| AMSURG CORP Item 1A Risk Factors The following factors affect our business and the industry in which we operate |
| The risks and uncertainties described below are not the only ones facing our company |
| Additional risks and uncertainties not presently known to us or that we currently consider immaterial may also have an adverse effect on us |
| If any of the matters discussed in the following risk factors were to occur, our business, financial condition, results of operations, cash flows or prospects could be materially adversely affected |
| We depend on payments from third-party payors , including government healthcare programs |
| If these payments decrease or do not increase as our costs increase, our operating margins and profitability would be adversely affected |
| We depend on private and governmental third-party sources of payment for the services provided to patients in our surgery centers |
| The amount our surgery centers receive for their services may be adversely affected by market and cost factors as well as other factors over which we have no control, including Medicare and Medicaid regulations and the cost containment and utilization decisions of third-party payors |
| We derived approximately 35prca of our revenues in 2005 from US government healthcare programs, primarily Medicare |
| Managed care plans have increased their market share in some areas in which we operate, which has resulted in substantial competition among healthcare providers for inclusion in managed care contracting and may limit the ability of healthcare providers to 14 _________________________________________________________________ [67]Table of Contents Item 1A Risk Factors – (continued) negotiate favorable payment rates |
| We can give you no assurances that cost containment measures by private third-party payors, including fixed fee schedules and capitated payment arrangements, changes in reimbursement rates by government healthcare programs or other factors affecting payments for healthcare services will not adversely affect our revenues, operating margins or profitability |
| Our results of operations may be adversely affected by proposed changes in the reimbursement system for outpatient surgical procedures under the Medicare program |
| The Medicare program pays for ASC services using a fee schedule |
| The Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or MMA, provides that there will not be an increase in ASC reimbursement rates during the years 2005 through 2009 |
| The MMA also directed the Government Accountability Office, GAO, to conduct a comparative study of the relative costs of procedures furnished in ASCs to the relative costs of procedures furnished in hospital outpatient departments |
| We expect the GAO to submit its recommendations to Congress regarding the appropriateness of using the groups and relative weights established for the hospital outpatient prospective payment system as the basis for a revised ASC payment system during 2006 |
| The Secretary of the Department of Health and Human Services, or DHHS is scheduled to implement a revised payment system for ASCs no later than January 1, 2008 |
| We can give no assurances that a new payment system will not reduce our reimbursement rates from Medicare in the future |
| Our business would be adversely affected if we fail to maintain good relationships with the physician partners who use our surgery centers |
| Our business depends on, among other things, the efforts and success of the physician partners who perform procedures at our surgery centers and the strength of our relationship with these physicians |
| Our physician partners perform procedures at other facilities or hospitals, are not required to use our surgery centers and may choose not to perform procedures at our surgery centers |
| In addition, from time to time we may have disputes with physicians who use or own interests in our surgery centers |
| Our revenues and profitability could be adversely affected if a key physician or group of physicians stopped using or reduced their use of our surgery centers |
| In addition, if the physicians who use our surgery centers do not provide quality medical care or follow required professional guidelines at our facilities or there is damage to the reputation of a key physician or group of physicians who use our surgery centers, our business and reputation could be damaged |
| If we fail to acquire and develop additional surgery centers on favorable terms, our future growth and operating results could be adversely affected |
| Our growth strategy includes increasing our revenues and earnings by acquiring existing surgery centers and developing new surgery centers |
| Our efforts to execute our acquisition and development strategy may be affected by our ability to identify suitable acquisition and development opportunities and negotiate and close transactions in a timely manner and on favorable terms |
| The surgery centers we develop typically incur losses during the initial months of operation |
| We can give you no assurances that we will be successful in acquiring and developing additional surgery centers, that the surgery centers we acquire and develop will achieve satisfactory operating results or that newly developed centers will not incur greater than anticipated operating losses |
| If we are unable to grow revenues at our existing centers, our operating margins and profitability could be adversely affected |
| Our growth strategy includes increasing our revenues and earnings by increasing the number of procedures at our surgery centers |
| Because we expect the amount of the payments we receive from third-party payors to remain fairly consistent, our operating margins will be adversely affected if we do not increase the revenues and procedure volume of our surgery centers to offset increases in our operating costs |
| We seek to increase procedure volume and revenues at our surgery centers by increasing the number of physicians performing procedures at our centers, obtaining new or more favorable managed care contracts, promoting screening programs, increasing patient and physician awareness of our centers and achieving operating efficiencies |
| We can give you no assurances that we will be successful at increasing or maintaining revenues and operating margins at our centers |
| We operate a significant number of surgery centers in Florida, which makes us sensitive to weather and other factors in Florida |
