Item 1. Business.
General Information
Canfield Medical Supply, Inc. ("the Company", "it", "we', "us" or "our") was incorporated in the State of Ohio on September 3, 1992. On April 18, 2012 it changed its domicile to the State of Colorado by merging with a newly formed Colorado subsidiary.
We commenced our operations in September 1992. Initially we operated as a compounding pharmacy providing Intradialytic Parenteral Nutrition (a means of providing additional nutrition to patients on dialysis) to patients with End Stage Renal Disease who had experienced excessive weight loss due to intestinal malabsorption. We also provided pharmacy services to patients who required intravenous antibiotic therapy, home total parenteral nutrition and home enteral nutrition. (Enteral nutrition involves absorption of the drug through the gastrointestinal tract and parenteral nutrition involves administering the drug/nutrition in some way other than the digestive tract.) We also provided various nebulizer medications for patients with chronic obstructive pulmonary disease. (A nebulizer is a device used to administer medication in the form of a mist inhaled into the lungs.) We ceased pharmacy operations in May 2002 in response to significant reductions in reimbursement by Medicare, Medicaid and Private Insurance Companies, and changed our focus to providing quality home medical equipment and supplies to patients in our geographical area.
Business
We are a provider of home medical equipment, supplies and services (which relate to the equipment sales) in Ohio's Mahoning Valley, with an emphasis on providing for patients with mobility related limitations. We also sell to patients in Western Pennsylvania and Northern West Virginia. We typically provide equipment, supplies and services to people who have had strokes, hip or knee replacements, and other surgeries after they are discharged from a hospital or rehab center. We provide almost any medical equipment and supplies these persons need to enable them to remain in their homes. We have been in the home health care business since 1992 and have developed relationships with many of the local physicians, discharge planners for hospitals and rehab facilities, nursing services, and home health agencies.
We operate in only one segment, which is home medical equipment and supplies. We also provide the services described below along with the equipment and supplies, but most of our revenue is derived from the sale of equipment and supplies. Most of the equipment and supplies that we sell are prescribed by a physician and are part of a care plan. We provide substantial benefits to both patients and payors by allowing patients to receive necessary care and services in the comfort of their own home while reducing the cost of treatment. Our services include:
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Providing in-home delivery, set-up, and maintenance of equipment;
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Providing patients and caregivers with written instructions about home safety, self-care, and the proper use of equipment;
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Processing claims to third-party payors and billing/collecting patient co-pays and deductibles.
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We supply a wide range of home medical equipment to help improve the quality of life for patients with special needs, particularly those who face unique mobility challenges as they try to remain independent in their homes. The use of home medical equipment provides a significant relative cost advantage to our patients and payors. The basic categories of equipment we carry are:
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Electric wheelchairs, scooters, and lift chairs
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Manual wheelchairs and ambulatory equipment, such as wheeled walkers, canes, and crutches;
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Bathroom equipment, such as bedside commodes, shower chairs, grab bars, and toilet risers;
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Support surfaces, such as pressure pads and mattresses, for patients at risk for developing pressure sores or decubitus ulcers;
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Threshold ramps, folding ramps, and lift systems for cars or vans that make it easy to exit the home or transport electric wheelchairs or scooters.
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Industry Overview
The home healthcare market comprises a broad range of products and services – including respiratory therapy, infusion therapy (which deals with all aspects of fluid and medication infusion, usually via the intravenous route), home medical equipment, home healthcare nursing, orthotics and prosthetics, and general medical supplies.
We expect to benefit from the following trends within the home healthcare market:
Favorable industry dynamics
. Favorable demographic trends and the continued shift to in-home healthcare have resulted in patient volume growth in the United States and are expected to continue to drive growth. As the baby boomer population ages and life expectancy increases, the elderly – who comprise the majority of our patients – will represent a higher percentage of the overall population. According to a 2010 U.S. Census Bureau projection, the U.S. population aged 65 and over is expected to grow substantially from 13 % of the population in 2010 to 19 % of the population by 2030.
Compelling in-home economics
. Between 2010 and 2020, the nation's healthcare spending is projected to increase to $4.6 trillion, growing at an average annual rate of 5.8 % according to the Centers for Medicare and Medicaid Services ("CMS"). The rising cost of healthcare has caused many payors to look for ways to contain costs and home healthcare is increasingly sought out as an attractive, cost-effective, clinically appropriate alternative to expensive facility-based care.
Increased prevalence of in-home care
. Improved technology has resulted in a wider variety of treatments being administered in patients' homes. Based on its experience, management believes that these improvements have allowed for earlier patient discharge and have lengthened the portion of the recuperation period spent outside of an institutional setting. In addition, medical advancements have also made medical equipment simpler, and more adaptable and cost-effective for use in the home.
