| NOVAMED INC Item 1A Risk Factors The following factors should be considered in evaluating our company and our business |
| These factors may have a significant impact on our business, operating results and financial condition |
| Risks Relating to Our Business Our failure to operate, acquire or develop a sufficient number of profitable surgical facilities could limit our profitability and revenue growth Our growth strategy is focused on growing our existing ASCs and acquiring or developing new ASCs in a cost-effective manner |
| We may not experience an increase in surgical procedures at our existing or future ASCs |
| We may not be able to achieve the economies of scale and patient base, or provide the business, administrative and financial services required to sustain profitability in our existing and future ASCs |
| Newly acquired or developed facilities may generate losses or experience lower operating margins than our more established facilities, or they may not generate returns that justify our investment |
| The current market for ASC acquisitions is very competitive, and most potential targets are evaluating offers from multiple bidders |
| This bidding process often results in increased purchase prices and less favorable transaction terms |
| In many instances, we have dropped out of the bidding because we thought the price was too high or other proposed terms were unacceptable |
| We may not be able to identify suitable acquisition or development targets, successfully negotiate the acquisition or development of these facilities on satisfactory terms, or have the access to adequate capital to finance these endeavors |
| We anticipate that we will fund the acquisition and development of future ASCs from cash generated from our operations and amounts borrowed under our credit facility |
| The maximum commitment available under our credit facility is currently dlra50 million |
| Our current credit facility expires on June 30, 2008 |
| As of March 31, 2006, we have available approximately dlra21 million remaining under our credit facility |
| Given that we intend to continue to finance our acquisitions by using a combination of cash generated from our business operations and borrowings under our credit facility, we may in the future need to increase our maximum commitment available to us |
| To the extent we are able to increase our maximum commitment, such an increase may not be on terms that are favorable to us or sufficient for our needs |
| In addition, the continued periodic escalation in interest rates has increased our borrowing costs which have an adverse effect on our profitability |
| Our borrowing capacity and higher borrowing costs could limit our ability to successfully implement our growth strategy, and could trigger the need to procure additional equity financing |
| If we are unable to successfully implement our growth strategy or manage our growth effectively, our business, financial condition and results of operations could be adversely affected |
| We may not compete effectively with other companies that have more resources and experience than us or that may have the ability to influence our licensure Competitors with substantially greater financial, technical, managerial, marketing and other resources and experience may compete more effectively than us |
| We compete with other businesses, including ASC companies, hospitals, individual ophthalmologists, other ASCs, laser vision correction centers, eye care clinics and providers of retail optical products |
| Competitors with substantially greater resources may be more successful in acquiring and developing surgical facilities |
| Our optical laboratories and optical products purchasing organization also face competition on national, regional and local levels |
| Companies in other health care industry segments, including managers of hospital-based medical specialties or large group medical practices, may become competitors in providing ASCs and surgical equipment as well as competitive eye care related services |
| Competition for retaining the services of highly qualified medical, technical and managerial personnel is significant |
| In addition to competing for patients and physician relationships, ASCs are often required by Medicare and certain state laws to maintain a written transfer agreement with an area hospital |
| A transfer agreement provides that a hospital will accept an ASC’s patient in the event of an emergency |
| Generally, we have not encountered problems obtaining transfer agreements from area hospitals |
| Recently, however, in limited instances, we have observed hospitals resisting entering into transfer agreements for what we believe to be competitive reasons |
| While there often are alternatives for ASCs to comply with federal and state regulations without a transfer agreement, competitive pressures from hospitals may make it more difficult and/ or expensive for our ASCs to maintain their licensure and/or Medicare certification |
| Reduced prices and reimbursement rates for surgical procedures as a result of competition or Medicare and other governmental and private third party payor cost containment efforts could reduce our revenue, profitability and cash flow Government sponsored health care programs accounted for approximately 39prca of our consolidated net revenue for the year ended December 31, 2005 |
