| DIALYSIS CORP OF AMERICA Item 1A Risk Factors We have listed below certain of the risk factors relating to Dialysis Corporation of America and our securities |
| There may be other risks and uncertainties that we may face and of which we are currently unaware which could also adversely affect our business, operations and financial condition |
| If any of such risks or uncertainties arise, or the risks listed below occur, our operations, earnings and financial condition could be materially harmed, which, in turn, would most likely adversely affect the trading price of our common stock |
| Any such event could negatively impact a shareholder’s investment in the company |
| 21 _________________________________________________________________ Until fiscal 2001, we had experienced operational losses Since 1989, when we sold four of our five dialysis centers, we had experienced operational losses |
| Not until fiscal 2001 did we reflect net income |
| We initiated an expansion program in 1995, opening two new dialysis centers that year, and to date operate and/or manage 29 centers in the states of Georgia, Maryland, New Jersey, Ohio, Pennsylvania, Virginia and South Carolina, and we have five centers in development |
| Some of our dialysis centers have generated losses since their commencement of operations and, although typical to newly established facilities, some continue to generate losses after 12 months of operations |
| This is due to operational costs and time needed to reach maturity of dialysis treatments |
| See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| ” Dialysis operations are subject to extensive government regulation Our dialysis operations are subject to extensive federal and state government regulations, which include: · licensing requirements for each dialysis center · government healthcare program participation requirements · reimbursement for patient services · patient referral prohibitions; broad federal and state anti-kickback regulations · false claims prohibitions for health care reimbursement and other fraud and abuse regulations · record keeping requirements · health, safety and environmental compliance · expanded protection of the privacy and security of personal medical data · standards for the exchange of electronic health information; electronic transactions and code sets; unique identifiers for providers · medical waste disposal regulations Many of these laws and regulations are complex and open to further judicial and legislative interpretations |
| If we are forced to change our method of operations because of these regulations, our earnings, financial condition and business could be adversely affected |
| The imposition of additional licensing and other regulatory requirements may, among other things, increase our cost of doing business |
| In addition, any violation of these governmental regulations could involve substantial civil and criminal penalties and fines, revocation of our licenses, closure of one or more of our centers, and our exclusion from participating in Medicare and Medicaid programs |
| Any loss of federal or state certifications or licenses would materially adversely impact our business |
| In February, 2005, CMS published a proposed rule that would revise the conditions for coverage for dialysis facilities |
| The revised conditions would establish performance expectations and promote continuous quality improvement |
| These rules are subject to revision and would not become effective until issued in final form |
| Until the rules are finalized, it is impossible to predict what impact any revisions to the conditions of coverage will have on our business or our operating results |
| 22 _________________________________________________________________ Our arrangements with our physician medical directors do not meet the safe harbor provisions of federal and state laws, and may subject us to greater governmental scrutiny Neither our arrangements with the medical directors of our facilities, typically retained by us as independent contractors under a fixed fee medical director agreement, nor the minority ownership interests of physicians in certain of our dialysis facilities meet all of the requirements of safe harbors to the Anti-Kickback Statute and similar state laws |
| These laws impose civil and criminal sanctions on persons who receive or make payments for referring a patient for treatment that is paid for in whole or in part by Medicare, Medicaid or similar state programs |
| Transactions that do not fall within a safe harbor may be subject to greater scrutiny by enforcement agencies |
| Our operations are subject to Medicare and Medicaid audits with concurrent potential civil and criminal penalties for failure to comply We are subject to periodic audits by the Medicare and Medicaid programs, which have various rights and remedies if they assert that we have overcharged the programs or failed to comply with program requirements |
| Rights and remedies available under these programs include repayment of any amounts alleged to be overpayments or in violation of program requirements, or making deductions from future amounts due to us |
| These programs may also impose fines, criminal penalties or program exclusions |
| In the ordinary course of our business, we receive notices of deficiencies for failure to comply with various regulatory requirements |
| We review such notices and take appropriate corrective action |
| In most cases, we and the reviewing agency will agree upon the measures that will bring the center or services into compliance |
| In some cases or upon repeat violations, none of which we have experienced, the reviewing agency may take various adverse actions against a provider, including but not limited to: · the imposition of fines; · suspension of payments for new admissions to the center; and · in extreme circumstances, decertification from participation in the Medicare or Medicaid programs and revocation of a center’s license |