Preference for in-home care
. Based on its experience, management believes that many patients prefer the convenience and typical cost advantages of home healthcare over institutional care, as it provides patients with greater independence, increased responsibility, and improved responsiveness to treatment.
Our Competitive Strength
Our principal competitive strength is that we are an established local company in the Mahoning Valley with a reputation for good service and good quality. If a patient has any problems with a piece of equipment they purchase from us, they can call us and we will take care of the problem. Historically we have not experienced significant returns or refunds. We contract with Medicare, Medicaid, most major health insurance companies, and a number of other payors. We are especially known as a business that can provide almost anything a patient with reduced mobility needs, including home modifications necessary to remain independent in the home.
We also qualify as a "small supplier" under the Medicare competitive bidding program, since our annual revenues are less than $3.5 million. The Medicare regulations have established a 30 percent target for small supplier participation, which improves our chances of winning small bids from Medicare. As a supplier in the Medicare program, we are required to meet and adhere to certain standards set by Medicare.
We also participate in the Ohio Medicaid program. Our agreement with the Ohio Department of Jobs and Family Services expires on July 31, 2020 at which time we must apply for a new agreement.
Our Business Strategy
We are attempting to grow our revenue and increase our market share in our primary market, which is the Mahoning Valley with an estimated population in excess of 900,000 persons. In addition to continuing our marketing activities in the Mahoning Valley, we intend to enhance our website to cater to patients located both inside and outside of our primary market area who might be interested in looking for better prices on certain equipment or supplies. These persons would not be buying products because of physician referrals or under their health insurance policies. Instead, they would merely be buying products online and paying with a credit card.
In 2012, we submitted bids in Medicare's Round 2 of competitive bidding. In addition to our local Youngstown-Warren market area, we also submitted bids in four additional Ohio markets of Akron, Columbus, Dayton and Toledo. We won the bid for our local market area for wheel chairs, enteral tube feeding, and pressure reduction surfaces.
The next round of bidding has been postponed until the new administration in Washington D.C. decides on how they are going to proceed.
We are also attempting to increase our private pay business because of the continuing reduction in Medicare reimbursement rates. We offer the same home medical equipment and supplies to private pay customers that we offer to Medicare and Medicaid customers. Our private pay customers include persons who have private (non-government) health insurance and persons who have no insurance or are buying something that is not covered by their insurance policy. In this regard, we are contacting home care coordinators from private insurance companies and Bureau of Worker's Compensation in order to gain additional referrals. The amount of revenue earned from each classification as a percent of total revenues is as follows:
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December 31,
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2018
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2017
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Medicare
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29
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%
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38
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%
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Medicaid
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9
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%
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14
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%
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Private pay/private insurance
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58
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%
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47
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%
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Other
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4
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%
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1
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%
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Total
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100
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%
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100
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We do not manufacture any of the products and supplies that we sell to our customers. We do not have exclusive relationships with any of these suppliers/manufacturers. When the products we sell come with warranties, we are usually the person who the customer contacts when they have any kind of issue covered by a warranty. We then go to the manufacturer and order the part needed or otherwise take care of the problem. We do not warranty any products ourselves.
We are also attempting to increase our exposure to assisted living facilities, nursing homes, and acute rehabilitation facilities in order to gain additional referrals. We have experienced some success due to recent marketing efforts in these areas. We will continue to provide in-service education programs to the staff of these facilities in order to make them aware of the services we are able to provide for their patients. We would not need any additional level of accreditation to make sales to patients in these facilities.
We are always evaluating our ability to provide equipment and services to our patients and trying to improve wherever we can. We are not operating close to our capacity and we have room for substantial growth without needing to add any significant overhead.
Organization and Operations
Organization
. Our only facility is our office/showroom located at 4120 Boardman-Canfield Road in Canfield, Ohio, about eight miles southwest of Youngstown, Ohio. From this location we deliver our home healthcare products and services to patients in their homes and to other care sites using our delivery vehicles and our employees.
Payors
. We derive substantially all of our revenues from third-party payors, including private insurers, Medicare, Medicaid, and managed care organizations. For the year ended December 31, 2018, approximately 38% of our net revenues were derived from Medicare and Medicaid. Generally, each third-party payor has specific requirements, which must be met before claim submission will result in payment. We have procedures in place to manage the claims submission process, including verification procedures to facilitate complete and accurate documentation. Notwithstanding these measures, violation of these requirements may still occur and could result in the termination of a contract with a payor, the repayment of amounts previously received, or other potentially significant liability. When the third-party payor is a governmental entity, violations of these requirements could subject us to civil, administrative, and criminal enforcement actions. We are subject to periodic audits by Medicare and Medicaid, the results of which have not identified any violations by us of these governmental entities' claim submission requirements.
