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Risk management Risk management is the identification, evaluation, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives) followed by coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unfortunate events or to maximize the realization of opportunities.\nRisks can come from various sources including uncertainty in international markets, threats from project failures (at any phase in design, development, production, or sustaining of life-cycles), legal liabilities, credit risk, accidents, natural causes and disasters, deliberate attack from an adversary, or events of uncertain or unpredictable root-cause.
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East India Company The East India Company (EIC) was an English, and later British, joint-stock company founded in 1600. It was formed to trade in the Indian Ocean region, initially with the East Indies (the Indian subcontinent and Southeast Asia), and later with East Asia.
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Operations management Operations management is an area of management concerned with designing and controlling the process of production and redesigning business operations in the production of goods or services. It involves the responsibility of ensuring that business operations are efficient in terms of using as few resources as needed and effective in meeting customer requirements.
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Risk Factors
NATIONAL HOME HEALTH CARE CORP Item 1A Risk Factors This section summarizes certain risks, among others, that should be considered by stockholders and prospective investors in the Company
The Company relies significantly on its ability to attract and retain caregivers who possess the skills, experience and licenses necessary to meet the requirements of the Company’s customers
The Company competes for home health care services personnel with other providers of home health care -10- _________________________________________________________________ services
The Company must continually evaluate and expand its network of caregivers to keep pace with its customers’ needs
Currently, there is a shortage of qualified nurses and a diminishing pool of home health aides in the states in which the Company conducts its business, competition for nursing personnel is increasing and wages and benefit costs have risen
The Company may be unable to continue to increase the number of caregivers that it recruits, adversely affecting the potential for growth of the Company’s business
The Company’s ability to attract and retain caregivers depends on several factors, including the Company’s ability to provide such caregivers with assignments that they view as attractive and with competitive wages and benefits
The cost of attracting caregivers and providing them with attractive benefit packages may be higher than the Company anticipates and, as a result, if it is unable to obtain increased reimbursement rates, the Company’s profitability could decline
Moreover, if the Company is unable to attract and retain caregivers, the quality of its services to its customers may decline and, as a result, it could lose certain customers
Risks Related to Collective Bargaining
Effective May 1, 2004, Allen Health Care and District Council 1707, AFSCME concluded negotiations on an initial three-year labor contract
The Company is unable to estimate how upcoming negotiations will affect the Company’s future results of operations or financial condition
On May 13, 2005, Accredited received a copy of a Petition for Certification of Representative, pursuant to the provisions of the National Labor Relations Act
Although on March 21, 2006, the home health aides of Accredited, in a mail ballot election, rejected union representation by SEIU 1199 New Jersey, there can be no assurance that further unionizing activity will not occur at this or other subsidiaries of the Company or that any such activity or any new collective bargaining agreements will not have a material adverse effect on the Company
Risks Related to Competition
The home health care business is highly competitive
Some of the Company’s competitors, unlike the Company, provide pharmaceutical products and other home health care services that generate additional referrals
Some of the Company’s competitors also may have greater marketing and financial resources than the Company
The Company believes that the primary competitive factors in obtaining and retaining customers are the quality of services provided and the pricing of such services
Competition for referrals may increase in the future and, as a result, the Company may not be able to remain competitive
To the extent competitors gain or retain market share by reducing prices or increasing marketing expenditures, the Company could lose market share or otherwise experience a material adverse effect
The Company does not have long-term agreements or exclusive guaranteed order contracts with its customers
The success of the Company’s business is dependent upon its ability to continually secure new business from its customers and to service such new business with its caregivers
The Company’s customers are free to seek services from the Company’s competitors and to use caregivers that such competitors offer them
Therefore, the Company must maintain positive relationships with its customers; otherwise, the Company may be unable to generate new business for its caregivers, which could have a material adverse effect on the Company
-11- _________________________________________________________________ New England, as a Connecticut Medicaid provider, is subject to retroactive adjustments due to prior year audits, reviews and investigations, government fraud and abuse initiatives and other similar actions
Federal regulations also provide for withholding payments to recoup amounts payable under the Medicaid program
While the Company believes it is in material compliance with applicable Medicaid reimbursement regulations, there can be no assurance that the Company, pursuant to such audits, reviews and investigations, among other things, will be found to be in compliance in all respects with such reimbursement regulations
A determination that the Company is in violation of any such reimbursement regulations could result in retroactive adjustments and recoupments and have a material adverse effect on the Company
As a Medicaid provider, the Company is also subject to routine, unscheduled audits, which may have an adverse impact on the Company’s results of operations
For information on a recent audit performed by the Connecticut Department of Social Services, Office of Quality Assurance, see “Government Regulation and Licensing – Audit
Risks Related to Federal and State Regulations
The Company is subject to substantial and frequently changing federal, state and local regulations
The Company must also comply with state licensing along with federal and state eligibility standards for certification as a Medicare and Medicaid provider
In addition, new laws and regulations are adopted periodically to regulate new and existing services in the health care industry
Changes in laws or regulations or new interpretations of existing laws or regulations can have a dramatic effect on operating methods, costs and reimbursement amounts provided by government and other third-party payers
Federal laws governing the Company’s activities include regulation of Medicare reimbursement and certification and certain financial relationships with health care providers (collectively, the “fraud and abuse laws”)