| Any such regulatory actions could adversely affect a center’s ability to continue to operate, to provide certain services, and/or its eligibility to participate in Medicare or Medicaid programs or to receive payments from other payors |
| Moreover, regulatory actions against one center may subject our other centers, which may be deemed under our common control or ownership, to similar adverse remedies |
| There has been increased governmental focus and enforcement with respect to anti-fraud initiatives as they relate to healthcare providers State and federal governments are devoting increased attention and resources to anti-fraud initiatives against healthcare providers |
| Legislation has expanded the penalties for healthcare fraud, including broader powers to exclude providers from the Medicare and Medicaid programs |
| We have established policies and procedures that we believe are sufficient to ensure that our facilities will operate in substantial compliance with these anti-fraud requirements |
| While we believe that our business practices are consistent with Medicare and Medicaid criteria, those criteria are often vague and subject to change and interpretation |
| Anti-fraud actions could have an adverse effect on our financial position and results of operations |
| 23 _________________________________________________________________ Our revenues and financial stability are dependent on fixed reimbursement rates under Medicare and Medicaid During 2003, 2004 and 2005, approximately 54prca , 48prca and 51prca, respectively of our patient revenues was derived from Medicare reimbursement, and 8prca of our patient revenues in each of these years was derived from Medicaid and equivalent programs |
| Decreases in Medicare and Medicaid and equivalent rates and programs for our dialysis treatments would adversely affect our revenues and profitability |
| Federal and state governments seek to maintain, if not reduce, costs, and any such actions in the healthcare industry could adversely affect our revenues and earnings, including the following: · reductions in payments to us or government programs in which we participate · increases in labor and supply costs, which we do experience, without comparable governmental reimbursement rate increases · inclusion in the flat composite rate for dialysis treatments those ancillary services which we currently bill separately In November, 2005, CMS released the final physician fee schedule for 2006 |
| A number of provisions contained in the fee schedule will affect dialysis facilities |
| First, CMS revised the geographic designations and wage index adjustment applied to the composite payment rate |
| CMS will eliminate the wage index cap, currently set at 1dtta3, and will reduce the wage index floor for 2006 to 0dtta85 from 0dtta98 |
| Revisions to the geographic adjustments applicable to composite rate payments will be phased in over a four year period |
| For 2006, 75prca of the wage adjusted composite rate will reflect the old geographic adjustments and 25prca will reflect the revised adjustments |
| CMS also revised its drug payment methodology, moving from average acquisition cost pricing to average sales price plus 6prca |
| While these rates will result in lower payments for pharmaceuticals, the composite rate was concurrently increased with a revision to the drug add-on adjustment from 1dtta087 to 1dtta147 |
| CMS is continuing the case mix adjustments finalized in 2005 whereby providers receive higher composite rate payments for certain patients based on age, body mass index and body surface area |
| Management does not believe that in the aggregate these changes in Medicare reimbursement have significantly impacted our operations, expenses or earnings |
| Future changes in the structure of, and payment rates under, the Medicare program could substantially reduce our earnings |
| Decreases in reimbursement payments from third-party, non-government payors could adversely affect our earnings Any reduction in the rates paid by private insurers, hospitals and other non-governmental third-party organizations would adversely affect our business |
| Alternatively, any change in patient coverage, such as Medicare eligibility as opposed to higher private insurance coverage, would result in a reduction of revenue |
| We estimate approximately 38prca, 44prca and 41prca of our patient revenues for 2003, 2004 and 2005, respectively, was obtained from sources other than Medicare or Medicaid and equivalent programs |
| We generally charge non-governmental organizations for dialysis treatment rates which exceed the fixed Medicare and Medicaid and equivalent rates |
| If private payors reduce their payments or we experience a shift in revenue mix toward Medicare or Medicaid reimbursement, then our revenue, cash flow and earnings would decrease, and our cash flow and profits would be disproportionately affected |
| 24 _________________________________________________________________ Any decrease in the availability of or the reimbursement rate of EPO would reduce our revenues and earnings EPO, a bio-engineered drug used for treating anemia in dialysis patients, is currently available from a single manufacturer, Amgen, Inc |
| There currently is no alternative drug available to us for the treatment of anemia of our dialysis patients |
| The available supply of EPO could be delayed or reduced, whether by Amgen itself, through unforeseen circumstances, or as a result of excessive demand |
| In addition, Amgen could increase the price of EPO This would adversely impact our revenues and profitability, since approximately 28prca of our medical revenues in each of 2003, 2004 and 2005 were based upon the administration of EPO to our dialysis patients |
| If government or private payors reduce reimbursement for EPO, then our revenues and earnings will decline |