Medicare Claims
. Most Medicare claims are paid within 30 to 60 days of submission. High dollar claims such as power chairs and pressure reduction surfaces require increased scrutiny by Medicare. Such high dollar claims frequently are singled out for pre-payment audits, which require all hard copy documentation of the patient's condition by the physician be sent in to Medicare prior to receiving payment. These claims take a minimum of 60 days to process and denials must be appealed. All subsequent claims to Medicare for rental payments for the denied equipment continue to be denied until the appeal process is finished. All of these claims require additional time to be completed and sometimes require phone calls to patients and doctors to reconcile. Management is constantly reviewing unpaid claims to determine their status and claims are not written off until all attempts to collect payment from Medicare have been exhausted. We historically write off approximately 5% of Medicare payments due to unsuccessful collection attempts.
Medicaid Claims
. Based on our results for the last three years, approximately 70% of our Medicaid claims are paid within 30 days. Any claims not paid within 30 days usually have a billing error that has not been resolved by management and end up getting resolved and paid within an additional 30 to 60 days.
Self-pay Claims
. Approximately 10% of our business during the year ended December 31, 2018 was comprised of self-pay business. This business represents persons who come into our store and purchase items not covered by insurance and patients who already may be purchasing something from us that is covered by insurance and they desire to purchase something additional that is not covered by insurance. Some of these customers pay for their product at the time of purchase and we send or deliver invoices to the others. These invoices request payment on receipt of the invoice. We consider these receivables delinquent once they are 180 days late. We rely on our past collection experience with other patients for similar or different products to determine if any of such receivables are still collectible. At December 31, 2018, we determined that no allowance for such items was necessary.
With respect to our claims submitted to third party payors, our billing system generates contractual adjustments based on fee schedules for the patient's insurance plan for each claim.
Receivables Management
. We operate in an environment with complex requirements governing billing and reimbursement for our products and services. We are expanding our use of technology in areas such as electronic claims submission and electronic funds transfer whenever we can to more efficiently process business transactions. This use of technology can expedite claims processing and reduce the administrative cost associated with this activity for both us and our customers/payors. Our policy is to collect co-payments from the patient or applicable secondary payor. In the absence of a secondary payor, we generally require the co-payment at the time the patient is initially established with the product/service. Subsequent months' co-payments are billed to the patient.
With respect to rentals of power chairs, once initial delivery of rental equipment is made to the patient, a monthly billing cycle is established based on the initial date of delivery. The Company recognizes rental revenue ratably over the 13-month service period. Routine maintenance and servicing of the equipment is the responsibility of the Company.
Marketing
We market our products and services primarily to physicians, discharge planners for hospitals and rehab facilities, nursing services, companies that provide home care companions and aides, home health agencies, and case managers. Our marketing is primarily done by our President who has developed relationships with many of the persons to whom we market in the course of his dealings with prior patients who purchased our products or services over the past 25 years that we have been in business. Most of our marketing consists of face-to-face meetings and in-service education with the staff at facilities to which we provide services. We also provide educational pamphlets and product specific brochures to go along with marketing materials such as pens, scratch pads, calendars, and prescription pads.
One of the marketing steps we have
taken is to be accredited by The Joint Commission, which is a nationally recognized organization that develops standards for various healthcare industry segments and monitors compliance with those standards through voluntary surveys of participating providers. We have been accredited by The Joint Commission since 2008, with on-site accreditation renewal every three years and online recertification every year. As the home healthcare industry has grown and accreditation has become a mandatory requirement for Medicare DMEPOS
providers, the need for objective quality measurements has increased. Accreditation is also widely considered a prerequisite for entering into contracts with managed care organizations and is required for Medicare competitive bidding. Because accreditation is expensive and time consuming, not all providers choose to undergo the process.
Sales
Our President has primary responsibility for generating new referrals and for maintaining existing relationships for our products and services. Our customers are typically the patients who purchase and utilize our products and services, but these patients are usually referred to us by physicians and their staffs, the discharge planners in hospitals and rehab facilities, nursing services and services that provide home care companions, and aides. We have several rehabilitation facilities that refer a significant amount of patients to us that account for in excess of 25% of our gross revenues. These facilities include Park Vista Rehabilitation, Sunrise Senior Living, and Whispering Pines Village Assisted & Independent Living. However, these facilities also refer business to other providers.
Website
We currently have a website which shows pictures of most of the products we sell with links to the manufacturers/suppliers of the products. This allows viewers to obtain more information on the products. The website is not designed to be used for online sales, and instead it is used more to show new or existing patients what products we can obtain and sell to them. There is also no product pricing on the website.