| At December 31, 2005, 30 of the 149 surgery centers we operated were located in the State of Florida |
| This concentration makes us particularly sensitive to adverse weather conditions and other factors that affect the State of Florida |
| During 2005, the results of operations of our surgery centers in Florida were adversely impacted by several hurricanes, which caused disruption of patient scheduling, displacement of our patients, employees and physician partners and forced certain of our surgery centers temporarily to close |
| Our future financial and operating results may be adversely affected by weather and other factors affecting the State of Florida, as well as other geographic regions in which we operate |
| 15 _________________________________________________________________ [68]Table of Contents Item 1A Risk Factors — (continued) If we are unable to manage the growth in our business, our operating results could be adversely affected |
| To accommodate our past and anticipated future growth, we will need to continue to implement and improve our management, operational and financial information systems and to expand, train, manage and motivate our workforce |
| We can give you no assurances that our personnel, systems, procedures or controls will be adequate to support our operations in the future or that focusing our financial resources and management attention on the expansion of our operations will not adversely affect our results of operations |
| If we do not have sufficient capital resources to complete acquisitions and develop new surgery centers, our growth and results of operations could be adversely affected |
| We will need capital to acquire, develop, integrate, operate and expand surgery centers |
| We may finance future acquisition and development projects through debt or equity financings |
| To the extent that we undertake these financings, our shareholders may experience ownership dilution |
| To the extent we incur debt, we may have significant interest expense and may be subject to covenants in the related debt agreements that affect the conduct of our business |
| If we do not have sufficient capital resources, our growth could be limited and our results of operations could be adversely impacted |
| Our credit facility requires that we comply with financial covenants and may not permit additional borrowing or other sources of debt financing if we are not in compliance |
| We can give you no assurances that we will be able to obtain financing necessary for our acquisition and development strategy or that, if available, the financing will be available on terms acceptable to us |
| If we are unable to effectively compete for physician partners, managed care contracts, patients and strategic relationships, our business would be adversely affected |
| The healthcare business is highly competitive |
| We compete with other healthcare providers, primarily hospitals and other surgery centers, in recruiting physicians to utilize our surgery centers, for patients and in contracting with managed care payors |
| In some of the markets in which we operate, there are shortages of physicians in certain specialties, including gastroenterology |
| Some of our competitors may have greater resources than we do, including financial, marketing, staff and capital resources, and may have or may develop new technologies or services that are attractive to physicians or patients |
| In each of our markets there are hospitals and other healthcare providers with established relationships with physicians and payors |
| Exclusion from participation in a managed care contract in a specific location could result in material reductions in patient volume and revenues to our surgery centers |
| There are several large, publicly held companies, divisions or subsidiaries of large publicly held companies, and several private companies that develop and acquire freestanding multi-specialty surgery centers, and these companies may compete with us in the development and acquisition of centers |
| Further, many physician groups develop surgery centers without a corporate partner, utilizing consultants who typically perform these services for a fee and who take a small or no equity interest in the ongoing operations of the center |
| We can give you no assurances that we can compete effectively in any of these areas |
| If we fail to comply with applicable laws and regulations, we could suffer penalties or be required to make significant changes to our operations |
| We are subject to many laws and regulations at the federal, state and local government levels in the jurisdictions in which we operate |
| These laws and regulations require that our surgery centers and our operations meet various licensing, certification and other requirements, including those relating to: • physician ownership of our surgery centers; • certificate of need, or CON, approvals and other regulations affecting the construction or acquisition of centers, capital expenditures or the addition of services; • the adequacy of medical care, equipment, personnel, and operating policies and procedures; • qualifications of medical and support personnel; • maintenance and protection of records; • billing for services by healthcare providers; • privacy and security of individually identifiable health information; and • environmental protection |
| If we fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in Medicare, Medicaid and other government sponsored and third-party healthcare programs |
| In addition, a number of states have adopted or are considering legislation or regulations imposing additional restrictions on or otherwise affecting free-standing ambulatory surgery centers, including expansion of CON requirements, restrictions on ownership, taxes on gross receipts and restrictions on the 16 _________________________________________________________________ [69]Table of Contents Item 1A Risk Factors — (continued) enforceability of covenants not to compete affecting physicians |
| In the future, different interpretations or enforcement of existing or new laws and regulations could subject our current practices to allegations of impropriety or illegality, or require us to make changes in our operations, facilities, equipment, personnel, services, capital expenditure programs or operating expenses |
| We can give you no assurances that current or future legislative initiatives or government regulation will not have a material adverse effect on us or reduce the demand for our services |