| Most of our EPO reimbursement is from government programs |
| For 2005, Medicare and Medicaid reimbursement represented 72prca of the total revenue derived from EPO In 2005, CMS revised its rules for reimbursement of pharmaceuticals, including EPO, which resulted in a net reduction of average Medicare payment rates |
| In 2006, reimbursement for EPO will be at the average sales price plus 6prca, which will result in lower reimbursement for pharmaceuticals, but offset by the 1dtta6prca composite rate increase |
| Changes in Medicare reimbursement criteria may also impact EPO revenue |
| In 2005, CMS adopted a national monitoring policy for EPO claims |
| This policy, which will be effective April, 2006, may have an adverse impact on our net revenue and earnings |
| Under the new policy, CMS will initiate monitoring when patient hematocrit levels reach a threshold of 39dtta0 |
| CMS expects a 25prca reduction in the dosage of EPO for patients whose hemotocrit exceeds this threshold |
| If dosage is not reduced, payment will be made as if the reduction had occurred |
| The policy also limits the quantity of EPO that can be administered in a month, regardless of hematocrit levels |
| We have revised our protocols on anemia management to address this policy |
| The implementation of the case-mix adjustment could adversely affect our revenues, profitability and cash flow |
| In April, 2005, CMS adopted a case-mix adjustment for the ESRD composite rate, under which the Medicare composite rate is adjusted based on a patient’s age, body mass index and body surface area |
| This change is intended to link payment more closely to acuity and its impact on revenues will turn on our patient acuity mix |
| For 2005, case-mix adjustment has not adversely affected revenues or profitability |
| New Amgen drug could affect use of EPO, adversely impacting our profitability |
| Amgen is the sole manufacturer of EPO, which is administered in conjunction with dialysis treatments to address a patient’s anemia |
| Amgen has developed and obtained FDA approval for its new drug Aranesp®, used to treat anemia, and which is indicated to be effective for a longer period than EPO Based on its longer lasting capabilities, potential profit margins on Aranesp® could be significantly lower than on EPO, and furthermore, Aranesp® could be administered by a dialysis patient’s physician, further eliminating potential revenues from the treatment of anemia in our dialysis patients |
| The introduction of Aranesp® as an anemia treatment for dialysis patients, therefore, could adversely impact our revenues and profitability |
| 25 _________________________________________________________________ Our ability to grow is subject to our resources and available locations Other than four center acquisitions over the period 2002 through 2004 and three centers acquired in the first quarter of 2006, expansion of our operations has been through construction of dialysis centers |
| We developed two dialysis centers and acquired one facility in 2003, opened five new centers and acquired a company with two dialysis facilities in 2004, opened three new centers in 2005, have four centers under development, and have acquired three centers in early 2006 |
| We seek areas with qualified and cost-effective nursing and technical personnel and a sufficient population to sustain a dialysis center |
| These opportunities are limited and we compete with much larger dialysis companies for appropriate locations |
| The time period from the beginning of construction through commencement of operations of a dialysis center generally takes four to six months and sometimes longer |
| Once the center is operable, it generates revenues, but usually does not operate at full capacity, and may incur losses for approximately 12 months or longer |
| Our growth strategy based on construction also involves the risks of our ability to identify suitable locations to develop additional centers |
| Those we do develop may never achieve profitability, and additional financing may not be available to finance future development |
| Our inability to acquire or develop dialysis centers in a cost-effective manner would adversely affect our ability to expand our business and as a result, our profitability |
| Growth places significant demands on our financial and management skills |
| Inability on our behalf to meet the challenges of expansion and to manage any such growth would have an adverse effect on our results of operations and financial condition |
| Our attempt to expand through development or acquisition of dialysis centers which are not currently identified entails risks which shareholders and investors will not have a basis to evaluate We expand generally by seeking an appropriate location for development of a dialysis center and by taking into consideration the potential geographic patient base, and the availability of a physician nephrologist to be our medical director and a skilled work force |
| Construction, equipment and initial working capital costs for a new dialysis center with 15 stations, typically the size of our dialysis facilities, range from dlra750cmam000 to dlra1cmam000cmam000 |
| We cannot assure you that we will be successful in developing or acquiring dialysis facilities, or otherwise successfully expanding our operations |
| We are negotiating with nephrologists and others to establish new dialysis centers, but we cannot assure you that these negotiations will result in the development of new centers |
| Furthermore, there is no basis for shareholders and investors to evaluate the specific merits or risks of any potential development or acquisition of dialysis facilities |
| 26 _________________________________________________________________ We depend on physician referrals, and the limitation or cessation of such referrals would adversely impact our revenues and earnings Most dialysis facilities, including ours, are dependent upon referrals of ESRD patients for treatment by physicians, primarily those physicians specializing in nephrology |