We intend to enhance this website so that online sales can be made on the website once we have funding available. We intend to contract with a leading web store builder program that offers a wealth of features to expand our business and provide support as our business grows. This program will make it easy to launch and maintain our web store. We hope to build a state-of-the-art e-commerce site that reflects our brands and puts our Company on a fast track to leveraging the sales opportunities on the Internet. This whole process could be accomplished in only a manner of weeks once funding is available, and will not require the purchase of new computers or software licenses, or hiring of additional staff.
Competition
The segment of the healthcare market in which we compete is highly competitive. In our line of products and services, there are a limited number of national providers and numerous regional and local providers. The competitive factors most important in our local market are:
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Reputation with referral sources, including local physicians and hospital-based professionals;
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Price of products and services;
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Accessibility and overall ease of doing business;
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Quality of patient care and associated services;
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Range of home healthcare products and services;
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Ability to provide local maintenance service on products sold.
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The primary national provider with which we compete is Apria Healthcare Group, Inc., and the primary regional providers with which we compete in Northeastern Ohio and Western Pennsylvania are Boardman Medical Supply, Inc., Community Home Medical, Inc., and Seeley Medical, Inc. Depending on their business strategies and financial position, a very large percentage of our competitors have access to significantly greater financial and marketing resources than we do. This may increase pricing pressure and limit our ability to maintain or increase our market share.
Government Regulation
We are subject to extensive government regulation, including numerous laws directed at regulating reimbursement of our products and services under various government programs and preventing fraud and abuse, as more fully described below. We maintain certain safeguards intended to reduce the likelihood that we will engage in conduct or enter into arrangements in violation of these restrictions. All contracts with Insurance Companies are fairly standard and do not require legal opinions, and all our policies and procedures have been reviewed by The Joint Commission and meet Industry standards and requirements. Federal and state laws require that we obtain facility and other regulatory licenses and that we enroll as a supplier with federal and state health programs. Notwithstanding these measures, due to changes in and new interpretations of such laws and regulations, and changes in our business, among other factors, violations of these laws and regulations may still occur, which could subject us to civil and criminal enforcement actions; licensure revocation, suspension, or non-renewal; severe fines and penalties; and even the termination of our ability to provide services, including those provided under certain government programs such as Medicare and Medicaid.
Medicare and Medicaid Revenues
. In the years ended December 31, 2018 and 2017, approximately 38% and 52% of our net revenues were reimbursed by the Medicare and state Medicaid programs, respectively. No other third-party payor represented more than 10% of our total net revenues for the year ended December 31, 2018. The majority of our revenues are derived from sales of equipment and supplies we sell to patients for patient care under fee-for-service arrangements. Fee-for-service is a payment model where services are unbundled and paid for separately, and occurs when doctors and other health care providers receive a fee for each service, such as an office visit, test, or procedure. Since most of the manufacturers of the products we sell do not provide direct patient care, our services primarily involve providing in-home-delivery, set-up, and maintenance of home medical equipment
. All of these services are included in our service under a single claim, and cannot be billed separately.
We do not have ongoing arrangements with patients or medical providers, other than rental agreements that we have for wheel chairs and hospital beds.
Medicare Reimbursement
. There are a number of legislative and regulatory initiatives in Congress and at CMS that affect or may affect Medicare reimbursement policies for products and services we provide. Specifically, a number of important legislative changes that affect our business were included in the Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("MMA"); the Deficit Reduction Act of 2005 ("DRA"); MIPPA, which became law in 2008; and the comprehensive healthcare reform law signed in March 2010 ("the Reform Package"). These Acts and their implementing regulations and guidelines contain numerous provisions that are significant to us and continue to have an impact on our operations today.
DMEPOS Competitive Bidding
. The MMA required implementation of a competitive bidding program for certain DMEPOS items. By statute, CMS was required to implement the DMEPOS competitive bidding program over time, with Round 1 of competition occurring in portions of 10 of the largest Metropolitan Statistical Areas ("MSAs") in 2007, launch of the program in 2008 and in 70 additional markets in 2009, and in additional markets after 2009.
Under the competitive bidding program, suppliers compete for the right to provide items to beneficiaries in a defined region. CMS selects contract suppliers that agree to receive as payment the "single payment amount" calculated by CMS after bids are submitted. Bids are evaluated based on the supplier meeting eligibility and financial requirements, and contracts are awarded to Medicare suppliers that offer the best price and meet these standards. CMS determines a supplier's financial viability based on certain financial ratios and the supplier's credit report and score. Based on the information requested in the bid forms, we believe that the CMS may also consider other factors, such as the volume which the bidder is offering to provide as compared to the volume it previously provided, whether the bidder has the staff and facilities to handle the volume it is bidding for, and other miscellaneous items.
