FFYs 2017-2019.
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Reduction of Medicare payments that would otherwise be made to hospitals by specified percentages to account for preventable hospital readmissions, as defined by CMS, effective October 1, 2012.
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Extension of the Medicare Dependent Hospital Program until September 30, 2017.
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Expansion, on a temporary basis, of the low volume hospital inpatient payment adjustment to include hospitals that are more than 15 miles from other Healthcare Services and have less than 1,600 discharges per year. The
new temporary criteria were effective for FFYs 2011 through 2013 and further expanded through September 30, 2017. Effective FFY 2018, the
low-volume
hospital definition and payment adjustment methodology
is scheduled to return to the
pre-FFY
2011 definition and methodology.
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Hospitals that do not successfully participate in the Hospital IQR Program and do not submit the required quality data will be subject to a
one-fourth
reduction of the market
basket update.
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A requirement that any hospital which is not a meaningful electronic health records user will be reduced by
one-half
of the market basket update in FY 2016. Our subsidiary
hospital did not attest as a meaningful electronic records user for FY 2017 or FY 2016.
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SunLinks subsidiary hospital
is an eligible hospital under one or more provisions of ACA, ATRA and MARA.
Medicare Outpatient Reimbursement
Most outpatient services provided by general hospitals are reimbursed by Medicare under the outpatient prospective payment system. This
outpatient prospective payment system is based on a system of Ambulatory Payment Classifications (APC). Each APC is designed to represent a bundle of outpatient services, and each
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APC is assigned a fully prospective reimbursement rate. Medicare pays a set price or rate for each APC group, regardless of the actual cost incurred in providing care. Each APC rate generally is
subject to adjustment each year by an update factor based on a market basket of services index. For calendar year 2016, the update factor was (0.3%). For calendar year 2017 the update factor was 1.7% and for 2018 the update is estimated
to be 2%. If the update factor for current and future periods does not adequately reflect increases in SunLinks subsidiary hospital cost of providing outpatient services, our financial condition or results of operations could be negatively
affected.
Medicare Bad Debt Reimbursement
Under Medicare, the costs attributable to the deductible and coinsurance amounts that remain unpaid by Medicare beneficiaries can be partially
added to, and reimbursed as a portion of, the Medicare share of allowable costs as cost reports are filed. Bad debts must meet specific criteria to be allowable. Hospitals generally receive interim pass-through payments during the cost report year
which are determined by the respective Medicare Audit Contractor (MAC) from the prior cost report filing, and which are finally adjusted when cost reports are filed and audited.
Amounts uncollectible from specific beneficiaries are charged off as bad debts in the accounting period in which the accounts are deemed to be
worthless. In some cases, an amount previously written off as a bad debt and allocated to the program may be recovered in a subsequent accounting period. In these cases, the recoveries must be used to reduce the cost of beneficiary services for the
period in which the collection is made. In determining reasonable costs for hospitals, the amount of bad debts otherwise treated as allowable costs was reduced by 35% beginning FFY 2014.
Medicare Disproportionate Share Payments
In addition to the standard DRG payment, the Social Security Act requires that additional Medicare payments be made to hospitals with a
disproportionate share of low income patients. Beneficiary Improvement and Protection Act (BIPA) provisions stipulate that rural facilities with fewer than 100 beds with a disproportionate share percentage greater than 15% will be
classified as a disproportionate share hospital and is entitled to receive a supplemental disproportionate share payment based on gross DRG payments. Since April 1, 2004, the effective rate has been 12.0% of DRG payments. Trace Hospital is
classified as a disproportionate share hospital as of July 1, 2016. The Affordable Care Act provides for material reductions in Medicare DSH funding. We estimate that Medicare disproportionate share payments represented approximately 1% of our
Healthcare Services net patient service revenues for the years ended June 30, 2017, 2016 and 2015.
Medicaid Inpatient and
Outpatient Reimbursement
Each state operates a Medicaid program funded jointly by the state and the federal government. Federal law
governs the general management of the Medicaid program, but there is wide latitude for states to customize Medicaid programs to fit local needs and resources. As a result, each state Medicaid plan has its own payment formula and recipient
eligibility criteria.
In the recent past, the state in which our subsidiary operates its hospital has initiated increased efforts to
reduce Medicaid assistance payments. These efforts and reductions often are triggered by one or more of the following factors: an increased effort by CMS to decrease the federal share of payments for Medicaid beneficiaries or significant increases
in program utilization resulting from increased enrollment or budgetary pressures on the applicable states. The federal governments percentage share of each states medical assistance expenditures under Medicaid is determined by a formula
specified in Medicaid law referred to as the Federal Medical Assistance Percentage (FMAP).
The states in which SunLink
subsidiaries currently operate Healthcare services facilities have implemented initiatives to decrease the Medicaid funds paid to providers. Medicaid pays providers for inpatient services in a
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manner similar to the Medicare prospective payment system in that hospitals receive a fixed fee for inpatient hospital services based on the established fixed payment amount per discharge for
categories of hospital treatment, also known as DRGs. These Medicaid DRG payments do not consider a specific hospitals costs, but are statewide rates adjusted for each subsidiaries hospitals capital cost allotment.
Medicaid outpatient services are reimbursed with interim rates based on a facility specific cost to charge ratio. These interim payments are
then adjusted subsequent to the end of the cost reporting period to an amount equal to 85.6% of the costs associated with providing care to the Medicaid outpatient population.
If SunLink or our subsidiaries or any of their facilities were found to be in violation of federal or state laws relating to Medicare,
Medicaid or similar programs, SunLink or the applicable subsidiary or facility could be subject to substantial monetary fines, civil penalties and exclusion from future participation in the Medicare and Medicaid programs. Any such sanctions could
have a material adverse effect on our financial condition or results of operations.
Adoption of Electronic Health Records
Electronic Health Records (EHR) incentive reimbursements are payments received under the Health Information Technology for Economic
and Clinical Health Act (the HITECH Act) which was enacted into law in 2009 as part of ARRA. The HITECH Act includes provisions designed to increase the use of EHR by both physicians and hospitals. Beginning with federal
fiscal year 2011 and extending through federal fiscal year 2016, eligible hospitals participating in the Medicare and Medicaid programs were eligible for reimbursement incentives based on successfully demonstrating meaningful use of their
certified EHR technology. Conversely, those hospitals that have not successfully demonstrate meaningful use of EHR technology are subject to payment penalties or downward adjustments to their Medicare payments beginning in federal fiscal
year 2015.
The Company accounts for EHR incentive payments in accordance with Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC)
450-30,
Gain Contingencies (ASC
450-30).
In accordance with ASC
450-30,
the Company recognizes a gain for EHR incentive payments when the applicable eligible subsidiary hospital has demonstrated meaningful use of certified EHR technology for the applicable period and when the
cost report information needed for the full cost report year used for the final calculation of the EHR incentive reimbursement payment is available. The demonstration of meaningful use is based on meeting a series of objectives and varies among
hospitals, between the Medicare and Medicaid programs, and within the Medicaid program from state to state. Additionally, meeting the series of objectives in order to demonstrate meaningful use became progressively more stringent as its
implementation is phased in through stages as outlined by the CMS.
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Attestation of Medicare meaningful use requirements was successful for each of SunLinks
hospital subsidiaries including certain discontinued operations for fiscal years ended June 30, 2014. SunLinks hospital subsidiaries have also successfully attested to the meaningful use requirements for the Medicaid program for
continuing and certain discontinued operations for the fiscal years ended June 30, 2017, 2016 and 2015. EHR incentive payments received (repaid) were as follows:
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2017
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2016
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2015
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Continuing Operations
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Medicare
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$
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64
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$
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(7
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)
|
|
$
|
0
|
|
Medicaid
|
|
|
0
|
|
|
|
0
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64
|
|
|
$
|
(7
|
)
|
|
$
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
703
|
|
Medicaid
|
|
|
0
|
|
|
|
(93
|
)
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0
|
|
|
$
|
(93
|
)
|
|
$
|
732
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
$
|
64
|
|
|
$
|
(7
|
)
|
|
$
|
703
|
|
Medicaid
|
|
|
0
|
|
|
|
(93
|
)
|
|
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
64
|
|
|
$
|
(100
|
)
|
|
$
|
753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amounts in the table above represent actual funds received from meeting the meaningful use requirements
for Medicare and Medicaid programs. The discontinued operations Medicare funds received in fiscal 2015 were for attestation of the meaningful use requirements in fiscal 2014. Amounts recognized may differ due to
year-end
adjustments and final settlement of cost reports.
The Company received no Medicare
meaningful use payments in continuing operations in fiscal 2017, 2016 and 2015 because, based on its cost-benefit evaluation, it chose not to attest for such payments. We currently believe we will receive no Medicare incentive payments and minimal
Medicaid incentive payments in future years.
Government Reimbursement Program Administration and Adjustments
The Medicare, Medicaid and TriCare programs are subject to statutory and regulatory changes, administrative rulings, interpretations and
determinations, requirements for utilization review and changing governmental funding restrictions, all of which may materially increase or decrease program payments as well as affect the cost of providing services and the timing of payments under
such programs.
All hospitals participating in the Medicare and Medicaid programs are required to meet certain financial reporting
requirements. Federal and, where applicable, state regulations require the submission of annual cost reports covering the revenues, costs and expenses associated with the services provided by each subsidiary hospital to Medicare beneficiaries and
Medicaid recipients.
Annual cost reports required under the Medicare and Medicaid programs are subject to routine audits which may result
in adjustments to the amounts ultimately determined to be due under these reimbursement programs. These audits often require several years to reach the final determination of amounts due. Providers have rights of appeal and it is common to contest
issues raised in audits. Although the final outcome of these audits and the nature and amounts of any adjustments are difficult to predict, we believe that we have made adequate provisions in our financial statements for adjustments that may result
from these audits and that final resolution of any contested issues should not have a material adverse effect upon our financial condition or results of operations. Until final adjustment, however, significant issues may remain unresolved and
previously determined allowances could become either inadequate or greater than ultimately required.