| The health care industry is continuing to experience a trend toward cost containment as government and private third-party payors seek to contain reimbursement and utilization rates and to negotiate reduced payment schedules with health care providers |
| These trends may result in a reduction from historical levels in per patient revenue received by our ASCs |
| Changes in Medicare payment rates have, in the past, resulted in reduced payments to ASCs |
| Medicaid and other governmental and private insurance payments also could be affected to the extent that these insurance companies use payment methodologies based on Medicare rates, or take actions independent of Medicare to revise payment methodologies |
| On December 8, 2003, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (referred to as the Medicare Modernization Act) was signed into law |
| The Medicare Modernization Act eliminates the historical practice of basing ASC facility fees on cost surveys of ASCs, and instead requires the Centers for Medicare & Medicaid Services (CMS) to devise a new methodology for establishing ASC facility payments, and to implement new reimbursement rates based on the new methodology between January 1, 2006 and January 1, 2008 |
| When CMS eventually implements rebased rates, payment amounts for most procedures could change, in some cases significantly |
| Additionally, the Medicare Modernization Act provides that there shall be no inflation update to Medicare ASC rates during calendar years 2005 through 2009 |
| The freezing of ASC payment rates, and any new rate structure that CMS may put in place by January 1, 2008, could adversely affect the revenues of our business |
| We cannot determine at this time what the full impact of such rate structures will be |
| On February 8, 2006, the President signed into law the Deficit Reduction Act of 2005 |
| This legislation requires CMS to limit Medicare reimbursements for surgical procedures furnished in ASCs to the amount paid to a hospital for the same service effective for services furnished on and after January 1, 2007 |
| Since Medicare currently pays ASCs more than hospitals for certain procedures commonly furnished in our facilities, this change, when implemented, will have the effect of reducing reimbursement for certain services furnished in our facilities |
| This change, when implemented, will negatively impact our business |
| Considering the procedures performed in our ASCs in 2005 and prior years, the most significant impact to us from this legislation will be the reduction in the Medicare facility fee for the after-cataract laser surgery procedure which is also known as the YAG procedure |
| Based on the number of YAG procedures performed in our ASCs in 2005, we estimate that the reduction in the Medicare facility fee paid for these procedures would have resulted in a reduction of approximately dlra1dtta0 million to dlra1dtta2 million in net revenue, or 1dtta6prca to 2dtta0prca of our total surgical facilities net revenue for 2005 |
| This would equate to an estimated negative impact in earnings per share of between dlra0dtta01 and dlra0dtta02 |
| To the extent that other payors, governmental and private, adopt this practice, the impact could be greater |
| Under current regulations, ASC Covered Procedures, ie, those for which a facility fee is provided by the Medicare program, are those procedures specifically approved by CMS CMS develops and maintains a listing of ASC Covered Procedures (defined by HCPCS Code) |
| A facility fee is available only for listed procedure codes |
| CMS is required by law to update the 15 ______________________________________________________________________ list of ASC Covered Procedures every two (2) years |
| CMS has disregarded this requirement in many years |
| There is a substantial risk that CMS will occasionally disregard this statutory requirement, and not update the list of ASC Covered Procedures as required by law |
| On November 26, 2004, CMS proposed to delete 100 procedures from the list of ASC Covered Procedures, including many procedures which are commonly furnished in ASC settings |
| Although CMS ultimately decided in May 2005 to delete only five of the proposed 100 procedures, CMS could again propose and ultimately decide to substantially reduce the number of procedures for which Medicare will pay an ASC facility fee, a change which could affect the financial viability of our business |
| To the extent that any procedures performed at our ASCs are deleted from the list of ASC Covered Procedures, it could negatively and materially affect our business |
| Considerable uncertainty surrounds the future determination of Medicare reimbursement levels for ambulatory surgical services |
| Services reimbursable under the Medicare program are subject to legislative change, administrative rulings, interpretations, discretion, governmental funding restrictions and requirements for utilization review |
| Such matters, as well as more general governmental budgetary concerns, may significantly reduce payments made to ASCs under this program, and there can be no assurance that future Medicare payment rates will be sufficient to cover the costs of, or cost increases in, providing services to Medicare patients |