Every bidder sets forth its estimated capacity of each item for which it is bidding and it sets forth a bid price. It is our understanding that the CMS will set a bid price as low as possible that will still result in a sufficient number of bidders, based on their estimated capacity, to supply the number of units the CMS estimates need to be provided for the particular market in the next year. We also believe that the CMS will attempt to award up to 30% of the bids to small businesses. There are no material costs associated with submitting bids and obtaining contracts.
In 2007 and 2008, CMS sought and reviewed bids and developed a plan to implement Round 1 on July 1, 2008.
The bidding process for Round 1 was controversial and complex, which resulted in deadline extensions. Moreover, CMS was subject to numerous lawsuits seeking a delay of Round 1. Then on July 15, 2008, MIPPA was enacted which, among other provisions, delayed the DMEPOS competitive bidding program by requiring that Round 1 competition commence in 2009, and required a number of program reforms prior to CMS re-launching the program. Changes mandated by MIPPA include requirements for the government to administer the program more transparently, exemption of certain DMEPOS products from the program, and a new implementation schedule.
In November 2010, CMS published a final rule containing several provisions related to the competitive bidding program. The rule included a list of 21 additional MSAs to be included in Round 2.
Under MIPPA, the initial competitive bidding areas ("CBAs") and product categories subject to rebidding in the Round 1 Rebid are very similar to those of Round 1. However, MIPPA excludes Negative Pressure Wound Therapy Pumps and Related Supplies and Accessories as a competitive bidding product category in Round 1 and permanently excludes Group 3 Complex Rehabilitative Power Wheelchairs and Related Accessories as a competitive bidding product category.
Notwithstanding the changes MIPPA requires, competitive bidding imposes a significant risk to DMEPOS suppliers under the rules governing the program. If a DMEPOS supplier such as us operating in a CBA
is not awarded a contract for that CBA, the supplier generally will not be able to bill and be reimbursed by Medicare for DMEPOS items supplied in that CBA for the time period covered by the competitive bidding program unless the supplier meets certain exceptions or acquires a winning bidder. Because the applicable statutes mandate financial savings from the competitive bidding program, a winning contract supplier will receive lower Medicare payment rates under competitive bidding than the otherwise applicable DMEPOS fee schedule rates. As competitive bidding is phased in across the country under the revised MIPPA and Reform Package implementation schedule, we believe that we will experience a reduction in reimbursement. In addition, there is an increasing risk that the competitive bidding prices will become a benchmark for reimbursement from other payors, as evidenced by the Administration's fiscal budget proposal which would cap state Medicaid reimbursement levels at competitive bid rates using an as-yet-undetermined methodology. Neither MIPPA nor the Reform Package prevents CMS from adjusting prices for DMEPOS items in non-bid areas; however, before using its authority to adjust prices in non-bid areas, MIPPA requires that CMS issue a regulation that specifies the methodology to be used and consider how prices through competitive bidding compare to costs for those items and services in the non-bid areas.
The Reform Package also includes changes to the Medicare DMEPOS competitive bidding program. Significantly, Round 2 of the competitive bidding program has been expanded from 70 to 91 of the largest MSAs. In August 2011, CMS announced the product categories that would be included in Round 2. Round 2 included the majority of the same product categories, but CMS expanded the program by, among other things, (i) combining standard power wheelchairs and manual wheelchairs into a single new product category, and (ii) expanding the Support Surfaces (Group 2 mattresses and overlays) category across all Round 2 markets.
On July 1, 2016, the Medicare fee schedule was reduced in non-competitive bid areas on certain DME items, but the new 2016 fee schedule is still higher than the competitive bid pricing in adjacent areas. In addition, efforts to repeal the competitive bidding program altogether or mandate significant program changes continue. In March 2011, the Fairness in Medicare Bidding Act of 2011 ("FIMBA") was introduced into the U.S. House of Representatives and referred to the House Subcommittee on Health. FIMBA would repeal the program without specifying a reduction in the industry's current reimbursement levels. Other efforts are underway by independent economists who seek to alter certain critical aspects of the program. Specifically, those efforts are designed to change the way in which CMS conducts the auction process itself, establishes the single payment rates, determines supplier capacity needed and related aspects which, if adopted by CMS in their entirety or in part, would change how Round 2 would be administered. We cannot predict whether these or other efforts to repeal or amend the program will be successful, or their potential impact on us.