14
In 2005, CMS began using recovery audit contractors (RACs) to detect Medicare
overpayments not identified through existing claims review mechanisms. The RAC program relies on private companies to examine Medicare claims filed by healthcare providers. The RAC program was made permanent by the Tax Relief and Health Care Act of
2006. The ACA expanded the RAC programs scope to include managed Medicare and Medicaid claims, and required all states to establish programs to contract with RACs by 2011. Currently all states where our subsidiaries operate have RAC programs,
and all of our Healthcare Services facilities have had requests from the various RACs to review claims.
RACs perform post-discharge
audits of medical records to identify Medicare overpayments resulting from incorrect payment amounts,
non-covered
services, incorrectly coded services, and duplicate services. CMS has given RACs the authority
to look back at claims up to three years old, provided that the claim was paid on or after October 1, 2007. Claims review strategies used by RACs generally include a review of high dollar claims, including inpatient hospital claims. As a
result, a large majority of the total amounts recovered by RACs has come from hospitals. Claims identified as overpayments are subject to an appeals process and the Companys Healthcare Services routinely appeal RAC overpayment determinations.
Under the RAC program, SunLink has experienced losses in the aggregate from audit adjustments of approximately $3, $0 and $86 for the fiscal years ended June 30, 2017, 2016 and 2015, respectively.
RACs are paid a contingency fee based on the overpayments they identify and collect. We expect that the RACs will continue to look closely at
claims submitted by our subsidiary facility in an attempt to identify possible overpayments. Although we believe the claims for reimbursement submitted to the Medicare program are accurate, we cannot predict the results of any future RAC audits.
In addition, CMS employs Medicaid Integrity Contractors (MICs) to perform post-payment audits of Medicaid claims and identify
overpayments. The ACA increases federal funding for the MIC program for federal fiscal year 2011 and later years. In addition to RACs and MICs, the state Medicaid agencies and other contractors have also increased their review activities.
Government Reimbursement ProgramsNursing Centers
Medicare
The Medicare Part A program provides reimbursement for extended-care services furnished to Medicare beneficiaries who are
admitted to nursing centers after at least a
three-day
stay in an acute care hospital. Covered services include supervised nursing care, room and board, social services, physical, speech, and occupational
therapies, certain pharmaceuticals and supplies, and other necessary services provided by nursing centers. Medicare payments to our nursing centers are based upon certain resource utilization grouping (RUG) payment rates developed by CMS
that provide various levels of reimbursement based upon patient acuity.
The Balanced Budget Act established a Medicare prospective
payment system (PPS) for nursing centers in 1998. The payments received under PPS cover substantially all services for Medicare residents including all ancillary services, such as respiratory therapy, physical therapy, occupational
therapy, speech therapy, and certain covered pharmaceuticals.
Medicare Part B provides reimbursement for certain physician services,
limited drug coverage, and other outpatient services, such as therapy and other services, outside of a Medicare Part A covered patient stay. Payment for these services is determined according to the Medicare Physician Fee Schedule
(MPFS). Annually since 1997, the MPFS has been subject to the sustainable growth rate adjustment (SGR) reduction, which is intended to keep spending growth in line with allowable spending. Each year since the SGR was enacted,
this adjustment produced a scheduled negative update to payment for physicians, therapists, and other healthcare providers paid under the MPFS. Annually, since 2002, Congress has stepped in with
so-called
doc fix legislation to suspend payment cuts to physicians. Subsequent legislation annually suspended the payment cut with the Protecting Access to Medicare Act of 2014, enacted on April 1, 2014 (PAMA) most recently
15
suspending the payment cut until March 31, 2015. The Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) permanently replaces the SGR formula previously used to
determine updates to Medicare physician reimbursement, replacing these updates with quality and value measurements and participation in alternative payment models.
Since 2006, federal legislation has provided for an annual Medicare Part B outpatient therapy cap. In years since 2006, CMS has increased the
amount of the therapy cap. In addition, legislation was passed that required CMS to implement a broad process for reviewing medically necessary therapy claims, creating an exception to the cap. Legislation has annually extended the Medicare Part B
outpatient therapy cap exception process. MACRA further extended the therapy cap exception process until December 31, 2017. This review process has had an adverse effect on the provision and billing of services for patients and can negatively
impact therapist productivity. Patients whose stay is not reimbursed by Medicare Part A must seek reimbursement for their therapy under Medicare Part B and are subject to the therapy cap.
In 2006, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Part D) implemented a major
expansion of the Medicare program through the introduction of a prescription drug benefit. Under Medicare Part D, dual-eligible patients have their outpatient prescription drug costs covered by this Medicare benefit, subject to certain limitations.
Most of our nursing center patients are dual-eligible patients who qualify for the Medicare drug benefit. Accordingly, Medicaid is no longer a primary payor for the pharmacy services provided to these patients.
The Budget Control Act of 2011 (as amended by the Taxpayer Relief Act) instituted an automatic 2% reduction on each claim submitted to
Medicare beginning April 1, 2013.
In February 2012, the Middle Class Tax Relief Act of 2012 was enacted, which provides that
certain Medicare Part B therapy services exceeding a threshold of $3,700 would be subject to a
pre-payment
manual medical review process effective October 1, 2012. The review process for these services
continues to be used by CMS. This review process has had an adverse effect on the provision and billing of services for patients and can negatively impact therapist productivity.
In February 2012, Congress passed The Job Creation Act of 2012 (the Job Creation Act), which provides for reductions in
reimbursement of Medicare bad debts for nursing centers. The Job Creation Act provides for a
phase-in
of the reduction in the rate of reimbursement for bad debts of patients that are dually eligible for
Medicare and Medicaid. The rate of reimbursement for bad debts for these dually eligible patients were reduced from 100% to 88% for cost reporting periods beginning on or after October 1, 2012 and was reduced to 76% for cost reporting periods
beginning on or after October 1, 2013, and was reduced to 65% for cost reporting periods beginning on or after October 2, 2014. The rate of reimbursement for bad debts for patients not dually eligible for both Medicare and Medicaid was
reduced from 70% to 65%, effective for cost reporting periods beginning on or after October 1, 2012.
On July 31, 2013, CMS
issued final regulations updating Medicare payment rates for nursing centers effective October 1, 2013. These final regulations implement a net market basket increase of 1.3% consisting of: (1) a 2.3% market basket inflation increase, less
(2) a 0.5% adjustment to account for the effect of a productivity adjustment, and less (3) a 0.5% market basket forecast error adjustment.
On April 1, 2014, PAMA was enacted, which directed CMS to create a value-based purchasing initiative applicable to nursing centers
beginning October 1, 2018. The initiative will focus on a preventable hospital readmission measure to be provided on or before October 1, 2015 and corresponding preventable hospital readmission rates to be provided on or before
October 1, 2016. Nursing centers will be ranked according to performance on this preventable hospital readmission rate, with corresponding incentive payments based upon such ranking. CMS also will reduce the Medicare per diem rate by 2%
beginning October 1, 2018 in connection with the launch of this initiative.
16
On July 31, 2014, CMS issued final regulations updating Medicare payment rates for nursing
centers effective October 1, 2014. These final regulations implement a net market basket increase of 2.0% consisting of: (1) a 2.5% market basket inflation increase, less (2) a 0.5% adjustment to account for the effect of a
productivity adjustment.
On July 30, 2015, CMS issued final regulations updating Medicare payment rates for nursing centers
effective October 1, 2015. These final regulations implement a net market basket increase of 1.2% consisting of: (1) a 2.3% market basket increase, less (2) a 0.6% market basket forecast error adjustment and (3) a 0.5%
productivity adjustment.
Medicaid
Medicaid is a state-administered program financed by state funds and matching federal
funds. The program provides for medical assistance to the indigent and certain other eligible persons. Although administered under broad federal regulations, states are given flexibility to construct programs and payment methods consistent with
their individual goals. Accordingly, these programs differ in many respects from state to state.
Our subsidiary nursing centers provide
Medicaid-covered services consisting of nursing care, room and board, and social services to eligible individuals. In addition, states may at their option cover other services such as physical, occupational, and speech therapies, and
pharmaceuticals. Medicaid programs also are subject to statutory and regulatory changes, administrative rulings, interpretations of policy by the state agencies, and certain government funding limitations, all of which may materially increase or
decrease the level of program payments to our subsidiary nursing centers. We believe that the payments under many of these programs may not be sufficient on an overall basis to cover the costs of serving certain patients participating in these
programs. In addition, many states are experiencing budgetary pressures which have resulted in further reductions to Medicaid payments to our nursing centers.
There continue to be legislative and regulatory proposals that would impose further limitations on government and private payments to
providers of healthcare services. Many states are considering or have enacted measures that are designed to reduce their Medicaid expenditures and to make certain changes to private healthcare insurance. As states face budgetary issues, we
anticipate further pressure on Medicaid rates that could negatively impact payments to our nursing centers.
In addition, some states seek
to increase the levels of funding contributed by the federal government to their Medicaid programs through a mechanism known as a provider tax. Under these programs, states levy a tax on healthcare providers, which increases the amount of state
revenue available to expend on the Medicaid program. This increase in program revenues increases the payment made by the federal government to the state in the form of matching funds. Consequently, the state then has more funds available to support
Medicaid rates for providers of Medicaid covered services. However, states may not necessarily use these funds to increase payments to nursing center providers. Provider tax plans are subject to approval by the federal government. Although some of
these plans have been approved in the past, we cannot assure you that such plans will be approved by the federal government in the future.
Nongovernment payments
Although our nursing centers seek to maximize the number of nongovernment payment residents admitted to our
nursing centers, including those covered under private insurance and managed care health plans, nongovernment payment residents in our nursing centers are limited. Nongovernment payment residents typically have financial resources (including
insurance coverage) to pay for their services and do not rely on government programs for support. It is important to our business to establish relationships with commercial insurers, managed care health plans, and other private payors and to
maintain our reputation with such payors as a provider of quality patient and resident care. We negotiate contracts with purchasers of group healthcare services, including private employers, commercial insurers, and managed care companies. Most
payor organizations attempt to obtain discounts from established charges. We focus on demonstrating to these payors how our services can provide them and their customers with the most viable
17
pricing arrangements in circumstances where they may otherwise be faced with funding treatment at higher rates at other healthcare providers. The importance of obtaining contracts with commercial
insurers, managed care health plans and other private payors varies among markets, depending on such factors as the number of commercial payors and their relative market strength. Failure to obtain contracts with certain commercial insurers and
managed care health plans or reductions in lengths of stay or payments for our services provided to individuals covered by commercial insurance could have a material adverse effect on our business, financial position, results of operations, and
liquidity.