| We retain by written agreement qualified physicians or groups of qualified physicians to serve as medical directors for each of our facilities |
| The medical directors are typically a source of patients treated at the particular facility served |
| There is no requirement for these physicians to refer their patients to us, and they are free to refer patients to any other dialysis facility |
| The loss of the patient base of the medical director or other physicians in the area of our facilities could result in a decline in our operations, revenues and earnings |
| We may not be able to renew or otherwise negotiate compensation under the medical director agreements with our medical director physicians which could terminate the relationship, and without a suitable medical director replacement could result in closure of the facility |
| Accordingly, the loss of these key physicians at a particular facility could have a material adverse effect on the operations of the facility and could adversely affect our revenues and earnings |
| Most of our medical director agreements range in terms of from five to ten years with renewals |
| We have had no difficulty in renewing agreements as they have expired |
| All the medical director agreements provide for noncompetition restrictions |
| We have never had to attempt to enforce such restrictions, but there is no assurance that a particular jurisdiction in which the agreement is applicable would uphold such noncompetition agreement, which would increase the potential for competition with affiliated dialysis centers and could adversely impact our revenues and earnings |
| Some of our medical directors or the medical groups with whom they are associated own minority interests in certain of our subsidiaries which operate dialysis centers |
| If these interests are deemed to violate applicable federal or state law, these physicians may be forced to dispose of their ownership interests |
| Industry changes could adversely affect our business Healthcare organizations, public and private, continue to change the manner in which they operate and pay for services |
| Our business is designed to function within the current healthcare financing and reimbursement system |
| In recent years, the healthcare industry has been subject to increasing levels of government regulation of reimbursement rates and capital expenditures, among other things |
| In addition, proposals to reform the healthcare system have been considered by Congress, and still remain a priority issue |
| Any new legislative initiatives, if enacted, may (i) further increase government regulation of or other involvement in healthcare, (ii) lower reimbursement rates, and (iii) otherwise change the operating environment for healthcare companies |
| We cannot predict the likelihood of those events or what impact they may have on our earnings, financial condition or business |
| Our business is subject to substantial competition, and we must compete effectively, otherwise our growth could slow We are operating in a highly competitive environment in terms of operation, development and acquisition of existing dialysis centers |
| Our competition comes from other dialysis centers, many of which are owned by much larger companies, and from hospitals |
| The dialysis industry is rapidly consolidating, resulting in several very large dialysis companies competing for the acquisition of existing dialysis centers and the development of relationships with referring physicians |
| Many of our competitors have significantly greater financial resources, more dialysis facilities and a significantly larger patient base |
| In addition, technological advances by our competitors may provide more effective dialysis treatments than the services provided by our centers |
| 27 _________________________________________________________________ We also compete with physicians who open their own dialysis facilities |
| Competition for existing centers has increased the costs of acquiring such facilities |
| Competition is also intense for qualified nursing and technical staff as well as for nephrologists with an adequate patient base |
| Although we have exhibited growth over the last several years, we can provide no assurance that we will be able to compete effectively |
| Our failure to do so could impair our continued growth and profitability |
| We could be subject to professional liability claims that may adversely affect us Operation of dialysis centers and, in particular, the provision of dialysis treatments to ESRD patients, as is the case with most healthcare treatment services, entails significant risks of liability |
| Accordingly, we could be subject to various actions and claims of professional liability alleging negligence in the performance of our treatment and related services, as well as for the acts or omissions of our employees |
| As we grow and the number of our patients increases, so too does our exposure increase to potential malpractice, professional negligence, and other related legal theories and causes of action |
| These potential claims could seek substantial damages, possibly beyond our insurance coverage, and could subject us to the incurrence of significant fees and costs related to defending such potential claims |
| Such potential future claims for malpractice or professional liability, including any judgments, settlements or costs associated with such claims and actions, could have a material adverse effect on us |
| Our insurance costs and deductibles have been substantially increasing over the last several years, and may not be sufficient to cover claims and losses We maintain a program of insurance coverage against a broad range of risks in our business, including, and of primary importance, professional liability insurance, subject to certain deductibles |