We believe that our relationships with persons who refer business to us will allow us to maintain market share under Medicare competitive bidding. However, the bidding rules are complex and it is possible for bidders to be disqualified for technical reasons other than pricing. There is no guarantee that we will be selected as a winning contract supplier in any future phases of the program and be awarded competitive bidding contracts by CMS or that we will maintain or increase market share. Under the current competitive bidding regulations, if we are not selected as a winning contract supplier for a particular CBA, we will generally not be allowed to supply Medicare beneficiaries in the CBA with products subject to competitive bidding for the contract term of program, unless we elect to continue to service existing patients under the "grandfathering provision" of the program's final rule for certain products. Because of our combination of both managed care and traditional business, we believe we can nevertheless maintain a favorable overall market position in a particular CBA even if we are not selected as a contract supplier.
Enrollment and Accreditation of Durable Medical Equipment Suppliers; Surety Bond Requirements
. While we support the elimination of fraudulent suppliers, some of the CMS initiatives and developments with respect to the enrollment and accreditation of providers could impact our operations in the future. For example, all durable medical equipment providers who bill the Medicare program for DMEPOS services and products are required by MIPPA to be accredited. Although we currently are accredited, if we lose accreditation, that could have a material adverse effect on our results of operations, cash flow, and capital resources.
CMS also requires that all durable medical equipment providers who bill the Medicare program maintain a surety bond of $50,000 per National Provider Identifier ("NPI") number which Medicare has approved for billing privileges. We obtained the required surety bond for our location before the October 2009 deadline, and it is automatically renewed annually on August 1.
Other Issues
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Medical Necessity & Other Documentation Requirements
. In order to ensure that Medicare beneficiaries only receive medically necessary and appropriate items and services, the Medicare program has adopted a number of documentation requirements. For example, the DME MAC Supplier Manuals provide that clinical information from the "patient's medical record" is required to justify the initial and ongoing medical necessity for the provision of DME. Some DME MACs, CMS staff and government subcontractors have taken the position, among other things, that the "patient's medical record" refers not to documentation maintained by the DME supplier but instead to documentation maintained by the patient's physician, healthcare facility or other clinician, and that clinical information created by the DME supplier's personnel and confirmed by the patient's physician is not sufficient to establish medical necessity. It may be difficult, and sometimes impossible, for us to obtain documentation from other healthcare providers. Moreover, auditors' interpretations of these policies are inconsistent and subject to individual interpretation. This is then translated to individual supplier significant error rates and aggregated into a DMEPOS industry error rate, which is significantly higher than other Medicare provider/supplier types. High error rates lead to further audit activity and regulatory burdens. In fact, DME MACs have continued to conduct extensive pre-payment reviews across the DME industry and have determined a wide range of error rates. For example, error rates for CPAP claims have ranged from 50% to 80%. DME MACs have repeatedly cited medical necessity documentation insufficiencies as the primary reason for claim denials. If these or other burdensome positions are generally adopted by auditors, DME MACs, other contractors or CMS in administering the Medicare program, we would have the right to challenge these positions as being contrary to law. If these interpretations of the documentation requirements are ultimately upheld, however, it could result in our making significant refunds and other payments to Medicare and our future revenues from Medicare may be significantly reduced. We have adjusted certain operational policies to address the current expectations of Medicare and its contractors. We cannot predict the adverse impact, if any, these interpretations of the Medicare documentation requirements or our revised policies might have on our operations, cash flow, and capital resources, but such impact could be material.
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The impact of changes in Medicare reimbursement that have been enacted to date are reflected in our results of operations for the applicable periods through December 31, 2018. We cannot estimate the combined possible impact of all legislative, regulatory and contemplated reimbursement changes that could have a material adverse effect on our results of operations, cash flow, and capital resources. Moreover, our estimates of the impact of certain of these changes appearing in this "Government Regulation" section are based on a number of assumptions and are subject to uncertainties and there can be no assurance that the actual impact was not or will not be different from our estimates. However, given the recent significant increases in industry audit volume and the increasing regulatory burdens associated with responding to those audits, it is likely that the negative pressures from legislative and regulatory changes will continue and accelerate.
Medicaid Reimbursement
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State Medicaid programs implement reimbursement policies for the items and services we provide that may or may not be similar to those of the Medicare program. Budget pressures on these state programs often result in pricing and coverage changes and extended payment practices that may have a detrimental impact on our operations and/or financial performance. States sometimes have interposed intermediaries to administer their Medicaid programs, or have adopted alternative pricing methodologies for certain drugs, biologicals, and home medical equipment under their Medicaid programs that reduce the level of reimbursement received by us without a corresponding offset or increase to compensate for the service costs incurred. We periodically evaluate the possibility of stopping or reducing our Medicaid business in any state with reimbursement or administrative policies that make it difficult for us to safely care for patients or conduct operations profitably. Moreover, the Reform Package increases Medicaid enrollment over a number of years and imposes additional requirements on states which, combined with the current economic environment and state deficits, could further strain state budgets and therefore result in additional policy changes or rate reductions. The President's most recent budget proposal, would limit the amount state Medicaid programs pay for DMEPOS to be no higher than Medicare payment levels, including those impacted by Medicare competitive bidding. We cannot currently predict the adverse impact, if any, that any such change to or reduction in our Medicaid business might have on our operations, cash flow and capital resources, but such impact could be material. In addition, we cannot predict whether states will consider similar or other reimbursement reductions, whether or how healthcare reform provisions pertaining to Medicaid will ultimately be implemented or whether any such changes would have a material adverse effect on our results of operations, cash flow and capital resources.