Government Reimbursement ProgramsPharmacy
The operations of our Pharmacy segment are subject to certain rules implemented by the Medicare Modernization Act (MMA) and, in the
future, may be subject to other rules previously implemented by MMA with respect to urban providers. Regulations implementing cost containment mandates under MMA reduced the reimbursement for healthcare providers in urban areas for a number of
products and services which are also provided by our pharmacy operations and established a competitive bidding program for certain durable medical equipment provided under Medicare Part B in urban areas. Competitive bidding is intended to further
reduce reimbursement for certain products and will likely decrease the number of companies permitted to serve Medicare beneficiaries in the competitive bidding areas (CBAs). CMS had planned to implement the competitive bidding program
for Medicare durable medical equipment, prosthetics, orthotics, and supplies (DMEPOS) products and services with the goal of offering beneficiaries access to quality with lower
out-of-pocket
costs. Prior to January 1, 2016, our Pharmacy segment operations were exempted under the Deficit Reduction Act of 2005 from the proposed competitive acquisition program for DMEPOS. However,
on October 31, 2014, the CMS released Final Rule
1614-F,
Medicare Program:
End-Stage
Renal Disease Prospective Payment System, Quality Incentive Program, and
Durable Medical Equipment, Prosthetics, Orthotics, and Supplies, which, in conjunction with Sections 1834(a)(1)(F) and 1842(s)(3)(B) of the Social Security Act, established the methodology to expand competitive bidding to
non-bid
areas and to implement national price adjustments to payments for DMEPOS and enteral nutrition products previously paid under fee schedules. Under these rules and the resulting expansion plan, CMS applied
competitive bidding prices to claims for DMEPOS and enteral nutrition products in previously
non-bid
areas currently covered in Rounds One and Two of the Competitive Bidding Program (CBP). An
un-weighted
average of all of the single payment amounts from the CBAs in each of the eight distinct CBAs was used to determine a regional single payment amount (RSPA) for each covered item in each CBA. From
January 1, 2016 to June 30, 2016, reimbursement rates for affected product categories were reduced significantly, based on the sum of 50 percent of the current unadjusted fee schedule amount plus 50 percent of the RSPAs. Then, on
July 1, 2016, the reimbursement rates were reduced further too fully implement the bidding-derived rates (i.e., 100% of the adjusted fee schedule amount, based on regional competitive bidding rates). The January 1, 2017 implementation of
the 21st Century Cures Act (Cures Act), enacted December 13, 2016, among other things, reinstated the January 1, 2016 reimbursement rates for competitive bid items in
non-competitive
bidding areas retroactively for the applicable July 1, 2016 through December 31, 2016 Medicare claims. Accordingly, the impact of the Cures Act will lead to increased reimbursement for the Pharmacy segment. This legislation contained no
provisions to defer or change reimbursement rates effective as of January 1, 2017 and prospectively thereafter, and it does not include any changes to rates in competitive bidding areas. We cannot assure you that The Pharmacy segment will be
able to operate its DMEPOS and enteral nutrition products operations profitably in the future at the current reimbursement rates. The MMA also created a Medicare prescription drug benefit (which began in 2006) and a prescription drug card program.
Final rules implementing the portions of the MMA relating to the prescription drug benefit were adopted in 2005.
Under MMA Medicare Part
B, covered drugs and biological products generally are paid based on the average sales price (ASP) methodology. The ASP methodology uses quarterly drug pricing data submitted to CMS by drug manufacturers. CMS will supply contractors with
the ASP drug pricing files for Medicare Part B drugs on a quarterly basis. Principal products paid under the ASP methodology include certain oncology and renal dialysis drugs. Although, there are exceptions to this general rule which are listed in
the latest ASP
18
quarterly change request document and which exceptions generally are paid on a cost basis, such exceptions have not been and are not expected to be material to our operations.
Beginning in January 2008, CMSs outpatient prospective payment system began paying for most separately payable Medicare Part B drugs
administered in a hospital outpatient setting at a reimbursement level of ASP plus 5% and ASP plus 6% in other settings. Such outpatient price represented a decrease from ASP plus 6%.
Section 303(d) of the MMA also requires the implementation of a competitive acquisition program (the Part B CAP) for Medicare
Part B drugs and biological not paid on a cost or prospective payment system basis. The Part B CAP is an alternative to the ASP methodology for acquiring certain Part B drugs which are administered incident to a physicians services. Currently,
the Part B CAP is a voluntary program that offers physicians the option to acquire many injectable and infused drugs they use in their practice from an approved Part B CAP vendor, thus reducing the time and cost of buying and billing for drugs.
Currently, the CAP for Part B Drugs and Biologicals is only for injectable and infused drugs currently billed under Part B that are administered in a physicians office, incident to a physicians service.
In late 2005, CMS conducted the first round of bidding for approved Part B CAP vendors. The Part B CAP was implemented on July 1, 2006.
The 2009-2011 CAP vendor bidding period concluded on February 15, 2008. CMS received several qualified bids; however, contractual issues with the successful bidders resulted in the 2009 program being postponed by CMS in September 2008. As a
result, CAP drugs were not available from an approved CAP vendor for dates of service after December 31, 2008.
At least one Medicaid
program has adopted, and other Medicaid programs, some states and some private payors may be expected to adopt, those aspects of the MMA that either result in or appear to result in price reductions for drugs covered by such programs. Adoption of
ASP as the measure for determining reimbursement by Medicare and Medicaid programs for additional drugs sold by our Pharmacy operations could reduce revenue and gross margins and could materially affect our current average wholesale price
(AWP) based reimbursement structure with private payors.
We cannot assure you that the ASP reimbursement methodology will not
be extended to the provision of all specialty pharmaceuticals or to the specialty pharmaceuticals most often sold by our Pharmacy segment operations or that our Pharmacy segment will be able to operate profitably at either existing or at lower
reimbursement rates. Likewise, we cannot assure you that the Part B CAP program will not be extended to rural or exurban areas in general or to the areas in which it operates, or may seek to operate, or that the Pharmacy segment would be able to
meet the qualifications to become a Part B CAP vendor either now or at any time in the future.
HEALTHCARE REGULATION
Overview
The healthcare
industry is governed by an extremely complex framework of federal, state and local laws, rules and regulations, and there continue to be federal and state proposals that would, and actions that do, impose limitations on government and private
payments to providers, including community hospitals, nursing homes and pharmacy operations. In addition, there regularly are proposals to increase
co-payments
and deductibles from program and private
patients. Facilities also are affected by controls imposed by government and private payors designed to reduce admissions and lengths of stay. Such controls include what is commonly referred to as utilization review. Utilization review
entails the review of a patients admission and course of treatment by a third party. Historically, utilization review has resulted in a decrease in certain treatments and procedures being performed. Utilization review is required in connection
with the provision of care which is to be funded by Medicare and Medicaid and is also required under many managed care arrangements.
Many
states have enacted, or are considering enacting, additional measures that are designed to reduce their Medicaid expenditures and to make changes to private healthcare insurance. Various states have applied, or are
19
considering applying, for a waiver from current Medicaid regulations in order to allow them to serve some of their Medicaid participants through managed care providers. These proposals also may
attempt to include coverage for some people who presently are uninsured, and generally could have the effect of reducing payments to hospitals, physicians and other providers for the same level of service provided under Medicaid.
Healthcare Facility Regulation
Certificate of Need Requirements
A number of states require approval for the purchase, construction or expansion of various healthcare facilities, including findings of need
for additional or expanded Healthcare Services . Certificates of Need (CONs), which are issued by governmental agencies with jurisdiction over applicable healthcare facilities, are at times required for capital expenditures exceeding a
prescribed amount, changes in bed capacity or the addition of services and certain other matters. The state in which a SunLink subsidiary currently operates a hospital (Mississippi) has a CON law that applies to such facility. The two states
(Georgia and Mississippi) in which SunLink subsidiaries currently operate nursing homes/skilled nursing facilities also have CON laws that apply to nursing homes and other skilled nursing facilities. States periodically review, modify and revise
their CON laws and related regulations.
SunLink is unable to predict whether its Healthcare Services subsidiaries will be able to
obtain any CONs that may be necessary to accomplish their business objectives in any jurisdiction where such certificates of need are required. Any violation of state CON laws can result in the imposition of civil sanctions or the revocation of
licenses for such facilities. Future Healthcare Services acquisitions also may occur in states that do not require CONs or which have less stringent CON requirements than the states in which SunLink subsidiaries currently operate healthcare
facilities. Any healthcare facility operated by SunLink in such states may face greater competition from new entrants or expanding facilities operated by competitors, including physicians than in states where CON laws are applicable.
Utilization Review Compliance and Hospital Governance
Healthcare Services are subject to, and comply with, various forms of utilization review. In addition, under the Medicare prospective payment
system, each state must have a peer review organization to carry out a federally mandated system of review of Medicare patient admissions, treatments and discharges in hospitals. Medical and surgical services and physician practices are supervised
by committees of staff doctors at each healthcare facility, are overseen by each healthcare facilitys local governing board, the primary voting members of which are physicians and community members, and are reviewed by quality assurance
personnel. The local governing boards also help maintain standards for quality care, develop long-range plans, establish, review and enforce practices and procedures and approve the credentials and disciplining of medical staff members.
Emergency Medical Treatment and Active Labor Act
The Emergency Medical Treatment and Active Labor Act (EMTALA) is a federal law that requires any hospital that participates in the
Medicare program to conduct an appropriate medical screening examination of every person who presents to the hospitals emergency department for treatment and, if the patient is suffering from an emergency medical condition or is in active
labor, to either stabilize that condition or make an appropriate transfer of the patient to a facility that can handle the condition. The obligation to screen and stabilize emergency medical conditions exists regardless of a patients ability
to pay for treatment. There are severe penalties under EMTALA if a hospital fails to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patients ability
to pay. Penalties for violations of EMTALA include civil monetary penalties and exclusion from participation in the Medicare program, the Medicaid program or both. In addition, an injured patient, the patients family or a medical facility that
suffers a financial loss as a direct result of another hospitals violation of the law can bring a civil suit
20
against that other hospital. Although we believe that our subsidiaries hospitals comply with EMTALA, we cannot predict whether CMS will implement new requirements in the future and whether
our Trace Hospital will be able to comply with any new requirements. Neither Trace Hospital nor Parkside Ellijay offers an emergency department.