| Revenue from laser vision correction procedures comprised approximately 7prca of our surgical facilities net revenue for the year ended December 31, 2005 |
| The market for providing laser vision correction and other refractive surgery procedures continues to be highly competitive |
| This competitiveness has resulted in many of our competitors offering laser vision correction or other refractive surgery services at lower prices than the prices we charge |
| If price competition continues, however, we may choose or be forced to lower the facility fees we charge in our surgical facilities |
| If we lower our fees, we could experience reductions in our revenue, profitability and cash flow |
| As we develop and acquire more multi-specialty ASCs, we anticipate that the percentage of our surgical facilities net revenue derived from governmental payors such as Medicare will decrease while reimbursements from private third party payors will increase |
| Given this changing payor mix, our success will depend on our ability to negotiate favorable contracts with private third party payors |
| Even though our relative dependence on Medicare reimbursements may decrease, our revenue from private third party payors could be negatively affected by any adverse Medicare changes because many private third party payors tie their reimbursement levels to Medicare rates |
| Our revenue and profitability could decrease if we are unable to maintain positive relationships with the physicians who perform surgical procedures at our ASCs The success of our business depends on our relationship with, and the success and efforts of, the physicians who perform surgical procedures at our ASCs |
| Our net revenue and profitability would decline if our relationship with key physicians deteriorated or those physicians reduced or eliminated their use of our ASCs |
| In addition, co-owning ASCs with physicians may create additional regulatory risk |
| ” Regulation of the construction, acquisition or expansion of ASCs could prevent us from developing, acquiring, expanding or relocating facilities Most states require licenses to own and operate ASCs, and some states require a certificate of need or CON to construct or modify an ASC Several states recently have been revising licensure and CON laws in a manner that makes it more difficult to develop or relocate ASCs |
| If we are unable to procure the appropriate state licensure approvals, or if we are unable to obtain a CON in states with CON laws, then we may not be able to acquire or construct a sufficient number of ASCs, or to expand the scope of services offered in our existing ASCs, to achieve our growth strategy |
| Procuring these approvals could take considerable time, effort and expense, and may result in delays in opening new or modified facilities |
| Moreover, if we are unable to maintain good relations with the 16 ______________________________________________________________________ landlords of our ASCs, we may be forced to relocate a facility from time to time |
| If we are forced to relocate a facility, we may incur substantial costs in building out and furnishing our new location |
| In addition, depending on the state, we may also have difficulty obtaining the necessary state licensure and CON approvals to relocate the facility |
| ” Changes in the interpretation of existing laws and regulations, or adoption of new laws or regulations, governing our business operations, including physician use and/or ownership of ASCs, could result in penalties to us, require us to incur significant expenditures, or force us to make changes to our business operations We are subject to extensive government regulation and supervision under federal, state and local laws and regulations |
| Many of these laws and regulations are subject to varying interpretations, and courts and regulatory authorities generally have provided limited clarification |
| Moreover, state and local laws and interpretations vary from jurisdiction to jurisdiction |
| As a result, we may not always be able to accurately predict interpretations of applicable law, and federal and state authorities could challenge some of our activities, including our co-ownership of ASCs with physicians and other investors |
| If any of our activities are challenged, we may have to divert substantial time, attention and resources from running our business to defend our activities against these challenges, regardless of their merit |
| If we do not successfully defend these challenges, we may face a variety of adverse consequences, including: * loss of use of our ASCs; * losing our eligibility to participate in Medicare or Medicaid or losing other contracting privileges; or * in some instances, civil or criminal fines or penalties |
| Any of these results could impair our sources of revenue and our profitability and limit our ability to grow our business |
| For example, the federal anti-kickback statute prohibits the knowing and willful solicitation, receipt, offer or payment of any direct or indirect remuneration in return for the referral of patients or the ordering or purchasing of items or services payable under Medicare, Medicaid or other federal health care programs |