HIPAA
. The Health Insurance Portability and Accountability Act of 1996 ("HIPAA") is comprised of a number of components pertaining to the privacy and security of certain protected health information ("PHI"), as well as the standard formatting of certain electronic health transactions. Many states have similar, but not identical, restrictions. Existing and any new laws or regulations have a significant effect on the manner in which we handle healthcare related data and communicate with payors. Among other provisions, the HITECH Act of the American Recovery and Reinvestment Act of 2009 ("ARRA") includes additional requirements related to the privacy and security of PHI, clarifies and increases penalties of HIPAA and provides State Attorneys General with HIPAA enforcement authority. We have adopted a number of policies and procedures to conform to HIPAA requirements,
as modified by the HITECH Act of ARRA, throughout our operations, and we have educated our employees about these requirements. We cannot, however, guarantee that we will not have a HIPAA privacy or data security concern in the future. We face potential administrative, civil and possible criminal sanctions if we do not comply with the existing or new laws and regulations dealing with the privacy and security of PHI. Imposition of any such sanctions could have a material adverse effect on our operations.
Enforcement of Healthcare Fraud and Abuse Laws
. In recent years, the federal government has made a policy decision to significantly increase and accelerate the financial resources allocated to enforcing the healthcare fraud and abuse laws. Moreover, Congress adopted a number of additional provisions in the Reform Package that are designed to reduce healthcare fraud and abuse. In addition, private insurers and various state enforcement agencies have increased their level of scrutiny of healthcare claims in an effort to identify and prosecute fraudulent and abusive practices in the healthcare area. From time to time, we may be the subject of investigations or a party to additional litigation which alleges violations of law. If any of those matters were successfully asserted against us, there could be a material adverse effect on our business, financial position, results of operations or prospects.
Anti-Kickback Statutes
. As a provider of services under the Medicare and Medicaid programs, we must comply with a provision of the federal Social Security Act, commonly known as the "federal anti-kickback statute." The federal anti-kickback statute prohibits the offer or receipt of any bribe, kickback, or rebate in return for the referral or arranging for the referral of patients, products or services covered by federal healthcare programs. Federal healthcare programs have been defined to include plans and programs that provide health benefits funded by the United States Government, including Medicare, Medicaid, and TRICARE (formerly known as the Civilian Health and Medical Program of the Uniformed Services or CHAMPUS), among others. Some courts and the OIG interpret the statute to cover any arrangement where even one purpose of the remuneration is to influence referrals. Violations of the federal anti-kickback statute may result in civil and criminal penalties and exclusion from participation in federal healthcare programs.
Some states have enacted statutes and regulations similar to the federal anti-kickback statute, but which apply not only to the federal healthcare programs, but also to any payor source of the patient. These state laws may contain exceptions and safe harbors that are different from those of the federal law and that may vary from state to state. The states in which we operate have laws that prohibit fee-splitting arrangements between healthcare providers, if such arrangements are designed to induce or encourage the referral of patients to a particular provider.
Physician Self-Referral
. Certain provisions of the Omnibus Budget Reconciliation Act of 1993 (the "Stark Law") prohibit healthcare providers such as us, subject to certain exceptions, from submitting claims to the Medicare and Medicaid programs for designated health services if we have a financial relationship with the physician making the referral for such services or with a member of such physician's immediate family. The term "designated health services" includes several services commonly performed or supplied by us, including durable medical equipment and home health services. In addition, "financial relationship" is broadly defined to include any ownership or investment interest or compensation arrangement pursuant to which a physician receives remuneration from the provider at issue. The Stark Law prohibition applies regardless of the reasons for the financial relationship and the referral; and therefore, unlike the federal anti-kickback statute, an intent to violate the law is not required.
Violations of the Stark Law may result in loss of Medicare and Medicaid reimbursement, civil penalties, and exclusion from participation in the Medicare and Medicaid programs.