Pharmacy Segment Regulation
Overview
Much like our
subsidiaries Healthcare Services segment operations, the operations of our Pharmacy segment subsidiary are subject to various federal and state statutes and regulations governing their operations, including laws and regulations with respect to
operation of pharmacies, repackaging of drug products, wholesale distribution, dispensing of controlled substances, cross-jurisdictional sale and distribution of pharmacy products, medical waste disposal, clinical trials and
non-discriminatory
access. Federal statutes and regulations govern the labeling, packaging, advertising and adulteration of prescription drugs, as well as the dispensing of controlled substances. Federal controlled
substance laws require us to register our pharmacies and repackaging facilities with the United States Drug Enforcement Administration (DEA) and to comply with security, recordkeeping, inventory control and labeling standards in order to
dispense controlled substances. Although we believe that the operations of our Pharmacy segment have obtained the permits and/or licenses required to conduct its Pharmacy business as currently conducted, a failure to have the necessary permits and
licenses could have a material adverse effect on its Pharmacy business, and our financial condition or results of operations.
Pharmaceutical Distribution
The Pharmacy subsidiary conducts the operations of our Pharmacy segment. In addition to
walk-in
customers at its retail centers, it distributes pharmaceuticals through a variety of delivery methods, including by mail and express delivery services. Many states in which The Pharmacy segment delivers or may seek to deliver pharmaceuticals have
laws and regulations that require
out-of-state
mail service pharmacies to register with, or be licensed by, the boards of pharmacy or similar regulatory bodies in those
states. These states generally permit the dispensing pharmacy to follow the laws of the state within which the dispensing pharmacy is located.
However, various state Medicaid programs have enacted laws and/or adopted rules or regulations directed at restricting or prohibiting the
operation of
out-of-state
pharmacies by, among other things, requiring compliance with all laws of the states into which the
out-of-state
pharmacy dispenses medications, whether or not those laws conflict with the laws of the state in which the pharmacy is located, or requiring the
pharmacist-in-charge
to be licensed in that state. To the extent that such laws or regulations are found to be applicable to the Pharmacy operations of Pharmacy segment, we believe our Pharmacy operations
comply with them in all material respects. To the extent that any of the foregoing laws or regulations prohibit or restrict the operation of mail service pharmacies and are found to be applicable to the Pharmacy operations of the Pharmacy segment,
they could have an adverse effect on its ability to expand our pharmacy operations, which currently are concentrated in Louisiana. A number of state Medicaid programs prohibit the participation in such states Medicare program by either
out-of-state
retail pharmacies or mail order pharmacies, whether located
in-state
or
out-of-state.
Advertising and Marketing Regulations
There are also other statutes and regulations which may affect advertising, marketing and distribution of pharmacy products. The Federal Trade
Commission requires mail order sellers of goods generally to engage in truthful advertising, to stock a reasonable supply of the products to be sold, to fill mail orders within 30 days, and to provide clients with refunds, when appropriate.
21
General Healthcare Regulations
Drugs and Controlled Substances
Various licenses and permits are required by our subsidiaries Healthcare Services and by the Pharmacy segment operations in order to
dispense narcotics and operate pharmacies. All of our subsidiaries are required to register our dispensing operations for permits and/or licenses with, and comply with certain operating and security standards of, the United States DEA, the Food and
Drug Administration (FDA), state Boards of Pharmacy, state health departments and other state agencies in states where we operate or may seek to operate.
State controlled substance laws require registration and compliance with state pharmacy licensure, registration or permit standards
promulgated by the states pharmacy licensing authority. Such standards often address the qualification of an applicants personnel, the adequacy of its prescription fulfillment and inventory control practices and the adequacy of its
facilities. In general, pharmacy licenses are renewed annually. Pharmacists and pharmacy technicians employed at each of our dispensing locations also must satisfy applicable state licensing requirements.
Fraud and Abuse, Anti-Kickback and Self-Referral Regulations
Participation in the Medicare and/or Medicaid programs is heavily regulated by federal statutes and regulations. If a Healthcare Services or
Pharmacy segment operations fails to comply substantially with the numerous federal laws governing such activities, the participation in the Medicare and/or Medicaid programs by the applicable subsidiary or even SunLink generally may be terminated
and/or civil or criminal penalties may be imposed. For example, a hospital may lose its ability to participate in the Medicare and/or Medicaid programs if it:
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makes claims to Medicare and/or Medicaid for services not provided or misrepresents actual services provided in order to obtain higher payments;
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pays money to induce the referral of patients or the purchase of items or services where such items or services are reimbursable under a federal or state health program;
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fails to report or repay improper or excess payments; or
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fails to provide appropriate emergency medical screening services to any individual who comes to a hospitals campus or otherwise fails to properly treat and transfer emergency patients.
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Hospitals continue to be one of the primary focus areas of the Office of the Inspector General (OIG) of the United States and
other governmental fraud and abuse programs. In January 2005, the OIG issued Supplemental Compliance Program Guidance for Hospitals that focuses on hospital compliance risk areas. Some of the risk areas highlighted by the OIG include correct
outpatient procedure coding, revising admission and discharge policies to reflect current CMS rules, submitting appropriate claims for supplemental payments such as pass-through costs and outlier payments and a general discussion of the fraud and
abuse risks related to financial relationships with referral sources. Each federal fiscal year, the OIG also publishes a General Work Plan that provides a brief description of the activities that the OIG plans to initiate or continue with respect to
the programs and operations of Department of Health and Human Services (HHS) and details the areas that the OIG believes are prone to fraud and abuse.
Sections of the Anti-Fraud and Abuse Amendments to the Social Security Act, commonly known as the anti-kickback statute, prohibit
certain business practices and relationships that might influence the provision and cost of healthcare services reimbursable under Medicare, Medicaid, TriCare or other healthcare programs, including the payment or receipt of remuneration for the
referral of patients whose care will be funded by Medicare or other government programs. Sanctions for violating the anti-kickback statute include criminal penalties and civil sanctions, including fines and possible exclusion from future
participation in government programs, such as Medicare and Medicaid. Pursuant to the Medicare and Medicaid Patient and Program Protection Act of 1987, HHS issued regulations that create safe harbors under the anti-kickback statute. A given
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business arrangement that does not fall within an enumerated safe harbor is not
per se
illegal; however, business arrangements that fail to satisfy the applicable safe harbor criteria are
subject to increased scrutiny by enforcement authorities.
The Health Insurance Portability and Accountability Act of 1996
(HIPAA) broadened the scope of the fraud and abuse laws by adding several criminal statutes that are not related to receipt of payments from a federal healthcare program. HIPAA created civil penalties for proscribed conduct, including
upcoding and billing for medically unnecessary goods or services. These laws cover all health insurance programs, private as well as governmental. In addition, HIPAA broadened the scope of certain fraud and abuse laws, such as the anti-kickback
statute, to include not just Medicare and Medicaid services, but all healthcare services reimbursed under a federal or state healthcare program. Finally, HIPAA established enforcement mechanisms to combat fraud and abuse. These mechanisms include a
bounty system where a portion of the payment recovered is returned to the government agencies, as well as a whistleblower program, where a portion of the payment received is paid to the whistleblower. HIPAA also expanded the categories of persons
that may be excluded from participation in federal and state healthcare programs.
There is increasing scrutiny by law enforcement
authorities, the OIG, the courts and the U.S. Congress of arrangements between healthcare providers and potential referral sources to ensure that the arrangements are not designed as mechanisms to exchange remuneration for patient-care referrals and
opportunities. Investigators also have demonstrated a willingness to look behind the formalities of a business transaction and to reinterpret the underlying purpose of payments between healthcare providers and potential referral sources. Enforcement
actions have increased, as is evidenced by highly publicized enforcement investigations of certain hospital activities.
In addition,
provisions of the Social Security Act, known as the Stark Act, also prohibit physicians from referring Medicare and Medicaid patients to providers of a broad range of designated health services with which the physicians or their immediate family
members have ownership or certain other financial arrangements. Certain exceptions are available for employment agreements, leases, physician recruitment and certain other physician arrangements. A person making a referral, or seeking payment for
services referred, in violation of the Stark Act is subject to civil monetary penalties of up to $15 for each service; restitution of any amounts received for illegally billed claims; and/or exclusion from future participation in the Medicare
program, which can subject the person or entity to exclusion from future participation in state healthcare programs.
Further, if any
physician or entity enters into an arrangement or scheme that the physician or entity knows or should have known has the principal purpose of assuring referrals by the physician to a particular entity, and the physician directly makes referrals to
such entity, then such physician or entity could be subject to a civil monetary penalty of up to $100. In addition, the monitoring of compliance with and the enforcing of penalties for violations of these laws and regulations is changing and
increasing. For example, in 2010, CMS issued a self-referral disclosure protocol for hospitals and other providers that wish to self-disclose potential violations of the Stark Act and attempt to resolve those potential violations
and any related overpayment liabilities at levels below the maximum penalties and amounts set forth in the statute. In light of the provisions of the Affordable Care Act that created potential liabilities under the federal False Claims Act
(discussed below) for failing to report and repay known overpayments and return an overpayment within sixty (60) days of the identification of the overpayment or the date by which a corresponding cost report is due, whichever is later,
hospitals and other healthcare providers are encouraged to disclose potential violations of the Stark Act to CMS. It is likely that self-disclosure of Stark Act violations will increase in the future. Finally, many states have adopted or are
considering similar legislative proposals, some of which extend beyond the Medicaid program, to prohibit the payment or receipt of remuneration for the referral of patients and physician self-referrals regardless of the source of the payment for the
care.