| The premiums and deductibles under our insurance program have been steadily and significantly increasing over the last several years as a result of general business rate increases coupled with our continued growth and development of dialysis centers |
| We are unable to predict further increases in premiums and deductibles, but based on experience we anticipate further increases in this area, which would adversely impact earnings |
| The liability exposure of operations in the healthcare services industry has increased, resulting not only in increased premiums, but in limited liability on behalf of the insurance carriers |
| Our ability to obtain the necessary and sufficient insurance coverage for our operations upon expiration of our insurance policies may be limited, and sufficient insurance may not be available on favorable terms, if at all |
| Such insurance may not be sufficient to cover any judgments, settlements or costs relating to potential future claims, complaints or law suits |
| Our inability to obtain sufficient insurance for our operations, or if we obtain insurance which is limited, any future significant judgments, settlements and costs relating to future potential actions, suits or claims, could have an adverse effect on our company |
| 28 _________________________________________________________________ The loss of certain executive personnel without retaining qualified replacements could adversely affect our business operations, and as a result, our revenues and earnings could decline We are dependent upon the services of Thomas K Langbein, Chairman of the Board, and Stephen W Everett, our President, Chief Executive Officer and a director |
| Langbein has been involved with us since we organized in 1976 |
| Everett joined our company in November, 1998 as Vice President, became Executive Vice President in June, 1999, President on March 1, 2000, and Chief Executive Officer in May, 2003 |
| Everett has been involved in the healthcare industry for 26 years |
| Everett had an employment agreement with us through December 31, 2005 |
| A new five-year employment agreement was entered into with Mr |
| Everett effective as of January 3, 2006 |
| Among other things, the employment agreement contains a non-competition provision during the term of the agreement and for one year after termination |
| It would be very difficult to replace the services of these individuals, whose services, both individually and combined, if lost, would adversely affect our operations and earnings, and most likely as a result, the trading price of our common stock |
| There is no key-man life insurance covering any of our officers |
| Shares eligible for future sale by restricted shareholders may adversely affect our stock price Our officers and directors own 2cmam340cmam675 shares of our common stock and vested options exercisable into an additional 36cmam250 shares of common stock, for an aggregate of 2cmam376cmam925 shares or approximately 25prca of then outstanding common stock |
| Most of the shares held by these officers and directors, upon satisfying the conditions of Rule 144 under the Securities Act, may be sold without complying with the registration provisions of the Securities Act |
| Rule 144 conditions include: · holding the shares for one year from acquisition; · volume limits of selling every three months an amount of shares which does not exceed the greater of 1prca of the outstanding common stock, or the average weekly volume of trading as reported by Nasdaq during the four calendar weeks prior to the sale; · filing Form 144 with the SEC; · the company continuing to timely file its reports under the Exchange Act; Our publicly tradable common stock, known as the float, is approximately 7cmam165cmam000 shares |
| Accordingly, the sale by such officers and directors under Rule 144 may have an adverse affect on the market price of our common stock, and may inhibit our ability to manage subsequent equity or debt financing |
| Over the last year, our stock price has exhibited volatility, and any investment in our common stock may, therefore, decline for reasons unrelated to our performance Our common stock trades on the Nasdaq SmallCap Market under the symbol “DCAI” The market price of our common stock has exhibited significant volatility |
| Other than the merger announcement on March 15, 2005, and the continued growth of the company, there was no information known to management that would cause significant fluctuation in the price of our common stock, or in the trading volume |
| The renal care industry has experienced continued and rapid consolidation as evidenced by the acquisition by DaVita, Inc |
| of Gambro Healthcare, Inc |
| in October 2005 and the prospective acquisition of Renal Care Group, Inc |
| by Fresenius Medical Care, AG This consolidation among the four larger dialysis service providers may have generated interest of the marketplace in our common stock |
| 29 _________________________________________________________________ Other factors that could continue to cause fluctuation in our common stock include: · changes in government regulation, whether legislative, enforcement or reimbursement rates · third party reports relating to the dialysis industry and our company (unsolicited by management) · announcements by management relating to the company’s performance or other material events · actions and announcements by our competitors · the outlook for the healthcare industry generally Investors should understand that in general, stock prices fluctuate for reasons unrelated to operating results |
| Any changes in the above discussed factors, the Medicare and Medicaid reimbursement rates in particular, or general economic, political, global and market conditions, could result in a decline in the market price and volume of trading in our common stock |