| If a Federal or state agency asserts a different position or enacts new laws or regulations regarding illegal remuneration or other forms of fraud and abuse, we could suffer penalties or be required to make significant changes to our operations |
| A federal law, referred to as the anti-kickback statute, prohibits healthcare providers and others from soliciting, receiving, offering or paying, directly or indirectly, any remuneration with the intent of generating referrals or orders for services or items covered by a federal healthcare program |
| The anti-kickback statute is very broad in scope and many of its provisions have not been uniformly or definitively interpreted by case law or regulations |
| Violations of the anti-kickback statute may result in substantial civil or criminal penalties and exclusion from participation in the Medicare and Medicaid programs |
| Exclusion from these programs would result in significant reductions in revenue and would have a material adverse effect on our business |
| DHHS has published regulations that outline categories of activities that are deemed protected from prosecution under the anti-kickback statute |
| Three of the safe harbors apply to business arrangements similar to those used in connection with our surgery centers: the “surgery centers,” “investment interest” and “personal services and management contracts” safe harbors |
| The structure of the limited partnerships and limited liability companies operating our surgery centers, as well as our various business arrangements involving physician group practices, do not satisfy all of the requirements of any safe harbor |
| Nevertheless, a business arrangement that does not substantially comply with a safe harbor is not necessarily illegal under the anti-kickback statute |
| In addition, many of the states in which we operate also have adopted laws, similar to the anti-kickback statute, that prohibit payments to physicians in exchange for referrals, some of which apply regardless of the source of payment for care |
| These statutes typically impose criminal and civil penalties as well as loss of license |
| In addition to the anti-kickback statute, the Health Insurance Portability and Accountability Act of 1996, or HIPAA, provides for criminal penalties for healthcare fraud offenses that apply to all health benefit programs, including the payment of inducements to Medicare and Medicaid beneficiaries in order to influence those beneficiaries to order or receive services from a particular provider or practitioner |
| Federal enforcement officials have numerous enforcement mechanisms to combat fraud and abuse, including the Medicare Integrity Program and an incentive program under which individuals can receive up to dlra1cmam000 for providing information on Medicare fraud and abuse that lead to the recovery of at least dlra100 of Medicare funds |
| In addition, federal enforcement officials have the ability to exclude from Medicare and Medicaid any investors, officers and managing employees associated with business entities that have committed healthcare fraud |
| Providers in the healthcare industry have been the subject of Federal and state investigations, and we may become subject to investigations in the future |
| Both federal and state government agencies have heightened and coordinated civil and criminal enforcement efforts as part of numerous ongoing investigations of healthcare companies, as well as their executives and managers |
| These investigations relate to a wide variety of topics, including referral and billing practices |
| Further, amendments in 1986 to the federal False Claims Act have made it easier for private parties to bring “qui tam” whistleblower lawsuits against companies |
| Some states have adopted similar state whistleblower and false claims provisions |
| From time to time, the Office of Inspector General, or OIG, and the Department of Justice have established national enforcement initiatives that focus on specific billing practices or other suspected areas of abuse |
| Some of our activities could become the subject of governmental investigations or inquiries |
| For example, we have significant Medicare billings and we have joint venture arrangements involving physician investors |
| In addition, our executives and managers, some of whom have worked at other healthcare companies that are or may become the subject of federal and state investigations and private litigation, could be included in governmental investigations or named as defendants in private litigation |
| We are not aware of any governmental investigations involving any of our facilities, our executives or our managers |
| A future investigation of us, our executives or our managers could result in significant expense to us, as well as adverse publicity |
| 17 _________________________________________________________________ [70]Table of Contents Item 1A Risk Factors — (continued) If regulations or regulatory interpretations change, we may be obligated to buy out interests of physicians who are minority owners of the surgery centers |
| Substantially all of the limited partnership and operating agreements for the limited partnerships and limited liability companies through which we own our surgery centers provide that if certain regulations or regulatory interpretations change, we will be obligated to purchase some or all of the minority interests of the physician entities affiliated with us in the limited partnerships and limited liability companies that own and operate our surgery centers |
| The regulatory changes that could trigger such obligations include changes that: • make the referral of Medicare and other patients to our surgery centers by physicians affiliated with us illegal; • create the substantial likelihood that cash distributions from the limited partnership or limited liability company to the affiliated physicians will be illegal; or • cause the ownership by the physicians of interests in the limited partnerships or limited liability companies to be illegal |
| The cost of repurchasing these minority interests would be substantial if a triggering event were to result in the purchase obligations simultaneously at each of our surgery centers |
| The purchase price to be paid in such event would be determined by a predefined formula, as specified in each of the limited partnership and operating agreements, which also provide for the payment terms, generally over four years |