| This statute is very broad and Congress directed the Department of Health and Human Services to develop regulatory exceptions, known as safe harbors, to the statute’s referral prohibitions |
| While we have attempted to structure the ownership and operation of our ASCs within a safe harbor, we do not satisfy all of the requirements |
| Because there is no legal requirement that relationships fit within a safe harbor, a business arrangement that does not comply with the safe harbor, or for which a safe harbor does not exist, does not necessarily violate the anti-kickback statute |
| Presently, despite the fact that we do not fit within a safe harbor, we believe that our ownership and operation of ASCs complies with the anti-kickback statute |
| However, existing interpretations or enforcement of the federal anti-kickback statute or other applicable federal or state laws and regulations could change |
| If so, violations of the anti-kickback statute or other laws may result in substantial civil and criminal penalties and exclusion from participation in Medicare, Medicaid and other federally funded programs |
| In addition, there also is a material risk that Congress, CMS or the states could revise physician ownership and referral laws in a manner that could prohibit or limit physician ownership of ASCs |
| In December 2003, Congress enacted legislation imposing an 18-month moratorium on physician referrals to certain categories of hospitals, ie, those classified as “specialty hospitals” under the law, if the physician has an ownership interest in the entity |
| This moratorium expired in June 2005 |
| Congress and CMS are both considering extending or possibly expanding the scope of the moratorium |
| Actions by either Congress or CMS potentially could prohibit or limit physician ownership of ASCs |
| Additionally, several states are considering limits on physician ownership in and referrals to specialty hospitals, and a few are considering similar limitations on physician ownership in and referrals to ASCs |
| To the extent that Congress, CMS or any of the states act to prohibit or limit physician ownership of ASCs, the investment arrangements in our ASCs could be affected |
| 17 ______________________________________________________________________ Our limited liability company agreements and limited partnership agreements provide that if certain laws and regulations change, or the interpretation and/or enforcement of such laws and regulations change, we may have to purchase some or all of the equity interests in our ASCs owned by physicians |
| The regulatory changes that could trigger this repurchase include it becoming: (i) illegal for a physician to own an equity interest in one of our ASCs; (ii) illegal for physician-owners in our ASCs to refer Medicare or other patients to the facility; or (iii) substantially likely that the receipt by physician-owners of cash distributions from the limited liability company or partnership will be illegal |
| The cost of repurchasing these equity interests would be substantial |
| We may not have sufficient capital resources to fund these obligations, and it may trigger the need to procure additional equity financing |
| While we attempt to structure these purchase obligations as favorable as possible to us, the triggering of these obligations could have a significantly negative effect on our financial condition and business prospects |
| Furthermore, CMS may revise the Medicare conditions for coverage of ASC services |
| Our Medicare-certified ASCs are required to comply with a series of regulatory obligations in order to qualify services furnished in those facilities for Medicare reimbursement |
| CMS has not revised the Medicare regulatory conditions for coverage in many years, but has in recent years indicated its intent to update these requirements through notice and comment rulemaking |
| It is our expectation that our facilities and operations could be modified as necessary to comply with whatever new conditions might be established |
| However, bringing our facilities and operations into compliance could involve substantial costs to the company |
| Moreover, it is possible that our facilities and operations could not be revised sufficiently to be in compliance with new Medicare conditions, in which case some or all of our ASCs may be forced to disenroll from the Medicare program |
| Many governmental and private payors require Medicare certification as a condition to participate in their payment plans |
| Any ASC not enrolled in Medicare may likewise be precluded from enrolling in other governmental and private payor plans |
| Such exclusion would have a material negative effect on our business |
| The nature of being actively involved in acquiring ASCs could subject us to potential claims and material liabilities relating to these businesses Although we conduct extensive due diligence prior to acquiring an ASC and are generally indemnified by the sellers, our acquisitions could subject us to claims, suits or liabilities relating to unknown or contingent liabilities or from incidents occurring prior to our acquisition of the facility |
| If we incur these liabilities and are not indemnified or insured for them, our operating results and financial condition could be adversely affected |