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The Federal False Claims Act and Similar State Laws
The Federal False Claims Act prohibits providers from, among other things, knowingly submitting false or fraudulent claims for payment to the
federal government. The False Claims Act defines the term knowingly broadly, and while simple negligence generally will not give rise to liability, submitting a claim with reckless disregard to its truth or falsity can constitute the
knowing submission of a false or fraudulent claim for the purposes of the False Claims Act. The qui tam or whistleblower provisions of the False Claims Act allow private individuals to bring actions under the
False Claims Act on behalf of the government. These private parties are entitled to share in any amounts recovered by the government, and, as a result, the number of whistleblower lawsuits that have been filed against providers has
increased significantly in recent years. When a private party brings a qui tam action under the False Claims Act, the defendant will generally not be aware of the lawsuit until the government makes a determination whether it will intervene and take
a lead in the litigation. If a provider is found to be liable under the False Claims Act, the provider may be required to pay up to three times the actual damages sustained by the government plus mandatory civil monetary penalties of between $5 to
$11 for each separate false claim. The government has used the False Claims Act to prosecute Medicare and other government healthcare program fraud such as coding errors, billing for services not provided, submitting false cost reports, and
providing care that is not medically necessary or that is substandard in quality.
HIPAA Transaction, Privacy and Security Requirements
HIPAA and federal regulations issued pursuant to HIPAA contain, among other measures, provisions that have required SunLink and our
subsidiaries to implement modified or new computer systems, employee training programs and business procedures. The federal regulations are intended to encourage electronic commerce in the healthcare industry, provide for the confidentiality and
privacy of patient healthcare information and ensure the security of healthcare information.
A violation of the HIPAA regulations could
result in civil money penalties of $1 per incident, up to a maximum of $25 per person, per year, per standard violated. HIPAA also provides for criminal penalties of up to $50 and one year in prison for knowingly and improperly obtaining or
disclosing protected health information, up to $100 and five years in prison for obtaining protected health information under false pretenses and up to $250 and ten years in prison for obtaining or disclosing protected health information with the
intent to sell, transfer or use such information for commercial advantage, personal gain or malicious harm. Since there is limited history of enforcement efforts by the federal government at this time, it is difficult to ascertain the likelihood of
enforcement efforts in connection with the HIPAA regulations or the potential for fines and penalties, which may result from any violation of the regulations.
HIPAA Privacy Regulations
HIPAA privacy regulations protect the privacy of individually identifiable health information. The regulations provide increased patient
control over medical records, mandate substantial financial penalties for violation of a patients right to privacy and, with a few exceptions, require that an individuals individually identifiable health information only be used for
healthcare-related purposes. These privacy standards apply to all health plans, all healthcare clearinghouses and healthcare providers, such as our subsidiaries facilities, that transmit health information in an electronic form in connection
with standard transactions, and apply to individually identifiable information held or disclosed by a covered entity in any form. These standards impose extensive administrative requirements on our subsidiaries facilities and require
compliance with rules governing the use and disclosure of such health information, and they require our subsidiaries facilities to impose these rules, by contract, on any business associate to whom we disclose such information in order to
perform functions on behalf of our subsidiaries facilities. In addition, our subsidiaries facilities are subject to any state laws that are more restrictive than the privacy regulations issued under HIPAA. These laws vary by state and
could impose stricter standards and additional penalties.
The HIPAA privacy regulations also require healthcare providers to implement
and enforce privacy policies to ensure compliance with the regulations and standards. In conjunction with a private HIPAA consultant and
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HIPAA coordinators at each facility, individually tailored policies and procedures were developed and implemented and HIPAA privacy educational programs are presented to all employees and
physicians at each facility. We believe all of our subsidiaries facilities are in compliance with current HIPAA privacy regulations.
HIPAA Electronic Data Standards
The Administrative Simplification Provisions of HIPAA require the use of uniform electronic data transmission standards for all healthcare
related electronic data interchange. These provisions are intended to streamline and encourage electronic commerce in the healthcare industry. Among other things, these provisions require Healthcare Services to use standard data formats and code
sets established by HHS when electronically transmitting information in connection with certain transactions, including health claims and equivalent encounter information, healthcare payment and remittance advice and health claim status.
The HHS regulations establish electronic data transmission standards that all healthcare providers and payors must use when submitting and
receiving certain electronic healthcare transactions. The uniform data transmission standards are designed to enable healthcare providers to exchange billing and payment information directly with the many payors thereby eliminating data
clearinghouses and simplifying the interface programs necessary to perform this function. We believe that the management information systems at our subsidiaries comply with HIPAAs electronic data regulations and standards.
HIPAA Security Standards
The Administrative Simplification Provisions of HIPAA require the use of a series of security standards for the protection of electronic health
information. The HIPAA security standards rule specifies a series of administrative, technical and physical security procedures for covered entities to use to assure the confidentiality of electronic protected health information. The standards are
delineated into either required or addressable implementation specifications.
In conjunction with a consortium of rural hospitals,
private HIPAA security consultants and HIPAA security officers at each facility, our subsidiaries have performed security assessments, and implemented individually tailored plans to apply required or addressable solutions and implemented a set of
security policies and procedures. In addition, our subsidiaries developed and adopted an individually tailored comprehensive disaster contingency plan for each facility and presented a HIPAA security training program to all applicable personnel. We
believe SunLink and our subsidiaries are in compliance with all aspects of the HIPAA security regulations.
HIPAA National Provider
Identifier
HIPAA also required HHS to issue regulations establishing standard unique health identifiers for individuals, employers,
health plans and healthcare providers to be used in connection with standard electronic transactions. All healthcare providers, including our facilities, were required to obtain a new National Provider Identifier (NPI) to be used in
standard transactions instead of other numerical identifiers by May 23, 2007. Our facilities implemented use of a standard unique healthcare identifier by utilizing their employer identification number. HHS has not yet issued proposed rules
that establish the standard for unique health identifiers for health plans or individuals. Once these regulations are issued in final form, we expect to have approximately one to two years to become fully compliant, but cannot predict the impact of
such changes at this time. We cannot predict whether our facilities may experience payment delays during the transition to the new identifiers. HHS is currently working on the standards for identifiers for health plans; however, there are currently
no proposed timelines for issuance of proposed or final rules. The issuance of proposed rules for individuals is on hold indefinitely.
Medical Waste Regulations
Our operations, especially our Healthcare Services facility operations, generate medical waste that must be disposed of in compliance with
federal, state and local environmental laws, rules and regulations. Our operations
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are also generally subject to various other environmental laws, rules and regulations. Based on our current level of operations, we do not anticipate that such compliance costs will have a
material adverse effect on our cash flows, financial position or results of operations.
Regulatory Compliance Program
Our subsidiaries maintain compliance programs under the direction of a risk manager. The compliance programs are directed at all areas of
regulatory compliance, including physician recruitment, reimbursement and cost reporting practices, as well as Pharmacy segment operations. Each Healthcare Services and the Pharmacy segment operations each have one or more compliance officer and
develops remediation plans to correct problems should they arise. In addition, all employees are provided with a copy of and given an introduction to the subsidiarys
Code of Conduct
, which includes ethical and compliance guidelines and
instructions about the proper resources to utilize in order to address any concerns that may arise. Each Healthcare Services and Pharmacy segment operations conduct annual training to
re-emphasize
its
Code
of Conduct
and monitor its compliance program to respond to developments in healthcare regulations and the industry. A toll-free hotline is also maintained to permit employees to report compliance concerns on an anonymous basis.
Professional Liability
As part of
our business, our subsidiaries are subject to claims of liability for events occurring in the ordinary course of operations. To cover a portion of these claims, professional malpractice liability insurance and general liability insurance are
maintained in amounts which are commercially available and believed to be sufficient for operations as currently conducted, although some claims may exceed the scope or amount of the coverage in effect.
The recorded liability for professional liability risks of our subsidiaries operations includes an estimate of liability for claims,
including claims retained after the disposition of any facility or operations or claims assumed in connection with the acquisition of any facility or operations. These estimates are based on actuarially determined amounts.
Environmental Regulation
We believe our
subsidiaries are in substantial compliance with applicable federal, state and local environmental regulations. To date, compliance with federal, state and local laws regulating the discharge of material into the environment or otherwise relating to
the protection of the environment have not had a material effect upon our consolidated results of operations, consolidated financial condition or competitive position. Similarly, we have not had to make material capital expenditures to comply with
such regulations.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers, as of September 26, 2017, their positions with the Company or its subsidiaries and their ages are as follows:
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Name
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Offices
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Age
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Robert M. Thornton, Jr.
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Director, Chairman of the Board of Directors, President and Chief Executive Officer
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68
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Mark J. Stockslager
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Chief Financial Officer and Principal Accounting Officer
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58
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Byron D. Finn
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PresidentSunLink ScriptsRx, LLC
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67
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All of our executive officers hold office for an indefinite term, subject to the discretion of the Board of
Directors.
Robert M. Thornton, Jr.
has been Chairman and Chief Executive Officer of SunLink Health Systems, Inc. since
September 10, 1998, President since July 16, 1996 and was Chief Financial Officer from July 18, 1997 to August 31, 2002. From March 1995 to the present, Mr. Thornton has been a private investor in and Chairman and Chief
Executive Officer of CareVest Capital, LLC, a private investment and management services firm. Mr. Thornton was President, Chief Operating Officer, Chief Financial Officer and a director of Hallmark Healthcare Corporation (Hallmark)
from November 1993 until Hallmarks merger with Community Health Systems, Inc. in October 1994. From October 1987 until November 1993, Mr. Thornton was Executive Vice President, Chief Financial Officer, Secretary, Treasurer and a director
of Hallmark.
Mark J. Stockslager
has been Chief Financial Officer of SunLink Health Systems, Inc. since July 1, 2007. He was
interim Chief Financial Officer from November 6, 2006 until June 30, 2007. He has been the Principal Accounting Officer since March 11, 1998 and was Corporate Controller from November 6, 1996 to June 4, 2007. He has been
associated continuously with our accounting and finance operations since June 1988 and has held various positions, including Manager of U.S. Accounting, from June 1993 until November 1996. From June 1982 through May 1988, Mr. Stockslager was
employed by Price Waterhouse & Co.
Byron D. Finn
was named President of SunLink ScriptsRx, LLC on October 1, 2010.
Mr. Finn was most recently president of Byron D. Finn, CPA, PC, which provided accounting, financial consulting and litigation support services to its clients, including numerous healthcare clients. His experience also includes various
positions with The Coca-Cola Company, where he served in a number of financial-related positions and in connection with special projects, and he was previously employed by Ernst & Young. Mr. Finn is a licensed CPA and received his BA
in Business Administration and Master in Accountancy degrees from the University of Georgia.