| There can be no assurance, however, that our existing capital resources would be sufficient for us to meet the obligations, if they arise, to purchase these minority interests held by physicians |
| The determination of whether a triggering event has occurred generally would be made by the concurrence of our legal counsel and counsel for the physician partners or, in the absence of such concurrence, by a nationally recognized law firm having an expertise in healthcare law jointly selected by both parties |
| Such determinations therefore would not be within our control |
| The triggering of these obligations could have a material adverse effect on our financial condition and results of operations |
| While we believe physician ownership of ambulatory surgery centers as structured within our limited partnerships and limited liability companies is in compliance with applicable law, we can give no assurances that legislative or regulatory changes would not have an adverse impact on us |
| The issue of physician ownership in ASCs is also being considered by some state legislatures |
| We are liable for the debts and other obligations of the limited partnerships that own and operate certain of our surgery centers |
| In the limited partnerships in which we are the general partner, we are liable for 100prca of the debts and other obligations of the limited partnership; however, the limited partnership agreement generally requires the physician partners to guarantee their pro rata share of any indebtedness or lease agreements to which the limited partnership is a party in proportion to their ownership interest in the limited partnership |
| We also have primary liability for the bank debt that may be incurred for the benefit of the limited liability companies, and in turn, lend funds to these limited liability companies, although the physician members also guarantee this debt |
| There can be no assurance that a third-party lender or lessor would seek performance of the guarantees rather than seek repayment from us of any obligation of the limited partnership or limited liability company if there is a default, or that the physician partners or members would have sufficient assets to satisfy their guarantee obligations |
| We have a legal responsibility to the minority owners of the entities through which we own our surgery centers, which may conflict with our interests and prevent us from acting solely in our own best interests |
| As the owner of majority interests in the limited partnerships and limited liability companies that own our surgery centers, we owe a fiduciary duty to the minority interest holders in these entities and may encounter conflicts between our interests and that of the minority holders |
| In these cases, our representatives on the operating board or board of governors of each joint venture are obligated to exercise reasonable, good faith judgment to resolve the conflicts and may not be free to act solely in our own best interests |
| In our role as general partner of the limited partnership or as chief manager of the limited liability company, we generally exercise our discretion in managing the business of the surgery center |
| Disputes may arise between us and the physician partners regarding a particular business decision or the interpretation of the provisions of the limited partnership agreement or limited liability company operating agreement |
| The agreements provide for arbitration as a dispute resolution process in some circumstances |
| We cannot assure you that any dispute will be resolved or that any dispute resolution will be on terms satisfactory to us |
| We may write-off intangible assets, such as goodwill |
| As a result of purchase accounting for our various acquisition transactions, our balance sheet at December 31, 2005 contained an intangible asset designated as goodwill totaling 18 _________________________________________________________________ [71]Table of Contents Item 1A Risk Factors — (continued) dlra347dtta4 million |
| Additional purchases of interests in practice-based surgery centers that result in the recognition of additional intangible assets would cause an increase in these intangible assets |
| On an ongoing basis, we evaluate whether facts and circumstances indicate any impairment of value of intangible assets |
| As circumstances change, we cannot assure you that the value of these intangible assets will be realized by us |
| If we determine that a significant impairment has occurred, we will be required to write-off the impaired portion of intangible assets, which could have a material adverse effect on our results of operations in the period in which the write-off occurs |
| The IRS may challenge tax deductions for certain acquired goodwill |
| For federal income tax purposes, goodwill and other intangibles acquired as part of the purchase of a business after August 10, 1993 are deductible over a 15-year period |
| We have been claiming and continue to take tax deductions for goodwill obtained in our acquisition of assets of practice-based ambulatory surgery centers |
| In 1997, the IRS published proposed regulations that applied “anti-churning” rules to call into question the deductibility of goodwill purchased in transactions structured similarly to some of our acquisitions |
| The anti-churning rules are designed to prevent taxpayers from converting existing goodwill for which a deduction would not have been allowable prior to 1993 into an asset that could be deducted over 15 years, such as by selling a business some of the value of which arose prior to 1993 to a related party |
| On January 25, 2000, the IRS issued final regulations that continue to call into question the deductibility of goodwill purchased in transactions structured similarly to some of our acquisitions |
| This uncertainty applies only to goodwill that arose in part prior to 1993, so the tax deductions we have taken with respect to interests acquired in surgery centers that were formed after August 10, 1993 are not affected |
| In response to these final regulations, in 2000 we changed our methods of acquiring interests in practice-based ambulatory surgery centers so as to comply with guidance found in the final regulations |
| There is a risk that the IRS could challenge tax deductions for pre-1993 goodwill in acquisitions we completed prior to changing our approach |
| Loss of these tax deductions would increase the amount of our tax payments and could subject us to penalties |