Although the Company intends to comply with all applicable federal and state fraud and abuse laws, these laws are not always clear and may be subject to a range of potential interpretations
(For further discussion on such fraud and abuse laws, see “Government Regulation and Licensing – Medicare Fraud and Abuse
”) There can be no assurance that administrative or judicial clarification or interpretation of existing laws or regulations, or legislative enactment of new laws or regulations, will not have a material adverse effect on the Company
In addition, the Balanced Budget Act of 1997, as amended (the “Balanced Budget Act”), introduced several government initiatives causing changes to Medicare reimbursement
These changes have resulted in the Company experiencing a decline in revenue from its Medicare certified subsidiary in Connecticut
”) New England, as a participant in the State of Connecticut Department of Social Services Medicaid program, is subject to survey and audits of operational, clinical and financial records with respect to proper applications of general regulations governing operations and billing of claims
These audits can result in retroactive adjustments for payments received from this program
There can be no assurance that federal, state or local governments will not change existing standards or impose additional standards
Any failure to comply with existing or future standards could have a material adverse effect on the Company
For information as to surveys of New England conducted by DPH, see “Government Regulation and Licensing – Surveys
” A failure by New England to retain Medicare certification would result in New England’s termination from participating in the Medicare and Medicaid programs
Revenues derived from New England’s participation in these programs for the fiscal year ended July 31, 2006 were 30prca of the Company’s total revenues
-12- _________________________________________________________________ Provision of home health care services entails an inherent risk of liability
Certain participants in the home health care industry may be subject to lawsuits that may involve large claims and significant defense costs
It is expected that the Company periodically will be subject to such suits as a result of the nature of its business
The Company currently maintains professional liability insurance intended to cover such claims in amounts which management believes are in accordance with industry standards
There can be no assurance that the Company will be able to obtain liability insurance coverage in the future on acceptable terms, if at all
There can be no assurance that claims in excess of the Company’s insurance coverage or claims not covered by the Company’s insurance coverage will not arise
A successful claim against the Company in excess of the Company’s insurance coverage could have a material adverse effect on the Company
Claims against the Company, regardless of their merit or eventual outcome, may also have a material adverse effect on the Company’s ability to attract customers or to expand its business
In addition, one of the Company’s subsidiaries is self-insured for its workers compensation and is at risk for claims up to certain levels
Risks Related to Third Party Payers
For the twelve months ended July 31, 2006, 2005 and 2004, the percentage of the Company’s revenues derived from Medicare and Medicaid was 51prca, 51prca and 48prca, respectively
The revenues and profitability of the Company are affected by the continuing efforts of all third-party payers to contain or reduce the costs of health care by lowering reimbursement rates, narrowing the scope of covered services, increasing case management review of services and negotiating reduced contract pricing
Any changes in reimbursement levels under Medicare, Medicaid or other payer sources and any changes in applicable government regulations could have a material adverse effect on the Company
See Item 7 – “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Certain Trends Expected to Impact Future Results of Operations
” Changes in the mix of the Company’s patients among Medicare, Medicaid and other payer sources may also affect the Company’s revenues and profitability
Risks Related to the Company’s Acquisition Strategy
In recent years, the Company’s strategic focus has been on the acquisition of small to medium sized home health care agencies, or of certain of their assets, in targeted markets
These acquisitions involve significant risks and uncertainties, including difficulties integrating acquired personnel and other corporate cultures into the Company’s business, the potential loss of key employees or customers of acquired companies, the assumption of liabilities and exposure to unforeseen liabilities of acquired companies and the diversion of management attention from existing operations
The Company may not be able to fully integrate the operations of the acquired businesses with its own in an efficient and cost-effective manner
The failure to effectively integrate any of these businesses could have a material adverse effect on the Company
In addition, the Company’s growth over the last several years has principally resulted from acquisitions and penetration of markets abandoned by competitors
There can be no assurance that the Company will be able to identify suitable acquisitions or available market share in the future nor that any such opportunities, if identified, will be consummated on terms favorable to the Company, if at all
In the absence of such successful transactions, there can be no assurance that the Company will experience further growth, nor that such transactions, if consummated, will result in further growth
-13- _________________________________________________________________ In addition, although the Company attempted in its acquisitions to determine the nature and extent of any pre-existing liabilities, and has obtained indemnification rights from the previous owners for acts or omissions arising prior to the date of the acquisition, resolving issues of liability between the parties could involve a significant amount of time, manpower and expense on the part of the Company
If the Company or any of its subsidiaries were to be unsuccessful in a claim for indemnity from a seller, the liability imposed on the Company or its subsidiary could have a material adverse effect on the Company
The Company has grown significantly over the past few years
This growth, which has resulted primarily from acquisitions and which management intends to continue to pursue, poses a number of difficulties and risks for the Company
As the Company has grown and may continue to grow (as to which there can be no assurance) in both revenue and geographical scope, such growth stretches the various resources of the Company, including management, information systems, regulatory compliance, logistics and other controls
There can be no assurance that such resources will keep pace with such growth
If the Company does not maintain such pace, then its prospects would be materially adversely affected
Risks Related to the Company’s Dependence on Senior Management
The Company believes that the success of its business strategy and its ability to operate profitably depends on the continued employment of its senior management team
If any member of the Company’s senior management team becomes unable or unwilling to continue in his present position, the Company’s business and financial results could be materially adversely affected