In addition to other information contained in this
Annual Report, including certain cautionary and forward-looking statements, you should carefully consider the following factors in evaluating an investment in SunLink:
Consolidated Operations Risks
If our operations
continue to generate operating losses, we may not be able to generate sufficient cash flows to meet our liquidity needs.
We rely upon
cash on hand, cash from operations and cash from asset sales to fund our cash requirements for working capital, capital expenditures, commitments and payments of principal and interest on borrowings. Our ability to generate cash from operations has
been negatively impacted by reduced Federal and state reimbursements, uncollectible
self-pay
net revenues of our Healthcare Services segment, increased salary
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expenses for employed physicians and decreased patient volume at our facilities as a result of economic conditions in the locations we serve as well as decreased sales volume and earning
experienced by our Pharmacy segment. We expect that these factors will continue to have a negative impact on our business for the foreseeable future. Further deterioration would negatively impact our results of operations and cash flows.
SunLink would require additional debt or equity capital in order to make significant capital investments or expand our operations and the inability to make
significant capital investments or expand our operations may negatively affect SunLinks competitive position, reduce earnings, and negatively affect our results of operations.
SunLinks operations strategy may require significant capital investments from time to time. Significant capital investments may be
required for
on-going
and planned capital improvements at existing facilities and/or in connection with future capital projects either in connection with existing operations or future acquired operations.
SunLinks ability to make capital investments depends on numerous factors such as the availability of funds from operations and access to additional debt and equity financing. No assurance can be given that the necessary funds will be
available. Moreover, incurrence of additional debt financing, if available, may involve additional restrictive covenants that could negatively affect SunLinks ability to operate its business in the desired manner, and raising additional equity
likely would be dilutive to shareholders. The failure to obtain funds necessary for the realization of SunLinks operating strategy could impair SunLinks existing operations and could force SunLink to forego opportunities that may arise
in the future. This could, in turn, have a negative impact on the competitive position of our operating subsidiaries.
Indebtedness of one of our
subsidiaries which we have guaranteed could be subject to prepayment which could require a substantial amount of our cash and any such repayment could restrict our current and future operations, which could adversely affect our ability to manage our
operations and liquidity.
The RDA loan at our Trace Hospital subsidiary contains various terms and conditions, including financial
restrictions and limitations, and affirmative and negative covenants. Currently, such subsidiary is not in compliance with the debt service coverage, fixed charge ratio and funded debt to EBITDA ratios under its RDA loan. The loan is guaranteed by
SunLink, and SunLink and Trace Hospital continue to discuss a modification or waiver of this
non-compliance
with the lender. In the event the lender were to declare an event of default and accelerate the
maturity of the indebtedness, either Trace Hospital or SunLink under its guarantee could be required to repay such loan in advance of its maturity which could require a substantial amount of our cash and any such repayment could restrict our current
and future operations, which could adversely affect our ability to respond to manage our operations and liquidity.
Healthcare reform has initiated
significant changes to the United States healthcare system some of which may adversely affect our business.
Various healthcare reform
provisions became law upon enactment of the ACA. The reforms contained in the ACA have impacted each of our businesses in some manner. Several of the reforms are very significant and could ultimately change the nature of our services, the methods of
payment for our services, and the underlying regulatory environment. The reforms include the possible modifications to the conditions of qualification for payment, bundling payments to cover both acute and post-acute care, and the imposition of
enrollment limitations on new providers. The ACA also provides for: (1) reductions to the annual market basket payment updates for additional annual productivity adjustment reductions to the annual market basket payment update as
determined by CMS for nursing centers (beginning in federal fiscal year 2012); (2) new transparency, reporting, and certification requirements for nursing centers, including disclosures regarding organizational structure, officers, directors,
trustees, managing employees, and financial, clinical, and other related data; (3) a quality reporting system for hospitals beginning in federal fiscal year 2014; and (4) reductions in Medicare payments to hospitals beginning in federal
fiscal year 2014 for failure to meet certain quality reporting standards or to comply with standards in new value-based purchasing demonstration project programs.
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In general, a primary goal of recurrent efforts at healthcare reform is to reduce the cost to
federal and state government of reimbursement to providers under various governmental programs, which includes reductions in the reimbursement paid to us and other healthcare providers. Moreover, healthcare reform could negatively impact insurance
companies, other third-party payors, our customers, as well as other healthcare providers, which may in turn negatively impact our business. As such, healthcare reforms and changes resulting from the ACA, as well as other similar healthcare reforms,
could have a material adverse effect on our business, financial position, results of operations, and liquidity.
SunLink conducts business in a heavily
regulated industry; changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce revenue and profitability.
The healthcare industry is subject to extensive federal, state and local laws and regulations relating to:
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conduct of operations including patient referrals, physician recruiting practices, cost reporting and billing practices;
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ownership, condition and operation of facilities;
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addition of facilities and services;
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confidentiality, maintenance, and security issues associated with medical records;
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billing for services; and
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These laws and regulations are extremely complex and, in many instances,
the industry does not have the benefit of significant regulatory or judicial interpretation of these laws and regulations, including in particular, Medicare and Medicaid anti-fraud and abuse amendments, codified in Section 1128B(b) of the
Social Security Act and known as the anti-kickback statute. This law prohibits providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent to generate referrals of orders
for services or items reimbursable under Medicare, Medicaid, and other federal healthcare programs.
HHS regulations describe some of the
conduct and business relationships immune from prosecution under the anti-kickback statute. The fact that a given business arrangement does not fall within one of these safe harbor provisions does not render the arrangement illegal.
However, business arrangements of healthcare service providers that fail to satisfy the applicable safe harbor criteria risk increased scrutiny by enforcement authorities.
We have a variety of financial relationships with physicians who refer patients to our subsidiaries hospitals. We have contracts with
physicians providing services under a variety of financial arrangements such as employment contracts and professional service agreements. We also provide financial incentives, including loans and minimum revenue guarantees, to recruit physicians
into the communities served by our subsidiaries facilities and other operations.
HIPAA broadened the scope of the fraud and abuse
laws to include all healthcare services, whether or not they are reimbursed under a federal program. In addition, provisions of the Social Security Act, known as the Stark Act, also prohibit physicians from referring Medicare and Medicaid patients
to providers of a broad range of designated health services in which the physicians or their immediate family members have an ownership interest or certain other financial arrangements.
In addition, SunLinks facilities will continue to remain subject to any state laws that are more restrictive than the regulations issued
under HIPAA, which vary by state and could impose additional penalties. In recent years, both federal and state government agencies have announced plans for or implemented heightened and coordinated civil and criminal enforcement efforts.
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Government officials charged with responsibility for enforcing healthcare laws could assert that
SunLink or any of the transactions in which the Company or its subsidiaries or their predecessors is or was involved, are in violation of these laws. It is also possible that these laws ultimately could be interpreted by the courts in a manner that
is different from the interpretations made by the Company or others. A determination that either SunLink or its subsidiaries or their predecessors is or was involved in a transaction that violated these laws, or the public announcement that SunLink
or its subsidiaries or their predecessors is being investigated for possible violations of these laws, could have a material adverse effect on SunLinks business, financial condition, results of operations or prospects and SunLinks
business reputation could suffer significantly.
The industry trend towards value-based purchasing may negatively impact our revenues.
There is a trend in the healthcare industry toward value-based purchasing of healthcare services. These value-based purchasing
programs include both public reporting of quality data and preventable adverse events tied to the quality and efficiency of care provided by facilities. Governmental programs including Medicare and Medicaid currently require providers under such
programs to report certain quality data to receive full reimbursement updates. In addition, Medicare does not reimburse for care related to certain preventable adverse events. Many large commercial payors currently require providers under such
programs to report quality data, and several commercial payors do not reimburse providers under such programs for certain preventable adverse events.
The ACA contains a number of provisions intended to promote value-based purchasing. Effective July 1, 2011, the ACA prohibits the use of
federal funds under the Medicaid program to reimburse providers for medical assistance provided to treat hospital acquired conditions (HACs). An HAC is a condition that is acquired by a patient while admitted as an inpatient at a
hospital, such as a surgical site infection. Beginning in federal fiscal year 2015, hospitals that fall into the top 25% of national risk-adjusted HAC rates for all hospitals in the previous year will receive a 1% reduction in their total Medicare
payments. Hospitals with excessive readmissions for conditions designated by HHS will receive reduced payments for all inpatient discharges, not just discharges relating to the conditions subject to the excessive readmission standard.
The ACA also requires HHS to implement a value-based purchasing program for inpatient hospital services. The Affordable Care Act requires HHS
to reduce inpatient hospital payments for all discharges by a percentage beginning at 1% in federal fiscal year 2013 and increasing by 0.25% each fiscal year up to 2% in federal fiscal year 2017 and subsequent years. HHS will pool the amount
collected from these reductions to fund payments to reward hospitals that meet or exceed certain quality performance standards established by HHS. HHS will determine the amount each of our subsidiaries hospital that meets or exceeds
the quality performance standards will receive from the pool of dollars created by these payment reductions.
We expect value-based
purchasing programs, including programs that condition reimbursement on patient outcome measures, to become more common and to involve a higher percentage of reimbursement amounts. We are unable at this time to predict how this trend will affect our
results of operations, but it could negatively impact our financial condition or results of operations.
The lingering effects of the economic
recession could adversely affect our cash flows, financial position, or results of operations.
The United States economy
experienced a major economic recession beginning in 2008, the economy remains relatively weak in certain respects and there is a risk that the economy could lapse back into recession. Much healthcare spending is discretionary and can be
significantly impacted by economic downturns. When patients are experiencing personal financial difficulties or have concerns about general economic conditions, they may choose to defer or forego elective surgeries and other
non-emergent
procedures, which are generally more profitable lines of business for hospitals. In addition, employers may impose or patients may select a high-
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deductible insurance plan or no insurance at all, which increases a hospitals dependence on
self-pay
revenue. Moreover, a greater number of uninsured
patients may seek care in our emergency rooms.