| If eye care professionals and the general population do not continue to accept laser vision correction and other refractive surgical procedures as alternatives to eyeglasses and contact lenses, a source of our historical and future revenue and earnings growth will be limited Our profitability and growth will depend, in part, upon continued acceptance by eye care professionals and the general population of laser vision correction and other refractive surgical procedures in the US Eye care professionals and the general population might not continue to accept laser vision correction surgery because of the cost of the procedure that, to date, has primarily been paid directly by patients, and concerns about the safety and effectiveness of laser vision correction |
| If eye care professionals and the general population do not continue to accept laser vision correction and other refractive surgical procedures, a source of our historical and future revenue and earnings growth will be limited |
| A significant portion of our revenue from laser vision correction procedures is derived from multi-year laser services agreements that we negotiated with our former affiliated physician practices in connection with the divestiture of our physician practice management business |
| One of our largest laser services agreements expired in April 2006 |
| Unless the parties agree on extensions, our other laser services agreements will be expiring over the next two years, with the last one expiring in February 2008 |
| under which we have procured excimer lasers |
| We pay Alcon monthly based on the number of procedures performed on each laser, but are required to pay for a minimum number of procedures per year for each laser, regardless of whether the procedure 18 ______________________________________________________________________ is performed |
| If these minimum procedure thresholds exceed the actual number of procedures performed, these obligations will have an adverse effect on our financial condition and operating results |
| Our supply agreement with Alcon expires on December 31, 2006 |
| To the extent we do not extend this agreement and we determine that we need to replace those excimer lasers furnished to us by Alcon, then we may incur additional capital costs to replace these excimer lasers |
| Rapid technological advances may reduce our sources of revenue and our profitability Adoption of new technologies that may be comparable or superior to existing technologies for surgical equipment could reduce the amount of the facility fees we receive from physicians who use our surgical facilities, or the amount of revenue derived from our laser services agreements |
| Reduction of these sources of revenue could decrease our profitability |
| In this case, we might have to expend significant capital resources to deploy new technology and related equipment to remain competitive |
| Our inability to provide access to new and improving technology could deter physicians from using our surgical facilities or equipment |
| Loss of the services of key management personnel could adversely affect our business Our success depends, in part, on the services of key management personnel, including Thomas S Hall our President and Chief Executive Officer; Scott T Macomber, our Executive Vice President and Chief Financial Officer; and E Michele Vickery, our Executive Vice President Operations |
| However, in light of the role that each of these officers is expected to play in our future growth, if we lost the services of any of these officers, we believe that our business could be adversely affected |
| The nature of our business could subject us to potential malpractice, product liability and other claims The provision of surgical services entails the potentially significant risk of physical injury to patients and an inherent risk of potential malpractice, product liability and other similar claims |
| Our insurance may not be adequate to satisfy claims or protect us and this coverage may not continue to be available at acceptable costs |
| A partially or completely uninsured claim against us could reduce our earnings and working capital |
| Our insurance policies are generally renewed on an annual basis |
| Although we believe we will be able to renew our current policies or otherwise obtain comparable professional liability coverage, we have no control over the potential costs to renew |
| Increases in professional liability and other insurance premiums will negatively affect our profitability |
| If a change in events or circumstances causes us to write-off a portion of our intangible assets, our total assets could be reduced significantly and we could incur a substantial charge to earnings Our assets include intangible assets primarily in the form of goodwill |
| At December 31, 2005, intangible assets of our continuing operations represented approximately 70prca of total assets and 116prca of stockholders &apos equity |
| The intangible asset value represents the excess of cost over the fair value of the separately identifiable net assets acquired in connection with our acquisitions and affiliations |
| The value of these assets may not be realized |
| We regularly, and at least annually, evaluate whether events and circumstances have occurred that indicate all or a portion of the carrying amount of the asset may no longer be recoverable, in which case an additional charge to earnings may become necessary |