In addition, Ohio, Pennsylvania, and West Virginia have similar prohibitions against physician self-referrals, which may not necessarily be limited to Medicare or Medicaid services and may not include the same statutory and regulatory exceptions found in the Stark Law.
False Claims
. The federal False Claims Act imposes civil and criminal liability on individuals or entities that submit false or fraudulent claims for payment to the government. Violations of the federal civil False Claims Act may result in treble damages, civil monetary penalties, and exclusion from the Medicare, Medicaid, and other federally funded healthcare programs. If certain criteria are satisfied, the federal civil False Claims Act allows a private individual to bring a qui tam suit (i.e., whistleblower law suit) on behalf of the government and, if the case is successful, to share in any recovery. Federal False Claims Act suits brought directly by the government or private individuals against healthcare providers, like us, are increasingly common and are expected to continue to increase.
The federal government has used the federal False Claims Act to prosecute a wide variety of alleged false claims and fraud allegedly perpetrated against Medicare and state healthcare programs. The government and a number of courts also have taken the position that claims presented in violation of certain other statutes, including the federal anti-kickback statute or the Stark Law, can be considered a violation of the federal False Claims Act, based on the theory that a provider impliedly certifies compliance with all applicable laws, regulations, and other rules when submitting claims for reimbursement.
On May 20, 2009, President Obama signed into law the Fraud Enforcement and Recovery Act of 2009 ("FERA"). Among other things, FERA modifies the federal False Claims Act by expanding liability to contractors and subcontractors who do not directly present claims to the federal government. FERA also expanded the False Claims Act liability for what is referred to as a "reverse false claim" by explicitly making it unlawful to knowingly conceal or knowingly and improperly avoid or decrease an obligation owed to the federal government.
Ohio and Pennsylvania have enacted false claims acts that are similar to the federal False Claims Act. In addition, there is a corresponding increase in state-initiated false claims enforcement efforts.
Other Fraud and Abuse Laws
. HIPAA created, in part, two new federal crimes: "Healthcare Fraud" and "False Statements Relating to Healthcare Matters." The Healthcare Fraud statute prohibits executing a knowing and willful scheme or artifice to defraud any healthcare benefit program. A violation of this statute is a felony and may result in fines and/or imprisonment. The False Statements statute prohibits knowingly and willfully falsifying, concealing, or covering up a material fact by any trick, scheme, or device or making any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items, or services. A violation of this statute is a felony and may result in fines and/or imprisonment.
The increased public focus on waste, fraud, and abuse, and their related cost to society will likely result in additional Congressional hearings, CMS regulatory changes, and/or new laws. The Reform Package also provides for new regulatory authority, and additional fines and penalties. More recently, additional legislation has been proposed in the U.S. Senate which would further expand the government's oversight of the healthcare industry via new regulatory authority. In addition, a Senate bill released in June 2011 (S. 1251) would require pre-payment review of all claims for durable medical equipment that are at high risk for fraud and abuse. At this time, we cannot predict whether these or other reforms will ultimately become law, or the impact of such reforms on our business operations and financial performance.
Facility Licensure
. We only have one facility and it is located in Canfield, Ohio. We are regulated by and licensed with the Ohio Respiratory Care Board, and we also have a home medical equipment vendor's license from the State of Ohio. We are committed to complying with all applicable licensing requirements.
Healthcare Reform
. Economic, political, and regulatory influences are causing fundamental changes in the healthcare industry in the United States. Various healthcare reform proposals are formulated and proposed by the legislative and administrative branches of the federal government on a regular basis. In addition, Ohio and Pennsylvania periodically consider various healthcare reform proposals. Even with the passage of the Reform Package, we anticipate that federal and state governments will continue to review and assess alternative healthcare delivery systems and payment methodologies and public debate of these issues will continue in the future.
The elections since the passage of the Reform Package changed the composition of Congress and affected certain priorities related to healthcare. Congress is debating the potential to repeal or amend the Reform Package altogether. A number of other parties, including some State governments, are challenging the Reform Package, and we cannot predict the outcome of such challenges. Changes in the law or new interpretations of existing laws can have a substantial effect on permissible activities, the relative costs associated with doing business in the healthcare industry and the amount of reimbursement by governmental and other third-party payors. Also, the government has begun to promulgate the implementing of rules and regulations of the Reform Package, including additional requirements related to our business and that of our customers. Until those rules are more clearly understood, and due to uncertainties regarding the ultimate features of additional reform initiatives and their enactment and implementation over the next few years, we cannot predict which, if any, of such reform proposals will be adopted, or when they may be adopted, or that any such reforms will not have a material adverse effect on our results of operations, cash flow, capital resources, and liquidity.
Employees
As of December 31, 2018, we had four full-time and five part-time employees. None of our employees were represented by a labor union or other labor organization.