We are unable to quantify the specific impact of current or recent economic conditions on
our business; however we believe that the economic conditions in the service areas in which our subsidiaries operate in have had an adverse impact on our operations. Such impact can be expected to continue to affect not only the healthcare decisions
of our patients and potential patients but could also have an adverse impact on the solvency of certain managed care providers and other counterparties to transactions with us.
Our subsidiaries are subject to potential claims for professional liability, including existing or potential claims based on the acts or omissions of third
parties, which claims may not be covered by insurance.
Our subsidiaries are subject to potential claims for professional liability
(medical malpractice) in connection with current operations, as well as potentially acquired or discontinued operations. To cover such claims, professional malpractice liability insurance and general liability insurance is maintained in amounts
believed to be sufficient for operations, although some claims may exceed the scope or amount of the coverage in effect. However, SunLink currently purchases limited insurance policies relating to discontinued operations exposures and may purchase
such additional insurance in the future. The assertion of a significant number of claims, either within a self-insured retention (deductible) or individually or in the aggregate in excess of available insurance, could have a material adverse effect
on our results of operations or financial condition. Premiums for professional liability insurance have historically been volatile and we cannot assure you that professional liability insurance will continue to be available on terms acceptable to
us, if at all. The operations of hospitals also depend on the professional services of physicians and other trained healthcare providers and technicians in the conduct of their respective operations, including independent laboratories and physicians
rendering diagnostic and medical services. There can be no assurance that any legal action stemming from the act or omission of a third party provider of healthcare services, would not be brought against one of our subsidiaries hospitals or
SunLink, resulting in significant legal expenses in order to defend against such legal action or to obtain a financial contribution from the third-party whose acts or omissions occasioned the legal action.
SunLink depends heavily on its management personnel and the loss of the services of one or more of SunLinks key senior management personnel could
weaken SunLinks management team.
SunLink has been, and will continue to be, dependent upon the services and management
experience of its executive officers. If any of SunLinks executive officers were to resign their positions or otherwise be unable to serve, SunLinks management could be weakened.
Risks Related to Our Healthcare Services Operations
SunLink depends heavily on its corporate staff and subsidiaries healthcare services management personnel and the loss of the services of one or more
of SunLinks key personnel could weaken SunLinks management team and its ability to deliver healthcare services.
The
success of our Healthcare Services operations depends on the ability of such operations to attract and retain managers and related health care employees and information technology staff as well as on the ability of hospital-based officers and key
employees to manage growth successfully. SunLinks subsidiaries have not had any material difficulties in attracting healthcare facility management; however, if the subsidiaries or corporate is unable to attract and retain affective local
management, the operating performance could decline.
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SunLinks success depends on the ability of our operating subsidiaries to attract and retain qualified
healthcare professionals. A shortage of qualified healthcare professionals in certain markets could weaken the ability of our subsidiaries to deliver healthcare services.
In addition to the management personnel which each subsidiary employs, our Healthcare Services operations are dependent on the efforts,
ability, and experience of other healthcare professionals, such as physicians, nurses, therapists, pharmacists and lab technicians. Nurses, pharmacists, lab technicians and other healthcare professionals are generally employees of an individual
subsidiaries hospital. Each subsidiarys success has been, and will continue to be, influenced by its ability to attract and retain these skilled employees. A shortage of healthcare professionals in certain markets, the loss of some or
all of its key employees or the inability to attract or retain sufficient numbers of qualified healthcare professionals could cause the operating performance of one or more of our subsidiaries to decline.
A significant portion of SunLinks revenue is dependent on Medicare and Medicaid payments to its subsidiaries and possible reductions in Medicare or
Medicaid payments or the implementation of other measures to reduce reimbursements may reduce our revenues.
A significant portion of
SunLinks consolidated revenues are derived from the Medicare and Medicaid programs, which are highly regulated and subject to frequent and substantial changes. Approximately 84% of consolidated net patient revenues were derived from the
Medicare and Medicaid programs for the year ended June 30, 2017. Previous legislative changes have resulted in, and future legislative changes may result in, limitations on and reduced levels of payment and reimbursement for a substantial
portion of hospital procedures and costs. Georgia and Mississippi have not expanded Medicaid or
set-up
exchanges.
Future healthcare legislation or other changes in the administration or interpretation of governmental healthcare programs may have a material
adverse effect on our consolidated business, financial condition, results of operations or prospects.
Revenue and profitability of our
subsidiaries Healthcare Services operations may be constrained by future cost containment initiatives undertaken by purchasers of such services.
Our subsidiaries have been affected by the increasing number of initiatives undertaken during the past several years by all major
purchasers of healthcare, including (in addition to federal and state governments) insurance companies and employers, to revise payment methodologies and monitor healthcare expenditures in order to contain healthcare costs. Our community hospital
operations derived approximately 16% of their consolidated net patient revenues for the fiscal year ended June 30, 2017 from private payors and other
non-governmental
sources who contributed less than 5%
of consolidated patient days. Initiatives such as managed care organizations offering prepaid and discounted medical services packages have adversely affected hospital revenue growth throughout the country and such packages represent an increasing
portion of our subsidiarys hospitals admissions and outpatient revenues and have resulted in reduced revenue growth at our current and former subsidiaries hospitals. In addition, private payers increasingly are attempting to
control healthcare costs through direct contracting with hospitals to provide services on a discounted basis, increased utilization review and greater enrollment in managed care programs such as health maintenance organizations and preferred
provider organizations, referred to as PPOs. If our subsidiaries, specifically our hospital subsidiary operations, are unable to contain costs through increased operational efficiencies and the trend toward declining reimbursements and payments
continues, the results of Healthcare Services facility segment operations and cash flow will be adversely affected and the results of our consolidated operations and our consolidated cash flow similarly likely would be adversely affected.
Our Healthcare Services operations face intense competition from other hospitals and nursing centers which directly affect such segment and consolidated
revenues and profitability.
Although Trace Hospital operates in a community where it is currently the only general, acute care
hospital, it faces substantial competition from other hospitals, including larger tertiary care centers. Although these
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competing hospitals may be as far as 30 to 50 miles away, patients in these markets may migrate to these competing facilities as a result of local physician referrals, managed care plan
incentives or personal choice.
Our nursing centers also compete on a local and regional basis with other facilities providing similar
services, including hospitals, extended care centers, assisted living facilities, home health agencies, and similar institutions. Some competitors may operate newer facilities and may provide services, including skilled nursing services that we do
not offer at all of our nursing centers. Our competitors include government-owned, religious organization-owned, secular nonprofit and
for-profit
institutions. Many of these competitors have greater financial
and other resources than we do. Although there is limited, if any, price competition with respect to Medicare and Medicaid residents (since revenues received for services provided to these residents are generally based on
pre-established
rates), there is substantial price competition for private payment residents. Historically our nursing centers have been located adjacent to acute care hospitals owned and operated by one of our
subsidiaries. Currently, however, one of our two nursing homes operate in environment where we no longer own an adjacent hospital and the former hospital has ceased operations which could subject such center to greater competition from nursing
centers located closer to hospital facilities.
The Healthcare Services business is highly competitive and competition among hospitals,
nursing homes and other healthcare providers for patients has intensified in recent years. Some of these competing facilities offer services which are not offered by SunLinks subsidiaries facilities. Some of the competing facilities are
owned or operated by
tax-supported
governmental bodies or by private
not-for-profit
entities supported by endowments and
charitable contributions which can finance capital expenditures on a
tax-exempt
basis and are exempt from sales, property, and income taxes. SunLinks subsidiaries also face competition from other
for-profit
healthcare companies, some of which have substantially greater resources, as well as other providers such as outpatient surgery and diagnostic centers and home health agencies.
The intense competition from other providers Healthcare Services directly affects the market share of our subsidiaries facilities, as
well as their and our revenues and profitability.
Changes in market demographics may increase competition for certain of our Healthcare Services
subsidiaries.
The subsidiary which owns and operates our Parkside Ellijay facility is located in an exurban area which is becoming
more suburban or metropolitan. Such market is likely to attract additional competitors. We cannot assure you that we will have the financial resources to fund capital improvements to our existing facilities of this or any other subsidiary, which may
face additional competition or that even if financial resources are available to us, that projected operating results will justify such expenditures. An inability to fund or the infeasibility of funding capital improvements could directly or
indirectly have an adverse impact on our revenues through lower utilization, increased difficulty in the recruitment of physicians or other service providers and otherwise as a result of increased competition.
SunLinks subsidiaries Healthcare Services may be subject to, and depend on, certificate of need laws which could affect their ability to
operate profitably.
All states in which SunLink subsidiaries currently operate have laws requiring approval for the purchase,
construction or expansion of various Healthcare Services including hospitals, nursing homes and ambulatory surgery centers and the provision of various services. Under such certificate of need (CON) laws, prior state approval is required
for the acquisition of major medical equipment or the purchase, lease, construction, expansion, sale or closure of covered healthcare facilities, based on a determination of need for additional or expanded facilities or services. The failure to
obtain any required CON may impair SunLinks subsidiaries ability to operate profitably.
In addition, the elimination or
modification of CON laws in states in which SunLink subsidiaries operate or in the future may operate covered Healthcare Services could subject such facilities to greater competition making it more difficult to operate profitably.
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The success of SunLinks hospital subsidiary depends upon that subsidiarys hospitals ability
to maintain good relationships with the physicians and, if the hospital is unable to successfully maintain good relationships with physicians, admissions and outpatient revenues may decrease and operating performance could decline.
Because physicians generally direct the majority of hospital admissions and outpatient services, a hospitals success is, in part,
dependent upon the number and quality of physicians on the medical staffs, the admissions and referrals practices of the physicians at our subsidiaries hospitals, and the ability to maintain good relations with physicians. Many physicians are
not employees of the hospitals at which they practice and, in many of the markets, most physicians have admitting privileges at other hospitals. If one or more of the hospitals operated by our subsidiaries is unable to successfully maintain good
relationships with physicians, admissions may decrease and operating performance could decline.
Changes in the laws and regulations regarding payments
for hospice services and room and board provided to hospice patients residing in skilled nursing facilities could reduce our net patient service revenue and profitability.
For hospice patients receiving nursing center care under certain state Medicaid programs who elect hospice care under Medicare or Medicaid, the
state must pay, in addition to the applicable Medicare or Medicaid hospice per diem rate, an amount equal to at least 95% of the Medicaid per diem skilled nursing facility rate for room and board furnished to the patient by the skilled
nursing facility. The reduction or elimination of Medicare payments for hospice patients residing in skilled nursing facilities could adversely affected the revenues of our skilled nursing facility.