| If, in the future, we determine that our intangible assets have suffered an impairment which requires us to write off a portion of the asset due to a change in events or circumstances, this write-off could significantly reduce our total assets and we could incur a substantial charge to earnings, as well as be in default under one or more covenants in our credit facility |
| 19 ______________________________________________________________________ Becoming and remaining compliant with federal regulations enacted under the Health Insurance Portability and Accountability Act could require us to expend significant resources and capital, and could impair our profitability and limit our ability to grow our business Numerous federal regulations have been adopted under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) |
| Compliance with HIPAA regulations governing patient privacy was required by April 14, 2003 |
| We have taken actions in an effort to establish our compliance with HIPAA’s Privacy regulations, and we believe that we are in substantial compliance with HIPAA’s privacy regulations |
| These actions include having our ASCs and affiliated providers implement new HIPAA-compliant policies and procedures, conducting employee HIPAA training, identifying “business associates” with whom we need to enter into HIPAA-compliant contractual arrangements and entering into such arrangements, and various other measures |
| Ongoing implementation and oversight of these measures involves significant time, effort and expense |
| Other federal regulations adopted under HIPAA require that our affiliated providers and us be capable of conducting certain standardized health care transactions, including billing and other claims transactions |
| We have undertaken significant efforts, involving substantial time and expense, to assure that our ASCs and affiliated providers can submit transactions in compliance with HIPAA We anticipate that continuing time and expense will be required to maintain the ability to submit HIPAA-compliant transactions, and to make sure that newly-acquired ASCs can submit HIPAA-compliant transactions |
| In addition, compliance with the HIPAA security regulations was required by April 21, 2005 |
| In general, the security regulations require ASCs and other covered entities to implement reasonable technical, physical and administrative security measures to safeguard protected health information maintained, used and disclosed in electronic form |
| We have taken actions in an effort to establish our compliance with HIPAA’s security regulations, and we believe that we are in substantial compliance with HIPAA’s security regulations |
| Ongoing implementation and oversight of these measures involves significant time, effort and expense |
| HIPAA violations could expose us to civil penalties of up to dlra25cmam000 per person per year for each violation or criminal penalties with fines of up to dlra250cmam000 and/or up to 10 years in prison per violation |
| Risks Relating to our Common Stock Fluctuations in our quarterly operating results may make it difficult to predict our future results of operations and may cause volatility in our stock price During 2005, the market price of our common stock was volatile, fluctuating from a high trading price of dlra7dtta75 to a low trading price of dlra4dtta10 per share |
| Our results of operations have varied and may continue to fluctuate from quarter to quarter |
| We have a high level of fixed operating costs, including compensation costs, rent and minimum usage commitments on our excimer lasers |
| As a result, our profitability depends to a large degree on the volume of surgical procedures performed in, and on our ability to utilize the capacity of, our surgical facilities, as well as the volume of surgical procedures performed through our laser services agreements |
| The timing and degree of fluctuations in our operating results will depend on several factors, including: * general economic conditions; * decreases in demand for non-emergency procedures due to severe weather; * availability or sudden loss of the services of physicians who utilize our surgical facilities; * availability or shortages of surgery-related products and equipment, including technologically progressive laser vision correction equipment; * the timing and relative size of acquisitions; and * the recording of gains or losses on the sale of minority interests in our ASCs |
| These kinds of fluctuations in quarterly operating results may make it difficult for you to assess our future results of operations and may cause a decline or volatility in our stock price |
| 20 ______________________________________________________________________ Any return on your investment in our stock will depend on your ability to sell our stock at a profit We have never declared or paid any dividends and our credit agreement prohibits payment of dividends on our common stock |
| We anticipate that we will not declare dividends at any time in the foreseeable future |
| In addition, the stock market has, from time to time, experienced extreme price and volume fluctuations |
| These broad market fluctuations may adversely affect the market price of our common stock |