Risks Relating to our Pharmacy Operations
The
operations of our Pharmacy segment may be adversely affected by changes in government reimbursement regulations and payment levels.
For the year ended June 30, 2017, the operations of our Pharmacy segment derived approximately 58% of its net revenues from government
payors, principally Medicare and Medicaid. The Deficit Reduction Act of 2005 exempted rural providers of home care related services from the competitive acquisition program to which urban providers are subject.
We cannot assure you that the ASP reimbursement methodology will not be extended to the provision of all specialty pharmaceuticals or to the
specialty pharmaceuticals most often sold by the Pharmacy segment or that the Pharmacy segment will continue to be able to operate our Pharmacy segment profitably at either existing or at lower reimbursement rates. Likewise, we cannot assure you
that the Part B CAP program will not be extended to rural or exurban areas in general or to the areas in which the Pharmacy segment operates, or may seek to operate, in particular or the Pharmacy segment would be able to meet the qualifications to
become a Part B CAP vendor either now or at any time in the future.
The operations of our Pharmacy segment could be harmed by further changes in
government purchasing methodologies and reimbursement rates for Medicare or Medicaid.
In addition to the impact of MMA, in order to
deal with budget shortfalls, some states are attempting to create state administered prescription drug discount plans, to limit the number of prescriptions per person that are covered, and to raise Medicaid
co-pays
and deductibles, and are proposing more restrictive formularies and reductions in pharmacy reimbursement rates. Any reductions in amounts reimbursable by other government programs for pharmacy services
or changes in regulations governing such reimbursements could materially and adversely affect our Pharmacy business, financial condition and results of operations.
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The durable medical equipment service line of the Pharmacy segment may be adversely affected by further
changes in government reimbursement regulations and payment levels, especially if the durable medical equipment service line becomes subject to additional competitive bidding procedures.
The Pharmacy segment is currently subject to the expanded provisions of the Medicare competitive acquisition program. The current provisions
could be expanded or changed in the future. Any additional changes in government reimbursement or payment amounts could have an adverse effect on our consolidated results of operations.
The operations of our Pharmacy segment depend on a continuous supply of key products. Any shortages of key products could adversely affect the business of
the Pharmacy segment.
Many of the products distributed by the operations of our Pharmacy segment are manufactured with ingredients
that are susceptible to supply shortages. In addition, the manufacturers of these products may not have adequate manufacturing capability to meet rising demand. If any products distributed by the Pharmacy segment are in short supply for long periods
of time, this could result in a material adverse effect on our business and results of operations.
The operations of our Pharmacy segment are highly
dependent on relationships with key suppliers and the loss of any of such key suppliers could adversely affect the business of the Pharmacy segment.
Any termination of, or adverse change in, our relationships with our key suppliers, or the loss of supply of one of our key products for any
other reason, could have a material adverse effect on the business of the Pharmacy segment and our consolidated results of operations. The largest supplier for the Pharmacy segment accounted for approximately 76
%
of the segments cost of
goods sold in the fiscal year ended June 30, 2017. In addition, the Pharmacy segment has few long-term contracts with its suppliers. Arrangements with most of its suppliers may be canceled by either party, without cause and on minimal notice;
and many of these arrangements are not governed by written agreements.
The loss of one or more of larger institutional pharmacy customers could hurt
our business by reducing the revenues and profitability of the operations of our Pharmacy segment.
As is customary in the
institutional pharmacy industry, the institutional pharmacy service line of our Pharmacy segment generally does not have long-term contracts with its institutional pharmacy customers. Significant declines in the level of purchases by one or more of
the larger institutional pharmacy customers could have a material adverse effect on the business of the Pharmacy segment and our consolidated results of operations.
The failure of the Pharmacy segment to maintain eligibility as a Medicare and Medicaid supplier could materially adversely affect its
competitive position. Likewise, its failure to maintain and expand relationships with private payors, who can effectively determine the pharmacy source for their members, could materially adversely affect its competitive position
.
Changes in average wholesale prices could reduce our pricing and margins.
Many government payors, including Medicare and Medicaid, have paid, or continue to pay, the operations of our Pharmacy segment directly or
indirectly at a rate based upon a drugs AWP less a percentage factor. The Pharmacy segment also has contracted with some private payors to sell drugs at AWP or at AWP less a percentage factor. For most drugs, AWP is compiled and published by
several private companies, including First DataBank, Inc. Several states have filed lawsuits against pharmaceutical manufacturers for allegedly inflating reported AWP for prescription drugs. In addition, class action lawsuits have been brought by
consumers against pharmaceutical manufacturers alleging overstatement of AWP. We are not responsible for such calculations,
35
reports or payments; however, there can be no assurance that the ability of our Pharmacy segment to negotiate discounts from drug manufacturers will not be materially adversely affected by such
investigations or lawsuits.
The federal government also has entered into settlement agreements with several drug manufacturers relating
to the calculation and reporting of AWP pursuant to which the drug manufacturers, among other things, have agreed to report new pricing information, the average sales price, to government healthcare programs. The average sales price is
calculated differently than AWP.
The Pharmacy segment faces numerous competitors and potential competitors in the market in which our Pharmacy segment
operates, many of whom are significantly larger and who have significantly greater financial resources.
Large national companies
operate in the existing market in which our Pharmacy segment operates. We cannot assure you that one or more of such companies or other healthcare companies will not seek to compete or intensify their level of competition in the areas in which we
conduct or may seek to conduct one or more of the components of the operations of our Pharmacy segment.
The operations of our Pharmacy segment may be
adversely affected by industry trends in managed care contracting and consolidation.
A growing number of health plans are contracting
with a single provider of Pharmacy services. Likewise, manufacturers may not be eager to contract with regional providers of Pharmacy services. If the Pharmacy segment is unable to obtain managed care contracts in the areas in which we provide
Pharmacy services or are unable to obtain Pharmacy products at reasonable costs or at all, the business operations of our Pharmacy segment could be adversely affected.
The Pharmacy segment market may grow slower than expected, which could adversely affect our revenues.
We cannot predict the rate of actual future growth in product availability and spending, the extent to which patient demand or spending for
specialty drug services in rural or exurban areas will match national averages or whether government payors will provide reimbursement for new products under Medicare or Medicaid on a timely basis, at what rates or at all. Adverse developments in
any of these areas could have an adverse impact on the business operations of our Pharmacy segment.
The profitability of our Pharmacy segment can be
adversely affected by a decrease in the introduction of new brand name and generic prescription drugs.
Sales and profit margins of the
Pharmacy segment are materially affected by the introduction of new brand name and generic drugs. New brand name drugs can result in increased drug utilization and associated sales revenues, while the introduction of lower priced generic
alternatives typically result in relatively lower sales revenues, but higher gross profit margins. Accordingly, a decrease in the number of significant new brand name drugs or generics successfully introduced could adversely affect our business
and results of operations.
Other Risks
Future
developments could affect our ability to maintain adequate liquidity. Additionally, our ability to access alternative sources of capital is limited.
Historically our available capital has been sufficient to meet our operating expenses, lease obligations, debt service requirements, and
capital expenditures and we have managed our liquidity such that our aggregate unrestricted cash at June 30, 2017, was $10,494. Future circumstances could require us to materially increase our revenues, materially reduce our expenses,
or otherwise materially improve operating results, dispose of existing assets or obtain material new sources of capital in order to maintain adequate liquidity.
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The Company is currently limited in its ability to raise capital, debt or equity, in the public
or private markets on what it considers acceptable terms. Trace Hospital has been able to borrow money through facility based mortgages, each of which is guaranteed by the Company, utilizing USDA Rural Development Authority guaranties, (RDA
Loan). The Company and its subsidiaries currently must fund working capital needs from cash from operations or from the sale of additional assets, and we cannot assure you that we would be successful in improving our results of operations,
reducing our costs, obtaining additional credit facilities or selling additional assets.
If we were to go private, holders of our securities would be
subject to the risks of an investment in a private rather than a public company.
From time to time the Company has considered the
advisability of deregistering it common shares under the Exchange Act. In the event the Company were able to deregister its common shares under the Exchange Act, holders of our securities would be subject to the risks of an investment in a private
rather than a public company. Upon any such deregistration of our shares, our duty to file periodic reports with the SEC would be suspended for as long as we had fewer than 300 record shareholders, and we would no longer be a public reporting
company. In addition, we would be relieved of the obligation to comply with the requirements of the proxy rules under Section 14 of the Exchange Act. When and if the Company were to deregister, SunLink shares would no longer be listed on the
NYSE American, LLC stock exchange, and there might not be a sufficient number of shares outstanding and publicly traded following any deregistration to ensure a continued trading market in the shares in any
over-the-counter
market. The continued quotation of our common shares as well as the availability of any
over-the-counter
trading in our common shares would depend, in part, on the nature and extent of continued publicly available information about SunLink. Shareholders also could be adversely affected by a reduction in our public float, that is, the number
of shares owned by outside shareholders and available for trading in the securities markets, especially if the Company makes future tender offers or private or open market purchases of its common shares. The suspension of our reporting obligations
under the Exchange Act might further reduce the existing limited trading market for the Companys shares and may result in a decline in the price of the Companys shares and reduced liquidity in any trading market for our shares in the
future. We might also have less access to capital markets and not be able to use the Companys shares to effect acquisitions as a
non-reporting
company. Although the Company is not currently pursuing an
effort to deregister our common shares under the Exchange Act, there is no assurance that our Board may not again determine to pursue going private in the future.
Forward-looking statements in this annual report may prove inaccurate.
This document contains forward-looking statements about SunLink that are not historical facts but, rather, are statements about future
expectations. Forward-looking statements in this document are based on managements current views and assumptions and may be influenced by factors that could cause actual results, performance or events to be materially different from those
projected. These forward-looking statements are subject to numerous risks and uncertainties. Important factors, some of which are beyond the control of SunLink, could cause actual results, performance or events to differ materially from those in the
forward-looking statements. These factors include those described above under
Risk Factors
and elsewhere in this report under
Forward-Looking Statements
.